Walker Group Constructions Pty Ltd v Tzaneros Investments Pty Ltd

BATHURST CJ: This is an appeal from a decision of a judge of the Equity Division of the Court in which the appellant, Walker Group Constructions Pty Ltd (WGC) was found liable to the first respondent, Tzaneros Investments Pty Ltd (Tzaneros) in the sum of $11,612,013.53 under building warranties granted in relation to the construction of a container terminal at Molineux Point, Port Botany (the terminal). The land on which the terminal was built is owned by Sydney Ports Corporation (the land). At the time of construction of the terminal, the land was leased to P&O Trans Australia Holdings Limited (P&O). WGC was responsible for, among other things, laying various types of pavement, in particular types P2 and P2/B2 pavement (the pavement). It was common ground that the pavement did not meet the relevant contractual specifications and was thus defective. The leasehold interest in the terminal was assigned on a number of occasions. This appeal concerns firstly whether the assignee of the relevant building warranties had a right to sue under those warranties and secondly, the extent of its loss.

Construction of the terminal was governed by a design and construct contract between P&O and WGC (the D&C contract). Under that contract, work was to be performed in two stages: the first stage to be completed by 28 January 2004 and the second stage to be completed by 6 April 2004. These timeframes were complied with, with construction of the first stage being completed on 27 January 2004 and construction of the second stage being completed on 6 April 2004.

The D&C contract was comprised of a number of documents including the formal instrument of agreement, special and general conditions of contract and the performance specification. The operation and maintenance manual (the O&M manual) was Annexure E to the special conditions of contract.

Clause 3.1 of the general conditions of contract provided that “[T]he Contractor”, being WGC, would “execute and complete the work under the Contract in accordance with the requirements of the Contract.”

Clause 4.1 contained the warranties provided by WGC. It was in the following terms:

“Works” was defined as:

Clause 5 dealt with the provision of security for ensuring due and proper performance of the contract. WGC provided security to P&O in the form of an insurance bond in accordance with this clause (the contract security).

Clause 9.1 dealt with assignment of the contract. It was in the following terms:

Clause 37 stipulated that the “Defects Liability Period” was to commence at 4.00pm on the date of practical completion. As soon as possible after that date, the Contractor was to “rectify any defects or omissions in the work under the Contract existing at the Date of Practical Completion”. The defects liability period lasted one year, expiring on 27 January 2005 for stage 1 works and on 6 April 2005 for stage 2 works.

Clause 3.41 of the special conditions of contract provided:

In the O&M manual, s 3.0 set out the pavement design parameters that were incorporated into the design calculations. It then provided: “P&O must not permit any vehicle to be used or operated on the pavements that places a load on the pavements which is greater than the loads for which the pavements have been designed.”

Section 5.0 prescribed obligations for pavement maintenance. It was, relevantly, in the following terms:

Appendix D to the O&M manual was the pavement inspection checklist. It stipulated that the pavements were to be inspected every six months with defects recorded in a table according to distress type and measured value, which was then accorded a severity level of either non-contributing, light, medium or heavy.

Clause 2.4 of the performance specification relevantly provided:

On 1 April 2004, P&O assigned its leasehold interest to a subsidiary, Smith Bros Trade and Transport Terminal Pty Ltd (Smith Bros). On 2 December 2005, Smith Bros assigned the leasehold interest to Tzaneros, the sole director of whom was Terry Tzaneros. A deed of assignment was entered on the same day between P&O, Smith Bros and Tzaneros under which P&O purported to assign the benefit of the building warranties given by WGC (the assignment deed).

The recitals to the assignment deed were in the following terms:

The definitions of “Building Contract” and “Improvements” circularly referred to one another, but it was accepted that the “Building Contract” was a reference to the D&C contract. “Building Warranties” was defined as:

Clause 2.1 was an acknowledgement of interest. It was in the following terms:

Clause 3.1 effected the assignment. It was in the following terms:

The “Effective Date” was the date on which the agreement for sale of assets between Smith Bros and Tzaneros was completed, that is, 2 December 2005.

Clause 4 contained the warranties given by P&O in relation to the assignment. Clause 4.1 was in the following terms:

Clause 6 operated to impose a trust on P&O in the event that the assignment of the benefit of the building warranties was not effective. It was in the following terms:

Clause 7.4 was an entire agreement clause. It provided as follows:

In accordance with cl 9.1 of the D&C contract, WGC provided a letter of consent to the assignment. The terms of that consent were as follows:

In the agreement for the sale of assets between Smith Bros and Tzaneros, it was a condition precedent to the sale of the assets that there be:

“Building Warranties” was defined in that agreement as “the benefit of any building warranties under the Building Contract in respect of the Leasehold improvements, including, without limitation, the Insurances and the Contract Security under the Building Contract, to the extent capable of assignment”.

In evidence was a series of emails between representatives of P&O, Tzaneros and WGC in which draft versions of the assignment deed and letter of consent were exchanged. The use which could be made of such evidence was the subject of considerable debate at the appeal. That evidence revealed three significant changes in the evolution of these documents: first, the removal of WGC as a party to the assignment deed; second, the release of the contract security and resolution of outstanding claims between WGC and P&O; and third, the removal of explicit reference to “any cause of action” in the description of building warranties.

In a draft assignment deed, circulated by Peter Panagiotopoulos (the solicitor acting for Terry Tzaneros) to Richard de Carvalho of WGC on 25 October 2005 (the draft assignment deed), WGC was listed as a party to the deed. Clause 6.1 contained an expression of WGC’s consent in the following terms:

Clause 3.1 of the draft assignment deed was in the following terms:

Clause 4 dealt with the transfer of the contract security from P&O to Tzaneros. It was in the following terms:

In the draft assignment deed, “Building Warranties” was defined as having

In a draft letter from a Mr Walker of P&O to Tzaneros sent on 28 October 2005 (the P&O draft letter), it was stated that Smith Bros and P&O confirmed that: “Save for x invoices totalling $y which remain outstanding from Walker Constructions, P&O has no call on the Contract Security and will work with Walker Constructions to assign the benefit of that security to Tzaneros Investments”.

In an email of 31 October from Mr Walker to Mr Tzaneros, Mr Walker stated: “Subject to agreement of the issues re the insurance bond the letter appears fine from a vendor perspective.” The email went on to state: “This is the only form of assignment document that Walkers [WGC] will agree to. I am liaising with our Peter Lim re the amended building warranty deed sent to us today and will revert shortly with comments – this document will need to take out all references or issues as affects Walkers”.

The response referred to by Mr Walker was an email from David Thomas (Development Manager of WGC) which attached the draft letter of consent. Mr Thomas stated: “We are prepared to sign the letter provided we can resolve the outstanding claims from both parties and have returned our outstanding insurance bond.” That letter, subject to an immaterial amendment, was in the same form as the signed consent letter.

The “outstanding claims” were documented in a series of meetings and defects lists culminating in the minutes of a meeting on 1 September 2005 which referred to air conditioning issues, concrete crack repairs, roof repairs, wall cladding repairs and flood light lens failure.

In an email from Mr Walker to Mr Thomas on 2 November 2005, Mr Walker wrote: “Further to our telco can I ask you to confirm that if we courier the bank guarantee to you in the morning and agree that there remain no outstanding monies from either side, that Walkers will have the building warranty letter signed and couriered to me asap Thursday”. Mr Thomas confirmed that this was OK and sent the signed consent letter the following day. There was no further evidence exposing the reasons for WGC’s withdrawal as a party from the assignment deed.

Cracks began to develop in the pavement shortly after pouring, as early as September 2003. Cracking and spalling continued to worsen in terms of number and severity. On 15 December 2004, Peter Watt of P&O undertook a “cursory survey” of the external pavements, identifying areas on a map (the crack map) of medium, heavy and severe spalling and cracking. He was accompanied on this inspection by Terry Tzaneros. In cross-examination, Mr Tzaneros was asked to recall this inspection and the following exchange occurred:

Later in the exchange, Mr Tzaneros clarified: “I never actually saw these markings on this map, when I’m saying, you know, heavy and so forth … this would have been done after he’d left”. In his affidavit of 14 June 2013, Mr Tzaneros stated:

Mr Tzaneros’ evidence was that the first time he was aware that the cracks in the pavement were of a structural nature was upon receiving a letter dated 25 July 2006. The letter enclosed a report into issues associated with cracking and stated that “the issues raised can partly be attributed to either a design or construction related issue”. Mr Tzaneros gave evidence that he had been reassured on a number of occasions by representatives of WGC that the cracks were only shrinkage and surface cracks. In cross-examination, Mr Tzaneros stated “I’ve always had in my mind that they were only shrinkage crack[s], shrinkage cracks and surface cracks, and being repaired by Walkers”. On this latter point, Mr Tzaneros also gave evidence that he was continuously assured, up until 2009, that WGC would rectify the pavement.

Mr Tzaneros indicated in cross-examination that he was not concerned to conduct any form of due diligence prior to the acquisition, despite being aware of the cracking. He did conduct a personal visual inspection of the pavement for around half an hour to an hour, without the assistance of an engineer.

Fielder Engineers Pty Limited was appointed superintendent under the D&C contract. Mr Peter Fielder (the Superintendent) carried out this function on its behalf. In his affidavit of 14 June 2013, Mr Fielder stated:

When cross-examined on this statement, Mr Fielder agreed that the cracking during that period “was indicative of some form of either construction or design defect in the pavement which took it beyond the category of mere shrinkage cracking”. He proceeded to confirm that “[b]y April 2005 we were becoming concerned with the structural integrity of the pavement” and in February 2005 he had noticed cracking which he would describe as “structural cracking”. Reference was also made to the minutes of a site meeting held on 20 April 2005 between Mr Fielder and Mr Walker that recorded a “[s]tructural [c]rack west of warehouse 4”.

Mr Fielder prepared a report in late 2009 on the instructions of Tzaneros (the Fielder report). The report stated, by reference to the O&M manual, that, if defects exceeded the maximum repairable severity, there was no recommended repair methodology and replacement of the defect slab would be required. In cross-examination, Mr Fielder was asked to apply the O&M manual distress criteria to the descriptions provided on the crack map and agreed that many of the cracks there described exceeded the maximum repairable severity, requiring replacement.

From late 2004, WGC attempted to repair some of the cracks by epoxy injections. However, it soon became apparent that the crack repairs were not performing satisfactorily. Some repairs were performed by WGC at no expense to Tzaneros. However, after proceedings were commenced, Tzaneros began engaging third parties to perform the repairs totalling costs of approximately $534,185.74.

Design experts were retained by WGC and Tzaneros to assess the extent of the damage and necessary repair. In their joint report, they identified four defects in the design of the pavement: inadequate thickness of the concrete; joint details which relied too heavily on aggregate interlock and were inadequate to transfer the specified loads; inappropriate joint spacing; and use of sand as a sub-base.

The position of Tzaneros’ expert, Anthony Davis, was that the state of the pavement was such that it would require substantial replacement within the next three to five years and that if the pavement was to be used on the same basis as it was currently being used, the rate of failure of the pavement in the trafficked areas would increase and the already damaged pavement would deteriorate further and quicker. In cross-examination, Mr Davis clarified that his position was that the entire pavement should be replaced because of its under-design, but if that was inappropriate, then he had designated in his report the areas not requiring replacement. Following this exchange, Mr Davis produced diagrams indicating the precise panels requiring replacement. Panels were divided into those that required immediate replacement, those where an allowance should be made for possible future replacement and panels previously replaced by third parties.

WGC’s expert, Andrew Baigent, performed an inspection of a more “general nature”. His opinion was that “not every concrete panel displayed evidence of damage”. He concluded that approximately one half of the panels had suffered cracking and it was only those panels that had suffered significant cracking damage that required rectification. In a further supplementary report, Dr Baigent categorised the damage into five categories. His opinion was that only those in “Damage Category 5”, being 66 of approximately 1000 panels, required immediate replacement and a further allowance should be made for the replacement of approximately 20% of the 182 panels within ‘Damage Category 4”.

Mr Davis’ recommended method of replacement was a heavily reinforced pavement solution. In cross-examination, Mr Davis gave evidence that this form of pavement was defined under the Australian Standard AS 3600 as having a design life of around 50 years. According to the evidence of Michael Sturgess, an expert quantity surveyor retained by Tzaneros, the cost of replacing the entire pavement with the heavily reinforced design would be $14,819,256.72 and the cost of replacing those panels identified by Mr Davis as requiring immediate replacement, with allowance for those panels possibly requiring future replacement, would be $9,071,116.31.

On 5 February 2015, Tzaneros sold its leasehold interest to the Trust Company (Australia) Limited (TCAL) who in turn, through a number of transactions, subleased the terminal to ACFS Port Logistics (ACFS), the Managing Director of whom was Arthur Tzaneros, the son of Terry Tzaneros.

Tzaneros’ leasehold interest was sold for $44 million. This was consistent with a valuation report prepared by Knight Frank Valuations. The basis of the valuation was “Market Value ‘As is’ of the leasehold interest”. Under the heading “Building Age and Condition”, it was stated: “Our valuation is conditional on the structure and service installations of the improvements being free from any defects requiring material capital expenditure, other than that stated herein.”

Under the contract for sale entered between Tzaneros and TCAL (the sale agreement), Tzaneros undertook that it held the benefit of the building warranties (defined as per the assignment deed) and that the building warranties were valid and subsisting. Under cl 65.3 it also promised to hold and maintain the benefit, rights and entitlements of and associated with the building warranties and not to assign them without TCAL’s consent.

Clause 65.4 dealt with Tzaneros’ liability to carry out repairs to any defects in stage 1 or 2 of the premises. It was in the following terms:

Clause 65.5 dealt with Tzaneros’ liability to carry out repairs to any defects in stage 3 of the premises, it is not relevant for the purpose of the present proceedings. Clause 65.6 dealt with the categorisation of works as minor or substantial works. It was in the following terms:

Clause 65.7 contained warranties in respect of repairs under cl 65.4 or 65.5. “Minor Works” were defined as “Works that do not involve any substantial removal of the existing pavement including the Works or otherwise require material or structural works”. It provided:

On 5 February 2014, Tzaneros and TCAL also entered into a works side deed, under which Tzaneros was required to carry out certain work supplementary to its obligations under the contract for sale. Under cl 2.1, Tzaneros agreed “to commence the Works by 31 December 2016”. “Works” was defined as “the works detailed in the Works Schedule including Minor Works and Substantial Works (as applicable).”

The area of the works was identified in cl 4 of the Works Schedule as “the areas of the P2 external pavement located within the green and red zones on the aerial photograph in annexure A hereto and more specifically identified in the areas marked in orange on the drawing in annexure B hereto”. The annexed photograph and drawing revealed that some areas of P2 pavement were not subject to the works side deed, namely the P2 pavement between Warehouses 2, 3 and 4 on one side, and warehouses 5 and 6 on the other, and thus, were only subject to repair obligations under the contract for sale.

Clause 5 of the Works Schedule was in the following terms:

In the affidavit of Arthur Tzaneros of 6 November 2015, he stated: “It is my intention as Managing Director to take steps to cause ACFS Port Logistic to seek to have the whole of the P2 pavement progressively replaced over the next few years.” In an earlier affidavit, sworn on 27 September 2013, Arthur Tzaneros gave evidence concerning the operation and use of the terminal under ACFS. He stated:

The primary judge noted that it was not in dispute that the pavement was defective in the sense it did not meet the relevant contractual specifications.

The primary judge identified the first issue in dispute as whether the assignment to Tzaneros was only effective to assign the contractual right to performance under the D&C contract and not effective to assign any cause of action that had already accrued at the time of assignment. He noted that a cause of action for breach of warranty arises at the time of breach regardless of when damage is suffered.

The primary judge found that the ordinary and natural meaning of the words “all of the benefits of the Building Warranties” included the right to sue in respect of breaches that had already occurred, and that the right to sue was one of the benefits of the warranties. This construction was supported by the context of the assignment, “where P&O and Tzaneros knew that there had been cracking in the pavement and they must have contemplated the possibility that that would give rise to a claim for breach of warranty against WGC: Tzaneros Investments Pty Limited v Walker Group Constructions Pty Limited [2016] NSWSC 50 (Trial Judgment) at [95].

His Honour found that evidence of prior negotiations did not assist WGC’s construction as “the parties’ decision to change the definition [of building warranties] is equally consistent with a shared belief that the rejected words were unnecessary”: Trial Judgment at [94]. In regards to WGC’s contention that it did not consent to an assignment of accrued rights, the primary judge found first, that the consent given by WGC could not affect the scope of the assignment and second, that the reference to the date of sale was simply to identify when the assignment took effect and WGC should start dealing with Tzaneros rather than P&O.

The second issue was whether Tzaneros had suffered any loss in light of the principle in Allianz Australia Insurance Ltd v Waterbrook at Yowie Bay Pty Ltd [2009] NSWCA 224 (Allianz) that a successor in title who acquires a building in full knowledge of its defects suffers no loss from the existence of those defects. The primary judge dismissed this argument for two reasons. First, the principle was not applicable in the case of an assignee of warranties. In the absence of any other evidence, it was to be inferred that the price paid by Tzaneros for the terminal reflected the fact that warranties were being assigned. Second, Tzaneros did not have full knowledge of the defects at the time it acquired the terminal. The primary judge stated that the relevant knowledge was that of Mr Tzaneros, whose evidence was that the first time he knew of structural problems with the pavement was in July 2006. The primary judge accepted Mr Tzaneros’ evidence that he did not know the pavement suffered from a design defect at the time of acquisition, stating that this was consistent with what Mr Tzaneros was told at the time and the concession made by WGC’s counsel: Trial Judgment at [100].

In calculating Tzaneros’ loss, the primary judge referred to the principle in Bellgrove v Eldridge (1954) 90 CLR 613; [1954] HCA 36 (Bellgrove) that “the innocent party is entitled to recover as damages the cost of rectifying the defects, and not simply the difference in value of the relevant property with and without the defects”: Trial Judgment at [101]. He stated that an exception to this principle existed where it would be unreasonable to rectify the defects in question, but only where the cost of remedying the defect would be out of proportion to the achievement of the contractual objective. The primary judge pointed to undisputed evidence that the pavement was defective in the sense that it could not sustain the contracted-for level of traffic over the 20-year period specified and reiterated that what Tzaneros was seeking to recover was the cost of replacing the pavement so that it conformed to the contractual standard.

The primary judge stated that it was difficult to see how the assignment to Tzaneros could affect the application of the principle in Bellgrove. He stated that the effect of the assignment was that Tzaneros was placed in the shoes of P&O and seeking to recover damages from WGC as if it were P&O: Trial Judgment at [116]. He found there was no evidence to suggest Tzaneros acquired the terminal at a substantial discount.

In response to WGC’s contention that it would be unreasonable to replace the whole of the pavement because the defects had not affected the operation of the terminal, the primary judge queried how this fact affected the application of the Bellgrove principle in circumstances where WGC accepted that at least some of the panels required replacement. His Honour stated that, in any event, it did appear that the defects had a significant effect on the operation of the terminal on the basis of evidence given by Arthur Tzaneros to the effect that he had to engage in substantial repairs and that forklifts were required to operate at slower speeds. He said this was consistent with what could be observed on a view of the terminal.

The primary judge rejected the evidence of Dr Baigent, the engineering expert retained by WGC, in favour of Mr Davis, the expert retained by Tzaneros, on questions of both the extent of necessary replacement and appropriate design. His Honour noted that Mr Davis’ “concession” that not all panels needed to be replaced was made on an incomplete assumption, namely, on the physical state of the pavement at present.

Applying the principle in Bellgrove, his Honour concluded that it would be reasonable to replace any part of the pavement that has been or might be the subject of the loads specified in the D&C contract and it would be unreasonable to replace those parts of the pavement that have not been subjected and are not likely to be subjected to those loads over the next nine years. The only parts falling under this latter category were the parts of the pavement falling under the awnings of the warehouses. Regarding the balance of the area, he reasoned that there was a realistic possibility that systems of work would change over time with the result that different parts of the pavement would be subject to different levels of stress. Further, his Honour found that Tzaneros was not entitled to recover the costs of replacing panels that had been replaced by third parties, but was entitled to recover the original costs of replacement. He also accepted that the design of the replacement paving proposed by Mr Davies was the appropriate methodology.

Finally, regarding the effect of the sale to TCAL, the primary judge agreed with WGC’s proposition that Tzaneros could not recover any more than its liability arising under the contract for sale and work side deed. However, he did not agree that this liability was less than the cost of replacing the whole pavement. His Honour cited cl 5 of the works side deed, though omitting the reference to “pavement use at the time”, and acknowledged that the side deed did not cover certain pavement between the warehouses. Regarding the contract for sale, his Honour noted that Tzaneros was required to repair any part of the pavement to the extent reasonably necessary, provided that either ACFS requested the repairs or the conditions set out in cl 65.4(b) were satisfied.

His conclusion was that the result of those conditions was that Tzaneros would be obliged to replace those parts of the pavement which required replacement under the D&C contract. He stated that it would be expected that the parties to the work side deed would agree to such replacement and that, as far as the contract for sale was concerned, Arthur Tzaneros gave evidence that he intended to make a request under cl 65.4(a) for the replacement of the entire pavement.

In determining whether a discount to an award of damages was appropriate on the ground of betterment, the primary judge noted that each case must be considered on its facts, subject to two countervailing policy principles: first, to avoid granting a windfall to a successful plaintiff to which he or she is not entitled; and second, to avoid placing a successful plaintiff under the inconvenience of having to undertake unplanned capital expenditure as a result of the defendant’s wrongful conduct.

His Honour determined that a discount for betterment was not appropriate for two reasons. First, any benefit that Tzaneros obtained from a reinforced pavement was only speculative, as the 20 year specification was only a minimum, and it was expected that the original pavement could continue to be used after that period. Second, a reinforced pavement was the best way of ensuring that the terminal could continue to operate during pavement replacement. To the extent that the reinforced pavement was better than the one required by the D&C contract, that was not a result of Tzaneros’ choice but of the need to rectify WGC’s breach in a way that permitted the terminal to remain open and thus not incur the additional costs of closing it.

The primary judge generally accepted the evidence of Michael Sturgess, the quantity surveyor engaged by Tzaneros, as to the costs of implementing Mr Davies proposal and the time required to carry it out. This was not in issue on the appeal.

WGC relied on the following grounds of appeal (Trial Judgment references omitted):

WGC’s primary submission was that in order for a cause of action, as distinct from the benefit of the contract, to be assigned, there must be express assignment of that right. On that basis, its position was that there was no ambiguity in the assignment deed. In support of this principle, WGC relied on the decision of the Queensland Court of Appeal, Geroff & Ors v CAPD Enterprises [2003] QCA 187 (Geroff), and particularly on McPherson JA’s statement that “there is no presumption or expectation at law that the assignment of the benefit of an agreement has the effect of transferring debts that have already arisen or accrued before the assignment takes place”: at [5]. The principle said to be derived from this case was that assignment of the right to performance of a contract, at least where that performance involves payment, will not transfer the right to payments of which the obligation to pay already exists at the time of assignment.

WGC submitted that, in principle, there was no basis for a distinction to be drawn between debts and unliquidated claims. Senior counsel for WGC pointed to the fact that Geroff concerned “a number of debts and liabilities [that] had already matured or accrued”, submitting that the reasoning in Geroff pertained equally to liabilities as to debts.

Further, WGC relied on two cases in which accrued causes of action were effectively assigned through the use of explicit words. It submitted that Offer-Hoar v Larkstore Ltd [2006] 1 WLR 2926; [2006] EWCA Civ 1079 (Offer-Hoar) concerned two separate assignments: first, the benefit of the contract, in terms similar to Geroff; and second, the right to sue, using words similar to those deleted from the draft assignment deed. It submitted that this second clause was sufficient to assign the accrued cause of action, but not the first alone. Secondly, WGC pointed to Renold Australia v Fletcher Insulation [2007] VSCA 294 (Renold), in which a clause assigning “right, title and interest in all Claims” was sufficient to assign the right to sue, but submitted that proper words were required to capture the chose in action. Together, WGC submitted that these cases stood for the proposition that “[w]here the wording does not extend to the assignment of the cause of action it does not pass, and remains with the assignor”.

Senior counsel for WGC submitted that the ordinary and natural meaning of the words was not the appropriate method of construction in a case dealing with “a technical area of conveyancing, in which there is a well-established distinction between assignment of promises or of contracts on the one hand and assignment of causes of action that have already accrued on the other”.

WGC contended that the question of to what assignment it consented was crucial to the construction of the clause. It submitted that a purported assignment of contractual rights in breach of a contractual prohibition was ineffective both under common law and, for the purposes of assigning a cause of action, s 12 of the Conveyancing Act 1919 (NSW), which required express notice. Senior counsel for WGC accepted that there was no case below that if a broader construction of the assignment deed assigning accrued actions was correct then the assignment was ineffective due to WGC’s lack of consent. Rather, the significance of WGC’s consent was that one would presume that P&O and Tzaneros “intended their assignment to be efficacious, as a matter of law, and therefore, it had to be no wider than the consent that was provided by [WGC]”.

In response to Tzaneros’ submission that WGC’s construction of the assignment had no commercial purpose, WGC submitted that the commercial purpose of the assignment deed was not to assign accrued causes of action in respect of the defective pavement, but to assign the benefit of the warranties in relation to future defects arising from remaining works. In this respect, senior counsel for WGC originally pointed to two purported warranties relating to future defects. First, he pointed to the reference in the definition of “Building Warranties” to “manufacturer warranties in respect of any work or goods or equipment forming part of the improvements”. Although the manufacturers’ warranties were not in evidence, senior counsel for WGC submitted that the Court could infer that they took the usual form of obligations of replacing or repairing equipment within a defined period, irrespective of the question of fault. It was acknowledged that these warranties did not concern WGC. Second, he pointed to s 5.0 of the O&M manual which contained an “ongoing obligation to do fresh work to repair defects identified in the six-monthly inspections”, which, it was submitted, lasted for a period of 20 years (the s 5.0 obligation). He asserted that this fell within the definition of a warranty as it was “a binding contractual promise by a builder”.

In reply, senior counsel for WGC pointed to two further warranties purportedly relating to future defects. First, he noted that the definition of “Building Warranties” included warranties imposed by law, which would include an implied term of due care and skill in respect of the rectification work under s 5.0 of the O&M manual. Second, he pointed to cl 4.1(a) of the express warranties in the general conditions, which picked up the definition of “work under the Contract” rather than “Works” and began with the words “at all times”. This, he submitted, indicated that the warranty that the contractor be suitably qualified and experienced and exercise due skill, care and diligence applied to all work performed under the contract, including work done under s 5.0 of the O&M manual. In response to Tzaneros’ argument that s 5.0 was not a freestanding warranty but merely reflected cl 3.41 of the special conditions, senior counsel for WGC noted that cl 3.41 focussed on P&O’s obligation to conduct six-monthly inspections, while s 5.0 contained the additional obligation on WGC to rectify certain kinds of defects identified in the six-monthly inspections.

Ground 2 of WGC’s appeal concerned the ability to have recourse to the drafting history in construing the assignment deed and letter of consent. WGC contended that what was once a “possible exception” to the rule that the court does not look to the actual intention of the parties, identified by Mason J in Codelfa Constructions Pty Ltd v State Rail Authority of New South Wales (1982) 149 CLR 337; [1982] HCA 24 (Codelfa), was now an actual exception, citing Aberdeen Asset Management Ltd v Challenger [2002] NSWCA 245 (Aberdeen) and Gee Dee Nominees Pty Ltd v Ecosse Property Holdings Pty Ltd [2016] VSCA 23 (Gee Dee).

In its written submissions, WGC submitted that this exception applied regardless of ambiguity. At the hearing, senior counsel for WGC appeared to withdraw from this position, submitting that the clause supported WGC’s construction on its face with no ambiguity, but that if there was ambiguity, the exception in Codelfa applied. With reference to Gee Dee and Aberdeen, senior counsel for WGC contended that the exception operated to allow recourse to deleted words in order to negative an alternative possible construction. He noted that the statement in Gee Dee that the exception could only be used to rebut reliance on evidence of surrounding circumstances was too narrow and that in Aberdeen, it had been relied upon as an aid to construing the contractual language itself.

On the question of what the drafting history revealed, WGC emphasised three main points. First, it highlighted that a condition of its consent was the release of the contract security and resolution of outstanding issues. WGC pointed to the minutes of the 1 September 2005 meeting, submitting that “cracks in the pavement and the inadequacy of repairs were outstanding issues for which P&O had a right to recourse to the insurance bond provided by WGC”. The return and cancellation of that contract security was thus consistent, it was argued, with the deletion of accrued causes of action from the assignment. Senior counsel for WGC acknowledged that there was no formal release of claims between P&O and WGC but submitted that there was an informal understanding that there would be no outstanding money on either side and that the contract security would be returned.

Second, WGC submitted that the parties’ refusal to include the words “for the avoidance of doubt [‘Building Warranties’] includes any cause of action…” was decisively against the conclusion that a chose in action was assigned from P&O to Tzaneros. It submitted that the primary judge’s reasoning that the deletion of those words might equally have occurred because the parties concluded there was no such doubt, ignored the other changes to the draft assignment deed that occurred simultaneously. Furthermore, senior counsel for WGC pointed to the “very expansive notion of causes of action” that was picked up under the original wording of the assignment clause, which went beyond contractual causes of action and included breaches under the Trade Practices Act or any other law or obligation in which the assignor had an interest. He submitted that there must be an extreme level of doubt as to whether an assignment of contractual warranties carries with it an assignment of those much broader causes of action and thus, the deleted words could not be regarded as merely otiose.

WGC further contended that the primary judge had misused the evidence relating to the parties’ knowledge that there was a possible claim against WGC. It submitted that, rather than pointing against its contended construction, this evidence explained why WGC had sought to remove the clause relating to causes of action.

Third, WGC emphasised that the assignment took effect from the sale date rather than from the date of completion of the works. It submitted that this reflected the fact that causes of action accrued before that date were not intended to be assigned. WGC also pointed to the P&O draft letter which referred to assignment occurring “from the date of completion”. It submitted that this was a reference to the date of completion of the works rather than the date of completion of the sale.

Tzaneros submitted that the proposition that the assignment of a cause of action requires express words did not follow from the cases cited by WGC. It pointed to the statement in Geroff, at [5], that “whether the assignment has such an effect depends on its terms and the intentions of the parties to it, to be gathered from its language”, while noting that in Renold, the scope of the assignment was not in issue.

Tzaneros sought to draw a distinction between cases involving “ongoing rights to periodic payments” and those in which performance was already completed. Senior counsel for Tzaneros noted that there was, for instance, a key distinction between assignment in the context of a building contract and assignment in the sale of business or assignment of a lease. In the case of an ongoing business, such as was the case in Geroff, senior counsel for Tzaneros submitted that “all of the rights accrued, such as payments and debts arising prior to the sale, would as a matter of natural commercial practice be retained by the vendor”. Equally, with the assignment of a lease, he submitted, it was natural that the registered proprietor would take the benefit of any accrued rights to rent. However, in the case of a construction contract he noted that, first, as a matter of law, the cause of action has already accrued and, second, any breach may not be perceptible by the purchaser.

Tzaneros submitted that since there were no continuing obligations capable of performance under the building warranties, there was no commercial purpose to an assignment of the building warranties shorn of any accrued causes of action. In response to WGC’s contention that the manufacturer’s warranties and s 5.0 of the O&M manual were building warranties with a prospective operation, senior counsel for Tzaneros submitted that cl 3.41 of the special conditions was the operative provision and that s 5.0 was merely a reflection of cl 3.41, with no independent life or operation of its own. Regarding the manufacturers’ warranties, senior counsel for Tzaneros pointed to the definition of “Building Warranties” under the assignment deed which included two categories of warranties, namely, “the building warranties provided by, or imposed by law upon [WGC]” and “the benefit of all builders’ or manufacturers’ warranties in respect of any work or goods or equipment”. He submitted that the use of the plural in the reference to “building warranties” evinced an intention that the subject of assignment was not limited to manufacturers’ warranties with prospective operation.

Senior counsel for Tzaneros further submitted that non-assignment of accrued causes of action would lead to an uncommercial and capricious result in the sense that P&O would be left with the right to sue but with no right to damages since it had mitigated its loss, while Tzaneros would be subject to the ongoing obligations under the O&M manual with no way to enforce WGC’s corresponding obligations. While senior counsel for Tzaneros did not agree with the factual assumption that P&O had mitigated its loss, he submitted that nonetheless the bifurcation of rights between P&O and Tzaneros was uncommercial.

Tzaneros submitted that the natural and ordinary meaning of the terms of assignment, together with the objective circumstances, namely that all of the work the subject of the building warranties had been completed, that the D&C contract provided for a 20 year design life, that there was evidence of cracking and that any cause of action for breach had already accrued, pointed unambiguously to a construction that “all the benefit of the building warranties” included the accrued rights to sue. In those circumstances, it submitted, it was neither appropriate nor necessary to have recourse to evidence of pre-contractual negotiations.

Tzaneros submitted that the possible exception identified in Codelfa did not apply for a number of reasons. First, Tzaneros emphasised that the exception only applied where the words of the contract were ambiguous. Second, Tzaneros submitted that there was no evidence that the words “for the avoidance of doubt, includes any cause of action…” were removed as a matter of mutual concurrence of the parties to the deed, as required by the Codelfa formulation. Third, senior counsel for Tzaneros submitted that even if there was concurrence, “the only permissible use that one would take such an act of concurrency would be to rebut another inference that might emerge from the background circumstances”. Finally, Tzaneros submitted that the entire agreement clause in the assignment deed effectively precluded the operation of the Codelfa exception. Senior counsel for Tzaneros, relying on the judgment of Emmett JA in Righi v Kissane Family Pty Ltd [2015] NSWCA 238 (Righi), submitted that there was a distinction between the use of extrinsic evidence to show context and the use of extrinsic evidence to show subjective intention and that the entire agreement clause precluded the latter.

In any event, Tzaneros submitted that even if recourse was had to prior negotiations, the drafting history did not in fact reveal an intention not to assign accrued causes of action. On a proper characterisation, Tzaneros submitted that the real reason for the amendments to the draft assignment deed was that WGC did not want to be a party to the deed and subject to its onerous obligations, and importantly, wanted the resolution of outstanding claims and the return of the contract security. It submitted that the claims the subject of the present proceedings were not “outstanding claims” for the purpose of the 2005 defects lists. Furthermore, Tzaneros noted that there was nothing stated expressly by way of rejection or disagreement with the assignment of accrued causes of action. It adopted the primary judge’s finding that the removal of the deleted words could be explained by their being mere surplus usage.

In response to WGC’s submission that the date of assignment suggested that accrued causes of action were not intended to be assigned, Tzaneros submitted that the date was not a limitation on the scope of consent but rather, as senior counsel for Tzaneros stated, the time when “those rights falling within the concept of ‘all of the benefit’ are thereupon exercisable by the assignee”.

In Electricity Generation Corporation v Woodside Energy Ltd (2014) 251 CLR 640; [2014] HCA 7 at [35], the plurality reaffirmed the approach to be adopted in construing a commercial contract in the following terms:

The principles in my opinion apply equally to cl 3.1 of the assignment deed as to any other contractual provision.

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.

That construction, in my view, is consistent with the other provisions of the assignment deed dealing with this issue. Thus, the recitals to the assignment deed stated expressly that the assignor wished to assign all its right, title and interest in the building warranties. That would seem to me to include the right to sue for damages for breaches which had accrued prior to the date of the assignment.

Clause 2.1 refers to Tzaneros having a genuine and substantial commercial interest in the Building Warranties and the enforcement thereof, whilst cl 6 provided that if the assignment was for any reason ineffective or Tzaneros did not receive the benefit of the Building Warranties, then P&O would hold the Building Warranties and all rights and benefits thereof on trust for Tzaneros. It is also consistent with the condition precedent in the agreement for the sale of assets between Smith Bros and Tzaneros and the definition of Building Warranties in that agreement to which I have referred at [25]-[26] above.

Further, a contrary construction would deprive the assignment of significant commercial purpose. WGC submitted it could have potential application in relation to manufacturers’ warranties and would operate in respect of the obligations for pavement maintenance contained in s 5.0 of the O&M Manual. The difficulty with the first matter is, as WGC conceded, WGC had not given any manufacturers’ warranties so if the provision was limited to such warranties, the opening words of the definition of Building Warranties “Building Warranties provided by or imposed by law upon, Walker Group Constructions Pty Ltd” would have no work to do. So far as the second matter is concerned, even accepting that the obligations in cl 5.0 could be said to amount to a warranty, that ignores the fact that building warranties are expressed in the plural and the definition refers to all building warranties in respect of any work. Further, such a limitation sits uneasily with the warranty and representation given by P&O in the assignment deed to the effect that save for those which had expired due to the effluxion of time, the building warranties were valid and subsisting.

Further, a construction which excluded the right to sue for past uncompensated breaches would produce an uncommercial result. If that construction was correct either the right to sue for past breaches would remain with P&O in which case any proceeds would be held on trust for Tzaneros pursuant to cl 6 of the assignment deed, or as WGC apparently contended, it was relieved of liability as a consequence of the assignment. As to the first matter there is no reason to suppose that past breaches were intended to be enforced in that manner as distinct from the right to sue on them being assigned as part of the benefit of the building warranties. As to the second matter, there is nothing to suggest that either P&O or Tzaneros intended that WGC be released from potential substantial liabilities for the defective pavement.

Part of the context in which the deed of assignment was entered into is the consent to the assignment given by WGC. (I will deal with the argument based on the exception in Codelfa subsequently in this judgment). That consent (see [24]) referred to building warranties (plural) and contained a similar statement to that contained in the assignment deed to the effect that save for those warranties which had expired by effluxion of time, the building warranties were valid and subsisting. That tends to suggest that the consent went further than to the assignment of the rights contained in cl 5.0 of the Operation Manual. It is correct that the consent referred to the benefit of the warranties passing at the sale date but that in my view is only an acknowledgment of the date on which Tzaneros would become entitled to the assigned rights as distinct from limiting the scope of the assignment. It does not provide any assistance for the construction contended for by WGC.

WGC sought to derive support for its construction from a number of authorities, in particular the Queensland Court of Appeal decision in Geroff. That case concerned the assignment of a franchisor’s rights and obligations under a franchise agreement in the following terms: “all of the Assignor’s obligations, rights, title and interest in the Franchise Agreements on and from the Assignment Date”. A number of debts had already accrued due from the franchisee to the franchisor/assignor. The original franchisor sought to recover those debts and was held entitled to do so as they had not been assigned. McPherson JA, with whom Jerrard JA agreed, stated (at [3]) that a debt once accrued has in law an independent existence and enforceability of its own, apart from the transaction which gave rise to it. In that context he made the following comments:

Two things may be noted. First, as McPherson JA stated, whether the assignment did transfer debts which had accrued depended on the terms and intention of the parties gathered from the language. Second, whilst debts doubtless have an existence at law independent from the underlying transaction, the same cannot be said for breaches of contractual warranties. To recover for such breaches it is necessary to sue on the contract. Geroff in those circumstances in my opinion, does not provide support to the construction contended for by WGC.

The other cases relied upon by WGC in this context, Renold and Offer-Hoar, do not assist it. In the former case Renold had entered into a supply agreement with a company Laminex Ltd which it had breached by supplying defective equipment. The defects were discovered after Laminex sold the business and assets to its associated company, Fletcher, so Laminex suffered no loss by reason of the defect. Laminex assigned its right, title and interest in any claim under the agreement to Fletcher.

Fletcher was held entitled to recover damages for Renold’s breach. Chernov JA, with whom the other members of the Court agreed, pointed out (at [24]) the cause of action was complete on the occurrence of the breach, namely, when the defective equipment was supplied at which point a right to recover damages arose irrespective of when the loss manifested itself. His Honour pointed out it was that right that was assigned. His Honour in concluding that Fletcher was entitled to recover damages made the following remarks (at [26]):

Offer-Hoar involved a claim by the appellant against the respondent for damage for land slip which occurred in the course of development work carried out by the respondent. The respondent's predecessor S had obtained a specialised soil report from T to satisfy the terms of planning consent to the development. S used the report to satisfy the condition and sold the property to the respondent with a benefit of all building control consents. The respondent subsequently entered into a deed of assignment with S in the following terms:

It was held that the respondent was entitled to recover damages from T for breach of its agreement with S in providing a defective soil report.

Mummery LJ, with whom Rix LJ and Peter Smith J agreed, stated the position as follows:

Those cases were cited to support the proposition that the assignment of a cause of action of a past breach is separate from the assignment of the benefit of the contract. However, the ultimate question is whether or not, as a matter of construction, the right to sue for past breaches has been assigned. In my opinion in the present case it was.

WGC also submitted that what it consented to was relevant to the construction of the clause. Its submission was that assignment of a contractual right in breach of a contractual provision was ineffective both at common law and for the purpose of s 12 of the Conveyancing Act. So much may be accepted as a matter of principle: Linden Garden Trust Ltd v Lanester Sludge Disposals [1994] 1 AC 85 at 109; Pacific Brands Sport and Leisure Pty Ltd v Underworks Pty Ltd (2006) 149 FCR 395 at [32]. However, it should be noted that in the present case it was not pleaded that if the assignment went beyond the consent given it was ineffective and no attempt to raise that issue was made in this Court.

Whilst the terms of the consent can be taken into account in determining the construction of the assignment deed, it did not affect the conclusion I have reached in the present case. However, WGC relied on the drafting history of the deed as supporting the proposal that WGC did not consent to the assignment of the existing causes of action and that the assignment should be construed to reflect this fact.

In submitting that the drafting history could be used in this fashion, reliance was placed on what has sometimes been described as the exception to the Codelfa principle. In Codelfa Mason J made the following remarks (at 352-353):

Although Mason J expressed his views in somewhat tentative terms, what he said has been followed by intermediate appellate courts in this country. In Aberdeen the dispute arose from the interpretation of a clause in a Consultancy Agreement. Pursuant to that clause, the respondent undertook that it would advise the appellant of any proposed issue of shares in its holding company by way of private placement and would give the appellant the “opportunity to participate in such placement on the same or equivalent terms and conditions as offered to that third party”. The appellant argued that this gave it the right of first refusal in respect of any such placement. Evidence was admitted that such a right was expressly rejected in negotiations. It was held that if the clause in question was truly ambiguous and capable of more than one construction, then it was appropriate to take that evidence into account.

Gee Dee concerned the construction of a clause in a lease in which certain words had been deleted. McLeish JA stated (at [96]) that Australian appellate authority allows recourse to words or clauses deleted from standard or common form agreements for the purpose of construing ambiguous language. He stated the justification lies in a potential exception to the rule against admissibility of pre-contractual negotiations identified by Mason J in Codelfa. His Honour went on to make the following remarks (at [97]-[98]):

Applying the exception to negotiated contracts as distinct from words set out in a standard form contract is a matter of some difficulty. Although Mason J did not limit the exception to deletion of words in a standard form contract, it is important to bear in mind what his Honour stated was that evidence of mutual intention if it amounted to concurrence was receivable to negative an inference sought to be drawn from surrounding circumstances. Subject to one qualification, the scope of operation of the exception in my respectful opinion was explained correctly by Hayne J in Esso Australia Ltd v Australian Petroleum Agents’ & Distributors’ Association (1999) 3 VR 642 in the following terms (at [19]):

The qualification is that, although Hayne J did not explicitly refer to ambiguity as being a precondition to the operation of the Codelfa exception, both Codelfa itself and the cases which follow it have required ambiguity as a precondition to the operation of the exception.

In the present case I do not consider cl 3.1 of the assignment deed considered in context is ambiguous. However, even if it was, 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 (Codelfa at 353), or that the deletion negates an inference from the surrounding circumstances that the deed bears a meaning positively rejected by the deletion.

There is no suggestion of mutual concurrence. The emails themselves to which I have referred in pars [33]-[36] above, do not provide any explanation why the changes were made to the deed, although it may be inferred that WGC declined to be a party and thus did not agree to be bound by any of its terms. The removal of the words “for avoidance of doubt” and those following in the definition of Building Warranties in the draft agreement, does not amount to an acknowledgment that such causes of action were excluded. If that had been the parties’ intention presumably they would be excluded expressly. Further, the only matter expressly referred to in the email from Mr Thomas, the WGC representative (who was not called to give evidence), was resolution of outstanding claims and the return of the insurance bond.

In these circumstances even if the drafting history could be used under the Codelfa exception, the relevant mutual concurrence referred to by Mason J has not been established.

For these reasons, in my opinion, Grounds 1 and 2 of the grounds of appeal have not been made out.

WGC sought to rely on a principle said to be derived from the decision of this Court in Allianz that a successor in title who acquires a building with full knowledge of its defects suffers no loss as a consequence of those defects.

WGC submitted the requisite knowledge was that of a person acting reasonably. It submitted there was no reason to limit the principle to circumstances where a statutory regime imposes warranties in favour of subsequent purchasers as opposed to contractual warranties being assigned. It also submitted that it was not necessary to show a certainty of knowledge of the precise defect which caused the damage to result in a break of the chain of causation. In this context it pointed to the finding of the trial judge to the effect that by December 2005 it was apparent that a number of cracks in the pavement were structural.

Senior counsel for WGC, referring to what was said by Mummery LJ in Offer Hoar at [38]-[41], submitted that the assignee can sue for the same kind of loss as the assignor could have sued for, but subject to factual and legal issues of causation, remoteness, quantum and limitation of actions. He submitted that a purchase of the building by a purchaser having knowledge of the defects amounted to an intervening cause such as to break the chain of causation.

WGC pointed out that Mr Tzaneros was a director of P&O from 16 October 2001 to 1 August 2004 and the sole director of Tzaneros at the time of the acquisition. It pointed out he accompanied Mr Peter Watt, a civil engineer in the employ of P&O on an inspection in 2004 and submitted he was aware of heavy cracking, medium cracking and heavy spalling in the pavement as at December 2004.

WGC pointed out that it was not in issue that cracks appeared in what was described as the P2 pavement area, immediately after pouring in September 2003. It noted that Mr Tzaneros raised concerns about the cracking between late 2003 and August 2004 and was informed the cracks were shrinkage cracks.

WGC also pointed to the evidence of Mr Peter Fielder, the superintendent, who recalled the cracks began opening in 2004 and by April 2005 were getting worse, becoming wider, longer and more prolific. WGC referred to Mr Fielder’s evidence that by February 2005 he believed there was a structural problem with the pavement, although he was not sure whether it was the result of a design or construction issue.

WGC also referred to minutes of various meetings in 2005 which recorded that crack repairs were not performing satisfactorily. It submitted that the evidence of Mr Fielder showed that by April 2005 the cracking was getting worse indicative of a construction or design defect.

WGC also referred to a “crack map” prepared by Mr Watt in December 2004, which indicated a number of areas where cracking of “heavy severity” had occurred. It submitted that showed to a reasonably competent engineer that as at December 2004 the pavement had significant cracking that evidenced structural failure.

WGC submitted that the evidence demonstrated that during 2004/2005 it was apparent that the defects were of a structural nature. It noted that what was described by Mr Watt as heavy cracking, exceeded the maximum type of repairable severity and that rectification could only be achieved by replacement of the slab.

WGC also submitted that the evidence to which I have referred at [37]-[40] established that Mr Tzaneros was aware of “heavy cracking”, “medium cracking” and “heavy spalling” in the pavement as at December 2004. It submitted that in these circumstances, acting reasonably, and with minimum due diligence inquiries, Tzaneros would have been aware that the damage was of a structural nature incapable of repair by the prescribed methods in the O&M Manual and required replacement.

In that context WGC pointed to the fact that although Mr Tzaneros resigned as a director of P&O on 1 August 2004, he was onsite every day from October 2004 until the acquisition of the terminal. It referred to his evidence that he did a tour of the site with Mr Watt in 2004 and was aware, as noted on the “crack map”, that there was “medium to heavy cracking”, “heavy cracking and spalling” and “medium to severe cracking”. WGC submitted that despite that evidence and his earlier expressed concerns, he did not undertake any due diligence process.

WGC submitted that acting reasonably a prospective purchaser in these circumstances would have undertaken “some reasonable engineering analysis as to the structural adequacy of the pavement”.

WGC pointed out that Mr Tzaneros gave evidence he inspected the pavement prior to purchasing the facility. It noted, he said that the inspection lasted between half an hour and an hour and he observed “cracking”, “epoxy in cracks” and “some spalling”. WGC pointed to his evidence that notwithstanding this he did not obtain any building reports concerning the condition of the pavement, nor did he think it prudent to do so. WGC also pointed to his evidence that he was not aware of any due diligence being carried out.

Senior counsel for WGC pointed to the findings of the primary judge (Trial Judgment at [81]) that by the time the terminal was sold to Tzaneros it was apparent the cracks were structural. He noted that the primary judge accepted the evidence of Mr Tzaneros that he did not know there was a design defect at the time of acquisition. Senior counsel submitted that this was irrelevant as it was sufficient he knew there were structural defects which could lead to a claim against WGC.

Senior counsel for WGC also noted that the primary judge did not expressly accept the evidence of Mr Tzaneros that he first became aware there was a structural problem in July 2006. In that context he referred to Mr Watt’s report of December 2004 and the acknowledgement by Mr Tzaneros in his cross-examination that he was aware at that time that Mr Watt’s report noted medium to heavy cracking and heavy cracking and spalling. He submitted this evidence should be accepted, notwithstanding subsequent evidence of Mr Tzaneros that he did not see the markings on Mr Watt’s “crack map”.

Tzaneros submitted the principle stated in Allianz did not apply in the case of an assignee suing on a contractual warranty. It pointed out that it sued on assigned rights standing in the shoes of P&O, not for loss as a subsequent purchaser suing on an extended statutory warranty.

Tzaneros submitted that in any event the principle did not apply as it had neither full knowledge of the defect nor of its significance, both being required having regard to what was said by Ipp JA in Allianz at [111]. It submitted the nature and extent of the defects as found by the trial judge (Trial Judgment at [103]) were not discernible or known until after extensive joint testing was undertaken for the purpose of the proceedings in 2012 and as disclosed in the experts’ reports of Professor Roselar and Mr Davies, served in April 2013.

Tzaneros submitted that the principle in Allianz does not operate on the basis of constructive knowledge or import an obligation on a purchaser to act reasonably. It submitted that Ipp JA did not impose such a requirement but merely observed that even if a purchaser was acting reasonably in the face of patent defects, he might not in fact be aware that major expenditure would be required to remedy the defects. Further, it submitted that WGC’s arguments were predicated on the knowledge of persons who were not officers of Tzaneros and it was irrelevant what a reasonably competent engineer would know when Mr Tzaneros was not an engineer. It submitted it was not suggested to Mr Tzaneros that he had the skill to interpret information as might a person so qualified.

Tzaneros submitted that the evidence of Mr Tzaneros that the first time he was aware of there being a structural problem was in July 2006, was consistent with what he had been told. Tzaneros submitted the primary judge accepted that evidence, referring to [99]-[100] of the judgment of the Trial Judgment.

In that context Tzaneros pointed out that after Mr Watt’s inspection in December 2004, a further inspection was carried out by a consulting engineer Mr Alan Wright in January 2005. Mr Wright prepared a “crack map” which did not show cracking and showed severe spalling of just one corner of one crack south of Warehouse 1. Tzaneros noted that at the time WGC blamed most of the damage on P&O dragging containers and making use of a different type of forklift from that described in the O&M Manual, a contention in fact pleaded but abandoned at the trial. Tzaneros referred in this context to a letter from Mr Dave Thomas, the development manager of WGC to Mr Watt dated 25 July 2006, in which that assertion was made.

Tzaneros also pointed to the evidence of Mr Tzaneros to the effect that when he inquired of employees of WGC about the cracks, he was told they were surface cracks such as crazing or shrinkage. Tzaneros noted that this evidence was not contradicted and in particular Mr Thomas was not called. Tzaneros pointed to the fact the primary judge accepted Mr Tzaneros’ evidence on this issue: Trial Judgment at [100].

Tzaneros pointed out that the knowledge of Mr Watt and Mr Fielder was not attributable to it. It pointed out that Mr Watt said he was not a pavement expert. It pointed out that Mr Watt’s survey was visual and could not reveal structural problems.

In relation to Mr Fielder, Tzaneros pointed to his evidence that he did not recall discussing any concerns about structural cracking in the pavement with Mr Tzaneros before the end of 2005. It also noted that it was not put to either Mr Watt or Mr Fielder that the cracks indicated to them as civil engineers, that the pavement as a whole suffered from systemic defects or would structurally fail.

Tzaneros submitted that it was not put at the trial that it had failed to act reasonably in carrying out an investigation of the pavement. However, WGC in its closing submissions at the trial did assert a failure to act reasonably, albeit only in passing, its primary submission being that Mr Tzaneros was aware of structural defects. WGC also asserted it raised the failure to act with due diligence. However, the portion of the closing submissions to which it referred was rather directed to an attack on Mr Tzaneros’ evidence of his lack of knowledge of any structural defect, rather than any failure to undertake due diligence: WGC Closing Submissions at [209]-[226].

Tzaneros also submitted that no submission was made as to what further investigations should have been conducted, nor what constituted a reasonable inquiry or analysis as to the structural adequacy of the pavement. It submitted the only evidence of what could have been done to reveal the defect was what was carried out by the parties’ experts prior to the trial. Tzaneros noted that WGC did not submit that it should have carried out such an investigation prior to the acquisition of the terminal.

Allianz relevantly concerned a claim under an insurance policy which responded to loss or damage arising from a breach of statutory warranty contained in Pt 2C, s 18B of the Home Building Act 1989 (NSW). That provision imposed a warranty in respect of residential building work to the effect that the work will be performed in a workmanlike manner and be reasonably fit for the specified purpose for which it had been done. Section 18D extended the benefit of the warranty to a successor in title.

A majority of the Court of Appeal (Ipp JA, Hodgson JA agreeing), held the person who acquired the premises in question with knowledge of the defects was not entitled to the benefit of the warranty. Ipp JA identified the issue as whether the successor in title suffered any loss from a breach of the warranty and what caused the loss. He stated at [106] that generally speaking, the free deliberate informed act of a human being negates causation and concluded as follows:

Giles JA dissented. His reasoning was as follows:

Although in my opinion there is much to be said for the view taken by Giles JA, it is not necessary to consider whether the case was correctly decided.

This is first because the present case concerns an assignment of contractual warranties including as I have determined, the right to sue for past breaches. As was pointed out in Renold supra the assignee is entitled to recover damages of the same kind as the assignor could have recovered and steps into the shoes of the assignor for the purpose of pursuing the right vested in the assignor: at [26]. It is irrelevant in my opinion whether the assignee knows of the breaches or otherwise.

That is not to say that an act of the assignee could not break the chain of causation (for example, in the present case by using excess loads on the pavement). However, acquisition with knowledge of the defects, in my opinion, would not do so.

The position is quite different to Lambert v Lewis supra where a person who acquired an item of equipment with the benefit of a warranty deliberately made use of the equipment knowing it to be defective. It was the use of the equipment in those circumstances which broke the chain of causation in respect of the damage which ultimately eventuated.

Second, Ipp JA made it clear that what was required was that the successor in title had full knowledge of the defects, not only their existence but also of their significance: at [111]. In my opinion it could not be said that Tzaneros had such knowledge.

It is clear that Mr Tzaneros knew of the existence of cracks in the pavement. However, his evidence was that he was not aware there was a structural problem until 25 July 2006. Further, the primary judge found (Trial Judgment at [100]) that Mr Tzaneros did not know there was a design defect when Tzaneros acquired the terminal.

WGC sought to avoid the consequence of this finding by submitting that Mr Tzaneros was aware there was a structural issue. However, even that was not accepted by WGC at the time the purchase of the terminal took place. I have referred earlier in these reasons to the inspection carried out by Mr Wright in 2005 and the fact that WGC alleged at the time that damage was caused by the manner in which P&O used the terminal (at [142]) and that Mr Tzaneros was informed by WGC employees that the cracks were surface cracks or shrinking (at [143]). In these circumstances, it does not seem to me that it can be concluded that at the time of the acquisition of the terminal, Tzaneros was aware of the significance of the breach.

WGC also submitted that Tzaneros failed to act reasonably in not investigating the extent of the damage. 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. In any event it was not suggested to Mr Tzaneros that he should have made further investigation and no evidence was led as to what reasonable investigations could have been carried out and whether they would have uncovered the significance of the defect.

In these circumstances, this ground of appeal is not made out.

WGC submitted damages were assessed on the basis of a complete replacement using a revised scope of work that gave Tzaneros a pavement with a design life of 50 years. It submitted that rather than compensating Tzaneros, that gave it a substantial windfall and an uncovenanted profit.

WGC noted that the pavement contracted for was to have a minimum life of 20 years. It submitted Tzaneros and its predecessor, had the benefit of the completed work since 2004 and there was no evidence the defects had materially affected productivity or operations at the terminal. It submitted any evidence to the contrary was so general it was impossible to challenge.

In these circumstances WGC submitted damages ought to have been assessed on the basis that:

WGC submitted the evidence of its expert, Dr Baigent, and that of Mr Davis, established there were certain slabs which required replacement and that Mr Davis affirmed there were certain areas which did not require replacement having regard to current use.

In those circumstances WGC submitted there was no need for wholesale replacement using reinforced concrete.

WGC also referred to the sale of the leasehold interest to TCAL, to which I have referred at [51]ff above. It pointed out that the Knight Frank Valuation to which I have referred at [50], valued the interest at $44 million which was the sale price.

WGC submitted that the sale was at full market value. It submitted that the obligations of Tzaneros under cll 65.4-65.7 of the sale deed (see [52]-[54] above) were the extent of its potential loss and damage.

WGC submitted the potential liability under the provisions of cl 65 of the sale deed therefore required consideration of the likelihood of such a liability arising by the giving of notice and the extent of the work which would then be required. It submitted the assessment had to be done on the probabilities and the conclusion of the trial judge could not be justified on the evidence.

WGC did not challenge the evidence of Mr Arthur Tzaneros that he would cause a notice be given by ACFC under cl 65.4 of the sale agreement. However, it was submitted the primary judge erred in concluding Tzaneros would be required to replace the whole of the pavement, merely because that was sought by ACFC.

WGC submitted that the potential liability of Tzaneros was only to do that which was reasonably necessary, so the pavement was fit for purpose for the balance of the term of the warranties. It submitted the areas required to be replaced were established by the evidence. It submitted that on the available evidence, there was no basis to conclude that there had been or would be a change in operation, which would require replacement of areas not presently damaged.

Counsel for WGC referred to cl 65.4 of the sale agreement and submitted the work required was limited to such repairs as were reasonably necessary to ensure the pavement was fit for the purpose described in the D&C contract for the term of the warranties.

Counsel for WGC pointed out that the area specified by the Works Side Deed over which work was to be carried out did not include a portion of the P2 pavement. He accepted, however, that repair of that area may be required under the sale contract.

Counsel for WGC emphasised that it was the fact of traffic over particular areas which caused damage and submitted that what therefore was of importance was the question of use and future use. He submitted there was no evidence from any expert or lay witness to suggest that the area which currently did not suffer cracking because it did not have to cope with traffic or use that existed in other parts of the pavement would in fact be subjected to such use.

Counsel for WGC referred to the opinion of Mr Davis that if regard is had to the nature of the current damage and its severity, it was not necessary to replace all the panels but rather the damaged panels needed replacing with an allowance for the replacement of some additional panels. He pointed to the fact that Mr Sturgess, the quantity surveyor retained by Tzaneros, estimated the cost of replacing the P2 panels in accordance with Mr Davis’ design, was $14,819,256.72 whilst the cost of replacing the damaged panels under the alternative proposal of Mr Davis totalled $8,333,538.34, after allowance was made for panels already replaced.

Counsel for WGC submitted that in rejecting the evidence of Dr Baigent as to the panels required to be replaced, his Honour erred in stating (Trial Judgment [125]) that there was no basis for the assumption made by Dr Baigent that there would be no change in the use of the terminal over the next 9 years and it was possible that there would be changes in traffic flow which would damage some presently undamaged panels. He submitted Mr Tzaneros did not state that there was going to be any change in the use or operation that would result in areas not presently required to bear traffic and load being subjected to such stresses.

Counsel for WGC also contended that the primary judge erred in concluding that the obligation of Tzaneros under the contract for the sale of the leasehold interest required it to repair any part of the pavement to the extent reasonably necessary to ensure that it complied with the warranties in the original D&C contract. He submitted the obligation was substantially less and was to undertake such repairs as required, subject to there being a material deterioration or dilapidation in the external pavement which would adversely affect the operational use having regard for the purpose for which the pavement was being used.

In that context counsel for WGC submitted that subpars (a) and (b) were not freestanding obligations but rather cl 65.4(b) qualified cl 64.4(a).

Tzaneros submitted that the proposition that damages should be limited to repairs which it would be required to perform under the sale of the leasehold contract and work side deed, was not supported by authority.

Tzaneros submitted damages are normally assessed at the date of trial and in respect of defective building work, are normally the cost of rectification to the contractual standard subject only to a finding of unreasonableness.

Tzaneros pointed out that the finding by the primary judge that the whole of the P2 pavement was defective was not disputed. It submitted the primary judge was correct in concluding that the sale of the leasehold interest did not displace its entitlement to damages on the Bellgrove measure. It submitted the sale of the leasehold agreement imposed an obligation to perform rectification work. It submitted no authority was cited in support of the propositions advanced by WGC.

Tzaneros submitted WGC was incorrect in submitting that the primary judge found that Tzaneros was entitled to the whole of the cost of replacement because the tenant required it. It submitted rather that his conclusion was that the question of whether to award damages, other than on the Bellgrove principle, did not arise as it was intended that the rectification work be carried out.

Tzaneros submitted that the submission by WGC that damage should be confined to the costs of rectifying panels actually damaged was contrary to the underlying principle in Bellgrove and ignored allowance for further structural failure which was predicted by Mr Davis and Professor Roselar.

Tzaneros submitted that it was incorrect to say that Dr Baigent and Mr Davis were in agreement on this issue. It pointed out that Dr Baigent’s opinion based solely on a one day visual inspection was that only 66 of 1,000 panels (category 5 panels) needed replacement but there were a further 182 panels (category 4 panels) which he claimed were stable with less than 20% requiring replacement.

Tzaneros pointed out that Mr Davis disagreed. It pointed out that Mr Davis having utilised his observation of deterioration from 2005 to 2015, concluded that all category 4 and 5 panels and most of those described as category 3 panels had failed, and would continue to deteriorate and due to the under-design of all the P2 pavements, all the panels in categories 3, 2 and 1 were merely at a less advanced stage of their fatigue cycle and would structurally fail and degrade once they had received sufficient loads. Tzaneros noted that Mr Davis stated any change in traffic patterns involving weight loads well below the performance specifications in the D&C contract may cause them to fail.

Tzaneros noted that the primary judge rejected the evidence of Dr Baigent, which rejection does not appear to have been challenged. Senior counsel for Tzaneros also emphasised that Dr Baigent was neither asked to prepare, nor prepared, an alternative design to underpin a contention that a design other than that proposed by Mr Davis, should reasonably be adopted.

Senior counsel for Tzaneros also submitted that to the extent WGC contended that damage should be assessed by reference to the chance of future pavement failing, that was contrary to Bellgrove and the cases which followed it, including: Scott Carver Pty Ltd v SAS Trustee Corporation [2005] NSWCA 462; Hyder Consulting (Australia) Pty Ltd v Wilhelmsen Agency Pty Ltd [2001] NSWCA 313; Westpoint Management Ltd v Chocolate Factory Apartments Ltd [2007] NSWCA 253; UI International Pty Ltd v Interworks Architects Pty Ltd [2008] 2 Qd R 158; [2007] QCA 402; Cordon Investments Pty Ltd v Lesdor Properties Pty Ltd [2012] NSWCA 184 and Bannister & Hunter v Transition Resort Holdings (No 3) [2013] NSWSC 1943.

The general principle on which damages are recoverable by a building owner for breach of a building contract is the cost of making the work or building conform to the contract, subject to the qualification that not only must the work be necessary to produce conformity, but it must also be a reasonable course to adopt: Bellgrove at 617-618; Tabcorp Holdings Ltd v Bowen Investments Pty Ltd (2009) 236 CLR 272; [2009] HCA 8 at [15]. In the latter case, the court indicated that the test of unreasonableness is only to be satisfied by fairly exceptional circumstances: at [17].

It must be remembered that this is not a case where rectification work will not be performed. Further, the sale of the property does not necessarily disentitle the owner to recover as damages the cost of remedying the defects provided it would also be reasonable to do the work. In Scott Carver Pty Ltd v SAS Trustee Corporation [2005] NSWCA 462 each of Hodgson JA and Ipp JA stated the sale of the property did not affect the ability to recover on the Bellgrove basis albeit for somewhat different reasons. Hodgson JA expressed his conclusion as follows:

WGC submitted that the loss or damage Tzaneros suffered was limited to its obligation under cl 65 of the Sale Agreement and cl 5 of the Works Schedule. It submitted that the experts had identified the areas which required replacement and there was no evidence of any change in operation which would occur over the next eight years which would affect those parts of the areas that had not cracked. It accepted that Mr Arthur Tzaneros would give a notice under cl 65.4 requiring defects to be remedied but it submitted that Tzaneros’ obligation in these circumstances was limited to what was required by cl 65.7(b)(ii) of the Sale Agreement and cl 5 of the Works Schedule.

The question which arises in these circumstances is whether having regard to that obligation it was unreasonable for Tzaneros to recover the total cost of replacement of the pavement. In my opinion, it was not. First, the whole of the pavement suffered from the defective design. Second, the primary judge rejected the evidence of Dr Baigent of the extent of the panels which needed to be replaced. That was not challenged on appeal. Rather Ground 4(c) of the Grounds of Appeal contended that each of Mr Davis and Dr Baigent agreed it was not necessary to replace all the panels. The primary judge pointed out (Trial Judgment at [126]) that to the extent that a concession to this effect was made by Mr Davis, it merely was that looking at the current state of the pavement, not all panels needed to be replaced immediately and some may never need to be replaced. The primary judge pointed out that Mr Davis’ ultimate position was that the whole payment should be replaced. That statement was correct. In his report of April 2013, Mr Davis stated that the current state of the panels was such that it would require substantial replacement within the next three to five years and if the pavement was used on the same basis that it is currently being used, the rate of failure in the traffic areas would increase and the already damaged pavement would deteriorate even further and quicker (April 13 Report, paras [215]-[216]).

Mr Davis repeated those views in his report of 16 November 2015 and reached the following conclusions:

Having regard to these conclusions which the primary judge accepted, it does not appear to me to be unreasonable to replace the whole pavement (subject to the limited exception of the pavement under the awnings, identified by the primary judge (Trial Judgment at [216]) 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. It is not unreasonable for Tzaneros to decline to bear that risk but rather to seek compensation sufficient to enable the repair work to be carried out so as to ensure the pavement is in conformity with the contract.

It follows that this ground of appeal has not been made out.

WGC correctly described the concept of betterment as the cure of a defect in a manner that provides the plaintiff with a product of a higher standard, quality or value than the contractor was originally obliged to supply. In the circumstances, it submitted, a credit was given in the award of damages: Tyco Australia Pty Ltd v Optus Networks Pty Ltd [2004] NSWCA 333 at [260].

WGC in this context repeated its submission that complete replacement using the methods selected gave an operational pavement with a 50 year design life. It submitted that there was no present or likely obligation to undertake such works on the evidence. It pointed to the fact that a significant portion of the existing areas had not failed and submitted that there was no substantive evidence to support the conclusion that it was likely there would be a change in operations such that the areas which had not failed would fail at some time during the period nominated by the D&C contract.

In these circumstances WGC submitted the appropriate reasonable measure of damages was to be calculated by a simple percentage reduction for the period of use. It pointed to the approach by Meagher JA in Hyder Consulting supra as an example of such an approach.

Tzaneros pointed out that WGC did not criticise the principles applied by the primary judge, only their application to the specific facts.

Tzaneros noted that the contract provided for a minimum design life of 20 years not a maximum design life. It pointed to the fact that the rectification method proposed by Mr Davis called for a reinforced concrete solution which was necessary in light of the need to undertake the work in sections in accordance with the pavement replacement programme. It noted that Dr Baigent did not propose an alternative design, nor was one suggested by WGC. In these circumstances it submitted the trial judge was justified in finding there was no evidence of an alternative design which would have met the minimum design life.

Tzaneros also submitted that the primary judge was correct in concluding that the interruption costs of replacing the pavement as a whole was so great that the reinforced design was the design which would permit replacement work to be undertaken whilst keeping the terminal open. It submitted that in those circumstances to the extent that the pavement was better than that required by the D&C contract, that resulted from WGC’s breach and the need to keep the terminal open.

Tzaneros also noted that the primary judge also found that rectification in accordance with Mr Davis’ design was no more expensive than an unreinforced design based on what was described as the “Packard” method.

Tzaneros also submitted that the alternative method of calculation of damages was not put to the primary judge. It pointed out that Meagher JA was in the minority in Hyder Consulting supra.

I have already indicated why I am of the view that it was reasonable to undertake the repair works on the whole pavement such that damages fall to be assessed on the principle in Bellgrove supra. The question of betterment must be considered in this context. In Tyco Australia Pty Ltd supra, Hodgson JA stated relevantly that there were two circumstances in which an allowance for betterment would be made. The first was when a plaintiff chose to acquire a more valuable asset than that which had to be replaced, where for less expenditure it could have acquired an asset which would have been as satisfactory as that replaced. He pointed out that the onus is on the defendant to establish that this could occur: Tyco Australia Pty Ltd supra at [260], [264]; British Westinghouse Electric and Manufacturing Company Ltd v Underground Railways Company of London Ltd [1912] AC 673 at 689-690.

In the present case, apart from contending only a limited number of the panels required replacement, 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.

The second basis referred to by Hodgson JA (at [262]) in which allowance is made are circumstances where even though there is no alternative available to the plaintiff, the plaintiff may have to give credit if there is a benefit which is not remote in time or speculative and can be quantified. In my opinion, care should be taken in applying a discount in these circumstances as it could result in the defendant’s breach requiring a plaintiff to pay for capital expenditure which it would otherwise be unwilling or perhaps financially unable to undertake.

In any event, the primary judge was correct in rejecting a claim for betterment on this basis. First, as the primary judge pointed out, the contract provided for a pavement with a minimum life of 20 years. A pavement properly designed to the specification would not be expected to be unusable immediately on the expiration of such a period. The position is similar to that considered by this court in Hyder Consulting supra where such a claim for betterment was rejected by the majority on the basis that there was no advantage to the plaintiff beyond the speculative proposition that the new pavement might last longer than the old one if properly built ([2001] NSWCA 313 at [55]).

Second, the proposed replacement pavement has been designed to ensure the terminal can continue in operation thus avoiding consequential loss which would otherwise have flowed from the breach.

Further, the method of calculating a discount proposed by WGC, namely percentage reduction calculated out by reference to the life of the new pavement compared to the period of 20 years was expressly rejected by the majority in Hyder Consulting supra, it being described by Giles JA as a “crude percentage discount”. Sheller JA agreed: [2001] NSWCA 313 at [55], [107].

In these circumstances the primary judge was correct in concluding that no allowance should be made for betterment. This ground of appeal has not been made out.

The primary judge dealt with the question of costs in a separate judgment: Tzaneros Investments Pty Ltd v Walker Group Constructions Pty Ltd [No. 3] [2016] NSWSC 526 (Costs Judgment). He noted that relying on the first offer of compromise made by it, Tzaneros sought costs on an indemnity basis from 14 December 2010 or relying on the second offer, from 17 October 2013.

The primary judge noted the proceedings were commenced on 30 September 2009 and claimed that WGC was liable for breach of the contractual warranties. The primary judge noted that on 4 June 2010 and 16 June 2010 the then solicitors for WGC requested particulars including the cause of the alleged defects. The response so far as relevant was as follows:

The primary judge noted that on 13 December 2010, Tzaneros made the first offer of compromise (the first offer) in the amount of $5,970,000 exclusive of costs and that on 22 December 2010 the solicitors for WGC responded asserting they were unable to deal with the offer as particulars of the cause of the alleged damage had not been supplied.

Thereafter expert reports were served. The primary judge noted that the expert reports of Professor Roselar and Mr Davis identified the design defect.

The primary judge also noted that on 20 June 2013 Tzaneros filed a notice of motion seeking to amend the summons and list statement by alleging that in breach of the contractual warranties, WGC failed to construct the pavement works with a minimum design working life of 20 years and by the amendment sought to allege that WGC failed to design and construct the pavement as specified.

On 16 October 2013 the further offer of compromise was made (the second offer) in an amount of $9 million exclusive of costs, expressed to be open until 14 November 2013.

The motion to amend was heard by Sackar J on 8 November 2013 on which date he allowed the amendment observing, however, the effect would be to introduce a new claim as up to that time a breach was only alleged in relation to the construction of the pavement and not its design.

The primary judge rejected the contention that the amendments in 2013 essentially raised a new case, stating he was not bound by the contrary conclusion reached by Sackar J. He concluded that since the proceedings were commenced, Tzaneros’ primary claim was that WGC was in breach of the warranties contained in the contract for the design and construction of the terminal. He considered that Tzaneros’ solicitors were correct in pointing out that the case did not depend on proving deficiencies in design or construction but rather it depended on proving that the pavement was incapable of supporting the contracted for loads for the minimum period of 20 years. The primary judge concluded in the circumstances, Tzaneros was entitled to costs on an indemnity basis from the day after the 2010 offer was made.

The primary judge stated that if he was incorrect in reaching this conclusion, he would have ordered costs on an indemnity basis from the day after the 2013 offer was made. He rejected the submission that it was not appropriate to make such a costs order because the proceedings were in a state of flux, noting that although the motion had not been determined, the amendment did not substantially change the plaintiffs’ case. He also rejected the submission that the crucial question was whether WGC acted unreasonably in rejecting the offer, stating that question is only relevant to an offer made in accordance with the principles in Calderbank v Calderbank [1975] 3 WLR 586. He stated that the question under UCPR r 42.14 is whether the Court should order otherwise than (in this case) making an order for indemnity costs. He stated that the onus is on the offeree to establish such an order should not be made, an onus which is not discharged merely by proving the offeree acted reasonably in rejecting the offer.

WGC submitted the primary judge erred in ordering indemnity costs in relation to the first offer as no particulars were supplied such as would enable the claim to be assessed, particulars not being supplied until 2013. It also submitted the claims upon which Tzaneros was successful were not pleaded until the 2013 amendments and thereafter Tzaneros did not pursue the claims it had made at the time of the 2010 offer.

WGC also submitted the provision of expert evidence was critical because the warranties could not be the subject of a claim unless it could be demonstrated that there had been compliance with the O&M Manual or the damage would have been occasioned in any event (Special Condition 3.41 of the D&C contract).

In relation to the second offer, WGC submitted that having regard to the procedural history of the case it was appropriate to decline to award indemnity costs. It repeated its submission below that it was not unreasonable to reject the offer when the pleadings were in a state of flux.

WGC noted a difference of views in the authorities as to whether it was appropriate to depart from the usual order, but submitted in the present case there were proper reasons for doing so.

Counsel for WGC summarised the allegations in the first summons and list statement as at 30 September 2009 as including an allegation that the contract involved the design and construction of the terminal (statement C5, C6 and C12) an allegation the defective work constituted a breach of contract (statement C37) and the failure to rectify constituted a breach of the pavement warranty (statement C38). He submitted that the amended summons dated 29 September 2010, the one in force at the time of the first offer, did not make allegations in these broad terms. It referred to C17 of the amended list statement which it stated contained no allegation that the design was inadequate and that WGC had breached the contractual warranties by the design work.

Tzaneros stated that its claim under the amended summons was for breach of contractual warranties under the D&C contract and the primary judge was correct in concluding that it did not depend on establishing the cause of the defect was a defect in design or construction.

Tzaneros submitted WGC overstated the significance of cl 3.41 of the special conditions. It submitted that the clause simply required the respondent to prove that any breach of the Pavement Design Loading Obligation was not caused by a failure to comply with the maintenance requirements under the O&M Manual.

In relation to the second offer, Tzaneros submitted that WGC advanced no substantial reason why the primary judge erred in the exercise of his discretion in failing to “otherwise order”.

Senior counsel for Tzaneros noted the particulars to C7 of the amended list statement (the one in force at the time of the first offer) embraced the obligations of both design and construct. He pointed out that C8 included reference to the design criteria.

Senior counsel for Tzaneros also referred to the allegation of breach in C17 of the amended list statement. He submitted the breach was want of fitness. He submitted that the precise cause of lack of fitness was not a material fact. He submitted the failure to provide particulars in the circumstances was not a ground to disentitle Tzaneros from an order for indemnity costs in its favour.

Each of the offers of compromise were made in accordance with the rules. The question is whether in those circumstances the primary judge erred in declining to make an order other than that provided for in UCPR r 42.14.

WGC argued that an order for indemnity costs should not be made from the date of the first offer because the case made by Tzaneros substantially changed by amendment made in 2013 and also by the failure to provide the particulars requested in June 2010.

I do not think that the failure to provide the particulars requested required the judge to make an order other than an indemnity costs order. The response to the request from the solicitors for Tzaneros, to which I have referred at [209] above, identified the defects said to constitute a breach of the contractual warranties. It does not seem to me to be necessary to supply particulars of why such a breach occurred.

As counsel for WGC pointed out, the original Summons and List Statement allege breaches of the warranties in broad terms. It is true that the List Statement of 29 September 2010, the one in force at the time of the first offer, was more detailed, but it does not seem to me that it limited the claim for breach of warranty to a breach caused by faulty construction as distinct from design.

Part B.1 of that List Statement stated that one of the issues likely to arise was the nature of the defects in respect of the pavement. Paragraph C.7 pleaded the warranties said to have been breached.

Paragraph C.17 is of importance. It was in the following terms:

Paragraph C.17(b) refers to a failure to construct the pavement with a minimum design working life of 20 years. The addition of the words “design working life” seems to me to effectively extend C.17(a) to a failure to construct a pavement designed to have a working life of 20 years. It does not seem to me that in those circumstances C.17 abandoned any claim for faulty design.

As the primary judge pointed out (Costs Judgment at [51]) Tzaneros’s claim was for breach of warranty and was dependent upon it proving the pavement was incapable of supporting the contracted-for loads for a minimum period of 20 years. To that extent the cause of the failure was irrelevant. In these circumstances the primary judge did not err in the exercise of his discretion by declining to make an order other than an order for indemnity costs.

Even if that order was incorrect I agree with the conclusion of the primary judge that there was no reason to make an order other than for indemnity costs from the date of the second offer of compromise. By that time Tzaneros had served a pleading which clearly identified the issue of faulty design. The fact that WGC was resisting the amendment does not, in my view, provide a reason to make an order other than an order for indemnity costs.

This ground of appeal has not been established.

Tzaneros somewhat faintly argued that if successful on the appeal it should have its costs of the appeal on an indemnity basis notwithstanding the failure to renew the offer of compromise following the conclusion of the trial.

Although there is authority that an offer of compromise retains significance for the purpose of cost orders on appeal (Ettinghausen v Australian Consolidated Press Ltd (1995) 38 NSWLR 404 at [409]-[410]), subsequent decisions of this court have expressed a contrary view: Coombes v Roads & Traffic Authority (NSW) (No 2) [2007] NSWCA 70 at [79]-[82]; Regency Media Pty Ltd v AAV Australia Pty Ltd [2009] NSWCA 368 at [37]-[43].

In the present case the appeal was arguable and raised some difficult questions. The offer of compromise not having been renewed, there is no reason to make an order other than the usual order for costs.

In the result I would make the following orders:

BEAZLEY P: I have had the advantage of reading in draft the reasons of Bathurst CJ. I agree with his Honour’s reasons and proposed orders.

GLEESON JA: I agree with Bathurst CJ.