WINROBE PTY LTD v SUNDIN'S BUILDING CO PTY LTD [No 3] SUPREME COURT OF NEW SOUTH WALES COURT OF APPEAL KIRBY P, SHELLER and Cripps JJA 24 December 1992, 4 May 1993 [1993] NSWCA 290 CONTRACT — building contract — construction of warehouse includes contractor's obligation to design and construct works and obtain necessary consents — contractor's warranty of due care and skill — correspondence with principal concerning rights of carriageway and drainage easements on adjoining land — late discovery that warehouse, as built, encroached upon such rights — principal by notice terminates agreement — contractor subsequently purports to terminate agreement — which termination valid — trial judge (Giles J) finds no failure of contractor to complete project with due diligence and competence and no duty to re-design or re-construct works — on appeal Court of Appeal holds contractor in breach of design obligations but principal's purported notice was not effective to terminate agreement — on further motion to Court of Appeal that effectiveness of notice was not in issue at trial, judgment withdrawn for reconsideration of further arguments — upon reargument of appeal held: (Sheller JA; Kirby P and Cripps JA concurring): (1) The contractor had failed to perform its obligation of design and re-design as originally found; (2) As the contractor did not argue at the trial that the notice given by the principal was not a notice validly based on the breach, and as the contractor did not comply with such notice, the principal validly terminated the employment of the contractor by its notice; (3) In light of such termination pursuant to the contract it was unnecessary to consider the exercise of the common law power of accepting a repudiation by the contractor of its obligations under the contract. DTR Nominees Pty Ltd v Mona Homes Pty Ltd (1978) 138 CLR 423 considered; (4) The contractor was not entitled to rely on any estoppel as against the principal in the circumstances; (5) The contractor was in breach of its warranty under the agreement and the principal was entitled to damages for breach of the warranty in the assessed amount of $351,496.40; (6) Damages for re-design and re-construction referred to Division for assessment; (7) On the cross appeal, the trial judge had correctly reduced the amount of the contractor's claim by the cost of certain electrical equipment for which the contractor had incurred liability. The Commonwealth of Australia v Amann Aviation Pty Ltd (1991) 174 CLR 64 applied. Kirby P I agree with Sheller JA. Sheller JA This is an appeal by Winrobe Pty Ltd and Simpost Pty Ltd, which together are referred to as "the Principal" in a Lump Sum Design and Construct Contract, from part of a decision given by Giles J on 18 December 1990 and orders made on 18 October 1991 in proceedings arising from disputes about the termination of the contract. The other party to the contract, Sundin's Building Co Pty Ltd, which is referred to therein as "the Contractor', is the respondent. The Contractor cross appeals from part of the same decision and orders of Giles J and from part of a decision given on 18 July 1991 in the same proceedings by his 2 UNREPORTED JUDGMENTS Honour. The notice of cross appeal extended to other decisions of his Honour but these parts of the cross appeal were not pursued. JUDGMENT OF 15 JUNE 1992 The argument on this appeal was heard on 6 and 7 April 1992 and judgment delivered on 15 June 1992. Thereafter, and before judgment was entered, the appellants applied to have the judgment reviewed. On 24 December 1992 the Court withdrew the judgment of 15 June 1992 and gave reasons for doing so. Costs were reserved and the decision of the Court on the appeal and cross appeal from the decisions of Giles J of 18 December 1990 and 18 July 1991 were again reserved. THE CONTRACT The Design and Construct Contract (DECON 1 May 1988) took the form of Articles of Agreement undated but signed on behalf of the parties on or about 20 March 1990. The Articles of Agreement included ten recitals lettered A - J. Recital A stated that the Principal desired to have building works ("the Works") designed and constructed by the Contractor. The short description of the Works was set out in Schedule 1: "New industrial warehouse development comprising twenty four (24) individual units (capable of being registered as strata title lots) inclusive of mezzanine office floors and access stairs, toilet facilities, car parking and access ramps." Recital B stated: "The Principal has submitted to the Contractor a proposal brief in sufficient detail to enable the Contractor to establish the Principal's requirements (hereinafter called the Principal's Proposal)." The particulars of the Principal's proposal (Recital C) as set out in Schedule 2 were: "To design and construct the Works, obtain all necessary approvals relating thereto and complete such Works and associated landscaping in accordance with such approvals." Recital D stated: "The Contractor has provided design as necessary in sufficient detail to enable the Contractor to provide a price." The Design Documents were listed (Recital E) in Schedule 3 which referred to several plans by number and to a Development Application number 254/89 dated 28 April 1989 and approved by Hornsby Shire Council on 4 July 1989. Recitals F and G were as follows: "F. The Principal has thoroughly examined the Design Documents and is satisfied that they appear to meet his requirements as set out in the Principal's Proposal as amended (if at all) by agreement in the Design Documents. G. That price is as set out in CL2 of the Articles of Agreement." The particulars of the land (Recital H), as set forth in Schedule 4, were: "Lot No 4 and 5 Deposited Plan 748030 Shire/Municipality of Hornsby known as Lots 4 and 5 Leighton Place, Hornsby". The reference to title showed the Computer Folio Identifier. The particulars of land in Schedule 4 made no mention of any easement to which the land was subject. Recitals I and J were as follows: "J. The Contractor agrees to undertake further design work in sufficient detail so as to apply for and to use his best endeavours to obtain consents from Authorities necessary to carry out the Works in accordance with this Contract. URJ WINROBE PTY LTD v SUNDIN'S BUILDING CO PTY LTD [No 3] (Sheller JA) 3 J. The Contractor and the Principal are satisfied that the carrying out of the Works (in accordance with the Contract) shall reasonably meet the requirements of the Principal as notified to the Contractor in the Principal's Proposal and, (if applicable) as revised by agreement in the Design Documents." By the Articles of Agreement it was agreed: "1. For the consideration hereinafter mentioned the Contractor shall upon and subject to the Conditions annexed hereto (a) with due care and skill carry out all activities involved in the design of the Works; and (b) execute the Work shown upon the Contract Drawings and described by or referred to in the Specification and Conditions." The Articles of Agreement went on to state the consideration, $4,193,000, and referred to certain items of work set out in Schedule 5 which were expressly excluded from the Works. These exclusions are not relevant to this judgment. It is necessary to set out parts of the annexed Conditions of Contract or summarise their effect. CL1 was a definition clause and included the following: "A. Whenever the following words or phrases are used (i) in this document; or (ii) in the Drawings and Specifications; or (iii) in any other document or writing having reference to the Works; or orally, they shall, unless the context indicates otherwise, be deemed to mean as follows: "Contract Drawings', 'Drawings' and 'Specification' shall mean the drawings and specifications that form part of the Design Documents referred to in the Articles of Agreement and shall also include any further drawings and specifications produced by the Contractor pursuant to the Contractor's design obligations. 'Design Documents' shall mean those Drawings, Specifications and any other relevant documents which are the basis upon which: (a) the Contractor provides a lump sum price (as set out in CL2 of the Articles of Agreement) for the designing, carrying out and completing the proposed building work; (b) variations to the Works are determined; and which documents shall be deemed to be read with and form part of the agreement between the parties. 'Project' shall mean the Works and shall include the Contractor's obligation to design the Works as well as to construct the Works." "Variations" were defined as meaning, inter alia: "a change in the Principal's requirements which makes necessary the alteration or modification of the design, quality or quantity of the Project as described by or referred to in the Principal's Proposal or in the Design Documents..... " "Works" were defined as meaning "the works shown upon the Contract Drawings and described by or referred to in the Specification as they may be varied (if at all) from time to time in accordance with this Agreement." CLI (C) provided that none of the provisions of the contract should be construed or interpreted by reference to headings, marginal notes, footnotes and the Table of Contents. CL13 provided: "(a) The Contractor shall from the date of this Contract continue with the design of the Works and shall, within the number of days stated in Schedule 9, bring the design of the Works to such a stage that application for approvals from Authorities (sufficient to permit the Contractor to commence the carrying out of the Works) shall have been submitted. 4 UNREPORTED JUDGMENTS (b) The Contractor shall use his best endeavours to obtain within the number of days stated in Schedule 10 such consent approvals licenses and permits (in this clause called 'Approvals') from Authorities as may be necessary to enable the Contractor to commence the carrying out of the Works. (c) The Contractor (having commenced the carrying out of the Works) shall continue from time to time (i) to carry out the design of the Works; and (ii) where necessary, submit any design for approval from Authorities, in such a way as to ensure the timely completion of the Project but subject to any extensions of time the Contract may be entitled to including the delay of any consents, approvals, licences and permits by Authorities." CL15 provided: "The Principal shall provide the Contractor with all necessary legal and other particulars concerning the Site and shall accept responsibility for the accuracy thereof. Except that any survey prepared for consolidation of the Site shall be to the Principal's account." I should interpolate here that the printed form of this clause was amended to take out the word "survey" after the words "with all necessary legal" and to add the exception. This exception mirrored an express arrangement whereunder the Contractor was to be responsible for survey of the Site for the buildings but not responsible for the consolidation of the Site for Strata Title purposes. CL20 and CL21 provided: "20. The Contractor warrants to the Principal that the design of the Works has been and shall be carried out with due care and skill appropriate to the undertaking. 21. The Contractor shall with due care and skill and subject to these Conditions, carry out and complete the Works shown on the Contract Drawings and described in the Specification." CL23 provided for the situation where the Contractor found "any error, discrepancy or ambiguity" in the Drawings or the Specification or between the Drawings and the Specification. It was accepted that this clause was not relevant to the particular dispute with which we are concerned. CL27 provided for the contract to be varied. CL30 provided: "Should the Principal fail to pay or cause to be paid any progress payment within ten (10) days of the Contractor- requesting payment or within any longer time after request as is indicated in Schedule 14, the Contractor may, without prejudice to his right to determine his employment under this Contract in pursuance of the provisions of Condition 32, suspend the Project and forthwith give notice of the suspension in writing to the Principal." CL31 (a) provided that if the Contractor should make default in any of a number of respects set out thereunder which included: "(ii) If he fails to proceed with the Project with due diligence or in a competent manner;..... AND if, in the face of a default that is capable of remedy, he shall continue that default for ten (10) days after notice in writing has been given to the Contractor specifying the default and stating the Principal's intention of determining the Contractor's employment, THEN the Principal may, without prejudice to any other rights or remedies, by notice by registered mail, determine the employment of the Contractor under this Contract." CL31 (b) provided for the following procedure upon determination by the Principal: URJ WINROBE PTY LTD v SUNDIN'S BUILDING CO PTY LTD [No 3] (Sheller JA) 5 "Tn the event that the Principal determines the employment of the Contractor in accordance with Condition 31 (a) the Principal may thereupon engage another Contractor to carry out and complete the Project and the following provisions shall apply: (i) The Contractor shall give the Principal two (2) copies of Drawings and Specifications that the Contractor has prepared (whether or not previously provided to the Principal) before the determination of the Contractor's employment. (ii) If the reasonable cost of completing the Project by the other Contractor (after taking into account the amount available to the Principal from any Retention Fund or other form of security under this Contract) exceeds that which would have been otherwise payable under this Contract, then the amount of that excess shall be a debt due and payable by the Contractor to the Principal. (iii) If the reasonable cost of completing the Project by the other Contractor (after taking into account the amount available to the Principal from any Retention Fund or other form of security under this Contract) differs from but is less than that which would have been otherwise payable under this Contract, then the amount of that difference shall be a debt due and payable by the Principal to the Contractor." CL32 provided that: "Tf the Principal shall make default in the following respect, inter alia: (c) If he fails to pay the Contractor any progress payment within ten (10) days of a written request or within any longer time as is specified in Schedule 14,...... AND if, in the case of a default that is capable of remedy, he shall continue the default for ten (10) days after notice in writing has been given to the Principal (specifying the default and stating the Contractor's intention of determining his employment), THEN the contractor may, without prejudice to any other rights or remedies, thereupon by notice by certified mail, determine his employment under this Contract." RIGHTS OF CARRIAGEWAY Access to Lots 4 and 5 from Leighton Place was by way of two adjoining strips of land, part of the respective lots, which ran from Leighton Place in an easterly direction and then curved to the north. These strips of land, which were referred to as a "handle", were subject in part to easements in the form of rights of carriageway, in the case of the strip of land part of Lot 4, in favour of Lots 3 and 5 and in the case of the strip of land part of Lot 5, in favour of Lots 3 and 4. There were also drainage easements over Lots 4 and 5 each for the benefit of the other and also for the benefit of Lot 3. KNOWLEDGE OF EXISTENCE OF RIGHTS OF CARRIAGEWAY The Articles of Agreement were signed after the construction of the development had commenced on 19 October 1989. The approach to the Contractor to do the design and construct the work was made early in 1989. By March 1989 the Contractor had provided a number of what were called "options" which it presented to Mr Livingstone, who, with Mr Slattery, were ultimately accepted for the purposes of the case as representing or being the mind of the Principal. What was referred to as the fourth option was set out in a letter from the Contractor to the Principal dated 15 March 1989. In part the letter said: "We note that this proposal also relies on; 1. Solicitor checking title, particularly the easement between lots 4, and 5 to drain water over existing pipes. This option is dependent on gaining approval to build over this easement. 6 UNREPORTED JUDGMENTS 2. Council approving consolidation of lots 4 and 5. 3. Approval by Council to a 5 metre wide access ramp to upper level. In conclusion we believe this option to be the only feasible and workable construction method for you to be able to obtain a profit. Should this meet with your approval we will then commence to the next stage of development approval. This letter referred to the drainage easement but not to the rights of carriageway. Giles J observed: "The sketch for the fourth option was far from detailed, but if one sought to correlate the extent of the development with the rights of carriageway it indicated a structure upon or over part of the parcel the subject of the rights of carriageway, being the area where the access ramp and other interferences with the rights of carriageway were in fact constructed. I think it can be inferred that this structure was that referred to in the letter as an access ramp to the upper level for which council's approval was required." Whether as a result of this letter or for some other reason Mr Livingstone made some enquiry of the Principal's solicitor, Mr Freidman of Maurice Freidman and Company. Mr Freidman replied by letter dated 17 March 1989. In view of the importance attached to this letter in argument, I set it out, apart from formal parts, in full. "Re: Lots 4 and 5 Leighton Place, Hornsby I refer to your fax of the 15th instant and, in particular, the enquiry concerning the easement to drain water over existing pipes affecting lots 4 and S. I attach photocopy of the relevant page of Deposited Plan 748030 showing lots 4 and 5 which I have outlined in red and blue respectively for ease of reference. I advise as follows: 1. The relevant easement to drain water passes through lot 5 appurtenant to the southern boundary of lot 4 as disclosed by the broken line in the Plan. You will observe the pipeline also passes through the handle of lot 4. 2. That section of the pipe which passes through the handle of lot 4 has been reserved for the benefit of lots 3 and 5 whilst the section passing through lot 5 has been reserved for the benefit of lots 3 and 4. I assume, in these circumstances, the fall of the land is towards the east and that the pipeline is designed, in effect, to drain water from lots 3, 4 and 5. The easement to drain is covered by a statutory definition under the Conveyancing Act. Copy of the relevant easement to drain water as contained in the Conveyancing Act is attached. You will observe on reading the document reference to dominant and servient tenements. A dominant tenement is one which enjoys the benefit of an easement whilst a servient tenement is one affected by the easement. As lots 4 and 5 are or will be owned by companies controlled by you, they may be treated as servient tenements and lot 3 as the dominant tenement. It is my view, it will not be possible to erect improvements over the side of the easement without varying the easement as it presently exists. For this to be done, it would be necessary to obtain the approval of Abignano Limited. Such approval would need to be done in a formal manner and recorded on the title. As the pipe is obviously designed to carry storm water, approval of Hornsby Council may also be necessary. In view of the foregoing, it seems to me it will be necessary for you to confer with your builder as to whether there is any way by which drainage of water from the lots can be effected by means of possibly a substitute easement which would not interfere with any building proposed to be erected on the land. URJ WINROBE PTY LTD v SUNDIN'S BUILDING CO PTY LTD [No 3] (Sheller JA) 7 3. I also note the handle of lot 4 is affected by a right of carriageway 5 metres wide which I have hatched green on the Plan for ease of reference. That right of carriageway has been created for the benefit of lots 3 and 5 and it is assumed there is some sort of access ramp or driveway over the area designated. Vehicular traffic acceding [sic] 2 tonnes may not use the right of carriageway for the purpose of access to lot 3. 4. That portion of lot 5 hatched brown is also the subject of the similar right of carriageway as mentioned in 3 above. The right of carriageway has been created in favour of lots 3 and 4, however, vehicles using same for the purpose of ingress or egress from lot 3 may not accede [sic] 2 tonnes. 5. What are known as restrictions as to user have been created in relation to lots 3, 4 and 5 and copies of same are attached and, I trust, are self-explanatory. 6. The land is also affected by restrictions as to user created as a consequence of the registration of Deposited Plan 730453. Copy of the Plan is also enclosed. So far as I can determine, lots 4 and 5 are approximately in the area which has been hatched grey by me on the Plan. The restrictions affecting the property are contained in the document annexed and marked "X". I have marked with an asterisk the relevant sections of the documents which affect your particular lots and note that para7 of the document has been amended by a further document, it being a request Registered No W979943 which is also attached. You will observe I have marked with an asterisk the amendments effected by that document. I note on reference to CL7 of the document marked "X" there are restrictions on the type of structures which may be erected upon lots 4 and 5 as they now exist and that CL(c) contains restrictions concerning subdivisions. If you refer to CL(d) you should bear in mind both that clause and CL(e) have been varied by the document W979943. In addition CL8 of document "X" contains restrictions. If, after having read this letter and the attached documents, you are not thoroughly confused, I will be surprised. Should you have any enquiries, please contact me so that we may confer and discuss the position so far as it relates to your future plans. I further draw your attention to the fact that if you refer to the copy of Deposited Plan 730453, you will note there is a natural water course which appears to adjoin the area where I believe lots 4 and 5 are located and this being so, problems could be incurred in the future in carrying away storm water from the land otherwise than by means of the existing line of pipes. Yours sincerely, MAURICE FREIDMAN PS. At the time of dictating this letter, I have been unable to ascertain from the Water Board whether any sewer mains service the area and if so, their location. As soon as the relevant information is to hand, I will let you have it." Shortly after Mr Freidman sent this letter it was given to Mr Sundin, a director of the Contractor, together with other documents which included the relevant sheet of Deposited Plan 748030 which showed Lots 3, 4 and 5 and referred to the rights of carriageway. His Honour said: "Mr Sundin freely acknowledged that at all material times he appreciated that there existed the rights of carriageway in favour of Lot 3, that the development proposed by the Contractor involved building over the rights of carriageway, and that the development would 'interfere' with the rights of carriageway." Mr Livingstone's evidence was that, after he read the letter from Mr Freidman; "T didn't understand it hardly at all, to be perfectly honest." On 29 March 1989 Mr Livingstone sent the following facsimile to Mr Sundin regarding Lots 4 and 5. The substantial text of this was as follows: 8 UNREPORTED JUDGMENTS "Maurice F has been in touch re easement. Can you construct bldg per engineers (a) either piering another 2' higher or (b) run a 2' grate or man hole over the piping - Being ignorant but practical - why not? This will save a lot of legal stuff and if access is needed owners of SP would only be slightly inconvenienced if grate or man hole uplifted to get access to easement section. Would not impede parking layout. Please jump onto right people, fix the problem and help MF so, when selling, he can pacify a careful and wise solicitor who checks everything the way he does. Thank God he's on our side. JC can get onto Bill Rose up above in Lot 3, as he is abt to SP block - However, why? Perhaps you can liaise with MF showing DA lodged on the basis of consolidation Lots 4 and 5 which C'cl may withhold until submission of BA - MF has ideas to save leg work and costs on presentation. - Thanks for your help." His Honour found that Mr Livingstone rang Mr Sundin, told him that he did not understand Mr Freidman's letter and said "I've sent you his letter by fax, you're the builder, please liaise with him." Mr Sundin did "liaise" with Mr Freidman in relation to the drainage easement but not in relation to the rights of carriageway. The evidence, according to his Honour did not establish that Mr Freidman had any familiarity with the plans for the development which should have alerted him to the fact it involved building on the rights of carriageway. I have already referred to Mr Sundin's appreciation of the existence of the rights of carriageway in favour of Lot 3. He did not raise it with Mr Livingstone, by reason of Mr Freidman's letter or at all, and had no recollection of raising it with Mr Freidman. According to him he acted in the belief that the Principal was "aware of all matters pertaining to the site', that the Principal's solicitor would deal with "all legal matters pertaining to the site" and that the owners of Lot 3 would not object to the development which the Contractor was proposing. He said that he believed that the Principal had reached an agreement with the owners of Lot 3 which would permit the construction of the development in the form proposed. Save so far as Mr Freidman's letter supported them, none of these beliefs was the result of any express communication from the Principal, and none was directly raised by the Contractor with the Principal. In mid-April 1989 it was found that the owners of Lot 3 had encroached on Lot 4 by improvements to gain vehicular access to Lot 3 from the right of carriageway over Lot 4. Mr Livingstone drew this to the attention of Mr Freidman. However, both Mr Slattery and Mr Livingstone said that they first became aware of the problem when the surveyor engaged by them to prepare the Strata Plan for the development pointed out in May 1990 that the development might obstruct the rights of carriageway. Giles J accepted that they were not conscious of the problem at any earlier time. In April 1989 the Contractor submitted a development application on behalf of the Principal on the basis of the fourth option. The drawings, part of the development application, took up the fourth option. They were much more detailed than the sketch included as part of the fourth option. As his Honour said: "While they did not mark out or otherwise refer to the area burdened by the rights of carriageway, it would have been fairly obvious to the reader conscious of that area who turned his mind to the matter that the development included construction of the ramp, supporting columns and access stair on part of that area as in fact occurred. The drawings were sent by Mr Sundin to Mr Livingstone on URJ WINROBE PTY LTD v SUNDIN'S BUILDING CO PTY LTD [No 3] (Sheller JA) 9 12 April 1989 with a request for 'your approval of the proposal'. There is no evidence of the response, but it must have been one of approval. In the period to the end of April 1989 Mr Sundin conferred with Mr Livingstone on a number of occasions, and handed to him a document which included a description of, and plans of, the proposed access to the development by the ramp. In April or May 1989 a brochure was produced by the principal to advertise the development which included an artist's representation showing the vehicular access ramp." By letter of 2 June 1989 the Contractor submitted its price "for the Design and Construction" of the project. This letter included: "2. Price includes the following items. A. Design component. Architects, Engineers and all associated Design Consultants fees. B. Construction component. All costs required to build and complete structure as generally shown by the Development Application Drawings and attached schedule of finishes and to a standard to be approved by Hornsby Council and other relevant authorities. D. Form of Contract to be BC 3 (commercial) or equivilant [sic]. (See attached sample copy.)" The form of contract was replaced by the form "DECON 1 May 1988". "The letter noted that the copy had been completed in pencil, and asked the principal to provide the missing information, read the clauses and conditions and advise its agreement, and return the document with its comments as soon as possible. The principal responded with a number of comments immediately. It obtained detailed advice from Mr Freidman, and answered some questions raised by him. Copies of its correspondence with Mr Freidman were provided to the contractor. The correspondence ended with instructions from the principal to Mr Freidman by letter of 15 June 1989 to prepare a contract 'so that we can get everything executed early next week'." Nothing more was done about the contract for many months but the necessary approvals were obtained and the Contractor began work on 19 October 1989. By 20 March 1990 the formwork for the structure of the development was in place but it was not clear from the evidence what stage the construction had reached by that date. The contract was signed on or about 20 March 1990 apparently because it was required to support an application by the Principal for finance. In April 1990 a surveyor, Turnidge Naughton and Kimber Pty Ltd, was instructed to prepare a draft Strata Plan for the development. On 4 May 1990 the surveyor wrote a letter enclosing two advance copy Strata Plans and drawing attention to the rights of carriageway affecting the subject land. "Our searches reveal that Lot 3 adjoining has a pertinent rights [sic] of carriageway over this part of the subject land and your development may obstruct this right". This letter was received by Mr Slattery on or about the date it was written. His Honour found that the occasion of the receipt of this letter was the first time that Messrs Slattery and Livingstone were aware of the problem. As Mr Slattery said in his evidence: "Prior to the receipt of the letter from Turnidge Naughton and Kimber I was not aware that the building had been designed and constructed in such a manner as to encroach upon the rights of carriageway." This finding was not challenged in the appeal or cross appeal. PROCEEDINGS TO EXTINGUISH 10 UNREPORTED JUDGMENTS The discovery of the existence of the rights of carriageway resulted in proceedings being commenced in the Equity Division of the Court for extinguishment and lengthy negotiations between the Principal and the owners of Lot 3, the dominant tenement. Agreement was reached in the latter part of September 1990 at a cost to the Principal of $100,000, the expense of measures to control traffic on the handle and legal costs. However before this the Contractor and the Principal had ended their contractual relationship in the circumstances which I now recount. On or about 22 June 1990 Mr Slattery telephoned Mr Sundin. A conversation took place in the following terms: Slattery: "We are not getting anywhere with these people, we understand from Bruce Elson (from Camille) that they are trying to get some money out of this but the amount has not yet been determined. Our solicitors say the best thing for us to do is to get the proceedings under way and this has been done. It looks like it might cost us about $20,000 to get this thing resolved." Sundin: "Don't offer them any money at this stage." Slattery: "As far as we are concerned if we have to pay them then they will be paid and any money we have to pay them will be deducted from your progress claims." Sundin: "What about our claim for extras?" Slattery: "Until this matter is resolved will not even consider any claims for variations to the contract." Sundin: "We are not responsible for the problem with the right of way, and we still expect to receive your confirmation that the variations will be paid." The conversation was about the amount of money necessary to buy out or compensate the owners of the easements, the extent to which the Contractor would contribute to this, the Contractor's claim for extras and ultimately the Contractor's contention that it was not responsible for the problem with the rights of way. The evidence shows, and this was not contested, that the Works were approximately 80 per cent complete in July 1990. On the day of the conversation the Principal commenced the proceedings for extinguishment of the easements. On 22 July 1990 Mr Slattery rang Mr Sundin and the following conversation took place: Slattery: "The Court has given expedition. They have been ordered to file affidavits by 10 August and we have to file ours by 17 August. The matter then comes before the Court on 24 August and we are going to ask the Court to give us a hearing date." Sundin: "Okay, let me know what's happening." On 31 July 1990 the Contractor delivered progress claim number 14 which the Principal did not pay. On 2 August the Principal gave instructions to its solicitors to make an offer of settlement of the proceedings and on 7 August was informed by its solicitors that the owners would require the payment of $800,000 compensation or the transfer to them of four units for the extinguishment of the rights of carriageway. On 7 August 1990 Mr Slattery rang Mr Sundin and the following conversation took place: Slattery: "These people want $800,000 or four units to settle. My solicitors say that the best thing to do is to go to Court and we are hoping to get a hearing date from the Court on the 24 August." Sundin: "If that's the case, what about our progress payment?" Slattery: "We had better have a meeting to discuss that." URJ WINROBE PTY LTD v SUNDIN'S BUILDING CO PTY LTD [No 3] (Sheller JA) 14 On 10 August 1990 the defendants in the Equity proceedings for the extinguishment of the easements filed a cross claim seeking removal of the buildings and other structures erected on the rights of carriageway. Mr Slattery described the position in which the Principal then found itself in the following terms: "Tn the circumstances of the building having been erected upon the rights of carriageway the defendants were unable to register any strata plan of subdivision and if the defendants in the proceedings were successful in their cross claim it would have been necessary to demolish part of the building, substitute access made available to the top floor of the building and the building redesigned. On 18 August 1990 I met with my architect, Mr Drew Dickson, on the site and he informed me that (apart from the delays involved) if the defendants were ordered to demolish part of the building including the ramp to the top floor then significant redesign work for the building would be required and the demolition cost rebuilding and redesign costs would exceed $500,000." On 22 August 1990 the Court declined to give a hearing date and fixed a timetable for interrogatories and further affidavits. The length of the hearing was assessed at five days and Mr Slattery was advised that it might not take place until December 1990 at the earliest or possibly until March or April 1991. On 23 August 1990 he telephoned Mr Sundin and the following conversation took place: Slattery: "The Court won't give a hearing date." Sundin: "We will have to suspend the works. Are you going to recommend to AEFC that payment of the progress claim be made?" Slattery: "No." TERMINATION On 23 August 1990 the Contractor received a document described as "NOTICE UNDER CL31 OF DESIGN AND CONSTRUCTION CONTRACT" in the following terms, omitting formal parts: "WHEREAS A. On 20th March, 1990 Sundin's Building Co Pty Ltd ("the Contractor') entered into a Design and Construct Contract - Lump Sum ("the Contract") with Winrobe Pty Ltd and Simpost Pty Ltd ("the Principal') to: (i) With due care and skill carry out all activities involved in the design of the Works (as defined in the Contract) and (ii) Execute the work shown on the Contract Drawings and described by or referred to in the Specifications and Conditions. B. The Contractor has failed to proceed with the Project with due diligence or in a competent manner. C. Pursuant to CL31 of the Contract if the Contractor makes default in failing to proceed with the Project with due diligence or in a competent manner and should continue that default for 10 days after notice in writing has been given to the Contractor by the Principal specifying the default and stating the Principal's intention of determining the Contractor's employment then the Principal may without prejudice to any other rights or remedies, by notice by registered mail, determine the employment of the Contractor under the Contract. NOW THEREFORE TAKE NOTICE as follows: 1. That pursuant to CL31 of the Contract the Principal gives notice that the Contractor has failed to proceed with the Project with due diligence or in a competent manner particulars whereof are set out in the Schedule to this notice AND FURTHER TAKE NOTICE that if the Contractor shall continue the default 12 UNREPORTED JUDGMENTS for 10 days after this notice has been given to the Contractor then it is the intention of the Principal to determine the Contractor's employment under the Contract. 2. In this notice the terms used shall have the same meaning as in the Contract. SCHEDULE The Contractor has failed to proceed with the Project with due diligence or in a competent manner in that the Contractor has designed and constructed the Works in such a manner that the same encroach upon the Rights of Carriageway burdening the Site being Lots 4 and 5 in Deposited Plan 748030 so as to preclude the Proprietors of Strata Plan No 34735 which is the registered proprietor of the dominant tenement from having the benefit of such Rights of Carriageway. Dated 23rd August 1990." On the same day the Contractor wrote to the Principal in the following terms omitting formal parts: "Re: DESIGN AND CONSTRUCT CONTRACT ('THE CONTRACT") BETWEEN YOU AND SUNDIN'S BUILDING Co Pty Ltd DEVELOPMENT OF LOTS 4 AND 5 LEIGHTON PLACE, HORNSBY ("THE PROJECT") We refer to our request for progress payment dated the 30th July 1990 a copy of which is enclosed. As payment of the said progress payment has not been received we have suspended the project in accord with CL30 of the Contract from 3.30 pm, on 23rd August, 1990. All our other rights arising under the contract are reserved." On 13 September 1990 the Principal served upon the Contractor a document headed "NOTICE OF DETERMINATION OF DESIGN and CONSTRUCT" in the following terms omitting formal parts: "FURTHER to the Notice under CL31 of the Building Contract described in the Schedule (the Building Contract") served upon you on 23rd August, 1990 in pursuance of the CL31 of the Building Contract and pursuant to all other rights and powers enabling them Winrobe Pty Ltd and Simpost Pty Ltd hereby give you notice that your employment as Contractor under the said Building Contract is hereby determined and such determination is without prejudice to all accrued rights and causes of action thereunder or resulting therefrom on the part of Winrobe Pty Ltd and Simpost Pty Ltd SCHEDULE Design and Construct Contract - Lump Sum between Winrobe Pty Ltd and Simpost Pty Ltd (as Principal) and Sundin's Building Co Pty Ltd (as Contractor) dated 20th March, 1990 in respect of the property known as Lots 4 and 5 Leighton Place, Hornsby being Lots 4 and 5 in Deposited Plan 748030. Dated 12th September 1990" In the meantime the Contractor had made progress claim 15 which had not been paid. On 18 September 1990 the Contractor served upon the Principal a notice which treated the failure to pay progress claims 14 and 15 as defaults and the service of the notice terminating the contract as a default and gave notice that if those defaults were continued for ten days it was its intention to determine its employment under the contract. By a further notice dated 10 October 1990 it did terminate its employment. The Principal then changed the locks and let a contract to another builder to complete the development. As his Honour observed: "Undoubtedly the Contract was at an end." PROCEEDINGS BEFORE GILES J URJ WINROBE PTY LTD v SUNDIN'S BUILDING CO PTY LTD [No 3] (Sheller JA) 13 The proceedings giving rise to this appeal and cross appeal were commenced by a summons issued by the Contractor which, as amended by leave granted on 17 September 1990, claimed, relevantly, a declaration that the Principal by notices dated 23 August 1990 and 13 and 14 [sic] September 1990 wrongfully purported to determine the building contract between the Contractor and the Principal and damages. The Principal filed a cross claim against the Contractor seeking, inter alia, the following relief: "1. A declaration that the Cross Defendant has repudiated its obligations pursuant to articles of agreement made on or about 20th March, 1990 to carry out all activities involved in the design of the Works (as therein defined) with due care and skill. 2. Further or alternatively a declaration that the Cross Defendant has repudiated the said agreement by reason of its failure to proceed with and perform its obligation to design the said works with due diligence and in a competent manner. 3. A declaration that in consequence of the said breaches referred to in paral and para2 hereof, and further or alternatively, by reason of the refusal of the Cross Defendant to comply with the Cross Claimant's notice dated 23rd August, 1990, the Cross Claimants have validly determined the said agreement. 4. Further, or alternatively, a declaration that the Cross Defendant is in breach of its warranty to the Cross Claimants that its design of the said works had been and should be carried out with due care and skill. 5. Damages, together with interest therein, pursuant to s95, Supreme Court Act, 1970, and otherwise." As his Honour saw it the ultimate questions in the proceedings on which liability depended were which of the parties had validly terminated the contract and whether (apart from the consequences of termination) the Contractor was liable to the Principal in relation to the building of the development on the rights of carriageway. In his judgment of 18 December 1990 his Honour held that there was no failure on the part of the Contractor to proceed with the project with due diligence or in a competent manner. He said: "As the principal pointed out, the Project included the contractor's obligation to design the Works as well as to construct the Works. Implicit in the principal's notice given on 23 August 1990 was that the contractor was obliged to redesign and construct or reconstruct the Works so that there was no encroachment on the rights of carriageway interfering with the enjoyment of the rights of carriageway by the owners of lot 3. The principal relied for this obligation on an express obligation which it said was found in CLI (a) of the articles of agreement and CL11, CL13 and CL20 of the conditions, and did not contend for an implied obligation to correct a design (eg Equitable Debenture Assets Corporation Ltd v William Moss Group Ltd (1984) Con LJ 74) or warn of a defective design (eg Victoria University of Manchester v Wilson (1984) 2 Con LR 43; cf University of Glasgow v Whitfield (1988) Con LJ 416). Any such implied obligation may well have been inconsistent with the express terms of the contract, but that did not arise. For the reasons I have given, I do not think that in August 1990 there was any obligation on the contractor to so redesign the Works. On the contrary, the contractor was obliged to execute the work shown upon the Contract Drawings, and thus to construct the Works by building on the rights of carriageway in such a way as to interfere with the enjoyment of the rights of carriageway. The principal could vary the Works, but its remedy was in damages 14 UNREPORTED JUDGMENTS for the breach of the warranty in CL20 of the conditions. Hence the principal was not entitled to terminate the contract, as it purported to do by the notices of 23 August and 13 September 1990, pursuant to CL31 of the conditions. It follows also that the principal was not entitled to fail to pay progress payments 14 and 15. The contractor was entitled to suspend the Project, as it did on 23 August 1990, and any failure to carry on with the Works thereafter could not be a breach of the contract. And in due course the contractor was entitled to terminate the contract, as it did by the notices of 18 September and 10 October 1990, pursuant to CL32 of the conditions." His Honour rejected the Principal's argument that it had validly terminated the contract by the notice of 13 September 1990 on the basis that there was no obligation by the Contractor to redesign and construct or reconstruct the Works to avoid encroachment on the rights of carriageway interfering with their enjoyment by the owners of Lot 3. Further as at 13 September 1990 the Contractor was not obliged to carry on with the Works, since it had validly suspended the project on 23 August 1990. His Honour did however hold that the Contractor had failed to exercise due care and skill in the design "because it failed to take adequate steps to make known to the Principal that the fourth option involved building on the rights of carriageway and interference with the enjoyment of the owners and occupiers of Lot 3 of the rights of carriageway." It seemed to him that it was incumbent upon the Contractor to make sure that someone on behalf of the Principal realised that the design involved interference with the rights of carriageway, so that the Principal could select the fourth option, approve the development application, and go ahead with the development, in the knowledge that it would be necessary for it to reach agreement with the owners of Lot 3. The Contractor did not do so. Therefore in his view the Contractor was in breach of the warranty in CL20 of the conditions and the Principal was entitled to damages for the breach. His Honour rejected arguments advanced on behalf of the Contractor that the Principal was estopped from maintaining that it was in breach because its conduct had led the Contractor to believe that the Principal was aware of the position, was content with a development which involved building on the rights of carriageway and had reached or would reach an agreement with the owners of Lot 3. He rejected also an alternative argument that the Principal had engaged in misleading conduct within the meaning of s52 of the Trade Practices Act 1974 causing the Contractor to act to its detriment by continuing to carry out the works in the belief that there was no need that it procure the partial extinguishment to the rights of carriageway. The short answer, in his Honour's view, to these arguments was that any impression conveyed to the Contractor that the design was acceptable in this respect was occasioned by the Contractor's own failure to exercise due care and skill. His Honour referred out enquiries into damages and gave further judgments related to reports of the referee. On 18 October 1991 his Honour ordered that the Principal pay to the Contractor the sum of $770,485.99 and the Contractor pay to the Principal $351,496.40 with a resultant entry of judgment in favour of the Contractor in the sum of 418,989.59. The Principal was ordered to pay one half of the Contractor's costs of the proceedings up to and including 11 October 1991. APPEAL TO THE COURT OF APPEAL The Principal appealed against that part of his Honour's decision given on 18 December 1990 determining that the contract between the parties had not been validly determined by it on 13 September 1990 but had been so determined by URJ WINROBE PTY LTD v SUNDIN'S BUILDING CO PTY LTD [No 3] (Sheller JA) 15 the Contractor on 10 October 1990. The Principal sought a declaration that by reason of the valid termination by it of the contract the Contractor was not entitled to recover the damages found in its favour. Further, or alternatively, the Principal sought a declaration that in tendering a defective design for the Works and purporting to execute the same in accordance therewith or alternatively in failing to redesign or reconstruct the Works to avoid the consequences of the defective design the Contractor had repudiated its obligations under the contract, that such repudiation constituted a fundamental breach of the Contractor's obligations under the contract and that the Principal was thereby entitled to and had elected validly to terminate the contract. Giles J was said to have erred in finding that the only remedy available to the Principal on the true construction of the contract was the right to damages for breach of warranty, to the exclusion of any right of termination whether pursuant to the express provisions of the contract or for fundamental breach. The Contractor cross appealed against that part of his Honour's decision given on 18 December 1990 determining that the Contractor failed to exercise due care and skill in the design of the development and his Honour's decision given on 18 July 1991 determining that in assessing the damages payable by the Principal to the Contractor for wrongful termination of the contract the referee should have allowed $558,003 rather than $687,003 for what was described as "unpaid balance contract price". The appeal and cross appeal were also, in consequence, against the orders made by Giles J on 18 October 1991. Other matters raised in the notice of cross appeal were not pursued at the hearing of the appeal and cross appeal. MEANING OF THE CONTRACT Central to Giles J's decision of 18 December 1990 that the Principal had not validly terminated the contract was his view that the contract drew a line between design work prior to contract and design and construction work thereafter. This view founded his Honour's ultimate conclusion that the Contractor's design obligation under the contract was confined to the parameters set by the design documents or consequent upon a variation. Any problem in the design prior to contract was the subject of the warranty in CL20 that the design of the works "has been" carried out with due care and skill. His Honour awarded the Principal damages for breach of this warranty. The consequence of this view was that the Contractor was contractually obliged to build on the rights of carriageway and interfere with their enjoyment. Any further design work which it performed had to be within the parameters thus imposed upon it. Only a variation in accordance with the contract would alter the position. His Honour did not regard this as leading to what might, as the Principal submitted, be seen to be an uncommercial position namely an obligation to build a defective structure knowing that it must be demolished on completion. It did not do so, so his Honour thought, because the Principal could give an instruction to vary the work and if the problem in the design was the responsibility of the Contractor it could hardly be acting reasonably if it withheld consent. Commercially his Honour considered this unlikely to arise, because the warranty of the design carried out prior to contract would provide a powerful incentive to a contractor to redesign so as to overcome the problem and construct or reconstruct accordingly rather than pay damages for breaching the warranty. The following are the relevant contractual obligations of the Contractor: 16 UNREPORTED JUDGMENTS Pursuant to CL1 of the Articles of Agreement "upon and subject to the conditions annexed" thereto with due care and skill to carry out all activities involved in the design of the Works, that is to say the works shown upon the Contract Drawings and described by or referred to in the Specification as they may be varied (if at all) from time to time in accordance with the Agreement. The Contract Drawings are the drawings and specifications that form part of the Design Documents referred to in the Articles of Agreement and also include any further drawings and specifications produced by the Contractor pursuant to the Contractor's design obligations. Pursuant to CL13 (a) of the annexed Conditions of Contract from the date of the Contract to continue with the design of the Works and bring the design of the Works to such a stage that application for approvals from authorities shall have been submitted. Pursuant to CL13 (c) having commenced the carrying out of the Works to continue from time to time to carry out the design of the Works in such a way as to ensure the timely completion of the Project, that is to say the Works including the Contractor's obligation to design the Works. Pursuant to CL20 to carry out the design of the Works with due care and skill appropriate to the undertaking. Pursuant to CL21 with due care and skill and subject to the Conditions to carry out and complete the Works shown on the Contract Drawings and described in the Specification. In my opinion the obligation in CL13 (a) to "continue with the design of the Works" and in CL13 (c) to "continue, from time to time to carry out the design of the Works" involves more than carrying out design work within what his Honour described as the parameters of the pre-contract design. Recital A. to the contract which evidences the Principal's desire, at the date of contract, to have building works designed and constructed by the Contractor, Recital D which speaks of the provision of design as necessary in sufficient detail to enable the Contractor to provide a price and Recital F which speaks of the Principal's satisfaction, after thorough examination, that the Design Documents appear (my emphasis) to meet his requirements tell against an obligation limited to the parameters of a pre-contract design. The word "continue", in the context of this contract, denotes the carrying on of something already begun as part of an ongoing process; compare Gardner v Blaxill (1960) 2 All ER 457 at 460; the prolongation of an activity already begun; compare LM Electrics Pty Ltd v SGIO (Queensland) (1984) 2 QdR 394 at 398. It is not the case of an independent architect or designer which has prepared a design upon the basis of which the builder subsequently contracts. There is one obligation to continue to carry out the design of the Works being the works shown upon the Contract Drawings which include any further drawings and specifications produced pursuant to the Contractor's design obligations. If the original design is defective, this obligation requires that the Contractor remedy the defect. If a builder contracts to build a house and in the course of building it defective work is done the obligation to build would normally embrace the obligation to remedy that defect. Similarly if there is a contract to design and in the course of carrying out the design work there is found to be a defect in the design the obligation extends to remedying that defect. The use of the expression "continue" denotes an obligation undertaken by the Contractor at the time of contract to carry on the design process. The Contractor was in breach of this obligation. Accordingly I do not agree with his Honour's view that there was no URJ WINROBE PTY LTD v SUNDIN'S BUILDING CO PTY LTD [No 3] (Sheller JA) 17 obligation in the circumstances to redesign. Moreover the nature of the contract was such that the Contractor was obliged to construct or reconstruct in accordance with the redesign. In my opinion there was a breach of this contractual obligation by the Contractor. CL31 NOTICE The notice given by the Principal under CL31 of the contract recited the Contractor's obligation under CL1 of the Articles of Agreement: (a) with due care and skill to carry out all activities involved in the design of the Works (as defined in the contract), and (b) to execute the work shown on the Contract Drawings and described by or referred to in the Specifications and Conditions. The notice recited that the Contractor had failed to proceed with the project with due diligence or in a competent manner and, pursuant to CL31 of the contract, gave notice that the Contractor had failed to proceed with the Project with due diligence or in a competent manner. The particulars of this, as set out in the schedule to the notice, were that the Contractor had designed and constructed the Works in such a manner that the same encroached upon the rights of carriageway burdening the site being Lots 4 and 5 so as to preclude the proprietors of strata plan number 34735 which was the registered proprietor of the dominant tenement from having the benefit of such rights of carriageway. If the Contractor was obliged to redesign and construct or reconstruct in accordance with the redesign, as in my opinion it was, it had clearly failed duly to perform this obligation. The Contractor did not argue at the trial that the notice received by it on 23 August 1990 was not a notice validly based on this breach. In our judgment of 24 December 1992 (Winrobe Pty Ltd and Anor v Sundin's Building Co Pty Ltd (No 2)) we held that it was not open to the Contractor to do so on the appeal. It follows that since the Contractor did not comply with the notice, the Principal duly terminated the employment of the Contractor by its notice of 13 September 1990. The procedure upon such determination is described in CL31 (b). It also follows that the Contractor's notice of 10 October 1990 purporting to terminate its employment was of no effect. REPUDIATION Giles J recorded in his judgment of 18 December 1990 that the Principal argued that quite apart from CL31 of the conditions it was entitled to terminate the contract, and had validly terminated the contract by the notice of 13 September 1990 and by thereafter excluding the Contractor from the Site, in the exercise of the common law power of accepting a repudiation by the Contractor. The repudiation upon which the Principal relied was failure to redesign and construct or reconstruct the Works so that there was no encroachment on the rights of carriageway interfering with the enjoyment by the owners of Lot 3 of those rights. His Honour held that the argument failed by reason of his conclusion that there was no such obligation on the Contractor and further that as at 13 September 1990 the Contractor was not obliged to carry on with the Works at all, since it had validly suspended the project on 23 August 1990. Since in my opinion the Contractor was obliged to redesign and construct or reconstruct the Works the Principal's contention cannot be rejected for the reasons which found favour with Giles J. Giles J questioned whether the notice of 13 September 1990 could be read as the acceptance of a repudiation since it purported to be an exercise of the contractual power of termination, although it did refer to "all other rights and powers". He referred to Summers v The Commonwealth (1918) 25 18 UNREPORTED JUDGMENTS CLR 144 at 151. His Honour made no finding as to whether the exclusion of the Contractor from the Site amounted to an acceptance of a repudiation. The conclusion that the termination was valid under CL31 (a) makes it unnecessary to consider further this alternative basis for saying that the Principal validly terminated the contract. However the breach of contract constituted by the failure to redesign and whether this was a repudiation accepted by the Principal may have consequences in the assessment of damages recoverable by the Principal. The Principal's argument was based not, I think, upon the Contractor's design obligations being such that either party would have regarded a breach however slight as entitling it to terminate (see, for example, Tramways Advertising Pty Ltd v Luna ParK (NSW) Ltd (1938) 38 SR 632 at 641; Hong Kong Fir Shipping Co Ltd v Kawasaki Kisen Kaisha Ltd [1962] 2 QB 26 at 62) but rather on an intention evinced by the Contractor no longer to be bound by the contract or to fulfil the contract only in a manner substantially inconsistent with its obligations and not in any other way; see generally Shevill v Builders' Licensing Board (1982) 149 CLR 620 at 625-6; as explained in Laurinda Pty Ltd v Capalaba Park Shopping Centre Pty Ltd (1989) 166 CLR 623 particularly at 633-4, 641-5, 657-9 and 664-6. In Hong Kong Fir Shipping Co Ltd v Kawasaki Kisen Kaisha Ltd at 56, 64 and 70 the English Court of Appeal returned to the "legal landmark" of Boone v Eyre (1777) 1 Hy BI 373n; 126 ER 160n and re-emphasised the principle that one party's right to be free of his further obligations will, in most instances, depend on the extent and gravity of the breach by the other, rather than on the classification of the particular term broken. In DTR Nominees Pty Ltd v Mona Homes Pty Ltd (1978) 138 CLR 423 at 432 Stephen, Mason and Jacobs JJ, with whom Aickin J agreed, quoted with approval from the judgment of Pearson LJ in Sweet and Maxwell Ltd v Universal News Services Ltd [1964] 2 QB 699 at 734: "Tn the last resort, if the parties cannot agree, the true construction will have to be determined by the Court. A party should not too readily be found to have refused to perform the agreement by contentious observations in the course of discussions or arguments...... As their Honours said a party may be willing to recognise his heresy once the true doctrine is enunciated or he may be willing to accept an authoritative exposition of the correct interpretation. See also Greig and Davis, The Law of Contract 1208-9. The Contractor did not argue that the notice received by it on 23 August 1990 was not a valid notice under CL31. But we do not know what arguments were advanced as to the effect of the notice of termination as an acceptance of repudiation. No firm finding was made by Giles J as to whether if the breach amounted to a repudiation there was an acceptance and what flows from this. His Honour was dealing with whether or not there was a valid termination. However he rejected the argument on bases with which I do not agree. Accordingly it should, I think, be open to the Principal to put such submissions as were open to it on the evidence at the trial as to the consequences of the Contractor's breach of contract, if any, in damages. In the circumstances I do not think that we should investigate this issue further on the appeal. BREACH BY THE CONTRACTOR OF THE CL20 WARRANTY His Honour held that the Contractor failed to exercise due care and skill in the design, because it failed to take adequate steps to make known to the Principal that the fourth option involved building on the rights of carriageway and interference with the enjoyment of the owners and occupiers of Lot 3 of the rights URJ WINROBE PTY LTD v SUNDIN'S BUILDING CO PTY LTD [No 3] (Sheller JA) 19 of carriageway. Neither party called expert evidence but reference was made to a dictum of Lloyd-Jacob J in Armitage v Palmer (1959) 173 EG 91: "If by reason of the manner in which an architect sited a building it infringed an easement enjoyed by a neighbouring owner of which the architect had actual or constructive notice, he had not exercised reasonable skill or care". His Honour cited a passage in Hudson's Building and Engineering Contracts, 10th ed, at 144 where it is stated: "If an architect designs or constructs work without proper reference to the rights of adjoining owners, (except under specific instructions from his employer, or unless he has called the employer's attention to the effect of the work on the apparent rights of adjoining owners) he may render himself liable for negligence." It was not seriously contended that the obligation of the Contractor pursuant to this contract and in this respect was any different from that of an architect. In my opinion, careful and skilful design takes appropriate account of the rights of adjoining owners. The Contractors' design failed to do this and accordingly it was prima facie in breach of the warranty in CL20. The exceptions suggested by the learned editor of Hudson's and set out in parenthesis are not necessarily comprehensive or of universal application. In the present case the Contractor had no specific instructions from the Principal to interfere with the rights of carriageway. Nor did it call the Principal's attention to the effect of the work on the apparent rights of the owners of the easements. As I understood it the argument was that the responsibility for advising the Principal and for taking steps to remove or vary the rights of carriageway rested with the Principal's solicitor, Mr Freidman. Even if this could provide an answer to the Principal's allegations of breach, the facts found by his Honour do not support it as an exception to the warranty or excuse for its breach. His Honour found that neither in writing or orally did the Contractor point out to the Principal what the design entailed in respect of interference with the rights of carriageway. Although Mr Sundin said he thought the Principal had the relevant awareness, his belief depended upon the Principal marrying up the sketch accompanying the fourth option or the drawings part of the Development Application with knowledge of the area burdened by the rights of carriageway. "In the glare of hindsight, the result of that exercise is clear enough, but why should the Principal have turned its mind to it without some indication from the Contractor? I do not think that the Principal failed to exercise reasonable care in marrying up the two areas of information - after all, it had committed the design to the Contractor." With these comments by his Honour I entirely agree. His Honour went on to point out that Mr Sundin knew that Mr Livingstone had been made aware of the rights of carriageway by Mr Freidman's letter but he also knew that Mr Livingstone professed a very imperfect understanding of the title of the site and had referred him, Mr Sundin, to Mr Freidman. In argument before us the Contractor relied upon the fact that Mr Freidman had conducted some investigation into the easements affecting Lots 4 and 5 as is evidenced by his letter of 17 March 1989. His letter referred in some detail to the drainage easements and to the substitution of an easement which would not interfere with any building proposed to be erected on the land. Mr Freidman also referred to the rights of carriageway but says nothing about the structure interfering with them. This supports the view that Mr Freidman did not have any particular knowledge of the development proposal. There is certainly nothing in the letter to suggest that by contrast with the drainage easements he had in mind 20 UNREPORTED JUDGMENTS such interference and was putting forward any proposal to deal with it. Mr Sundin knew that Mr Livingstone did not understand the letter. Mr Livingstone asked Mr Sundin to liaise with Mr Freidman which Mr Sundin failed to do. Some argument was addressed to us about the meaning of the word "liaise". In the context in which it was found in this correspondence it called upon Mr Sundin to have some contact with Mr Freidman to resolve what the Contractor, reasonably, should have recognised as a considerable problem. In all these circumstances to do nothing to apprise the Principal of the effect of the design upon the rights of carriageway or to seek to overcome the interference by the design with these rights either by modifying it or obtaining the consent of the owners of the rights of carriageway, in my opinion, leaves unaffected the primary obligation as I have stated it and the Contractor in breach of the warranty under CL20. The Contractor sought to argue by way of alternative that the Principal was estopped from relying on the warranty or alternatively prevented from doing so by reason of the Trade Practices Act and in particular the consequences of s52 of that Act. In my opinion these arguments are without any substance. There is no material which would have justified the Contractor in proceeding on the basis that the Principal was representing that it was aware of the effect of the design on the rights of carriageway or alternatively that the problems caused thereby had been resolved. As his Honour said: "The short answer to the arguments is that any impression conveyed to the Contractor that the design was acceptable in this respect was occasioned by the Contractor's own failure to exercise due care and skill." DAMAGES In his judgment of 18 December 1990 his Honour said that enquiries would be necessary into the damages suffered by the Principal as a result of the Contractor's breach of warranty and the damages suffered by the Contractor as a result of the Principal's wrongful determination of the contract. Such enquiries were conducted and, as I have indicated, on 18 October 1991 his Honour gave judgment based upon the reports of the referee. In my opinion, the Contractor failed to proceed with the Project with due diligence or in a competent manner and failed to comply, as it was bound to, with the notice under CL31(a). The Principal accordingly validly terminated the Contractor's employment. It follows that the Contractor's purported termination of the contract was nugatory and his Honour's judgment in favour of the Contractor in the sum of $770,485.99 cannot stand. The Contractor was in breach of its warranty under CL20. Damages have been assessed for the breach of warranty in an amount of $351,496.40. It is not clear whether the Principal in addition to damages for breach of warranty claimed at the trial to recover some amount pursuant to CL31(b) of the contract or damages for the Contractor's failure to redesign and construct or reconstruct the Works to ensure that they did not interfere with enjoyment of the rights of carriageway. I would propose the following orders: 1. Appeal allowed. 2. Cross appeal dismissed. 3. Judgment and orders of Giles J of 18 December 1990 and 18 October 1991 insofar as they provided for a verdict for the plaintiff on the plaintiffs claim in the sum of $770,485.99 and interest thereon and the entry of judgment in favour URJ WINROBE PTY LTD v SUNDIN'S BUILDING CO PTY LTD [No 3] (Sheller JA) 21 of the plaintiff in the sum of $418,989.59 and that the defendants pay one half of the costs of the plaintiff of the proceedings up to and including 11 October 1991 set aside. 4. Proceedings remitted to the Common Law Division Construction List for such directions as may be necessary to enable the appellants, if so advised, to apply to the Common Law Division Construction List for the assessment of such amount (together with interest thereon), if any, by way of payment under CL31(b) of the Lump Sum Design and Construct Contract or damages additional to the damages already assessed at $351,496.40, as they may have suffered as a result of the respondent's breach of its obligations under the contract to redesign and construct or reconstruct the Works to ensure that they did not interfere with enjoyment of the rights of carriageway, such amount, if any, together with interest thereon, to be added to the verdict for the defendants on the defendants' cross claim in the sum of $351,496.40 which is otherwise confirmed. In my opinion it follows from the above that the respondent should pay the appellants' costs before Giles J and of the appeal and cross appeal and should have, if otherwise qualified, in respect thereof a certificate under the Suitors' Fund Act 1951. We reserved the costs of the application to withdraw the judgment of 15 June 1992. The parties were put to these costs as a result of the failure of the appellants to make clear to the Court that the validity of the Principal's notice received on 23 August 1990 could not be an issue on the appeal. On the other hand it was an issue raised by the Court itself and not one raised by the Contractor. Thus the Principal in its appeal was taken unprepared. Further there seems to have been some misunderstanding by counsel about the issue raised by the Court. On the whole I think it appropriate that there be no order as to the reserved costs. CROSS APPEAL AS TO QUANTIFICATION OF CONTRACTOR'S DAMAGES For the reasons I have given in my opinion the Contractor was not entitled to damages. On the basis that it was, the Contractor challenged one integer in the assessment of the damages held by his Honour in his judgment of 18 July 1991 to be payable to the Contractor by the Principal for wrongful termination of the contract. Since this was fully argued and the matter may go further I set out the views that I have formed about this challenge. Part of the Contractor's claim was to "the profit" which, it claimed, it would have made in completing the Works but for the wrongful termination of the contract. The amount claimed of $735,003 was calculated by deducting from the contract price ($4,193,000) the payments made by the Principal ($3,132,143) and then deducting $325,854 for the cost which the Contractor would have incurred in completing the work. This left variations and the claim to a bonus for separate consideration. This formula accords with what is described in McGregor on Damages, 15th ed, para 1094 as the "normal measure" that is to say the contract price less the cost to the builder of executing or, in this case, completing the work. As the learned author pointed out in para 1095 another way of describing the measure is the net profit which the builder could have made on the whole contract plus his expenditure in part performance. In an early report the referee had assessed the cost to complete at $502,854, made up of $325,854 for on site costs and $177,000 for off site material costs, thereby reducing the claim as allowed to $558,003. The off site material costs consisted of $30,000 for metalwork, $18,000 for woodwork and $129,000 for 22 UNREPORTED JUDGMENTS electrical equipment. In his later report delivered on 24 May 1991 the referee deducted from the claim of $735,003 only the amount of $48,000 for the costs of metalwork and woodwork. He allowed the claim at $687,003. His reason for doing so was obscure but his Honour, correctly, in my opinion, was satisfied that, since the Principal had in fact paid for the costs of metalwork and woodwork, the Contractor had been relieved of the liability for these costs and accordingly the $48,000 should be deducted from its claim. In short this was part of the cost of the contract incurred by the Contractor but for which it had been compensated. In any event his Honour's view was not challenged on the appeal. This left the amount of $129,000 for the electrical equipment which his Honour said was still held by the Contractor and for which no doubt it remained liable to the electrical sub-contractor. He said: "The real question is whether the contractor's damages include compensation for this liability - hence my comment earlier in these reasons that it is misleading to describe the claim as a loss of profit claim." To go back to the two ways of measuring damages I have cited from McGregor, the expense of $129,000 had been incurred. If it had been incurred in part performance of the contract it would normally not be an item to be deducted from the contract price to which the Contractor was entitled or alternatively would be recoverable as part of the Contractor's expenditure in part performance. But these formulae do not deal with expenditure on equipment intended to be used in the performance of the contract but in fact not so used. The Principal's argument which succeeded before his Honour was that the amount of $687,003 arrived at by the referee as allowable for this claim should be further reduced by $129,000 to $558,003. There may have been some confusion in the way the argument was put caused by the tendency to regard this amount as a cost which the Contractor would have incurred in completing the work and therefore as something to be taken into account in determining the net profit rather than as an expenditure in part performance. But the particular question, which resulted in his Honour's concluding that the Contractor was not entitled to be compensated for this expenditure or liability, was how the value of the electrical equipment still in the hands of the Contractor should be taken into account in determining the amount of compensation, if any. His Honour said: "The principal submitted before me that the conclusion to which the referee came left the contractor with (as it was put) both the money and the box, in that it was reimbursed for the cost of the electrical equipment but retained the equipment for itself. The contractor's response was that this assumed that the electrical equipment was worth something in the hands of the contractor. It suggested that the electrical equipment was probably purpose built and unlikely to have any resale value. The referee made no finding as to this; he said that the principal 'had or could have had' the benefit of the equipment and for that reason there should be no provision in relation to its cost: in doing so, he appeared to adopt a submission that where the principal 'elected not to use the same electrical subcontractor... consequences that flow to [the principal] should not reasonably be paid for by [the contractor]' (I make an agreed correction to this passage from the report). Accepting as I do that the principal's approach to this item is the preferable approach, the basis for an adjustment to the figure arrived at from the starting-point of a cost to complete of $502,845 must be that the contractor's damages include compensation for its liability for the $129,000. That then calls for inquiry into whether the liability for the $129,000 is alleviated by possession URJ WINROBE PTY LTD v SUNDIN'S BUILDING CO PTY LTD [No 3] (Sheller JA) 23 of electrical equipment with a value of that or some other amount. It is not a question of whether the principal used the same electrical subcontractor - had it done so, and thereby used the electrical equipment and relieved the contractor of its liability, then it would have removed that integer of the contractor's damages, but it did not do so, and the integer remains for evaluation. The question is whether the contractor has established a loss of $129,000 or some lesser amount after allowing for the value in its hands of the electrical equipment. As I have said, the referee made no finding as to the resale value of the electrical equipment. Given that it was clear that the contractor had obtained electrical equipment for the price of $129,000, and still held that electrical equipment, I do not think that it could baldly assert that its damages included compensation for the $129,000. In my view it was incumbent on the contractor to establish its loss by evidence that the electrical equipment in its hands had no value, or an estimated value, whereby the true loss to it could be seen. I was informed in the course of the hearing that there was no such evidence before the referee - that is why the referee made no finding in relation to the electrical equipment being purpose built or in relation to its resale value. I am not prepared to assume that it had no value in the hands of the contractor, and it seems to me that the contractor failed to prove the loss necessary for the adjustment to the figure arrived at from a cost to complete of $502,845. It will be apparent that I do not regard the referee's conclusion as one of fact, and consider that the report discloses an error in his reasoning which precludes adoption of his conclusion." I entirely agree with his Honour's conclusion. I shall endeavour to explain why. In its submissions to us the Contractor urged that it was entitled to reliance damages equivalent to its wasted expenditure on this equipment on the principle that it should be placed in the same position as if the contract had been performed. The Contractor sought to rely upon the decision of the High Court in The Commonwealth v Amann Aviation Pty Ltd (1991) 174 CLR 64. Whereas we are here concerned with the wrongful termination by the Principal of Lump Sum Design and Construct Contract the High Court in that case was concerned with the assessment of damages for the wrongful termination of an agreement whereunder the plaintiff agreed to provide a service over a period of time. Fundamental to the contract here is the Principal's obligation to pay a lump sum contract price which normally would be expected to be sufficient of itself or as a result of appropriate variation to cover the Contractor's expenditure and provide a profit. Application of the principles to be derived from The Commonwealth v Amann Aviation Pty Ltd involves bearing this distinction in mind. Before coming to deal with that case I should say that the problem that concerned his Honour was the absence of proof that the expenditure was wasted. As I read his Honour's judgment he accepted or certainly did not deny the principle that the measure of damage might appropriately be calculated by taking the expected profit to the Contractor on performance of the contract, adding the expenditure in part performance and, of course, deducting payments that had already been made by the Principal. However the problem recognised by his Honour was a facet of another problem. It is not clear whether the liability for electrical equipment was a cost of capital equipment in which case what should have been apportioned to expenditure in performance of the contract was not the liability to pay $129,000 but the cost of using the equipment represented, perhaps, by depreciation; see generally per Brennan J in The Commonwealth v Amann Aviation Pty Ltd at 100. 24 UNREPORTED JUDGMENTS As was emphasised in that case there are in assessing damages in a situation such as the present two fundamental principles. The first is that where a party sustains a loss by reason of a breach of contract, the party is, so far as money can do it, to be placed in the same situation, with respect to damages, as if the contract had been performed; Robinson v Harman (1848) 1 Ex 850 at 855; 154 ER 363 at 365. The second is that the party should not be put in a better position than the party would have occupied had the contract been fully performed; L Albert and Son v Armstrong Rubber Co (1949) 178 F2d 182 at 191; see generally The Commonwealth v Amann Aviation Pty Ltd at 80-3, 98-99 and 104-8, 134-6, 148-50, 153-5 and 161-7. An exemplification of these principles is that if performance of the contract would have resulted in a loss to the plaintiff that loss must be taken into account in determining the extent to which the plaintiff can recover its expenditure in part performance. In the language of Brennan J at 99; "Tf a contract be a loss contract, the costs actually and reasonably incurred in performance are the subject of compensation, but only to the extent that those losses would have been recovered had the contract been performed." At 84 Mason CJ and Dawson J having referred to a number of cases and a statement in Corbin on Contracts, 1964 ed, at 205-6 said: "Thus, if a plaintiffs expenditure would not have been fully recouped had the contract been performed, then full compensation for the wasted expenditure would not be awarded. A plaintiff is only entitled to damages for an amount equivalent to that which would have been earned had the contract been fully performed. In this way, the award of damages assessed by reference to a plaintiff's expenditure is in complete conformity with the principle that an award of damages for breach of contract should place the plaintiff in the same position as if the contract had been performed." The Court also considered the case in which it is not possible to predict what position a plaintiff would have been in had the contract been fully performed, of which examples are McRae v Commonwealth Disposals Commission (1951) 84 CLR 377 and Anglia Television v Reed [1972] 1 QB 60. While there were differing opinions amongst their Honours as to the onus of proof, in such cases the plaintiff can recover damages for expenditure reasonably incurred. It may be sufficient for the plaintiff to prove his or her expenditure and that it was reasonably incurred, leaving it to the defendant to show that the value of the performance would in fact have been less than the promisee's outlay. In those classes of case, that is to say the case of the contract in which performance would not have produced a profit to the plaintiff or in which the amount of profit cannot be demonstrated, the damages recoverable may usefully be described as reliance damages or damages for wasted expenditure; see per Mason CJ and Dawson J at 81. The claim by the Contractor falls within neither of these categories. The Contractor has demonstrated that had the Principal performed the contract there would have been a profit to it in addition to the recouping of any expenditure by it in the discharge of its contractual obligations. But even in such a situation a party may in addition recover damages for expenditure wasted in reliance on the other party's performance; The Commonwealth v Amann Aviation Pty Ltd at 163. The method of calculation here adopted takes as its starting point the contract price. Had the Principal completed the contract the Contractor would have incurred the $129,000 and would have been obliged to recoup that from the contract price it received. It would not have had the benefit of retaining the electrical equipment or retaining it unused in the performance of the contract. URJ WINROBE PTY LTD v SUNDIN'S BUILDING CO PTY LTD [No 3] (Cripps JA) 25 But, in fact, the expenditure was not an expenditure in part performance. Accordingly, if the Contractor is to recover the amount for which it incurred liability on the electrical equipment it must demonstrate that it would be a wasted expenditure and the extent to which it was wasted. In short it had to demonstrate the amount of its loss as a result of incurring this liability bearing in mind that it retained the electrical equipment unused in the performance of the contract. It failed to satisfy his Honour as to the amount of damage it had suffered as a result of incurring this liability. His Honour accordingly, in my opinion, correctly, reduced the amount of the Contractor's claim by the cost of the electrical equipment from $687,003 to $558,003. Cripps JA I agree with the reasons of Sheller JA and the orders he proposes. 1. Appeal allowed; 2. Cross-appeal dismissed; 3. Judgment and orders of Giles J of 18 December 1990 and 18 October 1991, insofar as they provided for a verdict for the plaintiff on the plaintiffs claim in the sum of $770,485.99 and interest thereon and the entry of judgment in favour of the plaintiff in the sum of $418,989.59 and that the defendants pay one-half of the costs of the plaintiff of the proceedings up to and including 11 October 1991, set aside; 4. Proceedings remitted to the Common Law Division Construction List for such directions as may be necessary to enable the appellants, if so advised, to apply to the Common Law Division Construction List for the assessment of such amount (together with interest thereon), if any, by way of payment under CL31(b) of the contract or damages additional to the damages already assessed at $351,496.40, as they may have suffered as a result of the respondent's breach of its obligations under the Lump Sum Design and Construct Contract to re-design and construct or re-construct the Works to ensure that they did not interfere with enjoyment of the rights of carriageway, such amount, if any, together with interest thereon, to be added to the verdict for the defendants on the defendants' cross claim in the sum of $351,496.40 which is otherwise confirmed; 5. The respondent to pay the appellants' costs of the trial before Giles J and of the appeal and cross appeal other than the reserved costs of the application to withdraw the Court's earlier judgment but to have, if otherwise so qualified, in respect of the costs of the appeal, a certificate under the Suitors' Fund Act 1951; and 6. No order as to the costs of the application to withdraw the Court's earlier judgment. Counsel for the Appellants: B Coles QC/JT Svehla Instructed by: Church and Grace Counsel for the Respondents: P Donohoe QC/S Deane-Johns Instructed by: Carroll and O'Dea