Facts

This case relates to a container terminal at Port Botany. Walker Group Constructions had been engaged to design and build five warehouses at the terminal. This work included significant concrete paving.

The original lessee (P&O) that engaged Walker transferred the lease to another party (Smith Bros) that in turn transferred its lease to Tzaneros Investments. P&O, Smith Bros and Tzaneros also entered into a tripartite deed under which P&O assigned to Tzaneros its rights in the building warranties that Walker had given P&O. Walker consented to this assignment.

The parties accepted that the concrete paving did not meet the specifications and was thus efective. Despite this, Walker’s appeal raised issues central to the role of contract in construction law.

Issues in the Court of Appeal

The issues raised by the notice of appeal were:

1. Whether on a proper construction of the terms of the Deed of Assignment and the letter of consent from WGC, there was an assignment by P&O to Tzaneros of any accrued cause(s) of action for breach of the building warranties.

2. Whether construction of the relevant documents by reference to the surrounding circumstances was permissible.

3. Whether Tzaneros acquired the terminal with knowledge of the defects and therefore suffered no loss as a consequence of those defects.

4. Whether Tzaneros was entitled to recover damages for the cost of full replacement of the pavement.

5. Whether a reduction in the sum of damages awarded to Tzaneros for betterment should have been made.

Bathurst CJ gave a substantial judgment with which Beazley P and Gleeson JA agreed.

 

1.      Were accrued rights under the building warranties assigned? — Yes

The Court held that the deed of assignment should be interpreted like any other contractual provision.[1] This required attention to:

  • the entire deed (including its recitals);[2]
  • the commercial purpose of the arrangement;[3]
  • whether particular interpretations would lead to an uncommercial result;[4] and
  • the context of the deed.[5]

In applying these principles, Bathurst CJ found:

Clause 3.1 expressly assigns all the benefits of the building warranties. On its face that would appear to include a right to sue for an existing breach of the warranties in the D&C contract, as well as any future breaches. I do not think that the concluding words of cl 3.1 “with effect from the Effective Date” limit the assignment to claims for breaches of warranties which arose after that date as distinct from making it clear that Tzaneros’ rights to the benefit of the building warranties arose from that date.” [6]

Shaun Bailey, Faheem Anwar and Krishneel Kumar thoroughly examine the issues arising from the assignment in a note on the Corrs website.

 

2.      Is evidence of text deleted during negotiations admissible in construction? — Not  here

The issue here was not the familiar debate about the meaning of Mason J’s “true rule”. 

Rather, Walter had sought to argue that the drafting history supported its argument that it had not consented to an assignment of existing causes of action. On everyday principles of construction, this argument would fail because it seems to rely on evidence inadmissible either because it concerns negotiations, or because it simply goes to subjective intention. Nonetheless, Mason J in Codelfa famously if tentatively offered a possible exception:

“If it transpires that the parties have refused to include in the contract a provision which would give effect to the presumed intention of persons in their position it may be proper to receive evidence of that refusal. … It is possible that evidence of mutual intention, if amounting to concurrence, is receivable so as to negative an inference sought to be drawn from surrounding circumstances.” [7]

The argument raises several fascinating complications.

 

Is evidence of text deleted from standard forms admissible?

Bathurst CJ cites with apparent approval authority to the effect that, in Australia:

“appellate authority allows recourse to words or clauses deleted from standard or common form agreements for the purpose of construing ambiguous language.” [8]

For practical purposes, where standard forms are involved, this position now seems to be settled in Australia, at least where the language is ambiguous.[9]

In a twist, the main authority Bathurst CJ relies on is the Victorian Court of Appeal’s decision in Gee Dee Nominees Pty Ltd v Ecosse Property Holdings Pty Ltd.[10] Just four weeks after judgment in this case, the High Court gave judgment in the Ecosse v Gee Dee appeal. By the time the parties reached the High Court, they accepted that evidence of words deleted from a standard form could be admitted.[11] It is hard not to have sympathy with Gageler J’s seeming disappointment that the matter was not fully agitated in the High Court.[12]

 

Is evidence of drafting history admissible to show anything other than shared intention?

Bathurst CJ would have excluded evidence of the drafting history because he did not think the drafting ambiguous. Beyond that, Bathurst CJ emphasised the elementary point that the intention must be shared:

“for the exception in Codelfa to apply it would be necessary to show that the parties to the deed, that is Smith Bros and Tzaneros, had mutually concurred in rejecting a construction that the assignment extended to the past breaches … There is no suggestion of mutual concurrence.” [13]

 

Evidence of surrounding circumstances in assignment and novation

Here, the relevant parties seemed to have access to the same information about the transaction and its purpose. Other situations might be different, such as where the assignor and assignee had different information and the warrantor provided prior consent. What evidence would be admitted, and what weight it might be given, would be heavily contested. The Court avoided comment on these complications.

 

3.      Did Tzaneros suffer no loss because it knew of the defects? — Not here

Walker argued that Tzaneros could not have suffered any loss if it knew of the defects. This forced a comparison between these facts, where Tzaneros was suing on assigned right, and a later buyer suing on a statutory warranty. The nub of the argument is that Tzaneros might be presumed to have paid less for the rights assigned if it knew of the defects. More elaborately, the subsequent transaction might be thought to break the chain of causation from the defendant’s wrongdoing to the plaintiff’s loss.[14]

The Court was largely able to evade this fascinating issue:

“It does not seem to me that any principle derived from Allianz extends to an assignee who has constructive knowledge by reason of failing to properly investigate the extent of a patent defect.” [15]

There is much room for further case law in this area. For the moment, the curious position appears to be that a party in Walker’s place might have improved its position as against Tzaneros by explaining in detail all the defective work before the assignment.

 

4.      Could Tzaneros recover full replacement costs — Yes

On the broad question of damages for defective work, it is clear rectification costs will be payable unless that is not a reasonable course to adopt. The complication here was that defective design affected all of the relevant paving, yet not all of the panels were ultimately likely to crack.

In resolving this, Bathurst CJ noted in one line that “this is not a case where rectification work will not be performed”.[16] Whether this is ultimately of any legal significance, this suggests it is of ongoing benefit to lead evidence, where possible, that the plaintiff intends to rectify defects.

Bathurst CJ further held that a sale will “not necessarily disentitle the owner to recover as damages the cost of remedying the defects”.[17] His Honour did not state whether this would be depend on evidence that the sale price was unaffected by the defects.

On these facts, all of the relevant pavement suffered from the defective design. Over time, more and more of it would need to be replaced. This led Bathurst CJ to conclude:

“It does not appear to me to be unreasonable to replace the whole pavement [subject to minor exceptions] in order to remedy the defective design which affected the whole pavement. The fact that certain panels may not in fact crack does not alter the position.” [18]

This aspect of the judgment will presumably be heavily applied and tested in defective design cases.

 

5.      Should Tzaneros’s damages have been reduced for betterment? — No

Walker argued that while the contract provided for a design working life of 20 years,[19] the repairs would yield an operational pavement with a 50-year design life. Bathurst CJ approached this by emphasising that the appropriateness of rectification costs coloured the question of betterment:

“The respondent did not point to any other method of repair of the pavement which would cost less than the solution proposed by Mr Davis and would have produced a pavement in conformity with the contract. In the circumstances, there was no entitlement to a credit for betterment on this basis.”

This observation will prove forceful in future cases in which the defendant argues the plaintiff’s damages should be reduced because they would otherwise put the plaintiff in a better position.

Bathurst CJ added three further observations that will be similarly useful. His Honour further found that the claim for a betterment reduction failed because:

  • the 20-year design working life, properly interpreted, did not imply that the pavement would be unusable after 20 years;[20]
  • the proposed replacement was designed to avoid consequential loss that would otherwise have flowed from the breach;[21] and
  • a simple percentage reduction based on the design life was too crude.[22]

 

Conclusion

This case is vital for construction lawyers for its obvious focus on assessment of damages for defective design. It is also an important authority on assignment of building warranties and the interpretation of negotiated contracts.

https://www.caselaw.nsw.gov.au/decision/58af9b95e4b058596cba460f (Court of Appeal decision)

http://www.corrs.com.au/publications/corrs-in-brief/assignment-of-defectwarranties-is-your-drafting-sufficient/ (Corrs note on the assignment aspects of the case)

For more commercially focussed commentary on the major judicial and legislative developments affecting the construction and infrastructure industry, click here.