COURT OF APPEAL
NEW SOUTH WALES
HEARING DATE: 16 June 2017
DATE OF ORDERS: 27 June 2017
BEFORE: McColl JA, Gleeson JA, McDougall J
(1) Notice of appeal dismissed with costs.
(2) On the cross-appeal:
(a) Set aside the costs orders made by the primary judge;
(b) In place of those orders, order the appellant to pay the respondent’s costs of the proceedings below; and
(c) Make no order as to the costs of the cross-appeal.
CATCHWORDS: CIVIL PROCEDURE – appeals – where new issues raised for the first time on appeal – CONTRACTS – damages – whether respondent entitled to recover cost of the management time spent by its employees in dealing with the appellant’s defective work – CIVIL PROCEDURE – appeals – costs – whether primary judge’s discretion miscarried
LEGISLATION CITED: Civil Procedure Act 2005 (NSW), Uniform Civil Procedure Rules 2005 (NSW)
- Bellgrove v Eldridge (1954) 90 CLR 613
- Electricity Generation Corporation v Woodside Energy Ltd (2014) 251 CLR 640
- House v The King (1936) 55 CLR 499
- Orlit Pty Ltd v JF&P Consulting Engineers Pty Ltd  QCA 277
- Orlit Pty Ltd v JF&P Consulting Engineering Pty Ltd (1995) 11 BCL 260
- Tabcorp Holding Ltd v Bowen Investments Pty Ltd (2009) 236 CLR 272
- Waters v PC Henderson (Aust) Pty Ltd (1994) 254 ALR 328
CATEGORY: Principal Judgment
PND Civil Group Pty Ltd (Appellant)
Bastow Civil Constructions Pty Ltd (Respondent)
FILE NUMBER: 2016/389583
- McCOLL JA: I agree with McDougall J.
- GLEESON JA: I agree with McDougall J.
- McDOUGALL J: The respondent (Bastow) engaged the appellant (PND) as a subcontractor to perform work on a project at Terrigal. Bastow claimed that PND’s work was defective. It sued to recover the cost of rectification. The primary judge concluded that the work was defective, and awarded Bastow some (but not all) of the claimed cost of rectification.
- PND appeals from the whole of the decision of the primary judge. Bastow cross-appeals from his Honour’s disallowance of a portion of its claim, and from a particular costs order made by his Honour.
- Bastow contracted with Energy Australia (the parties and the primary judge referred to this entity as “Ausgrid”, and I shall do likewise) to undertake work that involved constructing trenches in public roads, installing cable ducts in those trenches, and backfilling and sealing the trenches. Bastow subcontracted some of that work to PND. The subcontract, on the findings of the primary judge (not now challenged) was oral, but was made by reference to a “Pre-Works Order Inspection” (PWOI) which included notes and a diagram of the trench profiles. Documents including the PWOI and other material were given to and discussed with PND before the subcontract was made. It showed, among other things, the depth of the trenches, the positioning of the ducting within them, and the specification for composition and depth of the various layers of backfill.
The alleged defects
- When the work was complete or nearly complete, Ausgrid asserted that portions of it were defective, because the backfilling did not comply with the specification. The local council, Gosford City Council (the Council), became involved. Some rectification work was done. Thereafter, Bastow retained Coffey Geotechnics Pty Ltd (Coffey) to investigate and report.
- The work performed by PND extended over several streets. Coffey looked at each of them. It concluded, in most cases, that “the reinstated pavement might be expected to be adequate to support anticipated traffic loads”. In one case, however, Coffey concluded that “the design load might exceed the capacity of the pavement over its design life”. For that particular section of road, Coffey made the following recommendation:
Given the lack of base material encountered along Campbell Crescent, the remedial option that would present the lowest risk of failure would be for full depth reconstruction to the advised specification.
Consideration has been given to alternative remedial options for Campbell Crescent (TP06-09). A brief CIRCLY analysis has been completed for the option of removal of existing asphalt and replacement with 150mm thick asphalt layer. CIRCLY analysis suggests that a tolerable ESA would be between 1 x 105 to 2 x 105. However, given the lack of structural payment thickness we would suggest that there is a residual risk of failure if exposed to heavy vehicle loads. This risk may not be acceptable to Gosford City Council.
The settlement agreement
- Bastow commenced proceedings in the court below on 22 March 2013. They came on for hearing on 23 March 2015. On that day, the parties reached what they said was an agreement to settle their dispute. The agreement was recorded in short minutes of order which were provided to the court. The agreement was:
(i) That the Defendant undertakes to rectify the works in accordance with the Report of Coffey Geotechnic Pty Limited (“Coffey”) dated 19 September 2014 within 3 months of reaching agreement with Gosford City Council, and if required Ausgrid (“rectification works”).
(ii) That the rectification works be inspected during the carrying out of the rectification works and certified as being completed in accordance with the requirements of Gosford City Council by Coffey within 14 days after the Defendant has given notice that the rectification works have been completed and the Defendant shall pay Coffey’s fees in respect of such inspections and certification.
(iii) That the Defendant supply the relevant materials required to be utilised to complete the rectification works as specified in the Joint Costings Report dated 23 March 2015 at its expense.
(iv) That paragraphs (i), (ii) and (iii) above are subject to Gosford City Council consenting to the Defendant carrying out the rectification works.
(v) In order to seek Gosford City Council’s consent to the Defendant carrying out the rectification works, the parties herby undertake to take all steps necessary to convene a conference with Gosford City Council, and if required with Ausgrid, within 60 days of the date hereof to attempt to reach an agreement in relation to paragraphs (i), (ii) and (iii) and (iv) above.
(vi) In the event that Gosford City Council refuses to meet and/or refuses to permit the Defendant to carry out the rectification works then the Plaintiff and the Defendant undertake to attend a private Mediation (costs to be shared equally) within 30 days of the Plaintiff and the Defendant being given notice by Gosford City Council of its refusal to meet and/or consent to the rectification works being carried out by the Defendant.
(vii) On or before 15 June 2015, the Defendant will pay the sum of $99,999.99 into the Trust Account of Emprise Legal, who will notify the Plaintiff’s solicitors in writing upon the payment being made, with this sum to be held on trust until either of the following of (a) or (b) occurs and in accordance with (c) and (d) below:
(a) Gosford City Council advises the Plaintiff and/or the Defendant in writing that it refuses to permit the Defendant to carry out the rectification works, then the $99,999.99 be refunded to the Defendant forthwith; or
(b) If Gosford City Council advises the Plaintiff and/or the Defendant in writing that it permits the Defendant to carry out the rectification works, upon the rectification works being completed and certified by Coffey in writing, then the sum of $99,999.99 be paid to Matthews Dooley Gibson for the Plaintiff within 7 days of the written certification by Coffey.
(c) For the avoidance of doubt, in the event that (a) above is triggered, the parties agree that 1(vi) above applies by default.
(d) Once the sum of $99,999.99 referred to in 1(vii) above has been paid into the Trust Account of Emprise Legal, Emprise Legal irrevocably undertakes that it will not release, dispose of, deal with or diminish the value of that sum other than in accordance with 1(vii) (a) or (b) above or until further order of this Honourable Court.
- Mr DP O’Connor of Counsel, who appeared on the hearing of the appeal with Ms Bustos–McNeil of Counsel for PND, submitted that the settlement agreement had been “entered” as an order of the court. That is incorrect. The court noted the parties’ agreement, and made consequential orders (in accordance with the short minutes) standing the matter over with liberty to apply.
Negotiations with the Council
- On 7 April 2015, Bastow advised the Council of the parties’ settlement agreement. The letter said:
As discussed on the phone today PND Civil Group Pty Ltd (“PND”) have undertaken to rectify the works in accordance with Report of Coffee Geotechnic Pty Limited (“Coffey”) dated 19 September 2014 within 3 months of reaching agreement with Gosford City Council, and if required Ausgrid (“rectification works”).
Bastow Civil Constructions Pty Ltd (“Bastow”) and PND have agreed that the rectification works be inspected during the carrying out of the rectification works and certified as being completed in accordance with the requirements of Council by Coffey within 14 days after PND have given notice that the rectification works have been completed.
PND has agreed to pay Coffey’s fees in respect of such inspections and certification.
PND are required to supply the relevant materials required to be utilised to complete the rectification works at its expense.
In light of the above we would be pleased if you could confirm in writing that the Council consents to PND carrying out the rectification works along the lines set out above.
We look forward to hearing from you as soon as possible so that we can advise PND accordingly.
- The Council agreed to that proposal. Its email to Bastow of 8 April 2015 stated, so far as is relevant:
The proposed restoration plan is permissible based on those conditions set out in your letter “undated” forwarded with your email. Additionally Council imposes the following conditions:
1. A road opening permit from Council (application available by contacting Stephen Beavan at Council – …) will be required, as these works will not be carried out under the original application.
2. Bastow Civil will continue to be the proponent throughout the project and be ultimately responsible for achieving satisfactory outcomes.
3. Traffic Control will be required for this project. Council requires that an approved Road Occupancy Licence (ROL) and Traffic Control Plan (TCP) be obtained for this project. It is the applicants’ responsibility to provide details of any proposed traffic control on Council roads. An ROL, and a TCP signed by an accredited RMS Red or Orange card holder, must be approved by Council prior to traffic control being carried out for this project Council’s ROL application form can be found at: …
4. The proponent is wholly responsible for consulting with the owners of all affected residential frontage properties in relation to any proposed work prior to physical construction. The proponent shall advise Council’s Infrastructure Engineer, Michael Huy at least 7 days prior to commencement of physical construction and immediately following the road opening activities on …
5. Unless stated otherwise in Council correspondence all restoration conditions in Council Road opening guidelines are applicable to this project.
6. The proposed independent certification of works by Coffey Geotechnics shall include but not be limited to:
Road base density per layer at maximum 50m test intervals
Sand backfill density (existing layer)
Extent of works
- Thereafter, PND negotiated with the Council as to the work to be done. Bastow involved itself in those negotiations. At some stage, PND or its solicitor suggested that the Council had declined to agree to the rectification works. Bastow took that up with the Council. The Council made its attitude clear. By email dated 14 September 2015, the Council stated, among other things:
I confirm that Council representatives have met with PND to discuss the works required in accord with the Coffey report.
Council has not denied PND the right to undertake the works. Council did decline an informal offer of a bond to be held by Council in lieu of the physical works being undertaken. It was my understanding that PND were to forward to Council a program and methodology for the works to be undertaken. This has not been received.
- On 15 September 2015, after (it appears) further discussions, PND wrote to the Council. It suggested that it would be sufficient if PND were to remove the asphalt sealing and install a deeper layer. The letter proposed an alternative if that method of “rectification” were unacceptable to the Council.
- The Council reiterated its position. By letter of 7 October 2015, it said that it wanted the work done in accordance with Coffey’s report. The Council’s stated requirement was as follows:
Council requires a full depth pavement reconstruction of the subject trenches… to Council’s specification in line with report recommendations.
On the basis of the above, Council cannot accept any other rectification proposals from PND.
- The settlement agreement broke down at that point. After a contested interlocutory hearing, Bastow sought and was granted leave to amend its claim to include a claim for damages for breach of the settlement agreement. Bastow pleaded that those damages included, but exceeded, the damages claimed for breach of the subcontract.
- PND denied the allegation of breach of the settlement agreement. It pleaded that Bastow had “rejected [PND’s] endeavour to have the matter referred to mediation and thus was in breach of the settlement agreement”. PND pleaded, further, that Bastow “cannot allege ‘further’ loss and damage as the ‘further’ losses claimed already are sought” by reason of PND’s alleged breach of the subcontract: the cost of rectification.
- PND also pleaded, although with less than conspicuous clarity, that Bastow was not entitled “in addition” to the further loss and damage claimed for breach of the settlement agreement. That further loss, PND pleaded, could be claimed “only as an alternative” to the claim for damages for breach of the subcontract.
- Thereafter, the matter was relisted and the hearing proceeded before the primary judge in August 2016.
The primary judge’s reasons
- The primary judge set out the factual background that I have sketched. He concluded that there was an oral subcontract made between Bastow and PND, under which PND was to carry out the trenching works required by Ausgrid at a rate of $83 per metre. There was some dispute as to whether this was merely a “labour only” contract, but nothing now turns on this, because PND accepts (as it had before the primary judge) that whatever may have been the nature of the subcontract, it was required to carry out the work in a proper and workmanlike manner.
- The primary judge concluded that to carry out the works in a proper and workmanlike manner, PND was required to perform them in accordance with Ausgrid’s specification, which (his Honour found) had been provided to PND before the subcontract was formed. PND does not challenge that aspect of his Honour’s reasons.
- The primary judge concluded that Bastow had repudiated the settlement agreement. His Honour said that:
- the settlement agreement provided that if the Council refused to permit PND to carry out the rectification works, Bastow and PND were to mediate; and
- Bastow repudiated the settlement agreement by filing its amended statement of claim instead of proceeding to mediation.
- The essential but unstated premise of that reasoning is that the Council had refused to permit PND to carry out that work. His Honour did not deal with this. For the reasons I give at  and following below, that unstated premise was not proved.
- It is convenient to point out at this stage that PND had not pleaded that Bastow repudiated the settlement agreement, nor had it pleaded that it had accepted any such repudiation and elected to treat the settlement agreement as discharged thereby. Nor was there any reference made to repudiation in PND’s submissions until, at the heel of the hunt, its written submissions in reply raised the point; and then only in reply to Bastow’s submissions seeking costs of the motion for leave to amend.
- The primary judge then turned his attention to Bastow’s claim on the subcontract. He concluded that the work done by PND was defective. PND does not now challenge that finding. His Honour concluded, contrary to PND’s submissions, that Bastow had suffered loss as a result. PND does challenge that finding.
- The primary judge quantified Bastow’s loss at the costs of rectification, $269,355.15. PND does not challenge the arithmetic of that quantification.
- In reaching that figure, the primary judge excluded an amount of $43,669 claimed by Bastow for the time its employees spent in connection with the defects and their rectification. His Honour said that “there is no evidence that the allocation of this time resulted in any additional cost to Bastow”. Bastow challenges that conclusion by its cross-appeal.
- As to costs, the primary judge ordered that PND should pay Bastow’s costs of the action, excluding costs associated with the claim for breach of the settlement agreement. His Honour ordered that Bastow should pay PND’s costs in relation to that claim, including the costs of the application for leave to amend. His Honour ordered that those costs should be assessed on the indemnity basis “because, in my opinion, Bastow acted most unreasonably in failing to submit to mediation in face of PND’s manifest desire to come to some suitable arrangement with both the Council and Bastow”.
The grounds of appeal
- PND’s amended notice of appeal raises three grounds:
1. The trial Judge erred in finding that the Respondents were entitled to damages pursuant to an alleged breach of an oral contract as between the Appellants and the Respondents formed on 18 March 2011 [Judgment paragraph 53].
The trial Judge should have found that the rights of the parties were, by consent, governed by the compromise agreement memorialised in the short minutes of order made by the Court on 25 May 2015.
Given that the Court found that the Respondents had repudiated that agreement, it should have found as a consequence the Applicants were under no further obligation to perform the terms of the compromise agreement.
Further ground of repudiation
2. The Court should have found that the Respondents further repudiated the compromise agreement entered as orders of the Court on 25 May 2015 by agreeing a method of rectification with Gosford City Council that was outside the terms of the compromise agreement agreed between the parties.
In the alternative to Ground 1/The works were fit for the purpose
3. The trial Judge erred in awarding the Respondents damages in respect of claimed defective works conducted by the Applicants at the Karla Avenue and Ena Street work sites [Judgment paragraph 53-56].
The Court should have found that there was no evidence to ground a finding that the proposed rectification work claimed was reasonable and necessary.
The grounds of cross-appeal
- Bastow’s notice of cross-appeal raises the following grounds:
1. The Primary Judge erred at J  in finding that there was no evidence that the allocation of management time resulted in any additional cost to the cross-appellant, where there was uncontested evidence of that fact in the Court below.
2. The Primary Judge erred in finding at J  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 - 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
- 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 - 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
- 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.
- 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.
- 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.
- 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.
- Mr McNally submitted, further, that if, contrary to his principal submission, PND were permitted to rely on accord and satisfaction and repudiation, nonetheless:
- on the proper construction of the settlement agreement, it did not operate as an accord and satisfaction (or as an accord executory); and
- 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.
- 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.
- 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.
- 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.
- 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 . 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”.
- 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.
- 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.
- 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.
- 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.
- 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.
- 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
- 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.
- 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.
- 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.
- 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”.
- 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.
- PND denied that there was an express term as pleaded. It admitted that there was an implied term to the effect of that pleaded.
- 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.
- 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.
- 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.
- 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].”
- 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  above) were performed.
- The primary judge held that:
- Bastow was obliged by the terms of its contract with Ausgrid to make the works compliant with Ausgrid’s specification; and
- the rectification work would be carried out by Bastow to the satisfaction of the Council, whereby Bastow would suffer loss.
- 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.
- 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.
- 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  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”.
- 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  above), it is clear that those tentative expressions of opinion related to the reinstated pavement, not to the work originally done by PND.
- Ground 3 fails.
Conclusion on the appeal
- Each of the grounds of appeal fails. It is not necessary to consider Bastow’s notice of contention.
- I turn to Bastow’s cross-appeal.
Cross-appeal ground 1: cost management time
The parties’ submissions
- 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.
- 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.
- 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 … .
- 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.
- 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.
- 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.
- 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.
- In my view, ground 1 of the notice of cross-appeal fails.
Cross-Appeal ground 2: repudiation
- 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
- 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.
- 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.
- 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:
- there was but one event;
- the claim in relation to the settlement agreement was not clearly dominant or separable (he referred to Waters v PC Henderson (Aust) Pty Ltd;
- 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
- 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.
- 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.)
- 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.
- 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.
- 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”.
- 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.
- 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.
- 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.
- 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.
- As I have said, PND’s fails. There is no reason why it should not pay Bastow’s costs of the appeal.
- 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.
- I propose the following orders:
- Notice of appeal dismissed with costs.
- On the cross-appeal:
- Set aside the costs orders made by the primary judge;
- In place of those orders, order the appellant to pay the respondent’s costs of the proceedings below; and
- Make no order as to the costs of the cross-appeal.