Westpoint Management Ltd (Receivers and Managers Appointed) (in Liquidation) & Anor v QBE Insurance

Civil Procedure Act 2005 (NSW). LEGISLATION CITED : Court Procedures Act 2004 (ACT) Uniform Civil Procedure Rules 2005 (NSW)

CASES CITED : American Re-insurance Co v Gervay [2005] NSWSC 802 Aon Risk Services Australia Ltd v Australian National University [2009] HCA 27

Westpoint Management Limited (Receivers and Managers Appointed) (In Liquidation) (First Plaintiff) PARTIES : Perpetual Trustee Company Limited (Second Plaintiff) QBE Insurance (Australia) Ltd (Defendant)

COUNSEL : Mr G J Inatey SC, Mr B Jones (Plaintiff) Mr M Henry (Defendant/Cross claimant)

SOLICITORS : Blake Dawson Waldron (Plaintiff) Polczynski Lawyers (Defendant/Cross Claimant)

IN THE SUPREME COURT OF NEW SOUTH WALES EQUITY DIVISION COMMERCIAL LIST

Friday 18 September 2009 ex tempore Revised 21 September 2009

50208/08 Westpoint Management Ltd (Receivers and Managers Appointed) (in Liquidation) & Anor v QBE Insurance (Australia) Ltd JUDGMENT The Notices of Motion 1 These proceedings are fixed for hearing on 12 October 2009 at an estimate of approximately four days. 2 There are two notices of motion before the court.

The defendant's notice of motion filed on 7 December 2009:

i. seeking in paragraph one orders granting it leave to file and serve an amended commercial list response and an amended commercial list cross-claim statement;

ii. seeking in paragraph two for the first plaintiff/first cross-defendant to produce certain documents to the defendant/cross-claimant for inspection, namely the documents sought in a notice to produce dated 4 September 2009;

A notice of motion filed by the plaintiff on 17 September 2009:

iii. seeking to set aside a number of paragraphs of the defendant's said notice to produce. The Nature of the Proceedings 3 The plaintiff seeks to recover under what are said to be unconditional performance guarantee bonds issued by the defendant. Its case is that by their terms, the bonds are payable forthwith and without reference to the contractor, upon a demand from the plaintiffs that declares the contractor is in default and that such a default is a Construction Related Event (as defined). The plaintiffs' case is that the performance bonds were unconditional in nature. They are said to have required only that the plaintiffs make a declaration that a 'construction-related event' as defined, had occurred that is, to declare that that had occurred, and the obligation of QBE would arise to pay in accordance with the bonds without reference to the contractor/builder [see American Re-insurance Co v Gervay [2005] NSWSC 802]. Background 4 At all material times the first plaintiff was the trustee of the 60 Market Street Trust (the Trust). 5 The Trust was the proprietor of property located at 60 Market St, Melbourne in Victoria (the Market Street Property). 6 On or about 10 July 2003, the first plaintiff and Westpoint Constructions Pty Ltd (Receivers and Managers Appointed) (In Liquidation) (WCPL) entered into a building contract (the Building Contract) pursuant to which WCPL agreed to execute and complete certain design and construction works in respect of the Market Street Property in consideration for payment by the first plaintiff of the sum of $37,779,000.00. 7 On or about 28 November 2003, the first plaintiff and Perpetual Investment Management Limited (Perpetual) entered into a construction loan agreement (Loan Agreement) pursuant to which Perpetual agreed to provide a loan facility to the first plaintiff in connection with the Building Contract. 8 On or about 28 November 2003, the first plaintiff, WCPL and Perpetual entered into a construction tripartite agreement (Tripartite Agreement) as a condition of Perpetual agreeing to provide the loan facility under the Loan Agreement. 9 On or about 22 June 2004, the defendant issued performance guarantee bond no AO1866305BON dated 22 June 2004 and maintenance guarantee bond no AO1866306BON dated 22 June 2004 (together the Bonds) in favour of the plaintiffs as support for the performance by WCPL of its obligations under the Building Contract and the Tripartite Agreement. 10 The bonds are said to provide, inter alia that:

(a) the defendant unconditionally undertakes to pay on demand in accordance with the undertaking in the Bonds, which demand the plaintiffs may make from time to time, any amount or amounts up to a maximum aggregate sum of Nine Hundred and Forty Four Thousand Four Hundred and Seventy Five Dollars ($944,475.00) ("the Amount") in respect of each bond;

(b) any such demand (referred to in 10(a) above) will declare that WCPL has defaulted under the Building Contract and the Tripartite Agreement and that that default is a Construction Related Event (as that term is defined in the Bonds), and is continuing as at the date of demand;

(c) if the defendant is notified in writing purporting to be signed by or on behalf of the plaintiffs that the plaintiffs demand payment to be made of the whole or any part of the Amount, the defendant agrees that such payment will be made to the plaintiffs forthwith without reference to WCPL and notwithstanding any notice given by WCPL to the defendant not to make that payment. 11 On 22 December 2005, Salvatore Algeri and David Lombe (the Receivers) were appointed jointly and severally as receivers and managers in respect of the Market Street Property by the second plaintiff. 12 On 11 April 2006 the first plaintiff was ordered to be wound up by order of the Supreme Court of New South Wales and Simon Read of McGrathNicol was appointed as liquidator. 13 The defendant seeks to defend the claim by establishing that there was never a 'construction-related' event. Its defences and cross-claims seek to go behind the bonds and to examine the underlying state of affairs as to whether or not there was in fact such a construction-related event; whether there was a breach; whether there was a failure to proceed with the due diligence and delay and the like. 14 Hence the plaintiff claims as follows:

i. that the building contract was terminated by the receiver.

ii. that a new contract was entered into with a third party who completed the building works.

iii. that certificates of practical completion and final completion were given to the new third party builder.

iv. that the bonds provide that upon the giving of the certificate of practical completion in relation to one bond, and in relation to the other upon the giving of a final certificate, the bonds come to an end. Proximity to the final hearing 15 The proximity of the hearing requires to be closely born in mind in terms of the limited capacity of the court to case manage proceedings. [See part 6 Case Management and Interlocutory Matters in the Uniform Civil Procedure Rules 2005 New South Wales and the bracket of sections beginning at s 56 and running through to and including s 58]. The motion to set aside the notice to produce 16 It is convenient to firstly deal with the plaintiffs' motion seeking to set aside the aforesaid notice to produce. 17 The notice to produce the subject of the defendant's motion and which Westpoint seeks to set aside has a somewhat complex history. 18 The summons and commercial list statement were filed on 13 October 2008. On 27 November 2008 the defendant filed its response. The plaintiffs' reply was filed on 6 February 2009. 19 On 24 February 2009 the plaintiffs discovered their discovered documents. 20 On 2 April the plaintiffs produced documents under notices to produce issued by the defendant in March. 21 On 13 August 2009 the defendant served notices to produce in identical terms to both plaintiffs. While several categories of documents were sought, in summary the notices sought documents relating to extensions or variations of the time for completion of the building contract or any increase or variation to the price of the building contract. 22 On 30 August the plaintiffs' solicitors, Blake Dawson, sent a fax to the defendant's solicitors, Polczynski Lawyers, stating amongst other things that the plaintiffs had reviewed their records and were unable to locate any documents relating to any extension or variation of the building contract or any increase or variation to the price. 23 On 4 September the defendants served amended notices to produce on the plaintiffs. The documents sought were in substance identical to those sought under the 13 August notices. 24 On 7 September, Perpetual produced documents in answer to the amended notices. It apparently has no further documents to produce. 25 The defendant by its motion now seeks to compel Westpoint to produce documents under the amended notice. 26 The amended notice the subject of the motion is addressed to Perpetual, although it is common ground that it should refer to Westpoint. 27 The evidence of Mr Algeri, a joint receiver for Westpoint, is that there are thirty-two boxes and thirty-nine folders of documents that would need to be searched at an estimated cost of approximately $57,000. 28 Mr Algeri also deposes that:

(a) given that Perpetual had to consent to any extension or variation to the contracts, his preliminary view is that Perpetual is more likely to have any documents that answer the amended notice given its consent was required; and

(b) "It is most likely that documents meeting the description of those sought by the defendants (if any) were likely to have been produced either in relation to discovery or in answer to the 10 March request and 11 March request and by [Perpetual] in answer to the 13 August request." Decision 29 Bearing in mind the proximity of the final hearing and the defendant's position that it will be severely prejudiced if these documents are not provided by Westpoint, it seems to me that the principled exercise of the relevant discretion is to require the production sought by the material notice to produce subject to conditions. The conditions will require that in the first instance the defendant pay the reasonable costs incurred by Westpoint of and occasioned by the need to comply with the notice to produce. Those reasonable costs will require to be paid on a stepped basis prior to Westpoint being required to commence its investigation of collating the material documents. Those reasonable costs will include costs of a member of the plaintiffs' legal team travelling to Melbourne and participating in the exercise of obtaining the collation of the documents from Westpoint, including appropriate allowances for accommodation in Melbourne. 30 In the fullness of time following the handing down of the final judgment by whichever judge is to hear these proceedings, the issue of which party should at the end of the day bear a responsibility for the costs of obtaining these documents will be open for argument and will abide the decision of the discretion by the trial judge. The pleading issues 31 The current commercial list statement identifies the issues likely to arise as:

i. whether the defendant is entitled to refuse payment;

ii. whether the performance bonds are conditional or unconditional and, if conditional, what are the conditions and have they been met. 32 The current commercial list response identifies the issues likely to arise as follows: i. whether a construction-related event has occurred. This issue is said to be able to be refined by an examination of whether the plaintiffs are able to call in aid a default which constitutes a construction-related event. The proposition put by the defendant is that given the definition in the bonds for there to be a construction-related event depends upon whether as at 13 January 2006 Westpoint Constructions was in default under: (a) cl 44.2 of the construction contract; and/or

(b) cl 44.11 of the construction contract; and/or (c) cl 51 of the tripartite agreement. In short, the first issue is said to be able to be refined as whether the plaintiffs are able to call in aid a default which constitutes a 'construction-related event'.

ii. The second suggested issue is whether as a matter of the proper construction of the bonds, the defendant is obliged to pay on a statement which contains a declaration that there has been a construction related event when, on the defendant's case, in fact and in law, there has not been and could not have been a default which was a construction-related event.

iii. The third issue is whether, if the defendant succeeds on the first issue but fails on the second issue, any amount that the defendant is obliged to pay to the plaintiffs is able to be set off in equity against the defendant's claim in relation to the misleading statement containing the declaration the subject of the defendant's proposed cross claim for that same amount. 33 The proposed amended commercial list statement in essence seeks to raise two matters:

i. Proposed paragraphs 18 and 19 effectively contend in different ways that on the day 14 days after the issuance of the certificate of practical completion: (a) the defendant's liability under the performance guarantees is ended and the defendant's undertaking under the performance guarantees cease to have any force or effect whatever;

(b) in the alternative, the defendant's liability under the maintenance guarantee ended and the defendant's undertaking under that maintenance guarantee, ceased to have any force or effect whatever

ii. The contention that on 13 January 2006 the first plaintiff purported to terminate the building contract relying upon a statutory entitlement to do so and not on any default which was a construction related event. Dealing with the first set of proposed amendments - liability ended 34 The plaintiff claims that the argument that is being sought to be raised [in the first of the above described amendments pursued by the defendant], is an argument that effectively contends that upon the receipt of a certificate of final completion the bonds are at an end. The plaintiff prays in aid the observations by the High Court of Australia in Aon Risk Services Australia Ltd v Australian National University [2009] HCA 27, at [90] - [93]:

The overriding purpose of [the material section] to facilitate the just resolution of the real issues in civil proceedings with minimum delay and expense, is stated in the rules of other courts in Australia , although those purposes and the obligations cast upon the court and the parties may be stated in somewhat different terms.

In submissions before Gray J, Aon relied upon a decision of the New South Wales Court of Appeal which distinguished J L Holdings on the basis of later provisions of the Civil Procedure Act 2005 (NSW). His Honour did not consider those provisions to be comparable with the Court Procedures Rules and the Act under which they were made, the Court Procedures Act 2004 (ACT). No issue is taken concerning that aspect of his Honour's decision. The importance of r 21 to an application for leave to amend is to be determined by reference to its own terms.

The purposes stated in r 21 reflect principles of case management by the courts. Such management is now an accepted aspect of the system of civil justice administered by courts in Australia. It was recognised some time ago, by courts here and elsewhere in the common law world, that a different approach was required to tackle the problems of delay and cost in the litigation process . In its report in 2000, Managing Justice: A review of the federal civil justice system , the Australian Law Reform Commission noted that: "Over the last ten years Australian courts have become more active in monitoring and managing the conduct and progress of cases before them, from the time a matter is lodged to finalisation" .

Rule 21(2)(b) indicates that the rules concerning civil litigation no longer are to be considered as directed only to the resolution of the dispute between the parties to a proceeding. The achievement of a just but timely and cost-effective resolution of a dispute has an effect upon the court and upon other litigants. In Sali v SPC Ltd Toohey and Gaudron JJ explained that case management reflected : "[t]he view that the conduct of litigation is not merely a matter for the parties but is also one for the court and the need to avoid disruptions in the court's lists with consequent inconvenience to the court and prejudice to the interests of other litigants waiting to be heard ...". 35 The plaintiffs' claim is that consistently with ss 56, 57 and 58 of the UCPR the court should determine that the amendment not be allowed coming at this late stage as it does. 36 As the plaintiff has contended, in the defendant's address in relation to the paragraph 18 and 19 issues, this was said to be 'a question of construction'. Mr Henry used the words "that calls into focus whether there was termination". 37 In response to this statement the plaintiff has submitted as follows:

"I ask rhetorically where is that pleaded in paragraphs 18 and 19 as being the basis for the question of construction which arises. What seems to be articulated although not pleaded is (a) there was no valid termination, (b) the original building contract continued, (c) the certificates of final completion and practical completion were given under that original building contract but the underlying premise for that argument is the very issue that seems to arise out of the use of the words, purportedly terminated, i.e. that there was in fact no termination and that in turn once properly articulated will give rise to the whole gamut of what was the performance of the builder during the course of this project, not a point which has been addressed by us at any point because it has just never arisen. We've proceeded on the basis that there was - whatever use they wish to make of it. There was an effective termination. They pleaded it. We didn't raise it and now in an unpleaded, unparticularised way they seem to raise this point of nonvalid termination converted into a repudiation and then want to utilise it in an unpleaded way to support paragraphs 18 and 19 and we would be significantly prejudiced by that course being adopted. We would have to, as I have said, go back and it would raise questions of expert evidence, the performance of the builder, why he was delayed and so on ." 38 I am satisfied that at this very late stage the defendant has not made good an entitlement to vary its pleading as sought in the first set of proposed amendments. 39 Further the defendant's reliance upon what it said was the catalyst for its amendment relating to the termination of the agreement fails to take into account that almost 2 months had expired following this matter having been brought to the defendant's attention before the matter was again raised. That period of time seems to me a further reason for denying the amendment Dealing with the second set of purported proposed amendments 40 The current version of the defendant's pleading in paragraph 14K contends that on 13 January 2006, the first plaintiff terminated the building contract relying upon a statutory entitlement to do so and not on any default which was a construction-related event. 41 If allowed the amendment would remove the word "terminated" and replace it with the words "purported to terminate". 42 In this regard it is important to note that up to this point in time the fact of termination or purported termination of the building contract does not form part of the plaintiffs' case. That circumstance is put only in terms of historical background. 43 There is a clear difficulty with the plaintiff or the Court understanding what is meant by the phrase "purported to terminate" in the context of the pleading. The pleading appears to give no adjectival information as to this circumstance. In this regard there is before the Court a letter from the plaintiffs' solicitors to the defendant's solicitors of 7 September 2009 making the point that the plaintiffs' solicitors did not understand what the defendant intended by the insertion of the word "purported". The question put by the plaintiffs' solicitors was as to whether the defendant denied that the termination of the building contract took place or that it was valid. The further question put was, "if so, on what basis does the defendant say that the termination is denied or was not valid?" Finally what was sought by the plaintiffs' solicitors was particulars of the proposed amendment. 44 The response to that letter from the defendant's lawyers of 10 September 2009 relevantly was in the following terms:

"As a result of the documents annexed to the affidavit of Mr Algeri of 16 July 2009 QBE questions the validity of the termination of the building contract and no longer assets that the building contract was terminated on 13 January 2006. The basis for this is that as at 13 January 2006, notwithstanding that Westpoint Constructions was ready, willing and able to complete the project the receivers had taken over aspects of the construction works that Westpoint Constructions had been retained to perform. In these circumstances the purpose of notice of termination was a repudiation of the building contract by WML. The 13 January 2006 act did not justify the termination of the building contract." 45 The plaintiffs' problem in relation to the seemingly innocuous alteration from "terminate" to "purported to terminate" as revealed in the defendant's above response, is that the matter appears to raise a whole new issue which does not find its way into the pleadings in any way, shape or form. I accept that that matter has never been particularised and that no evidence has been addressed to it, certainly not from the plaintiffs' part, nor forming any part of the plaintiffs' case. 46 As I have understood it, that which the defendants seek to litigate is that as of the date 13 January 2006, notwithstanding that Westpoint was ready, willing and able to complete, the receivers had taken over the construction works. In those circumstances the defendant's proposition appears to be that the purported notice of termination was a repudiation of the building contract by WML. 47 In short, and as the plaintiffs have contended on the motion, the defendants seek, through the change from "terminate" to "purported termination", to run a case of repudiation of the contract between parties to it, [of which QBE is not one], in circumstances where the builder, whose contract was terminated, did not ever respond to the termination notice, did not challenge the termination notice: the defendant having never before sought to pursue this form of case now seeks to run it and to do so for the first time two weeks or so out from a hearing without it having been pleaded. 48 Regardless of the defendant's statement that they do not intend to rely upon further evidence, I accept as pervasive the plaintiffs' position which is that in order to treat with this "new case" they would have to examine the performance of the builder for the entirety of the project to establish what the nature of that performance was as at 13 January 2006 which gave rise to the right to terminate the contract and which does not constitute repudiatory conduct on the plaintiffs' part, i.e. in other words to support the termination. 49 A measure of the disarray, as it seems to me under which the defendant's camp is operating, may be discerned from the following submission and exchange with the defendant's counsel:

His Honour: "But this is something which occurred post termination of the contract that you want to rely upon.

Mr Henry: That calls into focus whether or not there was a termination which your Honour's aware that my client wishes to change its position in relation to, and I'll come to that in a moment but the bonds themselves refer the two certificates. They refer to a number of different contracts. They don't define the certificates whereas they do define some other terms that are referred to in the various contracts and there's no evidence that is before your Honour, but my friend said that the new contracts were entered into with different builders and the project was completed. My understanding of what occurred, and as I say I don't have evidence of this and he'll correct me if this is wrong, but the original building contract was in effect incorporated into the contract of the new builder such that there was a contract between different persons but which incorporated the then extant building contract on an assumption that there was no termination.

Mr Henry: No, no. It's not, and as I say, I don't have evidence of it but notwithstanding that point, there remains an issue as to, on the proper construction of the bonds, whether or not the certificates referred to in the bonds are the certificates that my friend has referred to." The seeming connection between the two amendments 50 It is important to keep in mind that Mr Henry when addressing made the point that the matters concerning paragraphs 18 and 19 were really a question of construction. His proposition was that what that called into focus was whether or not there was a termination. In those circumstances he appears to have intended to make clear that the two amendments were really related. The amendment as to the purported termination [as the letter of particulars to which I referred makes clear] seems to suggest that there was a repudiation. Although unpleaded in this way and unparticularised in this way, what Mr Henry had said was effectively that if there has not been a valid termination then the contract continued and any certificate of practical completion and any certificate of final completion must be one which is given under the continued contract. 51 To my mind neither of the proposed amendments should be permitted at this stage in these proceedings. The applications are simply too late. Furthermore the proposed amendments are simply too inchoate. 52 The overriding purpose rule and the decision of the High Court to which I have already referred seems to me to make clear that the principled exercise of the relevant discretion is to dismiss the motion for the leave to amend. Costs 53 In the fullness of time following the handing down of the final judgment by the judge who is to hear these proceedings, the issue of which party should at the end of the day bear a responsibility for the costs of obtaining those documents will be open for argument and will naturally abide the exercise of the relevant discretion by the trial judge. Orders 54 The court's orders are as follows:

1. Dismiss paragraph 1 in the notice of motion filed by the defendant on 7 September 2009.

2. Make order 2 as sought in the defendant's notice of motion of 7 September 2009.

3. Subject to the following conditions, the court orders that Westpoint produce the documents sought by the defendants under the subject notice to produce, subject to conditions. The conditions are as follows: (a) In the first instance, the defendant is to pay the reasonable costs incurred by the first plaintiff of and occasioned by the need to comply with the notice to produce.

(b) Those reasonable costs will require to be paid on a stepped basis prior to the first plaintiff being required to commence its investigation of collating the material documents. (c) Those reasonable costs will include costs of a member of the plaintiffs' legal team travelling to Melbourne and participating in the exercise of obtaining the collation of the documents by the first plaintiff. Those reasonable requirements will include a requirement that the defendants pay the reasonable costs of such a member of the first plaintiffs' legal team having appropriate Melbourne accommodation. 4. Costs of the motions are reserved. 5. These orders are to be entered forthwith. **********

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