New South Wales Supreme Court CITATION : Stockland (Constructors) Pty Limited v Darryl I Coombs Pty Limited & Ors [2004] NSWSC 894 HEARING DATE(S) : 24/09/04 JUDGMENT DATE : 28 September 2004 JURISDICTION: Equity Division Technology and Construction List JUDGMENT OF : Einstein J DECISION : Answer given to 5 separate questions. Proceedings to be remitted to Referee for clarification/reconsideration of the ambit of fees properly allowable to the joint venture in light of his findings or varied findings following the remitter. CATCHWORDS : Part 72 - Adoption of Referee's report - Motions dealt with by separate question orders under Part 31 Supreme Court Rules LEGISLATION CITED : Supreme Court Rules (NSW) 1970 ABB Engineering Construction Pty Limited v Abigroup Contractors Pty Limited [2003] NSWSC 665 Abigroup Contractors Pty Limited v Peninsula Balmain Pty Ltd [2001] NSWSC 752 Allied Constructions Pty Ltd v Hyder Consulting (Aust) Pty Ltd [2004] NSWSC 808 Antaios Compania Naviera SA v Salen Rederierna AB [1985] AC 191 Australian Broadcasting Commission v Australasian Performing Right Assn (1973) 129 CLR 99 Biscayne Partners Pty Limited v Valance Corporation Pty Limited [2003] NSWSC 874 Brambles Holdings Ltd v Bathurst City Council [2001] NSWCA 105 Carter v Hyde (1923) 33 CLR 115 Codelfa Construction Pty Ltd v State Rail Authority of NSW (1982) 149 CLR 337 CASES CITED : Di Biase v Rezek (1971) 1 NSWLR 735 Hide & Skin Trading Pty Ltd v Oceanic Meat Traders Ltd (1990) 20 NSWLR 310 International Fina Services AG v Katrina Shipping Ltd ("The Fina Samco") [1995] 2 Lloyds Rep 344 Investors Compensation Scheme Ltd v West Bromwich Building Society [1998] 1 WLR 896; [1998] 1 All ER 98 L Schuler AG v Wickman Machine Tool Sales Ltd [1974] AC 235 Maggbury Pty Ltd v Hafele Australia Pty Ltd [2001] HCA 70 Peppers Hotel Management Pty Limited v Hotel Capital Partners Limited [2004] NSWCA 114 Royal Botanic Gardens and Domain Trust v South Sydney City Council [2002] HCA 5; (2002) 76 ALJR 436 Unity Insurance Brokers Pty Limited v Rocco Pezzano Pty Limited (1998) 192 CLR 603 Upper Hunter District Council v Australian Chilling and Freezing Co Ltd (1968) 118 CLR 429 Vodafone Pacific Ltd v Mobile Innovations Ltd [2004] NSWCA 15 Stockland (Constructors) Pty Limited ACN 000 064 835 (Plaintiff) PARTIES : Darryl I Coombs Pty Limited ACN 001 367 317 (First Defendant) Philip J Flook Pty Limited ACN 000 412 564 (Second Defendant) Retail Design Group (International) Pty Limited ACN 002 421 098 (Third Defendant) FILE NUMBER(S) : SC 55046/99 Mr P Dodson (Plaintiff) COUNSEL : Mr I G Roberts (First and Second Defendants) Ms E Ollson SC, Mr R Newell (Third Defendants) Cohen & Krass (Plaintiff) SOLICITORS : Minter Ellison (First and Second Defendants) Cunningham Legal (Third Defendant) IN THE SUPREME COURT OF NEW SOUTH WALES EQUITY DIVISION TECHNOLOGY AND CONSTRUCTION LIST Einstein J Tuesday 28 September 2004 55046/99 Stockland (Constructors) Pty limited & Anor v Darryl I Coombs Pty Limited & Ors JUDGMENT The reference 1 These proceedings were referred to Mr G Lumsdaine AM by orders made pursuant to part 72 r 2(1) of the Supreme Court Rules on 21 April 2004 for inquiry and report on all issues raised. 2 Some limited background by way of a general earlier overview may be found in the Judgment [2004] NSWSC 333. 3 During the Reference hearings took place on 28, 29, 30 April, 3, 4, 5, 6, 10, 12 and 13 May 2004. Conclaves were held concurrently between the retained experts resulting in production of a joint report on certain technical matters. The motions 4 There are before the court opposing motions either for the adoption or rejection or remitter back to the referee for reconsideration/further consideration of the Report dated 29 June 2004 or of parts of it. The principles 5 The principles to be applied with respect to the adoption of a Referee's report are well established: "1. The authorities concerning these principles were recently reviewed in Allied Constructions Pty Ltd v Hyder Consulting (Aust) Pty Ltd [2004] NSWSC 808, paragraphs 7 to 11. 2. At paragraph 9, the following dicta of Barrett J in Abigroup Contractors Pty Limited v Peninsula Balmain Pty Ltd [2001] NSWSC 752 at paragraph 21 were set out: "It would substantially defeat the purposes underlying Pt72 if the report of a referee was effectively overtaken by a detailed re-assessment of all matters when the Court came to consider the question of adoption. The counter-productive nature of any such detailed re-assessment is emphasised in a case such as this where the vast majority of the issues go to matters of a technical and practical kind, including discretionary matters, lying squarely within the province of a specialised and experienced practitioner of the kind to whom these proceedings were referred. The Court's main function is to review general cogency. And where, as here, the referee has taken a particular issue to a point short of definitive legal conclusion, the Court may, of course, complete the task." 3. The relevant principles were summarized in point form in ABB Engineering Construction Pty Limited v Abigroup Contractors Pty Limited [2003] NSWSC 665: (a) The Supreme Court Rules confer a wide discretion on the Court considering a Referee's Report and the decision as to whether or not a Report should be adopted is an exercise in discretion (b) The present rules replace earlier provisions dealing with decisions of Arbitrators and Referees, to whom matters were referred by order of the Court. Those earlier provisions had the effect of giving the decision of an Arbitrator or Referee the same effect as though the decision was a verdict of a jury; the decision was only liable to review for error of law, perversity or manifest unreasonableness. (c) An application under Part 72 rule 13 is not an appeal. A reviewing judge has a judicial discretion to exercise. This must be exercised in a manner which is consistent both with the object and purpose of the rules and the wider setting in which they take their place (d) It is undesirable to attempt closely to define the manner in which the discretion is to be exercised. The nature of the complaints made about the Report, the type of litigation involved as well as the length and complexity of the proceedings before the Referee are all relevant considerations. (e) A party who is dissatisfied with the Referee's Report is not entitled to require a judge acting under Part 72 rule 13 to reconsider and determine afresh all issues whether of fact or law which that party wishes to contest before the judge (f) A judge exercising his discretion under Part 72 rule 13 may consider the material before the Referee where there is a real question as to whether there was any evidence for the decision made. The requirement for a "real question" in this context goes beyond a mere suggestion of the type of factual error that, if made by a trial judge, would be corrected on appeal (g) A judge exercising a discretion under Part 72 rule 13 may also need to consider the evidence before the Referee where the Referee's reasons appear adequate on their face, but the challenge is based on the adequacy of the reasoning due to the Referee's failure to refer to very significant evidence against the finding (h) There is no implied authority given to the Referee to make errors of law. The Court is bound to decide for itself whether the Referee erred in law and, if such error be found, to correct the error in exercising its discretion under the rules. (i) It would ordinarily be a reason for rejecting the Report if it reveals some error of principle, some absence or excess of jurisdiction or some patent misapprehension of the evidence. Perversity or manifest unreasonableness in fact finding would also ordinarily be a reason for rejecting a Referee's Report." Part 31 orders 6 As a matter of convenience in terms of the case management of the motions certain orders have been made pursuant to Part 31 of the Supreme Court Rules separating separate questions. This judgment proceeds accordingly: Separate Question 1 – Contractual terms "Question 1: Whether the referee's report should be adopted or rejected or referred back to the referee for reconsideration in respect of the findings identifying the contractual terms constituting the architects retainer [termed "the contract for services"]? Dealing with Question 1 7 The material section of the Report is to be found from [8.3] to [8.18] and in particular at [8.5]-[8.18]. 8 It is unnecessary to repeat the record. 9 In summary the following material finding was made: "That the architects: retainer agreement dated 10 June 1992 was varied by letter dated 24 May 1994 which capped the architects' fees at $2.2 million irrespective of any future cost variations unless the design or scope of work was substantially altered by the second plaintiff, Stockland (Properties) Pty Ltd ["SPL"]" 10 The matter is in fairly short compass. It involved the proper construction of a series of communications [against the material matrix of fact and circumstance objectively known to both parties]. Principles of contractual construction 11 The general principles of construction of contractual documents were recently set out by McColl JA in her judgment in Peppers Hotel Management Pty Limited v Hotel Capital Partners Limited [2004] NSWCA 114 in the following terms: "[66] Interpretation of a written contract involves "the ascertainment of the meaning which the document would convey to a reasonable person having all the background knowledge which would reasonably have been available to the parties in the situation in which they were at the time of the contract": Maggbury Pty Ltd v Hafele Australia Pty Ltd [2001] HCA 70; (2001) 210 CLR 181 at 188 [11] per Gleeson CJ, Gummow and Hayne JJ quoting Lord Hoffmann in Investors Compensation Scheme Ltd v West Bromwich Building Society [1998] 1 WLR 896 at 912; [1998] 1 All ER 98 at 114. [67] The words of the agreement will not be construed in a vacuum. In the case of a commercial contract where the words are ambiguous or susceptible of more than one meaning, the court should understand its commercial purpose and, to that end, may have regard to "the genesis of the transaction, the background, the context, [and] the market in which the parties are operating": see Codelfa Construction Pty Ltd v State Rail Authority of NSW (1982) 149 CLR 337 at 352 per Mason J (with whose judgment Stephens J and Wilson J agreed); Royal Botanic Gardens and Domain Trust v South Sydney City Council [2002] HCA 5; (2002) 76 ALJR 436 at 439 [10] per Gleeson CJ, Gaudron, McHugh, Gummow and Hayne JJ. [68] Commercial contracts should be construed so as to be given a sensible commercial operation: Upper Hunter District Council v Australian Chilling and Freezing Co Ltd (1968) 118 CLR 429 at 437; Australian Broadcasting Commission v Australasian Performing Right Assn (1973) 129 CLR 99 at 109; Hide & Skin Trading Pty Ltd v Oceanic Meat Traders Ltd (1990) 20 NSWLR 310 at 313-4; Vodafone Pacific Ltd v Mobile Innovations Ltd [2004] NSWCA 15 per Giles JA at [64]. [69] If the words used [in a written contract] are unambiguous the court must give effect to them, notwithstanding that the result may appear capricious or unreasonable, and notwithstanding that it may be guessed or suspected that the parties intended something different. The court has no power to remake or amend a contract for the purpose of avoiding a result which is considered to be inconvenient or unjust. On the other hand, if the language is open to two constructions, that will be preferred which will avoid consequences which appear to be capricious, unreasonable, inconvenient or unjust, 'even though the construction adopted is not the most obvious, or the most grammatically accurate': Australian Broadcasting Commission v Australasian Performing Right Assn Ltd (1973) 129 CLR 99 at 109–110 per Gibbs J (as he then was). However, in construing written contracts it should be presumed that the parties did not intend their terms to operate unreasonably. The more unreasonable the result a party's construction would produce, the more unlikely it is that the parties would have intended it. If the parties did intend an unreasonable result, it is essential that that intention be made "abundantly clear": L Schuler AG v Wickman Machine Tool Sales Ltd [1974] AC 235 at 251 per Lord Reid. [70] Dealing with the circumstances where there are internal inconsistencies in a contract, Gibbs J said "it will be permissible to depart from the ordinary meaning of the words of one provision so far as is necessary to avoid an inconsistency between that provision and the rest of the instrument.": Australian Broadcasting Commission v Australasian Performing Right Assn Ltd (1973) 129 CLR 99 at 109. [71] Gibbs J's statement in Australian Broadcasting Commission v Australasian Performing Right Assn Ltd (1973) 129 CLR 99 at 109 that "the court should construe commercial contracts "fairly and broadly, without being too astute or subtle in finding defects", finds reflection in the statement in International Fina Services AG v Katrina Shipping Ltd ("The Fina Samco") [1995] 2 Lloyds Rep 344 at 350 per Neill LJ (with whom Roch and Auld LL.J agreed) that the primary focus is the agreement itself which "must speak for itself, but … must do so in situ and not be transported to a laboratory for microscopic analysis". [72] Consistently with this approach, it has been held that if detailed semantic and syntactical analysis of a written contract lead to a conclusion that flouts business commonsense the contract must be made to yield to business commonsense: Antaios Compania Naviera SA v Salen Rederierna AB [1985] AC 191 at 201 per Lord Diplock; applied by Gleeson CJ, Gummow and Hayne JJ in Maggbury Pty Ltd v Hafele Australia Pty Ltd , above, at 198 [43]. In Maggbury, after referring to Lord Diplock's observations, Gleeson CJ, Gummow and Hayne JJ added: "what in respect of a particular contract comprises 'business commonsense', as an apparently objectively ascertained matter, may itself be a topic upon which minds may differ and in respect of which an imputed consensus is impossible". [73] Finally, it should be noted that no hard and fast rules can be set. The exercise of construction is neither uncompromisingly literal nor unswervingly purposive: The Fina Samco, above, at 350." 12 The written communications which constituted the correspondence became exhibits "H" [letter of 10 June 1992], "I" [letter of 31 August 1992], " J" [letter of 10 November 1992], and "K" [letter of 24 May 1994] on the hearing of the issue before this Court. 13 It was plainly not possible for the Referee to construe these communications in the absence of the relevant background as known to all parties, proven before him and in particular referred to in the Report at [8.7], [8.11], and [8.15]. It was in these paragraphs that the Referee adverted to the following matters: · As to the timing of the 24 May 1994 letter relative to D.A. or thereabouts: · In November 1992 the estimated building cost was $45m, and the estimated total architectural fee was $1.75m. · The D.A. was submitted in January 1993. · In November 1993, following a cost saving review, several design changes were initiated by Stocklands. · In March 1994 the design was substantially changed in a number of areas. · In April 1994, the estimated building cost was reviewed and the fee cap was increased from $1.75m to $2.2m. [8.7] · There were substantial changes to the design and to the JV's scope of works- the initial estimate of construction cost being some $45M and the final construction cost exceeding $60m. [8.11] · It was necessary to consider the timing of the substantial changes to the design and scope of works-The 3-month hiatus and the March 1994 re-design had both occurred before the 24/05/94 letter was written [8.15] 14 Against that environment no error of law has been demonstrated in the approach taken by the Referee to the question of construction. I particularly place special significance the use of the word "future" as used in the final paragraph of the 24 May 1994 letter. Further the approach taken by the Referee to the opening words "In conformity" of the same letter appears to me to be unexceptional. 15 The referee plainly relied upon the distinction which he drew as between, on the one hand future cost variations and on the other hand, changes to the design or scope of the work. No error is disclosed in this approach. 16 Effectively the approach taken before the Court by SPL and Stockland (Constructors) Pty Ltd [now Stockland (Developers) Pty Ltd ["SCL"]] is to put forward a series of propositions in an attempt to contradict the essential finding as to construction of the subject communications. None of those propositions are, to my mind, pervasive in terms of the ultimate decision. However in deference to the detail it is convenient to shortly identify the essence of the propositions put forward: "7. [Referee's] interpretation is erroneous because: (a) it misconstrues the phrase " in conformity with " to override the plain words of the agreement of 24 May 1994. That phrase refers to conformity with the mechanism for calculating total remuneration not semantic conformity with the language of the letter of appointment. (b) It gives no weight to the reiterated intention found in the expressions " total fee payable" "incorporating all such services" " total payable irrespective of any future cost variations". It is difficult to imagine a more forceful statement of the intention to finalize the quantification of the architects' remuneration. (c) It fails to take into account the fact that this agreement to fix fees was expressly contemplated in the original fee agreement as the last step in the mechanism for determining architects' remuneration. (d) It fails to take into account the fact that all parties were fully aware on 24 May 1992 of the status of the project; (e) It is inconsistent with the evidence of the circumstances surrounding the agreement in May 1994, as set out in the statements of Mr Andrew Forbes, Mr Farrant and Mr Hill yet the referee does not deal with that evidence or explain why it ought not be accepted. (f) The interpretation is inconsistent with the intention of the architects as demonstrated by their conduct on receipt of the letter. (g) It does not conform to the commercial purpose of the agreement, namely the finalization of architects' fees. It is not a sensible commercial construction because it leaves the question of architects' remuneration entirely uncertain. (h) It attributes to a letter written by a businessman the degree of semantic precision normally attributable to a legal draftsman." … 9. In Biscayne Partners Pty Limited v Valance Corporation Pty Limited [2003] NSWSC 874 a principle which is directly relevant to the present case was set out: "… where mechanical provisions intended to operate over an extended period of time are concerned, the court endeavours to follow the mechanics and provisions expressed in the contract in the endeavour to follow, always by looking at the manner in which the matter is expressed, how the parties saw the contract as a working guide to the way forward. " [at para [72]] 10. It is submitted that this is consistent with the commonsense proposition that where parties, by their contract, contemplate that there will be changes in their contractual relations upon the happening of later events, a subsequent contractual term which takes into account those events will normally supersede the earlier contractual term which anticipates those events. 11. In the present case, the original letter of appointment contained mechanical provisions for the calculation and eventual fixing of the architects' remuneration. It contained an agreement as to the applicable rates of remuneration: it provided that at a later date, the parties would agree about the times for progress payments to the architects; it provided that at a subsequent point the parties would agree upon a final specific sum for remuneration. These mechanical provisions were put into effect between August 1992 and May 1994, culminating in the letter setting out the agreement for final remuneration in the sum of $2.2M on 24 May 1994. " 17 I reject as of no substance the propositions put forward by the Stockland parties to the effect that surrounding circumstances known to the parties were not or were insufficiently taken into account by the Referee in terms of the proper construction of the retainer agreement. Answer to question 1 18 In the result the referee's report should be adopted in respect of the findings identifying the contractual terms constituting the architects retainer [termed "the contract for services"]. Second question 2 - Parties 19 A further order was been made pursuant to Part 31 of the Supreme Court Rules separating to be heard as a separate question the following issue: "Question 2: Whether the referee's report should be adopted or rejected or referred back to the Referee for reconsideration in respect of the findings identifying the parties to the architects retainer [termed "the contract for services"]? 20 This matter also lies in relatively short compass. The material reasoning and decision is to be found in the Report at [4]. 21 The question as to whom was/were the intended promisee[s] in relation to a written promise is of course no more and no less than a question of construction of the document in question [cf Carter & Harland, Contract Law in Australia, 4th ed, pp 46 – 47, citing inter alia Carter v Hyde (1923) 33 CLR 115]. However it is common ground that extrinsic evidence going to the genesis of the contract is admissible on the determination of the objective intent: Cf Di Biase v Rezek (1971) 1 NSWLR 735. ". Both pre- contractual conduct as well as post-contractual conduct is admissible on the question of whether a contract was formed [including the question as to parties] : cf Brambles Holdings Ltd v Bathurst City Council [2001] NSWCA 105 per Heydon JA. 22 The referee took into account a number of facts adduced during the reference going to the issue, including anterior dealings between the parties and most particularly the terms of the subject correspondence. The critical consideration appears to have been the manner in which the 31 August 1992 letter was signed, which on the evidence was consistent with the practice adopted within the Stockland Group. Evidence given by Mr Forbes had included: "Q. It is the case, is it not, that whenever somebody from the group, whether you or Mr Daly or others, dealt with the trust or wrote to the trust, they did that from Stockland Property Management Limited? A. Correct. Q. That was notwithstanding that you were not employed, you say, by that company? A. Correct. Q. But that was nonetheless the practice that was adopted within the group when dealing with the trust? A. That's right. Stockland Property Management Limited was the manager of the trust. Q. Yes. Then from time to time you and others in the group dealt with other parties other than the trust, such as tenants, consultants and so forth, and you've got examples of those letters also annexed to your statement at pages 49 and 50, and then an example of one dealing with a tenant at AJF7 to your second statement. Do you have that? A. Yes. Q. On each of the occasions that you dealt with a party other than the trust, you wrote from Stockland (Properties) Pty Limited. A. That's correct. Q. And that is consistent with the practice of others within the Stockland group such as Mr Myers who wrote the letter on 9 July that I took you to earlier behind tab 5 in D1? A. Correct. Q. It is not the case, is it, that you accidentally wrote Stockland (Properties) Pty Limited on the bottom of your letter of 31 August 1992? That was consistent with the practice that you and others within the group adopted when dealing with parties other than the trust. A. which annexure is that one? Q. Page 49 and the signature and identification of the company is at page 50. A. Yes, there's no accident." [emphasis added] 23 Clearly also the later letter of 24 May 1994 was also signed by Mr Forbes again under the heading "Stockland (Properties) Pty Ltd. 24 The Referee in dealing with a somewhat complex subject, clearly rejected the contention that it could properly be inferred, as an objective fact, that although the parties did not turn their minds to the precise identity of the Stockland company which would engage the architects, they should be taken to have intended that the architects would be engaged by what was said to have in fact been the operating entity in the group, and not by a subsidiary company which was said not in fact to have had any direct interest or involvement in the project. 25 Amongst the reasons for rejecting this contention was the finding that no evidence had been adduced to the effect that the joint venture parties were ever informed or aware: · Of SCL's agreement with National Australia Trustees Ltd ["NAT"] · That SCL was in fact the sole operating entity in the group 26 It is true that the Report moves in and out of reliance upon evidence which arguably could be said to prove no more than subjective intention of one or other party. Hence the Referee for example explicitly found that pre-contractual communications between the parties supported the proposition that the architects understood that SCL was the builder and that SPL represented the owner [4.6]. However on balance I do not see that there has been demonstrated an error in terms of the ultimate finding which significantly rests in particular upon manner of signing under the above described words descriptive of SPL. 27 As the third defendant has submitted other matters of relevance are as follows: "(a) The 31 August letter was written by a senior and longstanding executive of the Stockland Group – Mr Forbes. (b) The fact of the separation of corporate roles is one which is critical for the management of trust business on a basis consistent with the proper discharge of fiduciary duties. (c) The letter of 24 May 1994 – written as a follow-up to the contract, is signed off for and on behalf of Stockland (Properties) Pty Ltd. (d) Instructions to the defendant architects came from Stephen Beer and Brad Myers who signed their letters on behalf of Stockland (Properties) Pty Ltd – and, concomitantly described themselves as "National Development Manager." (e) There is a natural separation of interests between the owner interest and the builder interest. The separation is in its own terms generally of significance. It has a particular significance to the architects because they must frame their conduct with a view to discharging their professional duty. They can only reasonably do so by reference to an accommodation one interest or the other. (f) On 30 August 1995 the Joint Venture wrote to Stockland confirming that it had previously clarified that "the development manager would be (their) client". (LKR55K – Affidavit of Mr Reilly - 6 November 2003) There was no response from either plaintiff to suggest that the question was inappropriate, either contemporaneously or in the plaintiffs' evidence in response. (g) Transmittal sheets were sent by the JV throughout the project which recorded that the 'client" was Stockland Trust Group and the "builder" was Stockland Constructors Pty Limited. (ExLKR10 – Reilly affidavit 6 November 2003). (h) The owner is the architects' natural constituent. (i) On the plaintiff's own evidence, Stockland Properties undertakes very substantial functions in the management of properties, and it does so on behalf of the trustee. (ii) The trust deed permits the delegation of functions by the trustee on the recommendation of the manager. (iii) Mr Peter Daly acknowledged under cross -examination that the fact of separate entities was conceived for legal and commercial reasons. (transcript page 252 lines 38-47)." 28 There is no substance in the submission that the Referee is shown to have erred in his finding that the evidence did not support an inference that SPL acted as agent for SCL in engaging the architects. Answer to separate question 2 29 In the result the referee's report should be adopted in respect of the findings identifying the parties to the architects retainer [termed "the contract for services"]. Separate question 3 – Ambit of fees properly allowable 30 A further order was been made pursuant to Part 31 of the Supreme Court Rules separating to be heard as a separate question the following issue: "Question 3: Whether the referee's report should be adopted or rejected or referred back to be Referee for reconsideration of the ambit of fees properly allowable to the joint venture in light of his findings? " 31 The third defendant submitted as follows: "14. The learned referee made the following material findings: a. That the architects' retainer agreement dated 10th June 1992 was varied by letter dated 24 May 1994 (the May letter) and capped the architects' fees at $2.2 million irrespective of any future cost variations unless the design or scope of work is substantially altered by the Cross Defendants. b. that there were substantial changes to the design and to the Joint Venture's scope of works both before and after the May letter c. that it was irrelevant whether the substantial alteration appeared to take place prior to the 24 May 1994 letter for the purposes of calculating additional fees due to the Joint Venturers. d. that that the May 1994 letter was expressed to be in conformity with the August 1992 letter and to the extent that it did not expressly alter a term set out in the August 1992 letter, such term remained applicable. 15. The learned referee then erred in the assessment of the additional fees to which the Third Defendant is entitled. There are two separate provisions in the contract providing for additional remuneration to the architects for work outside the original scope. The first provides for a sliding scale percentage fee to be applied to the cost of construction so as to compensate the architects by reference to the substantial alteration to the scope of the project ("the basic fee provision"). 16. The second provision provides for the architects to be remunerated for variations in the nature of design change instructions at the hourly rates nominated by the contract ("the variations provision"). The learned referee allowed remuneration for increase to the basic fee (in accordance with the basic fee provision) but omitted to consider, and accordingly did not make allowance in relation to the third defendant's claim (for variations) pursuant to the variations provision. The error was twofold: i. The learned referee erred in proceeding on the basis that the Third Defendant's claim for variations under the contract was a quantum meruit claim (in the alternative to its claim for additional fees by reason of the scope provision). ii. Further (and apparently as a consequence), the learned referee erred in not considering the Third Defendant's claim for variations under the contract and accordingly omitted to compensate it for the changes to the scope of architectural work pursuant to the variation provision . 17. The Third Defendant contends that the learned referee, having found that substantial changes to design and scope were not included in the fixed fee of $2.2million, should have valued the additional works as variations performed by the architects by reference to their hourly rates for changes set out in the letter dated 10th June 1992, that being the contractual basis upon which variations would be valued. 18. The learned referee has viewed the variation claim made under contract as a Quantum Meruit claim in the alternative 19. At paragraph 1.5 of his report the learned referee states his understanding of the claim as follows: "The third defendant cross claims for fees and damages, arising from extra work under the contract , in the sum of $381,550 plus delay costs and expenses. In the alternative, it is claimed that the JV became entitled to a quantum meruit." 20. It appears from this statement (and from the consideration of the matter generally) that the learned referee understood the material submitted in support of a claim for contractual variations represented the Third Defendant's proposed method for quantifying an alternative as formally pleaded, rather than a claim for variations under the contract. A positive indication that such a misunderstanding informed the learned referee's omission to consider the cross-claimant's claim for variations under the contract appears at paragraph 8.14 of his decision: "The cross claimant contends that the time charge rates should be used to assess additional fees arising from substantial alteration to the design or scope of works. This would accord with the alternative quantum meruit claim. I do not believe it could have been the intention of the parties that this would be the result of such design changes. The sliding percentage scale fee set out in detail in the 31/08/92 letter (8.3 above) is appropriate, and its application for the purpose resolves the ambiguity." 21. It is submitted that the findings in fact made by the learned referee support the Cross-Claimant's claim for variations and that there are no such findings, which speak against that claim. It is submitted that the learned referee's consideration of the Third Defendant's claim for fees was affected by a manifest, and in the circumstances, understandable error." 32 To my mind this is an area in respect of which it is appropriate for the issues raised to be referred back to the referee for the purpose of clarification of his reasons and, if appropriate, reconsideration of the manner in which the matter is to be approached in the light of those reasons. Answer to separate question 3 33 In the result the referee's report should be referred back to be Referee for clarification/reconsideration of the ambit of fees properly allowable to the joint venture in light of his findings or varied findings following the remitter. 34 It is convenient to note that this decision means that the submission of the Stockland parties contending that the Referee's assessment of additional remuneration was based upon arbitrary figures must abide the next tranche of the Reference where the ambit of fees properly allowable in light of his findings is to be reconsidered. When the further Report is made to the Court the Stockland parties will be given a proper opportunity to deal with any parameter of the reconsideration of the ambit of fees. Separate question 4 35 A further order was been made pursuant to Part 31 of the Supreme Court Rules separating to be heard as a separate question the following issue: "Question 4: Whether the referee's report should be adopted or rejected or referred back to be Referee for reconsideration in terms of his conclusion that there was no breach of contract or breach of tortious duty?" 36 The alleged breaches of the architects were pleaded in the alternative in tort and contract (see first amended summons 8 February 2002 paragraphs 18 – 21B) as negligent failures to perform the obligations set out in the consultancy contract, negligent breach of duty and negligent failure to warn of their known non-performance of the contract in relation to the provision of structural steel drawings. The obligations were not put in issue by the first and second defendants but it was alleged that the architects warned the plaintiff(s) in November 1994 that the architectural drawings were not fully "co-ordinated" with the engineering drawings. 37 The referee dealt with this part of the case in part 5 of his report. 38 He dealt with contractual breach and negligence by concluding that on the evidence Mr Coombs and Mr Reilly had warned Stockland employees of their failure to co-ordinate their structural steel drawings with the engineering drawings at a meeting on an unspecified date in November 1994. 39 There is no substance to the challenge by the Stockland parties to the subject findings. As earlier observed, it would substantially defeat the purposes underlying Pt72 if the report of a referee was effectively overtaken by a detailed re-assessment of all matters when the Court came to consider the question of adoption. The counter-productive nature of any such detailed re-assessment is emphasised where a concerted attack is sought to be mounted upon: · statements of fact in the Report said to have been contrary to the evidence; · the manner in which the referee is alleged not to have made findings as to credit. 40 There is no substance in the attempt to impugn the manner in which the defendants put particular matters in issue on the pleadings. 41 That allegation the architects had warned the plaintiffs that the architectural drawings were not fully coordinated was plainly pleaded. Also pleaded was the fact (held to have been made out by the evidence) that the drawings prepared were entirely adequate for their contractual and reasonably expected purposes. 42 The finding of a warning meets and was found to meet the plaintiffs' allegation that there was a misrepresentation as to the status of the drawings. 43 Stocklands contend that the Referee had incorrectly found that in November 1994 the Architect had warned Stockland that the drawings were not co-ordinated. The finding is one of fact which is not shown to have been not open on the evidence. To the contrary the finding was supported by the evidence. The Referee was faced with two competing versions and chose one as being more probable. Further, the Referee found that the deficiencies would have been apparent to Mr Farrant, the Construction Manager employed by Constructors. 44 There is no basis to disturb such a factual finding. The Referee set out the competing versions in paragraphs 5.12 and 5.13 of the report, also making Reference to other matters that tend to make the version that he accepted more probable than not (at[5.14)]. 45 It is material that the subject contract did not stipulate a time by which the drawings had to be coordinated. The plaintiffs seek to overcome this impediment to establishing a breach in the material circumstances by asserting that the joint venture's obligation was to coordinate the drawings at all times. This approach is misconceived. It is and was plainly not possible to coordinate two sets of drawings until they both exist. The process necessarily takes place over time. Nor was it possible to create even the first set of drawings, until design instructions had been provided. 46 As the third defendant has contended: · a feature of the proceedings was that the plaintiffs never contended for a benchmark by which to judge the drawings so far as concerned coordination, and never established a failure to reach the benchmark; · nor could the plaintiffs in the circumstances of the case, and in light of the referee's findings of fact, assert that any meaningful benchmark had not been reached; · the referee found that the drawings were adequate for the purposes of the tender to which they were directed. 47 It is necessary to take into account that the development was apparently ultimately completely generally on time despite a number of issues that arose during the course of the project that delayed the design of the project. The drawings were ultimately completed and coordinated and used to construct the works. The issue that the Referee was considering related to whether the Architect breached its duty or contract at a particular time: namely when it issued drawings to be used in the structural steel subcontract. That issue was determined in favour of the defendants. Answer to Separate Question 4 "In the result the referee's report should be adopted in terms of his conclusion that there was no breach of contract or breach of tortious duty." Separate question 5 48 A further order was been made pursuant to Part 31 of the Supreme Court Rules separating to be heard as a separate question the following issue: "Question 5: Whether the referee's report should be adopted or rejected or referred back to be Referee for reconsideration in terms of his conclusion that the plaintiffs had proved no loss arising from the Story Steel settlement?" The background 49 It is convenient to commence by repeating a small section of the report which sets the relevant background: "2.7 SCL commenced construction of Stages 2-6 in mid-July 1994. Tenders were called for various subcontract works by way of Trade Packages , consisting of relevant architectural and engineering drawings, specifications, bills of quantities and conditions of subcontract. These packages were assembled by SCL staff on site, using documents provided by the architect and other consultants. As previously noted, this was a very large building contract; and there was undoubted pressure to have the centre completed in time for Christmas trading in 1996. At this stage the consultants had lost much time as a result of the 3 months June 93 stoppage and substantial design changes. 2.8 Tenders were called for the structural steel subcontract on 1 December 1994. Two tenders were received at approximately $1.9 million. The builder's budget for this work was approximately $1.6 million 2.9 In January 1994 a Mr. Doug Thistle joined the site force as Project Manager. On his recommendation a steel subcontract tender was obtained from D. A. Story Pty. Ltd., a steel fabricating firm under the control of an " old mate" of Thistle's, Doug Story. This tender, for the sum of $1.658M, was received by SCL on 16 January 1995, having been compiled within 5 days of receipt of the Tender Package. The tender was accepted on 18 January, but no subcontract form was signed then or later. 2.10 It is part of the normal process, in fabrication and erection of structural steelwork, for a draughtsman employee or subcontractor of the steelwork supplier to prepare detailed Shop Drawings from which the steelwork is fabricated. These shop drawings are compiled with reference to the Consulting Structural Engineer's steel drawings, the Architectural drawings, and relevant specifications. In the process the draughtsman resolves any ambiguities in the documents, or matters which he cannot understand, by sending a written Request for Information (RFI) to the Engineer, Architect or Site Office. When completed, shop drawings are referred back to the consultants for general approval before the relevant steel is fabricated. 2.11 Story Steel had subcontracted the production of shop drawings to a draughting firm, Downs Building Consultant and Draughting Services (DDS). DDS issued a considerable number of Requests for Information, ostensibly to resolve ambiguities in the documentation. DDS were later to raise a substantial claim against Story Steel for extra fees based on the asserted need for so many RFIs. This claim was passed on to the plaintiff. 2.12 The building works were practically completed in September 1996, in time for Christmas trading. 2.13 In August 1996 Story Steel commenced action (6640/1996) against SCL in the Queensland Supreme Court, It claimed that the work necessary to carry out the subcontract was profoundly greater than the work described in the Bill of Quantities (in the Tender Package), and the effect of the differences and additions were such that the subcontract was abandoned by the parties and a further subcontract entered into on the terms that the subcontractor would be entitled to a reasonable price for such work. This claim for $3,196,818.00 (original contract sum of $1,622,873.00 plus an additional $1,573,945.00) was settled out of court by Deed on 24 December 1997, by which SCL paid Story Steel $2,427,909.00 (original contract sum of $1,622,873.00 plus an additional $805,036.00). 50 The essence of the reasoning of the Referee is to be found in the report as follows: "6.9 The defendants contend, inter alia, that the plaintiffs have proved no loss arising from the Story Steel settlement. 6.10 Ownership of the Earlville Shopping Centre was vested in the trustee of the Stockland Unit Trust, NAT. On 31 January 1997 NAT agreed to the following proposal in a letter from Mr. Daly: "Should the cost of the Storey (sic) Steel settlement or any other additional development costs arise whereby the sum of the total development costs and the original acquisition costs exceed $130m then such additional costs will be borne by Stockland (Constructors) Pty. Ltd as is the total cost exceeding $82,157,227. 6.11 The plaintiffs have not proved the costs if any by which the $130m figure is exceeded, nor have they proved that any overrun is attributable to the Story settlement. Indeed, in the letter from KPMG to NAT dated 12/02/1997, cost overruns identified inter alia are: Construction costs $5.97M; Leasing Costs $0.65M; Funding Costs $2.28M; Relocation Allowance $1.94M. 6.12 While the settlement sum would be a cost to NAT, there is no proof that it caused a loss to either of the plaintiffs." 51 The approach taken by the Stockland Parties is to submit inter alia as follows: · the referee incorrectly cast upon the plaintiffs the legal onus of disproving a defence pleaded by the third defendant – but not, it would appear by the first and second defendants – namely, that in early 1997 the trustee of the Stockland trust had made a payment to Constructors as a provision for the anticipated costs or verdict of the Queensland proceedings. This defence pleaded by the third defendant took the following form: "17 I Further or in the alternative, the third defendant says that the first and/or the second plaintiff have not suffered any damage as alleged by reason of the payment received from NAT in the sum of $7,157,227 in whole or in partial satisfaction of any liability to Story." · the third defendant thereby undertook the burden of proving that: "(a) Either Constructors or Properties received a payment from NAT of $7,157,227; (b) That this payment was sufficient to cover any liability which the recipient had to Story Steel Limited; or (c) That this payment was sufficient to cover a part of such liability (in which case, the third defendant must prove the quantum of the partial indemnity)." · there was no evidence adduced that any distinct payment of $7,157,227 was ever paid or received. The defence was based substantially on documents showing that the sum of $82,157,247 was paid by NAT to Constructors over a period ending in early 1997 for developing and constructing the works at Earlville. The settlement of the Queensland litigation did not occur until December 1997. In effect, the defendants contended that this sum of $82,157,247 must have provided a provision referable to Constructors' anticipated outgoings on that litigation; · the first and second defendants tendered on the last day of testimony a bundle of accounting documents which they contended demonstrated such a provision was made; · the defendants did not establish on the balance of probabilities that any such provision for future litigation outgoings was included in the sums paid to Constructors. The referee failed to consider this question. · the referee's reasons [at 6.9 – 6.11] disclose that the referee misconceived (a) the matters to be proved by the plaintiffs (b) the onus of proof in relation to paragraph 17 I of the third defendant's defence. It is also clear that the matters referred to by the referee were not sufficient to establish this defence; · Constructors adduced prima facie proof of its loss, constituted by the settlement payments in relation to the Queensland litigation... There was no serious challenge to the fact that these sums were paid in connection with the Queensland proceedings and their settlement in late December 1997; · Constructors did not seek to prove, and was never obliged to prove "the costs if any by which the $130m figure is exceeded, nor … any overrun … attributable to the Story settlement." These forensic tasks were suggested by the defendants – presumably as suitably unattainable tasks for Constructors to be required undertake in the litigation; · in law, Constructors only had to prove that it had paid the sums alleged, that these payments were a consequence of the negligence of the architects and that the settlement sum was reasonable [Unity Insurance Brokers Pty Limited v Rocco Pezzano Pty Limited (1998) 192 CLR 603]. However, the referee was persuaded that Constructors was obliged to prove something quite different. It was required to prove a negative – that it had not been reimbursed by NAT in early 1997. 52 To my mind the submissions are not of substance. The submissions put forward by the first and second defendants are adopted in what follows. "11. Stockland's submission on this issue misunderstands the nature of HRC's (and RDG's) submission concerning Stockland's loss. It is for that reason that it has incorrectly proceeded on the basis that the Referee has cast an onus on Stockland that it asserts should have rested with the Architect. 12. Stockland's error has its genesis in the pleading of a contract in paragraph 6 of the First Amended Summons. That pleading sought to imply the existence of a lump sum contract between NAT and Constructors to carry out the work for the amount of $75,000,000. The contract was particularised as being contained in two letters: (a) Letter dated 15 November 1993 from Stockland Property Management Limited to NAT; and (b) Letter dated 19 November 1993 from NAT to Stockland Property Management Limited. 13. Similarly, Senior Counsel for Stockland opened the case by relying on a document entitled Plaintiffs' Overview Submissions: On [date] 1993, by a written contract, it engaged Constructors to refurbish and extend that shopping centre ("the Earlville Project"). The consideration for acting as developer and builder was $75m. 14. That, however, does not reflect the arrangement between Constructors and NAT. The true arrangement was an elaborate do and charge contract . 15. NAT and the Stockland group had a practice concerning the development of properties owned by NAT. In essence, the arrangement was one where: (a) Stockland would identify a property for development. (b) Sometimes the property was owned by NAT and other times it was one that NAT was able to acquire. (c) Stockland would prepare a development recommendation that would take into account matters such as an independent valuation of the developed property, the expected post development yield and Stockland's estimate of the costs of the development. (d) NAT would consider the recommendation and if accepted would authorise Stockland to incur the expenditure up to the amount of Stockland's development cost estimate. (e) In the Earlville project the November 1993 development cost estimate was $75,000,000. (f) During the course of the development Stockland asked for and received draw downs from the NAT on account of the development costs. (g) At the end of the project when the actual costs were known Stockland reported to NAT with the actual development costs. To the extent that they exceeded the original estimate Stockland sought to explain the increase. In the case of the Earlville project (where there was an increase) an auditor's report was obtained from KPMG to verify that the increase was justified. (h) Once the final costs were verified and subject to the total development cost including acquisition not exceeding valuation the additional expense was paid by NAT to Stockland. 16. The present development proceeded in accordance with that usual arrangement. Mr Daly gave evidence on behalf of Stockland to that effect. 17. Ultimately, when the actual development cost was known Stockland wrote to NAT and recommended that the development costs be increased from the original $75,000,000 to a maximum of $82,157,227. The amount of $82,157,227 was simply the difference between the more recent valuation and the cost of acquisition of the property. 18. In its recommendation to NAT Stockland identified and explained the reasons for the increased costs. It identified 11 reasons for the increased costs none of which were related to any lack of performance on the part of the Architect. 19. In its letter Stockland agreed to bear any additional development costs over and above the $82,157,227 requested. Therefore, if the development costs were $82,157,227 or less, they were paid for in total by NAT. It was only if they exceeded that sum that Stockland was potentially out of pocket. 20. The Referee took the view, correctly …that Stockland had an onus to prove that it had suffered loss. In order to demonstrate any loss it, therefore, had to prove that: (a) The development costs exceeded the amount of $82,157,227; and (b) The excess was caused by the Architect's breach. 21. The figure of $82,157,227 was stated in the KPMG audit as comprising a number of items, one of which was the construction costs. The construction costs were said to be $65,153,287. There is an inference reasonably able to be drawn that that figure included an allowance for the Story Steel claim. For example: (a) By 20 December 1996 the centre was completed, open and trading and most if not all of the construction costs were known. (b) Mr Farrant assessed the construction costs as at that date as $64,746,598 including an allowance of $800,000 for the Story Steel claim. (c) By 31 January 1997 that figure had increased to $65,153,287 without any explanation and despite the work having been completed. 22. The Referee was not satisfied of either of the matters in paragraph 20 above. That conclusion was open to the Referee on the evidence available to him. 23. None of the witnesses called by Stockland was able to explain how the actual figure representing the construction costs was made up although it was accepted that it would be possible to determine what it included by reference to the Stockland accounting system. The inference was that it already contained an allowance for the Story Steel dispute because Mr Farrant had included that in his final construction costs. 24. There was no evidence of the actual final cost of the development. The only evidence was that if it exceeded $82,157,227, any excess would be borne by Stockland. 25. There was no question that whether Stockland had suffered any loss was an issue on the pleadings. The issue of what was the final development costs was the subject of cross examination from the first day of the Reference. Stockland chose not to adduce any evidence of what was the final development cost to demonstrate that it exceeded the amount it was entitled to draw down from NAT. 26. The Referee's finding that in the event that there was a cost overrun, it was not attributable to the Story Steel settlement (and, therefore, the Architect's documents), was also available to him on the evidence. 27. The KPMG audit disclosed cost overruns of $7,157,227 across a number of development cost centres. All of those overruns were met by NAT. There is nothing to indicate in the detailed audit carried out at the conclusion of the project, and after Story Steel had already commenced proceedings against Constructors, that there was an additional overrun caused by the Story Steel claim. 28. On the contrary, KPMG confirmed that the overruns had been caused by a range of matters unrelated to the Story Steel claim or any lack of performance by the Architect. 29. There is no basis for concluding that the Referee was in error in reaching the conclusions that he did that Stockland had not proved that it had suffered any relevant loss. 53 Standing back from this challenge to the Referee's reasoning, it should be recalled that ultimately the loss issue is likely arid and for the following reasons: · The issue of loss turned upon two questions: 1. Whether Stockland suffered a loss by reason of the Story Steel dispute. 2. Whether there was any causal connection between the architects' conduct and the fact of those proceedings. · Even if the plaintiffs could raise an issue concerning the issue of loss, no challenge is made by them to the equally fatal finding that the Story Steel claim had no connection with the architects' conduct. · The referee found (at 6.7): (a) The drawings prepared by the defendants were sufficiently developed for the purposes of the steelwork tender. (b) The engineering drawings were in any event the main source for the bills of quantities and these were: (1) The prime function of the architectural drawings at the tender stage was to sufficiently indicate the general configuration of the steelwork. (2) Given that the tender was prepared in five days, it can be inferred that there was little time to properly evaluate the reasonable costs of carrying out the contract works. · Story's evidence was that its tender was based solely on the bill of quantities. · At 6.8 the referee concludes: "Accordingly I consider that the major reason for Story's claim was that it needed to recoup costs on an unprofitable contract; and the lack of a signed JCCD subcontract form created the possibility of a reasonable cost or quantum meruit claim.' 54 In light of these findings it matters little whether or not the plaintiffs might be able to show a loss, contrary to the plain effect of the evidence, because no question arises of attributing that loss to the conduct of the architects. The plaintiffs do not seek to impeach these findings of the referee. 55 Whilst the Referee was reasonably short in his ultimate reasons for the end of the day a careful examination of the parameters exposed in the above described submissions of the first and second defendants satisfies me that no material has been identified by the Stockland parties in relation to the issue. Answer to Separate Question 5 "In the result the referee's report should be adopted in terms of his conclusion that the plaintiffs had proved no loss arising from the Story Steel settlement" I certify that paragraphs 1 - 55 are a true copy of the reasons for judgment herein of the Hon. Justice Einstein given on 28 September 2004 ___________________ Susan Piggott Associate 28 September 2004 Last Modified: 10/05/2004 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.