Renown Corporation Pty Ltd v SEMF Pty Ltd

1. [1]

   MEAGHER JA: I agree with Brereton JA.

2. [2]

   BRERETON JA: The respondent SEMF Pty Ltd (“SEMF”) operates an engineering and project management consultancy. [1] In early 2013, for the purpose of upgrading its project management and accounting software, it contracted the first appellant Renown Corporation Pty Ltd (“Renown”) to supply and install a software package based on Microsoft Dynamics SL 2011 (“the Renown System”). [2] When installed between 2014 and 2016, the Renown System was defective, in that it did not provide all the functionality promised; the defects related chiefly to the inability of SEMF employees to generate certain real time reports in relation to project invoicing and other project enquiries using a software module known as Microsoft Business Portal for Dynamics SL 2011 (“Business Portal”), a module which permitted users to access the Dynamics SL database remotely using a web-based browser. SEMF expended considerable time and effort of employees and incurred costs in endeavouring to remediate the defects and in dealing with the problems arising from them. By the time of the trial, the experts on both sides were agreed that, because there was now not only a 2015 upgrade to Dynamics SL 2011 and the Business Portal (“the 2011 Suite”) since the Renown System was installed, but also a 2018 upgrade, the optimal solution was to replace the defective Renown System with a new one based on Dynamics SL 2018 (the current version of Dynamics SL) and Microsoft 2018 Web Apps (a replacement for Microsoft Business Portal) (“the 2018 Suite”).

3. [3]

   SEMF sued Renown for damages, claiming the costs of replacing the Renown System with the 2018 Suite, the costs incurred in endeavouring to remediate the defects, and time wasted by employees in dealing with the defects. Ball J gave judgment for damages in the sum of $662,344, comprising: [3]

   1. (1)

      $631,894 for the costs of installing a new system based on Dynamics SL 2018, less $52,218 for maintenance fees payable to Microsoft from 2016;

   2. (2)

      $84,744 paid to Mr McLean, an employee who was found to have been engaged specifically to work on solutions to the problems with the Renown System and the implementation of the Business Portal. However, damages were not allowed for the time of other SEMF employees performing tasks which would not have been necessary had the Renown System not been defective, by reason that the extent of the diversion was not established, a substantial portion of the time claimed was in respect of administrative staff and there was no evidence that SEMF had had to employ additional administrative staff, and the disruption to the business was not so great as to justify an award of damages based on employee costs;

   3. (3)

      $27,184 for additional licences, $13,935 paid to Plumbline, $7,320 paid to Ms Nicholls, and $800 paid to Pinnacle Analytics. These items either were not, or are no longer, in dispute;

   4. (4)

      less, a set-off in favour of Renown for $51,315 in respect of unpaid invoices.

4. [4]

   By this appeal, Renown challenges the first and second components of the award referred to above. In respect of the first, it argues, in substance, that damages are to be assessed as at the date of the breach; that no evidence was adduced of the cost of rectification at the date of the breach; and that SEMF had therefore failed to prove that it had suffered loss so as to be entitled to recover any damages. Alternatively, it submits that there should be a substantial discount for betterment. As to the second, it argues that Mr McLean was not engaged specifically to work on solutions for the defects with the Renown System and the claim in respect of him should have failed for the same reason it did in respect of the time of other employees.

Date of assessment of damages

1. [5]

   The starting point for the appellants’ submissions was the following dictum of Wilson, Toohey and Gaudron JJ in Johnson v Perez: [4]

2. [6]

   However, that passage itself shows that the rule is not an inflexible one, but must yield if in the particular circumstances some other approach is necessary to provide adequate compensation.

3. [7]

   The primary judge dealt with this issue as follows:

4. [8]

   In that passage, his Honour referred to Bellgrove v Eldridge [5] and Tabcorp Holdings Ltd v Bowen Investments Pty Ltd [6] as supporting the calculation of damages by reference to the costs of giving SEMF a solution that complied with the contractual specifications. In the former, Dixon CJ, Webb and Taylor JJ rejected a submission that, in a claim for damages for breach of a construction contract in respect of defects, the measure of damages was the difference between the value of the building as is and the value it would have had but for the defects, and said: [7]

5. [9]

   In Tabcorp, French CJ, Gummow, Heydon, Crennan and Kiefel JJ said (footnotes omitted): [8]

6. [10]

   Having referred to Bellgrove v Eldridge, their Honours continued: [9]

7. [11]

   These decisions of the High Court do not explicitly address the date of assessment of the costs of rectification. However, in his influential judgment in Radford v de Froberville, [10] which was referred to by the High Court in Tabcorp, Oliver J, taking as the starting point the rule stated by Parke B in Robinson v. Harman [11] that a party who sustains a loss by reason of a breach of contract is, so far as money can do it, to be placed in the same situation, with respect to damages, as if the contract had been performed, turned to the date of assessment:

8. [12]

   The field of construction contracts is closely analogous to contracts for the supply and installation of computer systems. [12] In East Ham Corp v Bernard Sunley, [13] the House of Lords accepted and applied as the normal measure of damages the cost of reinstatement, not at the date of the breach, but at the time when the defects were discovered. Lord Cohen said: [14]

9. [13]

   Lord Guest said (footnotes omitted): [15]

10. [14]

    Lord Upjohn said: [16]

11. [15]

    Lord Pearson said: [17]

12. [16]

    In Imperial College of Science and Technology v Norman & Dawbarn, [18] the defendant architects had designed a building in 1956, and tiles began to fall from it in 1977. The plaintiffs were held entitled to recover the reasonable cost of remedial work undertaken in 1984 in order to reclad the building. In Brit Inns Ltd v BDW Trading Ltd, [19] the proper approach to a claim for reinstatement costs was stated to be:

13. [17]

    In Cory & Son v Wingate Investments, [20] the contract specifications provided for concrete hard-standings, but the defendants instead provided a car park surfaced with tarmacadam. The plaintiffs were held to be entitled to the cost of replacing the surface with concrete hard-standings, at the date of the hearing, and notwithstanding that prices had risen steeply in the meantime: the claimants had felt unable to incur the considerable cost involved before they were assured of recovering it from the defendants, who denied liability until the door of the court. The Court of Appeal held that the true rule now was that the date of assessment of damages was to be determined by considering all the facts of the case, including the conduct of the defendants, and in that case the damages should be assessed as at the time of hearing. Walton J said: [21]

14. [18]

    Ormrod LJ said that the question of the date at which the cost of re-surfacing the car park was to be assessed was an aspect of the duty to mitigate, so that if it would have been reasonable for the plaintiffs to do the work in 1972 or 1973 then the damages should be assessed in 1972 or 1973 pounds, but as they had acted reasonably throughout in not taking earlier action, the cost of rectification was rightly assessed as at the trial: [22]

15. [19]

    Similarly in the New Zealand case of Bevan Investments v Blackhall & Struthers, [23] the cost of rectification as at the date of trial was allowed. In that case, the only practicable solution was to complete the building according to a modified design, called Scheme C. The Court of Appeal held that in those circumstances, the cost of so doing was the reasonable measure of damages (although to avoid an element of betterment credit should be given for the hypothetical additional cost of a proper initial design); and that the assessment should be computed at the date of trial, either because of the principle that damages were to be assessed by reference to the date when the reinstatement works could be reasonably carried out and, on the facts, it was reasonable to postpone the work until the issues of liability and damages were settled, or because such damage was not too remote in that it was foreseeable that the company might be unable to complete the works until a trial if the appellant failed to exercise the skill required of him. Richardson P said: [24]

16. [20]

    From the cases to which I have referred the principle emerges that the proper measure of damages in a case such as the present is the reasonable costs of rectification, which will be the costs when they were actually incurred (if they have been incurred by the date of trial), so long as they are not unreasonable; or (if they have not been incurred already), the reasonable costs as proved as at the trial, unless it is established that by not conducting rectification works earlier the plaintiff has unreasonably failed to mitigate its loss.

17. [21]

    Here, as the judge explained, SEMF allowed Renown an extended period of time to fix the problems, and it was Renown who ultimately in effect concluded that it could not do so. There is no suggestion that by deferring rectification, SEMF unreasonably failed to mitigate its damages; Renown eschewed any such contention. In those circumstances, the above-mentioned authorities make plain that the approach adopted here by the primary judge was correct. In the absence of any contention that SEMF had unreasonably delayed in rectification, the reasonable cost of rectification at the time of trial was the appropriate measure, and in circumstances where the only practical solution was to replace the Renown System with the 2018 Suite (as is discussed below), the reasonable cost of doing so was the proper measure.

18. [22]

    The appellants’ grounds of appeal also complained that:

    1. (1)

       the trial judge’s finding that it was “unclear” whether the source code necessary to rectify the identified errors in the existing system was available to SEMF was contrary to the evidence adduced at trial (Ground 2); and

    2. (2)

       the trial judge erred in awarding damages to SEMF calculated on the basis of the cost of a replacement of the system as a whole rather than the cost of rectifying the specific errors as agreed jointly by the experts in circumstances where SEMF was in a position to but did not adduce evidence to quantify the costs of rectification of the specific errors (Ground 3).

19. [23]

    These grounds involve a challenge to his Honour’s finding that damages should be assessed on the basis of replacing the Renown System with the 2018 Suite. In this respect, his Honour said:

20. [24]

    In written submissions, the appellant argued that the evidence indicated that rectification of the four identified defects in the Renown System was possible, and the costs capable of estimation. It was argued that his Honour erred in concluding that it was not possible to rectify the defects, short of replacing the whole system, in particular given that rectification could not be performed without access to the source code, and it was not clear whether it was available.

21. [25]

    It is true that the joint report of the experts stated (emphasis added):

22. [26]

    However Mr Shawver, having identified those problems, at a relatively high level, opined that it was not worthwhile digging deeper to diagnose all the causes of the defects, that it may never be possible to do so, and that it would be more efficient and cost-effective to replace the existing system. Moreover, as the primary judge recorded, all the experts agreed that “it would be more efficient and cost effective to upgrade to Microsoft Dynamics SL 2018 / SL 2018 Web Apps”. Like the New Zealand case of Bevan Investments referred to above, [25] this was a case in which the most efficient and cost effective solution was to replace the defective system with a new one. In those circumstances, it was quite unnecessary for SEMF to adduce evidence of the cost of rectifying the identified defects, rather than of replacing the system. If Renown wished to show that rectification of the identified defects would have been a more economical option, it was open to it to have done so; but it did not. Unsurprisingly, in circumstances where their counsel conceded before us that “by the time of the trial in 2021, both experts agreed that because there was now not only a 2015 upgrade since the appellants put in their program but a 2018 upgrade, that the appropriate thing to do was to simply, from a practical point of view, start again with a Dynamics 2018 SL program”, the appellant did not elaborate this ground in its oral submissions.

23. [27]

    In those circumstances, the availability or otherwise of the source code was a side issue. However, having regard to the unchallenged evidence of Mr Shawver that, having examined SEMF’s system, the Renown source code was not on it and he did not know where it was; [26] and to the evidence of Renown’s experts that rectification may be possible “if” the source code was available, [27] but that they did not request access to the code (and implicitly that it was not provided to them), [28] I am unpersuaded that his Honour’s conclusion that it was “unclear” whether it was available was incorrect. Mr Finn’s evidence, on which the appellants rely for the contrary proposition, appears to relate to a different issue.

Betterment

1. [28]

   In the course of argument, the primary judge had recognised that there might be a question of an allowance for betterment. His Honour said: [29]

2. [29]

   Ultimately, however, his Honour made no such allowance, for the following reasons:

3. [30]

   Thus his Honour reasoned that, subject to payment of maintenance fees, SEMF would have been entitled to upgrade to the 2018 Suite in any event.

4. [31]

   It is true that upgrading to the 2018 Suite brought enhancements and improvements to user experience and the interface. But they were enhancements and improvements to which SEMF would in any event have been contractually entitled. The appellants did not challenge the finding that SEMF would have been entitled to upgrade to the 2018 Suite, but submitted that, contrary to his Honour’s finding, the Renown System would not have been capable of migration to the 2018 Suite. In oral argument, the submission was put thus: [30]

5. [32]

   Reference was made to the evidence of Renown’s expert witness Mr Bowling: [31]

6. [33]

   Reference was also made to the evidence of Renown’s expert Mr Finn: [32]

7. [34]

   The point of Mr Bowling’s evidence was that the upgrade did not of itself resolve open issues with the Renown System. It does not say that the Renown System could not be migrated to the 2018 Suite without further work or cost. Mr Finn’s evidence was to the effect that while “add ons” would need to be tested and corrected as part of any upgrade, normally add-ons could be migrated: “what you do is you take the source code and recompile them with the new environment and then normally they work”. Mr Shawver – SEMF’s expert – assumed that the Renown System was capable of migration to the 2018 Suite, [33] and the contrary was not put to him.

8. [35]

   It may be that SEMF saved the cost of work that would have been required to migrate the “add-ons” or “third party modules”. Such a saving would attract the “avoided loss principle”. That is a matter in respect of which Renown bore the onus of proof, as was explained in Ruthol Pty Ltd v Tricon (Australia) Pty Ltd: [34]

9. [36]

   As the appellants conceded at the hearing of the appeal, there was no evidence of the work that would be involved, let alone of its cost. [35] Accordingly, even if in principle Renown was entitled to an allowance for the cost of work required to migrate the Renown System from the 2011 Suite to the 2018 Suite, it bore the onus of proving what if any saving was involved, and it failed to do so.

Employment costs of Mr McLean

1. [37]

   The remaining aspect of the appeal was the allowance for Mr McLean’s remuneration. The primary judge found: [36]

2. [38]

   The appellants submitted that this was erroneous because Mr McLean had in fact been employed in August 2015 on matters unrelated to the Dynamics SL integration, though his employment later extended to it, and he ought to have be categorised with the other employees for whose wasted time damages were not allowed.

3. [39]

   It is correct that Mr McLean was initially engaged in August 2015 on “a small project in relation to forecasting a database”. However subsequently, in October 2015, he was engaged as a technical business analyst to assist with implementing and subsequently rectifying problems with Dynamics SL. He was not employed on a fixed term contract, but on a casual basis. Although he was initially engaged on a project unrelated to the Renown System, from October 2015 he was engaged for the purpose of working on the Renown System, and he worked solely on its implementation and attempted rectification. His work during this period, which was the subject of the claim and award, and which was set out in his affidavit and was substantiated by his timesheets, related exclusively to the Renown System. His Honour was right to conclude that, during the period in respect of which a claim was made for his remuneration, he was employed specifically to work on a solution to the problems with the Renown System. As a casual employee whose work was solely related to the Renown System, he fell in a different category from the other employees in respect of whom “diversion of time” was claimed but not allowed.

4. [40]

   His Honour did not err in allowing, as a component of SEMF’s damages, the remuneration paid to Mr McLean while working on the Renown System.

Conclusion

1. [41]

   My conclusions may be summarised as follows:

   1. (1)

      In circumstances where Renown eschewed any contention that SEMF had by delaying in rectifying or replacing the Renown System unreasonably failed to mitigate its damages, the primary judge was right to assess damages as the reasonable cost of rectification as at the date of hearing.

   2. (2)

      In circumstances where it was common ground that the most efficient and cost-effective approach would be to replace the existing system with the 2018 Suite, his Honour was right to assess SEMF’s damages as the cost of such replacement. It was not necessary for SEMF to prove the cost of remedying each of the identified or identifiable separate defects short of replacement.

   3. (3)

      Even if SEMF saved the cost of work required to migrate the Renown System from the 2011 Suite to the 2018 Suite, so as to entitle Renown in principle to an allowance for that saving by way of “betterment”, Renown bore the onus of proving what if any saving was involved, and it failed to do so.

   4. (4)

      His Honour did not err in allowing, as a component of SEMF’s damages, the remuneration paid to Mr McLean while working on the Renown System.

2. [42]

   It follows that the appeal should be dismissed, with costs.

3. [43]

   MITCHELMORE JA: I agree with Brereton JA.