PND Civil Group Pty Ltd v Bastow Civil Constructions Pty Ltd

2.   The Primary Judge erred in finding at J [36] that the cross-appellant repudiated the settlement agreement when in fact:

a.   the cross-respondent breached the settlement agreement;

b.   there was no breach of the settlement agreement by the cross-appellant;

c.    if there was a breach of the settlement agreement by the cross-appellant, there was no repudiation by the cross-appellant of the settlement agreement; and/or

d.   the settlement agreement was abandoned by the parties.

3.   The Primary Judge’s discretion miscarried in relation to his decision at J [63]-[64] where he excluded from the costs order the costs associated with the claim for the breach of the settlement agreement and ordered that the cross-appellant was to pay the cross-defendant’s costs of the claim for breach of the settlement agreement and amendment of the statement of claim on an indemnity basis in circumstances where the Primary Judge:

a.   acted on a wrong principle in finding that the cross-appellant’s conduct justified such an order; and/or

b.   misapprehended the facts in concluding that the cross-appellant acted most unreasonably in failing to submit to a mediation.

Bastow’s notice of contention

30. Bastow filed a notice of contention. It contended that the decision of the primary judge (presumably, except in respect of management costs) could be affirmed on the following grounds:

1.   The decision of the Court below should be affirmed on the ground that regardless of any repudiation of the settlement agreement by the respondent:

a.   the appellant did not accept the repudiation and sue the respondent for damage and/or specific performance; or

b.   the appellant abandoned the settlement agreement.

2.   The decision of the Court below at J [53]-[56] should be affirmed on the ground that the rectification works at Ena Street and Karla Avenue were required so as to conform with the contract found to have entered into between the appellant and the respondent, and were reasonable

Appeal grounds 1 and 2: accord and satisfaction; repudiation

The parties’ submissions

31. Mr O’Connor submitted that the settlement agreement, on its proper construction, operated as an agreement for accord and satisfaction. In consequence, he submitted, any liability that PND may have had under the subcontract was discharged, and there were substituted for that liability (if any) its obligations under the settlement agreement.
32. Alternatively, Mr O’Connor submitted, the settlement agreement could be construed as an accord executory, by reason of which, upon PND’s performance of its obligations under the settlement agreement, its obligations under the subcontract would be discharged.
33. On either basis, Mr O’Connor submitted, because Bastow had (as the primary judge found) repudiated the settlement agreement, that was the end of any rights that Bastow had. Mr O’Connor submitted that the primary judge was correct to conclude that Bastow had repudiated the settlement agreement, but that his Honour erred in not proceeding from there to hold that, by reason of the settlement agreement’s operating as an accord and satisfaction, PND could have no further liability under the subcontract.
34. Mr McNally submitted that neither accord and satisfaction nor repudiation had been pleaded. In those circumstances, he submitted, PND should be held to its pleaded case.
35. Mr McNally submitted, further, that if, contrary to his principal submission, PND were permitted to rely on accord and satisfaction and repudiation, nonetheless:

1. on the proper construction of the settlement agreement, it did not operate as an accord and satisfaction (or as an accord executory); and
2. viewing the facts overall, Bastow did not repudiate the settlement agreement; it was PND that had breached the settlement agreement by failing to undertake the rectification works advised by Coffey and required by the Council.

36. Mr O’Connor accepted that accord and satisfaction had not been pleaded. However, he submitted, that was merely a question of the characterisation of the written agreement, and thus was something that could be dealt with in this court. Mr O’Connor accepted, also, that repudiation had not been pleaded. However, he submitted, it had been adverted to from time to time in the course of the hearing, and (as I have noted) had been raised in PND’s written submissions in reply provided to the primary judge. Mr O’Connor submitted, correctly, that Bastow had not then challenged PND’s reliance on repudiation.
37. At the conclusion of the argument on ground 1, the court indicated to the parties that it would not permit PND to rely on accord and satisfaction or repudiation. It said that reasons would be given.

Decision

38. The only basis on which this court could consider permitting PND to rely on accord and satisfaction would be that the question had been fully ventilated in the evidence (even though the issue was not pleaded), so that, as a practical matter, each party had had the opportunity of adducing whatever evidence it required, and putting whatever submissions it wished, on all the evidence bearing on that issue. Plainly, that did not happen.
39. Although it is correct to say that the pleaded settlement agreement was wholly written, that does not mean that evidence of mutually known background and mutually understood context is irrelevant. It is sufficient to refer to the joint reasons (French CJ, Hayne, Crennan and Kiefel JJ) in Electricity Generation Corporation v Woodside Energy Ltd at [35]. Their Honours said:

Both Verve and the Sellers recognised that this Court has reaffirmed the objective approach to be adopted in determining the rights and liabilities of parties to a contract. The meaning of the terms of a commercial contract is to be determined by what a reasonable businessperson would have understood those terms to mean. That approach is not unfamiliar. As reaffirmed, it will require consideration of the language used by the parties, the surrounding circumstances known to them and the commercial purpose or objects to be secured by the contract. Appreciation of the commercial purpose or objects is facilitated by an understanding “of the genesis of the transaction, the background, the context [and] the market in which the parties are operating”. As Arden LJ observed in Re Golden Key Ltd, unless a contrary intention is indicated, a court is entitled to approach the task of giving a commercial contract a businesslike interpretation on the assumption “that the parties … intended to produce a commercial result”. A commercial contract is to be construed so as to avoid it “making commercial nonsense or working commercial inconvenience”.

40. In this case, because the issue of accord and satisfaction was not pleaded or otherwise hinted at, Bastow was deprived of the opportunity to adduce evidence of background and context. On the contrary, as Mr McNally submitted, Bastow made a forensic decision not to read a particular affidavit which dealt with the making and documentation of the settlement agreement.
41. Further, and again as Mr McNally submitted, if the question of accord and satisfaction had been pleaded, it is at least possible that Bastow would have re-examined its forensic approach, and focused more closely on the claim for breach of the settlement agreement as its primary claim, rather than (as it did) the claim for breach of the subcontract.
42. What I have just said, which deals principally with ground 1, applies a fortiori in respect of ground 2. Repudiation was not pleaded. It was not until PND provided written submissions in reply that Bastow was given any indication that PND wished to rely on the proposition that Bastow had repudiated the settlement agreement. And that asserted repudiation was apparently to be relied upon only on the question of costs.
43. The argument now sought to be made is not that (as the primary judge found) Bastow repudiated the settlement agreement by failing to participate in the mediation for which it called. It is, rather, that Bastow repudiated the settlement agreement “by agreeing a method of rectification with [the Council] that was outside the terms of the compromise agreement agreed between the parties”. That is a paradigm example of a factual argument that could and would have been the subject of evidence, had it been raised by way of a pleading. The absence of any pleading denied Bastow the opportunity to address the facts, both in the evidence it adduced and in its submissions.
44. To permit PND now to rely on accord and satisfaction and repudiation would cause very significant injustice to Bastow. In theory, the adverse consequences of permitting PND to rely on those matters could have been accommodated by sending the matter back for a fresh hearing. However, it would be utterly unconscionable to do so, bearing in mind that there has already been a three day hearing, and that the amount of damages was quantified at less than $270,000.
45. The failure to plead the issues sought to be argued through those grounds means that PND cannot be permitted to rely upon them in this court. It follows that the grounds are not sustained.

Appeal ground 3: no loss

The parties’ submissions

46. Mr O’Connor referred to passages in the Coffey report which suggested that the works as executed “may offer greater capacity than construction by the advised specification”, with one exception that Mr O’Connor accepted did require full rectification. That conclusion appears to have been based on Coffey’s estimate of the traffic loads to which the roads would be subjected. In those circumstances, Mr O’Connor submitted, his client’s work was fit for its intended purpose.
47. That being so, Mr O’Connor submitted, it was neither necessary nor reasonable to redo the work that PND had done so as to bring it into conformity with the specification. It followed, he submitted, that Bastow had failed to prove loss.
48. Mr McNally referred to unchallenged evidence given by Mr Jason Bastow, the sole director and shareholder of Bastow, in an affidavit sworn 11 March 2015. In that affidavit, Mr Bastow drew attention to defects that he had observed in the work done by PND, and to work undertaken (it would appear, by Ausgrid) to rectify those defects. He said that Bastow was backcharged for the cost of those works, $64,247.
49. It is apparent that this rectification was done in 2013, well before the Coffey report was prepared. It followed, Mr McNally submitted, that Coffey’s evaluation of the load bearing capacity of the various pavements related to the pavements “as repaired”.

Decision

50. The starting point, in my view, is that Mr O’Connor’s submission that the work done by his client was fit for purpose fails to address the real issue. There was no pleaded case that PND warranted that its works would be fit for purpose. The pleaded issue was whether, by one means or another, the subcontract required PND’s work to conform to Ausgrid’s specification. Bastow pleaded its case on this question two ways. First, it pleaded, there was an express term to that effect. Alternatively, it pleaded, there was an implied term of the subcontract that PND would carry out its backfilling work in a proper and workmanlike manner, and that satisfaction of this obligation required PND to do its work in accordance with the Ausgrid specification.
51. PND denied that there was an express term as pleaded. It admitted that there was an implied term to the effect of that pleaded.
52. The primary judge did not decide whether there was an express term to the effect of that for which Bastow contended. He held, consistently with the pleadings, that the subcontract included the implied term for which Bastow contended. The primary judge then held that compliance with that implied term required PND to ensure that its work met the requirements of Ausgrid’s specification. His Honour said:

Backfiling the trenches inconsistently with the profiles [set out in Ausgrid’s specification] is inconsistent with carrying out the works in a proper and workmanlike manner.

53. The amended notice of appeal did not challenge that aspect of the reasons of the primary judge. Nor did Mr O’Connor address it in submissions. That aspect of the primary judge’s reasoning is plainly correct, taking into account the unchallenged evidence, and the consequent finding of the primary judge, that Ausgrid’s specification for the works was provided to PND when the terms of the subcontract were being negotiated, and before it was concluded. The primary judge found, in consequence, that the subcontract was one whereby PND was required, for a consideration of $83 per metre, “to perform the works described in” Ausgrid’s specification and discussed by Mr Di Cello of PND with Mr Hutchinson of Bastow before the subcontract was concluded.
54. The next point is that after PND claimed to have finished its work, Ausgrid carried out investigations. Mr Murray of Ausgrid wrote to Bastow saying that trial holes had been excavated throughout the project and that there were “inadequate road base levels found in almost all sections”. Mr Murray advised Bastow that if Bastow did not rectify the defects, Ausgrid would do so at Bastow’s cost.
55. Bastow in turn passed that requirement on to PND. Mr Di Cello said that “PND take no responsibility and will not carry out any works [of rectification] and will not pay any cost to Bastow for works [of rectification].”
56. It was after that exchange of correspondence that the temporary repair works to which Mr Bastow referred in his affidavit of 11 March 2015 (see at [48] above) were performed.
57. The primary judge held that:
1. Bastow was obliged by the terms of its contract with Ausgrid to make the works compliant with Ausgrid’s specification; and
2. the rectification work would be carried out by Bastow to the satisfaction of the Council, whereby Bastow would suffer loss.
58. Mr O’Connor did not challenge those findings of the primary judge. The first is self-evidently correct. The second is a conclusion adequately based on the evidence before the primary judge, and bearing in mind the absence of challenge, is one that must stand.
59. In those circumstances, Bastow has suffered loss. As the primary judge held, that loss is the cost to it of bringing PND’s defective work into compliance with Ausgrid’s specification. The conclusion of the primary judge to that effect is amply supported by the authorities to which his Honour referred, including Bellgrove v Eldridge and Tabcorp Holding Ltd v Bowen Investments Pty Ltd.
60. Even if, contrary to what I have said, the real issue were whether PND’s works were fit for purpose, the evidence does not support the proposition that they were. I have referred to some aspects of the Coffey report at [7] above. Coffey’s analysis used a computer program known as CIRCLY. It required, among other things, assumptions as to the traffic loads to which the pavement will be subjected. Those pavement loads were expressed in ESAs (the acronym denotes Equivalent Standard Axle). Based on those assumptions (which were not shown to reflect the design requirements for the roads in question), Coffey expressed the opinion “that the as-constructed condition may offer greater capacity than construction by the advised specification” (with an exception identified in the report). That is hardly a ringing endorsement of the quality of PND’s work. Nor is Coffey’s conclusion, expressed elsewhere in the report as to particular sections of pavement, that they “might be expected to be adequate to support anticipated traffic loads”.
61. I add that it is clear from the Coffey report that the somewhat tentative opinion that sections of pavement “might be expected to be adequate to support anticipated traffic loads” refers in each case to “the reinstated pavement”. Thus, as Mr McNally submitted (see at [49] above), it is clear that those tentative expressions of opinion related to the reinstated pavement, not to the work originally done by PND.
62. Ground 3 fails.

Conclusion on the appeal

63. Each of the grounds of appeal fails. It is not necessary to consider Bastow’s notice of contention.
64. I turn to Bastow’s cross-appeal.

Cross-appeal ground 1: cost management time

The parties’ submissions

65. Mr McNally submitted that the primary judge had erred in holding that Bastow was not entitled to recover, as an element of its damages, the cost of the management time spent by its employees in dealing with PND’s defective work. He noted that the evidence of quantification was detailed and unchallenged.
66. Mr McNally referred to a decision of the Queensland Court of Appeal in Orlit Pty Ltd v JF&P Consulting Engineers Pty Ltd. In that case, the plaintiff developer sued the defendant for damages for negligence. The defendant, an engineer, had designed inadequate slabs for a townhouse development undertaken by the plaintiff. The primary judge (Moynihan J) held that the engineer had been negligent, and that the developer was entitled to recover, in round figures, $342,000 by way of damages. The damages awarded included $44,663 for management time. Moynihan J upheld the claim on the basis that the amount in question was paid for executive time that otherwise would have been of no use to the developer.
67. The Court of Appeal (Fitzgerald P, Davies and Shepherdson JJ) dismissed the engineer’s challenge to the allowance for management time. Their Honours said:

Each of the relevant executives… gave evidence of the time spent and steps taken by him in respect of or associated with rectification work. It was this time which formed the basis of the calculations upon which the damages were assessed. Their evidence in this respect was uncontradicted and [Moynihan J] plainly accepted it. It is irrelevant that [the developer] did not prove that any other activities of theirs which would have profited [the developer] were curtailed by the need to spend time in relation to the rectification work. It is sufficient and reasonable to infer that they would otherwise have been engaged in [the developer’s] business … .

68. Moynihan J held that the developer had incurred an expense for the time spent by the executives (who were employed not by the developer, but by a related entity) in connection with the defects and their rectification. That expense was incurred through book entries whereby the developer was debited, and their actual employer was credited, with the cost of their time. There was also evidence, to which Moynihan J referred, that the actual amount charged to the developer was more than the amount of damages allowed, because some of the time for which the developer was charged was spent by the executives on other projects. It could be inferred that, apart from the problems caused by the engineer’s negligence, the amount that the developer was required to pay for the services of those executives would have been less, by $44,663, than the total amount actually paid.
69. On that basis, if I may say so with respect, the ultimate conclusion in Orlit both at trial and on appeal, on the issue of management time, was plainly correct. It is unnecessary to express a view about the reasoning that led the Court of Appeal to that conclusion. It is enough to say that, properly understood, the decisions in Orlit provides no support for Bastow in this case.
70. In the present case, and in contrast to the facts in Orlit, there is no evidence that any additional expense was incurred. It does not seem that Mr Bastow caused himself or the other staff member involved (who were both employees of Bastow) to be paid overtime or any other compensation or additional remuneration. Nor does it seem that any additional staff or contractors were employed, either to deal with PND’s defective work and its consequences or to attend to tasks from which Mr Bastow had been distracted because of his attention to those matters.

71. I can understand that where existing staff are paid more, or additional staff are employed, to manage a breach of contract and its consequences, the damages recoverable may include the amounts so paid. I can understand, also, that if no additional staff were employed, but the diversion of management time to the breach of contract meant that the employer lost other valuable business opportunities, then damages might be allowed, although their quantification could be a matter of some difficulty. But there was no evidence in this case that Bastow had been prevented from seeking or taking up any valuable business opportunity because Mr Bastow’s attention was focused on PND’s breach of contract and its consequences.
72. In my view, ground 1 of the notice of cross-appeal fails.

Cross-Appeal ground 2: repudiation

73. Mr McNally accepted that, in light of the court’s decision not to permit PND to rely on repudiation, this ground fell away.

Cross-Appeal Ground 3: costs

The parties’ submissions

74. Mr McNally accepted that the primary judge’s decision on costs represented the exercise of a discretion under s 98 of the Civil Procedure Act 2005 (NSW) and Part 42 of the Uniform Civil Procedure Rules 2005 (NSW). He accepted, in consequence, that this court would not intervene unless there were shown some relevant mistake of fact or error of principle in the approach taken by the primary judge. Mr McNally submitted that there were two such errors.
75. The first error, Mr McNally submitted, was that the trial judge had taken into account repudiation, in circumstances where that issue had not been pleaded and fought. The second error, Mr McNally submitted, was that in any event the primary judge had erred in concluding that Bastow had repudiated the settlement agreement, or had “acted most unreasonably in failing to submit to mediation” pursuant to that agreement.
76. In those circumstances, Mr McNally submitted, it was open to this court to re-exercise the costs discretion. He submitted that the ordinary result – that costs follow the event of the action – should apply, because:
1. there was but one event;
2. the claim in relation to the settlement agreement was not clearly dominant or separable (he referred to Waters v PC Henderson (Aust) Pty Ltd;
3. the claim under the settlement agreement was, at least by the time of the hearing, only an alternative, as indeed the primary judge realised; and
4. the subsidiary and alternative nature of the settlement agreement claim was so far from being a dominant or separable issue that Counsel (Mr Stewart) appearing for Bastow before the primary judge had felt it necessary to remind his Honour that the claim had not been abandoned, but nonetheless, if Bastow succeeded on the primary claim, was one that would have no further work to do.
77. Mr O’Connor submitted that it was reasonably open to the primary judge to conclude that Bastow had “acted most unreasonably in failing to submit to mediation”, a finding of fact that, he said, underpinned the primary judge’s conclusion that Bastow had repudiated the settlement agreement. (That statement of PND’s submissions appears from its written submissions in reply in this court; but it should be noted that in oral submissions, Mr O’Connor was not prepared to accept that the factual finding underpinning the primary judge’s reasons on costs was the same as his Honour’s conclusion on the settlement agreement.)
78. Mr O’Connor submitted that since Bastow had taken the step of amending its pleadings to plead the case based on the settlement agreement, it should not now be permitted to resile from that decision. In those circumstances, he submitted, the costs decision now under challenged was amply justified.

Decision

79. In my view, the primary judge’s exercise of the costs discretion did miscarry, and in a material way. His reasons appear to assume (as do his reasons on PND’s defence to Bastow’s claim based on the settlement agreement) that, in the events that had happened, Bastow was required to attend mediation. That is simply not correct.
80. Under the settlement agreement, mediation was only required if the Council “refuses to meet and/or refuses to permit [PND] to carry out the rectification works” that had been specified in a Joint Costing Report dated 23 March 2015. In the present case, the Council did agree to those works being carried out; indeed, it insisted on their being carried out, and stated that it would not accept anything less by way of rectification. That is plain from its email of 8 April 2015, its statement in the email of 14 September 2015 that it had “not denied PND the right to undertake the works”, and its statement in its letter of 7 October 2015 that it required “a full depth pavement reconstruction of the subject trenches… to Council’s specification”.
81. To the extent that it might be appropriate to consider breach, or repudiation, of the settlement agreement, PND was plainly the party in breach. It breached the agreement by failing to carry out the works to which Council had given consent. And, arguably, by its repeated refusal to do so, it repudiated that agreement.
82. It is apparent that the trial judge’s exercise of the costs discretion must be set aside. As the parties accepted, this court should re-exercise it.
83. The prima facie position suggested by UCPR r 42.1 is that costs should follow the event. The relevant event in this case is that Bastow succeeded on its claim. It recovered a judgment for about 86% of the total amount of its claim. Even if the reasons of the primary judge as to the alternative claim based on the settlement agreement were correct, that aspect of the claim was by no means dominant or separable. At least by the time of the hearing, it was treated as an alternative formulation, to be pressed only if the claim based on the subcontract failed.
84. In my view, the proper re-exercise of the costs discretion in the court below would require that PND pay Bastow’s costs of the action.

Costs

85. As I have said, PND’s fails. There is no reason why it should not pay Bastow’s costs of the appeal.
86. Bastow’s cross-appeal (to the extent that it was necessary to consider it separately from the appeal) has succeeded in part and failed in part. In my view, the appropriate costs order is that there should be no order for the costs of the cross-appeal.

Orders

87. I propose the following orders:

1. Notice of appeal dismissed with costs.
2. On the cross-appeal:

1. Set aside the costs orders made by the primary judge;
2. In place of those orders, order the appellant to pay the respondent’s costs of the proceedings below; and
3. Make no order as to the costs of the cross-appeal.