The Owners - Strata Plan No 84741 v Nazero Constructions Pty Limited & Ors

These proceedings arise out of a dispute in respect of alleged defects in an apartment block at 3 Donnellan Circuit, Clovelly (the Property), built by the first defendant, Nazero Constructions Pty Limited (Nazero), under a construction contract (the Contract) with the third defendant, Iris Diversified Property Pty Limited (Iris).

The Contract executed on 12 July 2011 was between Iris, as Principal, Nazero, as Contractor, and Mr Wardy Younan, as Guarantor. The Front Sheet of the Contract included the following:

The Formal Instrument of Agreement (the Instrument) included the following provisions:

The execution page was completed by Iris and Nazero. Although there was a portion for Mr Younan’s signature separately from his signature for Nazero it was not signed by him. There is no issue in respect of that lack of signature on the document. It is accepted that Mr Younan initialled each page of the Contract.

The General Conditions section of the Contract included the following definitions (clause 1):

The General Conditions also provided for liquidated damages (clause 34.7), defects liability and variations (clauses 35-36) and progress claims (clause 37.1).

On 8 August 2012 Nazero served a Payment Claim on Iris for $1,095,342.16. Iris disputed that sum and an application for adjudication was made by Nazero under the Building and Construction Industry Security of Payment Act 1999. On 14 September 2012 the Adjudicator issued a Determination in Nazero’s favour in the amount of $919,560.48.

On 24 September 2012 Iris commenced proceedings in the Technology and Construction List (the First Proceedings) against Nazero and the Adjudicator seeking a declaration that the Determination be declared void. Mr Younan was not a party to those proceedings.

On 28 September 2012 Iris, Nazero and Mr Younan executed a Deed of release and variation (the Deed) and on the same day consent orders were made dismissing the First Proceedings with an order that each party to the proceedings pay their own costs.

The Deed included the following:

On 19 February 2015 the plaintiff, The Owners Strata Plan No 84741, commenced proceedings against Nazero and Iris for damages for breach of warranties under the Home Building Act 1989. Nazero did not take part in the proceedings and did not appear when they were listed for hearing as between the plaintiff and Nazero on 16 October 2015.

On 16 October 2015 Hammerschlag J found that the structural defects as alleged had been established and entered judgment in the plaintiff’s favour for $1,452,419.32 and ordered Nazero to pay the plaintiff’s costs of the proceedings. These findings did not bind Iris.

The balance of the proceedings between the plaintiff and Iris continued and Iris filed a First Cross-Claim dated 30 March 2016 against Wardy Younan, the then sole director of Nazero, in which it sought a declaration that Mr Younan, as Guarantor of Nazero’s obligations under the Contract, is liable to remedy any of Nazero’s breaches of the statutory warranties or in the alternative, is liable to pay Iris such sum as it may be ordered to pay the plaintiff.

On 6 May 2016 orders were made for the parties to agree on questions to be determined separately before any other questions in the proceedings. On 19 May 2016 orders were made by consent for three questions to be determined separately before any other questions in the proceedings. The matter was listed for hearing on 31 May 2016.

The proceedings in relation to the separate question were heard on 31 May 2016 when Mr H Chiu, of counsel, appeared for the plaintiff; Mr A S McGrath SC, of counsel, appeared for Iris, and Mr L Gor, of counsel, appeared for Mr Younan. The questions were reduced to a single question for determination as follows:

Although there were other matters upon which the parties addressed, it is in the circumstances appropriate to deal only with their submissions on the real issue in dispute which is whether the expression “the parties” in clause 3.1 of the Deed included Mr Younan.

Mr Younan contended that the Deed released him from all obligations or liability under the Contract. He submitted that the term “parties” in clause 3.1 of the Deed must refer to Nazero, Iris and himself because the word is not capitalised. It was also submitted that the Court should not lightly infer that the word “parties” was erroneously used instead of the word “Parties” particularly as the Deed was executed by persons who were legally represented.

Mr Younan submitted that if the purpose of the Deed was to address no more than the dispute between Iris and Nazero in relation to the First Proceedings then there was no need to make him a “counter party” to the Deed. He submitted that he was an essential party to the Deed having regard to his liability in the Instrument as “continuing despite any intervening payment, settlement or other thing”.

Mr Younan also submitted that the distinction drawn in the Deed between “Disputed Claims” and “Claims” supports the proposition that the term “parties” refers to each of Iris, Nazero and himself. Reliance was also placed on the obligations in the Deed for him to pay his own costs, submit to the non-exclusive jurisdiction of New South Wales, and declare that he has authority to execute the Deed (clause 6).

Iris contended that Mr Younan was not released under the Deed in respect of the claims in these proceedings. It submitted that the word “parties” should be construed in accordance with the introductory section of the Deed which identifies Iris and Nazero as “the Parties”. It was submitted that the word “parties” is simply another grammatical form of “Parties” in accordance with schedule 1 of the Deed that provides “where a word or phrase is given a particular meaning, other parts of speech or grammatical forms of that word or phrase have corresponding meanings”.

Iris submitted that the release in clause 3.1 cannot extend to Mr Younan because it was subject to the parties compliance with the terms of the Deed and Mr Younan had no substantive obligations under the Deed. It was also submitted that if clause 3.1 releases Mr Younan from his obligations under the Instrument, then he is still liable with respect to breach of warranties under the Home Building Act 1989 on account of the exception to the release in clause 3.2 of the Deed. It was also submitted that it would not be commercially sensible and indeed remarkably odd if clause 3.2 excluded Nazero’s obligations under that Home Building Act from the release but did not exclude the guarantee of those obligations by Mr Younan.

The plaintiff supported the submissions made by Iris.

In determining the extent of the release in the Deed it is necessary to have regard to “the ordinary meaning of the release taking into account the terms of the Deed as a whole and by giving the words within it their natural and fair meaning. This is done having regard to their context within the Deed and in the context of the parties relationship and all relevant facts surrounding the transaction so far as was known to the parties at the time the Deed was executed”: Amaca Pty Ltd formerly known as James Hardie & Coy Pty Ltd v CSR Ltd [2001] NSWSC 324 at [77]. It is also important to identify the commercial purpose or objects to be secured by the Deed: Mount Bruce Mining Pty Ltd v Wright Prospecting Pty Ltd (2015) 325 ALR 188, 198 [47].

These were commercial parties operating within the construction industry. Nazero and Iris had been in a commercial relationship in respect of the construction of the apartment block for approximately 15 months by the time they entered into the Deed. During that period Nazero had served 17 Payment Claims on Iris, 14 of which had been paid. Payment Claim 15 was the subject of the Adjudication and the First Proceedings. Payment Claims 16 and 17 were not paid and it appears Iris disputed Nazero’s entitlement to the amounts in those Claims. The outcome of the First Proceedings, had they gone to trial, would not have finalised the disputes between Iris and Nazero.

The object of the Deed was to give effect to the decision by Iris and Nazero to settle not only the First Proceedings in relation to Payment Claim 15 but also their disputes about Payment Claims 16 and 17. This required not only entry into the Deed but also the making of orders by consent to finalise the First Proceedings. The fact that the First Proceedings were to be finalised was recognised in clause 4 the Deed.

It is necessary to decide whether the expression “the parties” in clause 3.1 of the Deed referred only to Iris and Nazero or to Iris, Nazero and Mr Younan. If it is the former, Mr Younan accepted that he is not released under the Deed and the answer to the separate question should be in the negative.

The Contract defined a “party” as Iris or Nazero and “the parties” as Iris and Nazero together. The use of the expression “parties” (rather than “Parties”) in in clauses 1.1(c), 3(a), (b) and (c) of the Contract clearly referred to Iris and Nazero. Mr Younan was defined as and referred to as “the Guarantor”.

The Deed defined “Party” as Iris or Nazero and “the Parties” as Iris and Nazero together. Mr Younan was defined as and referred to as “the Guarantor”.

Although Iris and Nazero were defined in the Deed as “the Parties”, such expression is only used once after the “Background” section of the Deed and before clause 1.2 where it is recorded that “The Parties agree”. All other references in the Deed in this regard were to “the parties”.

The expression “Party” was used in the Deed, although on occasions the word “party” was used. The provisions relating to the costs of producing the Deed specifically referred to “each Party and the Guarantor”. This was clearly intended to identify Nazero and Iris as “each Party” and Mr Younan as “the Guarantor” requiring them to pay their own costs and expenses of negotiating, preparing and executing the Deed. The same expression, “Each Party and the Guarantor”, is used in clause 6.4 of the Deed pursuant to which Nazero, Iris and Mr Younan submitted to the non-exclusive jurisdiction of the Courts of New South Wales. The expression “Each party who executes this document and the Guarantor” is used in clause 6.7(a) pursuant to which Iris, Nazero and Mr Younan declared that they had full authority to execute the Deed.

The definition of the term “Execution Date” is important. It was defined as the date that the Deed “is executed by the parties and the Guarantor”. This is the only instance in the Deed that the expression “the parties” is used in conjunction with the expression “and the Guarantor”. It is clear that the word “parties” was intended to refer to Iris and Nazero.

Clause 3.1 released “the parties” from all “Claims” against each other as defined in the Dictionary. Clause 3.2 excluded the Contractor’s (i.e Nazero’s) obligations under the Defects Liability Period under the Contract or under the Home Building Act 1989 from the release in clause 3.1. Construing clauses 3.1 and 3.2 together it is clear that the intention of “the parties” was that they did not “release and forgo each other” in respect of Nazero’s obligations under the Defects Liability Period under the Contract or under the Home Building Act 1989.

Taking into account the object of the Deed, the language used and the context in which the expression appears in the Deed, I am satisfied that reference to “the parties” in clause 3.1 means Iris and Nazero together. I am satisfied that it was not intended to include Mr Younan within that expression. If it had been intended to include Mr Younan in clause 3.1, then the expression “the parties and the Guarantor” would have been used.

The title “Deed of variation and release” reflected the intention to vary the existing contractual relationship and to provide certain releases. The variation was that Nazero was no longer obliged or liable to perform obligations under the Contract except those referred to in clause 3.2 of the Deed. That had a consequence for Mr Younan in that he could no longer be called upon to guarantee the performance of obligations from which Nazero had been released in clause 3.1 of the Deed. However he remains liable as Guarantor in respect of Nazero’s continuing obligations referred to in clause 3.2 of the Deed.

The expression “the parties” in clause 3.1 of the Deed means Iris and Nazero.

The answer to the separate question is “no”.

If Iris, Nazero and Mr Younan are unable to agree on a costs order, I will hear argument on the occasion that the matter is next listed.

The matter is listed for directions in the Technology & Construction List on 1 July 2016.