New South Wales Supreme Court CITATION : Tryhaz v FielderFielder v Tryhaz [2005] NSWSC 906 HEARING DATE(S) : 22/08/2005 JUDGMENT DATE : 9 September 2005 JURISDICTION : Equity Division JUDGMENT OF : Associate Justice Macready at 1 CATCHWORDS : Building and Construction. Acceptance of report of a Referee under Part 72 of the Supreme Court Rules. Whether point should have been taken before Referee. Whether any error disclosed. Report adopted. Tryhaz Pty Limited v Fielder Engineers Pty Ltd Fielder Engineers Pty Limited v Tryhaz Pty Limited and anor PARTIES : FILE NUMBER(S) : SC 55012 of 2003; 55016 of 2003 F. Corsaro SC & S.E. Torrington for Fielders COUNSEL : J. Anderson for Tryhaz R.J.H. Darke SC & G.K.J. Rich for Multiplex Deacons for Fielders SOLICITORS : Gibson Howlin for Tryhaz Sparke Helmore for Multiplex Limited LOWER COURT JURISDICTION : - 1 - IN THE SUPREME COURT OF NEW SOUTH WALES EQUITY DIVISION TECHNOLOGY AND CONSTRUCTION LIST Associate Justice Macready Friday 9 September 2005 55012 of 2003 Tryhaz Pty Limited v Fielder Engineers Pty Ltd 55016 of 2003 Fielder Engineers Pty Ltd v Tryhaz Pty Ltd and Mark Robert Steele JUDGMENT 1 His Honour: This case concerns the adoption of a referee's report which dealt with a dispute concerning the construction of the wash barrier element of the marine and infrastructure works undertaken as part of the redevelopment of wharves 9 and 10, 7-11 Sussex Street, Sydney (King Street Wharf works). The scope of the marine works undertaken in the development included provision for STA ferry and commercial vessel berths and a boardwalk along the entire wharf face of berths 9 and 10. The wash wall extends some distance from the quay face and was intended to prevent any disturbance of the berths from the wave wash generated by port activities, and in particular by tug vessels. 2 The Referee, Mr P.R. Callaghan SC made his report to the Court on 4 July 2005. The parties are at issue on three matters arising out of his report, namely, interest, the finding that GST was payable on the damages awarded and whether or not the damages should include costs relating to painting rather than costs associated with cathodic protection of the structure. Background facts and history of the proceedings 3 These are not in issue and I will adopt with some modification the non-contentious matters set out in the helpful submissions of the parties. 4 Multiplex Constructions Pty Ltd ("Multiplex") was the design and construct contractor engaged for the marine works, including the wash barrier. Multiplex subcontracted the detailed design and construction of the marine section of the King Street Wharf works, which included the wash barrier, to the First Defendant/Cross Claimant, Tryhaz Pty Ltd ("Tryhaz"). 5 The sub-contract included specifications that required the design and construction of the wash barrier to certain performance requirements, including the requirement for the wash wall to withstand an ultimate wash force of 80 tonne wash force, assumed as originating 15 metres from the barrier and dispersing at a 10º angle. 6 Tryhaz engaged the plaintiff, Fielder Engineers Pty Ltd ("Fielder"), to provide engineering and project management services in connection with the marine works, including the wash barrier design. The wash barrier deteriorated after completion and there is a need for its reconstruction. 7 Fielder commenced the proceedings in 2001 against Tryhaz and its principal director, Mr Mark Steele to recover unpaid fees due as a result of "design savings" and claiming damages arising out of representations made to Fielder in connection with Fielder's retainer. 8 Tryhaz then brought a cross claim against Fielder arising out of the collapse of the wash barrier. It claimed damages for breaches of contract, alleging deficiencies in design and project management on Fielder's part. That cross claim included a claim for an indemnity in respect of Tryhaz's liability to Multiplex. 9 Multiplex claims damages by way of cross claim both against Tryhaz and against Fielder arising out of the defects in the wash barrier. The basis of the Multiplex claim is a matter of some dispute before me. The Referee's principal findings 10 The Referee found that there should be verdict for Fielder against Tryhaz for the design savings fee of $216,863 plus interest from October 2000 and a verdict for Mr Steele on the claim by Fielder against him. This finding is not challenged by Tryhaz; 11 The Referee found that Multiplex was entitled to recover the cost of reconstructing the wash wall so that it confirms to the sub-contract by way of a sheet pile solution, being the amount of $1,507,380 plus GST, less agreed retention of $168,137, 60% against Fielder and 40% as against Tryhaz. 12 Fielder and Tryhaz challenge the Referee's finding that Multiplex is entitled to GST on the rectification costs and the quantum of the rectification costs which it submits should not include painting but should include the costs of providing cathodic protection. On the evidence before the Referee, this had the effect of reducing quantum by $121,000. 13 Fielder and Tryhaz do not otherwise challenge the liability findings made by the Referee or the apportionment determined by the Referee; 14 The Referee also found that Multiplex should be entitled to interest on the rectification costs, but not before the end of 2002 on the grounds that Multiplex did not agitate the collapsed wall before that time. In the hearing before me Multiplex did not seek to receive any interest pre judgment on the basis that it has not yet carried out the rectification works and that damages were based on May 2005 costings. This matter can be put to one side and the Referee's report will not be adopted in this respect. Principles of law on the adoption of the Referee's report 15 As a result of the provisions of Paragraph 10 of Schedule 6 of the Civil Procedure Act 2005 the provisions of Part 72 of the Supreme Court Rules still apply to the consideration of the report. In any event there is no substantial difference between that Part and Part 20 of the Uniform Civil Procedure Rules so far as it affects these proceedings. 16 The most recent summary of the well developed relevant principles was by McDougal J in Seven Sydney Pty Ltd v Fuji Zerox Australia Pty Ltd [2004] NSWSC 902 in these terms: "11 The principles to be applied, in exercising the discretion conferred upon the Court by Pt 72 r 13 to adopt, vary or reject in whole or in part a report of a referee, are well established. There are a number of cases to which, customarily, reference is made. They include Super Pty Ltd v SJP Formwork (Aust) Pty Ltd (1992) 29 NSWLR 549; the unreported proceedings in that case before Giles J (19 May 1992: the relevant considerations referred to by his Honour are sufficiently extracted in the decision of the Court of Appeal); Chloride Batteries Australia Ltd v Glendale Chemical Products Pty Ltd (1988) 17 NSWLR 60; White Constructions (NT) Pty Ltd v Commonwealth of Australia (1990) 7 BCL 193; and Foxman Holdings Pty Ltd v NMBE Pty Ltd (1995) 38 NSWLR 615. As to the nature and content of the referee's obligation to give reasons, the relevant authorities include Xuereb v Viola (1988) 18 NSWLR 453 and Hughes Bros Pty Ltd v Minister for Public Works (Rolfe J, 17 August 1994, unreported; BC 9402885). 12 The relevant principles, distilled from those decisions, can be stated as follows: (1) An application under Pt 72 r 13 is not an appeal either by way of hearing de novo or by way of rehearing. (2) The discretion to adopt, vary or reject the report is to be exercised in a manner consistent with both the object and purpose of the rules and the wider setting in which they take their place. Subject to this, and to what is said in the next two sub paragraphs, it is undesirable to attempt closely to confine the manner in which the discretion is to be exercised. (3) The purpose of Pt 72 is to provide, where the interests of justice so require, a form of partial resolution of disputes alternative to orthodox litigation; that purpose would be frustrated if the reference were to be treated as some kind of warm up for the real contest. (4) In so far as the subject matter of dissatisfaction with a report is a question of law, or the application of legal standards to established facts, a proper exercise of discretion requires the judge to consider and determine that matter afresh. (5) Where a report shows a thorough, analytical and scientific approach to the assessment of the subject matter of the reference, the Court would have a disposition towards acceptance of the report, for to do otherwise would be to negate both the purpose and the facility of referring complex technical issues to independent experts for enquiry and report. (6) If the referee's report reveals some error of principle, absence or excessive jurisdiction, patent misapprehension of the evidence or perversity or manifest unreasonableness in fact finding, that would ordinarily be a reason for rejection. In this context, patent misapprehension of the evidence refers to a lack of understanding of the evidence as distinct from the according to particular aspects of it different weight; and perversity or manifest unreasonableness mean a conclusion that no reasonable tribunal of fact could have reached. The test denoted by these phrases is more stringent than "unsafe and unsatisfactory". (7) Generally, the referee's findings of fact should not be re-agitated in the Court. The Court will not reconsider disputed questions of fact where there is factual material sufficient to entitle the referee to reach the conclusions he or she did, particularly where the disputed questions are in a technical area in which the referee enjoys an appropriate expertise. Thus, the Court will not ordinarily interfere with findings of fact by a referee where the referee has based his or her findings upon a choice between conflicting evidence. (8) The purpose of Pt 72 would be frustrated if the Court were required to reconsider disputed questions of fact in circumstances where it is conceded that there was material on which the conclusions could be based. (9) The Court is entitled to consider the futility and cost of re-litigating an issue determined by the referee where the parties have had ample opportunity to place before the referee such evidence and submissions as they desire. (10) Even if it were shown that the Court might have reached a different conclusion in some respect from that of the referee, it would not be (in the absence of any of the matters referred to in sub para (6) above) a proper exercise of the discretion conferred by Pt 72 r 13 to allow matters agitated before the referee to be re-explored so as to lead to qualification or rejection of the report. (11) Referees should give reasons for their opinion so as to enable the parties, the Court and the disinterested observer to know that the conclusion is not arbitrary, or influenced by improper considerations; but that it is the result of a process of logic and the application of a considered mind to the factual circumstances proved. The reasoning process must be sufficiently disclosed so that the Court can be satisfied that the conclusions are based upon such an intellectual exercise. 13 I have stated the principles without attribution and without citation. However, having regard to the way in which Seven Sydney put its case before me, it is important to bear in mind the aphorism of Mahoney JA in Super at 567 that the right to be heard does not involve the right to be heard twice. 14 Seven Sydney referred in particular to the decision of the Court of Appeal in Franks & Anor v Berem Constructions Pty Ltd (unreported: NSWCA 2/12/98; BC 9806367). Although (if I may say so with respect) I do not regard that case as stating any principle, relevant to the exercise of the discretion under Pt 72 r 13, that has not been dealt with by the authorities to which I have already referred, and which I have attempted to summarise above, I refer to it separately in deference to the submissions based upon it. 15 Hodgson CJ in Eq (with whom Priestley JA agreed, and with whom, as to the questions of principle but not as to their application, Fitzgerald AJA also agreed) said that there were three circumstances in which a court considering whether to adopt a referee's report should or could go to the evidence before the referee. They are: (1) If there were a real question as to whether there was evidence on which the referee, without manifest unreasonableness, could have come to the decision to which he or she did come. This was not required "by a mere suggestion of factual error such that, if it were made by a trial judge, an appeal judge would correct it". The application was far more limited: "to the situation where it is seriously and reasonably contended that the referee has reached a decision which no reasonable tribunal of fact could have reached; that is, a decision that any reasonable referee would have known was against the evidence and weight of evidence." (2) Where, although the referee's reasons on their face appear adequate, the party challenging the report contends that they are not adequate because there was very significant evidence against the referee's findings with which the referee did not at all deal. In these circumstances, examination of the evidence would show that the reasons were in fact inadequate because they omitted any reference to significant evidence. (3) Where the court decides that the reasons are flawed, either on their face or because they have been shown not to deal with important matters, the court has a choice. It may decline to adopt the report. Or it may itself look at the detail of the evidence to decide whether or not the expense of further proceedings before the referee (which would be the consequence of non adoption) was justified". Goods and Services Tax (GST) 17 The debate between the parties on this aspect concerns the proper characterisation of the loss to Multiplex and its GST consequences. The Referee dealt with the loss to Multiplex from paragraph 118 to 121 of his report. As they are important in the consideration of the matter I set them out as follows: " Loss to Multiplex 118. There is evidence in the form of letters of demand of November 2004 from its Solicitors, that Waterways now seeks to enforce its rights under the Master Development Agreement for rectification of the wash wall so that it is fit for its intended purpose and complies with the requirements agreed under or pursuant to that Agreement. There is also evidence from a director of Multiplex, authorised in this regard by the Developer and Construction: "In relation to the defective wash barrier, at all times (Developer) intends to enforce its contractual rights against (Construction) pursuant to the turnkey agreement which in turn intends to enforce tis contractual rights against Multiplex pursuant to the head contract such that to the extent that there is any loss or liability concerning the remedying of the wash barrier, (Developer) and (Construction) intend to pass this loss or liability onto Multiplex. " 119. While Multiplex has not yet been sued in respect of the wash wall nor has itself rectified the wash wall, the wash wall clearly must be rectified, and the risk to Multiplex of liability in resect thereof is very real. 120. As was said in Alucraft Pty Ltd (In Liquidation) v Grocon Ltd (No. 2) (1996) 2 VR 386 at 395: "Where a sub-contractor breaches its contract by producing a defective result, it fails to perform the service it contracted to provided for the head contractor. Thus the head contractor does not receive the benefit contracted for and is exposed to a loss or the risk of loss the extent of which will depend upon subsequent events. At the time of the sub-contactor's breach, the head contractor would normally be in the situation that it is unclear what the precise nature and extent of its loss will be. " 121 . In that case the risk to the head contractor of being called upon by the proprietor to do the rectification work or pay compensation was assessed to be remote and having regard to that risk, the award of damages was of a significantly small portion of the rectification costs. Here, the risk to Multiplex is so real that the damages should be, in my opinion, the full amount of the reconstruction cost." 18 The Referee then went on to deal with other matters such as the Apportionment of Liability and Mitigation then he turned to Wash Wall Quantum. Under this heading, he dealt with the different contractual terms which resulted from variations of the sub-contract and in paragraph 127 he commented as follows: "It follows from what I have just written that regardless of what different load requirements may be enforceable down the contractual chain against Multiplex, the loss for which Multiplex may claim is the cost of reconstructing the wash wall so that it conforms to the sub-contract." 19 The Referee continued on to consider the costs involved and he adopted a cost from Mr J. Millar, a costing expert retained by Multiplex, for a sheet pile wall reconstruction. He noted that there was little difference between the experts' costing depending upon the difference between the sub-contract and the head contract terms and concluded that the relevant figure was $1,507,380 (plus GST, less agreed retention money of $168,137 withheld by Multiplex from Tryhaz). 20 The plaintiff suggested that the award of damages, as determined by the Referee, was predicated on Multiplex having to acquire at some future stage, the goods and services required to make good the wash wall. On this basis, if it does acquire the goods and services to build the new sheet pile wash wall it will be charged GST by the suppliers but it will be able to obtain a credit for the amount charged. In these circumstances it was submitted that the transaction would be GST neutral and that, therefore, Multiplex will be over compensated to the extent of the GST allowance found by the Referee if any judgment in its favour includes a GST component. 21 For its part the submissions of Multiplex suggested that the loss for which damages was sought was not predicated upon Multiplex undertaking the rectification work. The loss, it said, was Multiplex's liability for damages for breach of contract which liability arose due to the default of Tryhaz and Fielder. In these circumstances, it submitted that the land owner could enforce a liability in damages against the developer which would be passed down to Multiplex which was measured by the reasonable costs of rectification including the GST payable by the land owner on such costs. 22 An initial matter arises and that is whether it is appropriate on this hearing to allow the point to be raised. It seems clear that the point was not debated at the hearing before the Referee. There is a strong reluctance referred to in the authorities to allow the parties to bring forward fresh evidence at the time of the adoption of the report which could have been brought forward before the Referee. The attitude on such occasions is well illustrated by the comments of the Court of Appeal in Roads & Traffic Authority of New South Wales v Welling & Comerford [2000] NSWCA 360 at paras 32 to 35 and para 37 to 38. 23 However, where the question is whether a point of law not taken before a Referee should be allowed to be argued before the Court, it is generally considered part of the Court's general discretion as to whether to adopt or reject the report. In the exercise of that discretion it is not necessarily appropriate for the Court to adopt the same approach that would be taken on an appeal where a party seeks to rely upon a point of law that was not taken in the Court below. See Australian Development Corp Pty Ltd v White Constructions (ACT) Pty Ltd Giles J unreported 14 October 1993 BC9302150. 24 It is really necessary to see what is involved in the point before deciding whether it is an appropriate one that can be raised. Plainly, in this case the parties have not sought to tender any further evidence which was not before the Referee and the debate has been in respect of the evidence which was before the Referee. 25 The submissions of Multiplex before the Referee make plain the basis upon which Multiplex contended that it was entitled to recover the damages. Paragraph 133 to 136 of the submissions suggest that Multiplex would have passed down to it a liability which Waterways could enforce against the intermediate companies for the reasonable costs of rectifying the wash wall. At paragraph 140 it was submitted that Multiplex's loss was equal to the amount of its liability in damages to W9 & 10 Construction Stage 1 Pty Ltd. It also submitted that in arriving at that amount the Court should assess the quantum of that liability in absolute terms as well as the chance that such liability would not be enforced against Multiplex. 26 Paragraph 141 of the submissions made it plain that the quantum would be equal to the quantum of damages which would be awarded to Waterways in the event that it sued for breach of the Master Development Agreement. At paragraphs 153 and 154 of the submissions reference was made to the likelihood of Multiplex being called upon to pay for the rectification of the wash wall and suggested that no discount should be allowed on the basis of the possibility that it would not have to satisfy its liability to W9 &10 Construction Stage 1 Pty Ltd. 27 In paragraph 155 it then sought damages for the amount actually awarded plus GST less the retention monies. It is plain from the paragraphs of the Referee's Report which I have quoted above that he did proceed to consider the matter on the basis that "the wash wall clearly must be rectified, and the risk to Multiplex of liability in respect thereof is very real." He then went on to deal with the discount and found that the risk to Multiplex was so real that the damages should be, in his opinion, the full amount of the reconstruction cost. 28 There was tendered before me certain correspondence which was in evidence before the Referee in order to establish that there had been a requirement during the defects liability period by Waterways to have a rectification done pursuant to the contract. In a letter dated 12 March 2001 to W9 & 10 Construction Stage 1 Pty Ltd, Waterways referred to the movement in the wall and said: "As this wall is still covered by the defects liability period it is requested that you arrange for rectification of the defects at your expense." 29 In a letter of 11 November 2004 addressed to W9 & 10 Construction Stage 1 Pty Ltd and Multiplex Limited the solicitors for Waterways referred to the letter of 12 March 2001 and repeated the demand that the defects in the wash barrier as originally requested in the earlier letter be rectified. 30 This correspondence suggests that what Waterways has done is to seek to enforce contractual rights to have the defects made good. This point was not put to the Referee although the evidence plainly would have allowed a submission on this aspect to have been made. 31 There was much debate before me as to the effect of the Goods and Services Tax Ruling 2001. However, I think that that misses the point as to what in fact occurred at the Reference. The correspondence makes it clear that the owner did, during the defects liability period, require rectification by the three relevant companies, including Multiplex. However, by the time that the Reference occurred there had been no rectification of the wash wall. It was because there was no rectification that there was a need to assess damages on the basis that the rectification work had not been done. 32 There does not seem to be any challenge to the Referee's finding that it is likely that rectification work will be done in the future. It is not known by whom the rectification will be done and there is no suggestion by Multiplex that it proposes to do the work. Indeed the likelihood is, one would think, that they would not and Waterways would be more likely to find some other contractor to carry out the rectification work. 33 Assuming for the moment that Waterways does decide to ask Multiplex to do the rectification work, it would seem clear that that would be a separate and independent contract. It would not be rectification of defects pursuant to the contractual obligations to remedy defects in the original contract because by the time the Reference occurred the contract most probably had been terminated. The parties' claims in the Reference, which was a lengthy and expensive hearing, appear to be for an adjustment of their final entitlements and would be wholly inconsistent with any continuing obligation of performance on either side. 34 In such circumstance the parties may have agreed that the contract was terminated on the basis that there is a mutual release from future performance only and that rights accrued to the date of termination will remain in full force and effect. See Brewarrina Shire Council v Beckhaus Civil Pty Ltd & Anor [2005] BSWCA 248 at para 74. Earlier I said that the contract had most probably been terminated as it illustrates the problem whether this point can now be raised in the proceedings. 35 If the contract has been terminated then it is an answer to the submission now put forward. There can be no question of Multiplex being obliged to rectify the defects as that obligation has ceased. All there is is a claim for damage for breach. 36 Whether the contract has been terminated is a factual question which can only be determined by the Referee who heard the whole of the evidence. In the reference in response to Multiplex's claim Fielder took the position that the contract between Multiplex and its principal had come to an end and that Multiplex would not be required to undertake any works. 37 If Fielder had raised this GST point before the Referee it would have to have persuaded him that the contract had not been terminated which was an inconsistent position to the stance it had taken. Fielder did not raise the GST point before the Referee and in the circumstances I do not think it appropriate to remit to the Referee a further consideration of this point. It should have been dealt with in the hearing before the Referee when all the facts were available to the Referee and the parties. Accordingly, I do not propose to reject or remit for further consideration that part of the report which made allowance for GST. Painting 38 Fielders made a submission before the Referee on the costing that the cost of painting should be reduced because Tryhaz had chosen to proceed by way of cathodic protection. In his reasons, the Referee did not specifically address this matter but by implication rejected it in accepting the costings of Mr Millar on behalf of Multiplex. Mr Whitmarsh who did the costings on behalf of Fielders apparently adopted a lesser figure based upon a reduced area to be painted presumably because of the existence of or the proposed installation of a cathodic system. There was evidence before the Referee, being Exhibit P68, that suitable cathodic protection to the sheet piles could be achieved by the placement of sacrificial anodes and that the cost of this work would be approximately $25,000 plus GST. This evidence was in a letter from Mr Whitmarsh. Exhibit 61 before the Referee consisted of a joint report on constructions costs by the three costing experts engaged by the parties. In the commentary to those costings the authors point out that Mr Whitmarsh had questioned the need for painting the sheet piles at all and that he was of the opinion that should painting be required then the sheet piles should only be painted on the upper section of the piles. They also suggested that if painting the sheet piles was not required the costs of the patchwork would be $25,000 as obviously proposed by Mr Whitmarsh in the letter that was before the Referee. During construction at a point when the precast concrete panels were being placed in situ there is a note that Fielder had advised that they had decided to provide cathodic protection to the steel piles in the structure to overcome the potential problem of damage to the paint coating during panel installation. 39 Interestingly in his evidence, Mr Whitmarsh referred to using anodes and indicated that they were only useful below the water level. As he said, "It doesn't matter how many anodes you have below water, it will corrode above the water. You'd have to come up with some type of protection system". 40 Mr Peter Fielder was cross-examined and he recalled that there was a problem with the packing to the panel for corrosion protection which caused a difficulty in installation. He referred to a decision not to put in that protection during the installation but to put a cathodic protection system on afterwards. This was expanded upon by Mr David Murrant who was a party to that agreement. He gave details of the earlier system for putting a cork joint at the corners of the concrete panels to try and reduce damage to the paintwork. He gave evidence that that was abandoned in favour of cathodic protection. 41 In essence it seems that the decision to install cathodic protection was made during the construction process in order to deal with the difficulty encountered in the installation process where damage was occurring to the existing paintwork. It does not seem to have been suggested in the evidence that cathodic protection was being adopted in lieu of painting as required under the Head Contract specifications. Fielders, in a report in August 2000, noted that steel work required paint touch ups prior to inspection for the execution of the paint warranty and that the cathodic protection of the wash barrier was still to be installed. Mr Whitmarsh, Fielder's expert on costings, in cross-examination conceded there would need to be some other protection above the water line in order to make the piles aesthetically pleasing. 42 This plainly is an area where the Referee had before him the three versions of costings and a submission by Fielders that cathodic protection could be used instead of painting. Having regard to the evidence on the matter which was before the Referee it does not seem to me that there was significant evidence which the Referee has ignored. His decision to reject Mr Whitmarsh's approach was not against the evidence and the weight of the evidence. In these circumstances the decision of the Referee on this aspect should not be disturbed. Accordingly, there should be no deduction for the amount suggested by the plaintiff. 43 I direct the parties to bring in short minutes and if necessary argue costs. ********** DISCLAIMER - Every effort has been made to comply with suppression orders or statutory provisions prohibiting publication that may apply to this judgment or decision. The onus remains on any person using material in the judgment or decision to ensure that the intended use of that material does not breach any such order or provision. Further enquiries may be directed to the Registry of the Court or Tribunal in which it was generated.