Eden Co Construction Pty Ltd v Leed Engineering and Construction Pty Ltd

1. [1]

   FAGAN J: This is an appeal from a decision of Mr Antrum LCM sitting in the Local Court at Queanbeyan. The plaintiff is a construction contractor. On 16 February 2016 it entered into a subcontract with the defendant to construct manholes in a sewer line which the defendant was installing for Young Shire Council. On 13 March 2016 the plaintiff commenced work on the first of 27 manholes which were to be built. On 18 March 2016 the defendant notified the plaintiff in writing that the subcontract was terminated for breach. In the Local Court the plaintiff contended that this termination was wrongful and claimed damages flowing from the loss of the subcontract. The learned magistrate held that the plaintiff had breached the agreement in fundamental respects and that the defendant had been entitled to give the notice of termination. His Honour dismissed the plaintiff’s claim with costs.

2. [2]

   The magistrate’s decision was given on 27 September 2017. The plaintiff filed his summons to commence the appeal on 21 November 2017, approximately one month out of time. On 5 December 2018, on the plaintiff’s application, I extended the time for filing the summons up to 21 November 2017 and proceeded to hear the appeal on its merits. The grounds of appeal may be paraphrased as follows:

   1. (1)

      The learned magistrate ought to have found that cl 23 of the subcontract was the exclusive source of the right to terminate and therefore erred in holding that the defendant was entitled to terminate the contract on common law principles for breach of a condition which required strict observance of safety standards. This is an issue of construction of the contract and therefore involves only a question of law. The plaintiff’s appeal on this ground is as of right pursuant to s 39 of the Local Court Act 2007 (NSW).

   2. (2)

      His Honour erred in failing to find that a prerequisite of termination under cl 23 (written notice of breach and an opportunity to remedy it) had been omitted. This is a question of mixed fact and law, involving both construction of cl 23 and findings of fact relevant to the application of the clause in the circumstances of the case. Leave is required to argue this ground under s 40(1) of the Local Court Act.

   3. (3)

      Even if common law principles were applicable, his Honour erred in finding that the relevant breaches by the plaintiff were sufficiently serious to have justified the defendant terminating the subcontract. This again is a question of mixed fact and law, requiring leave.

3. [3]

   Whether or not leave should be granted for grounds (2) and (3) depends at least in part upon how strongly the grounds are arguable. This is particularly so where the amount in issue is relatively substantial for a Local Court civil claim, namely damages in the order of $100,000. It is necessary for the Court to consider the merits of grounds (2) and (3) in some detail, even for the purpose of determining the question of leave.

4. [4]

   The plaintiff’s summons also contends that the learned magistrate erred in failing to assess damages. However this was clearly not an error given that his Honour found the defendant had been entitled to terminate the contract and that the plaintiff’s claim for damages should be dismissed with costs. On the hearing of the appeal the plaintiff’s solicitor accepted that if he succeeded on one or more of the other grounds, the appropriate order would be to remit the matter to the Local Court for assessment of damages.

5. [5]

   The subcontract works were specified on the basis that the defendant, either itself or by other subcontractors, would excavate trenches for the laying of sewer lines and pits at intervals along the lines, where manholes were to be constructed by the plaintiff. The manholes were to be built by pouring mass concrete around formwork at the bottom of each pit, leaving a central square void into which the sewer line would connect. This mass concrete with the central void would constitute the base of the manhole, at a depth of approximately 4-6 m below ground level. Concrete walls would be built on top of the base, on all four sides, up to ground level. A concrete cover would be placed on the top of the walls at ground level, with an access port. The space below ground level enclosed by the walls and cover provided the means of access for maintenance purposes to the sewer line.

Material provisions of the subcontract

1. [6]

   The subcontract took the form of a two-page formal instrument signed by the parties to which were annexed Conditions of Contract (31 pages), Special Conditions (14 pages) and various schedules of technical specifications, drawings and programs. Throughout the document the plaintiff is referred to as “the Subcontractor”. The clauses of the Conditions of Contract relevant to the appeal are as follows:

2. [7]

   The evidence before the Local Court showed that the defendant’s “occupational health, safety and environment policies” referred to in cl 15.2.1 included a “Project Induction” manual of 63 pages. This included (at p 9) a list of nine “Golden Safety Rules” which were emphasised by the manner in which they were printed. The second of these was:

3. [8]

   Immediately under the list of Golden Safety Rules was a list of “Things You Must Know” which included these items:

4. [9]

   Mr Ces Filardo was the managing director of the plaintiff. He prepared the quotation which became the basis of the subcontract. Mr Lee Marks was the defendant’s construction supervisor for the sewer line works including the construction of the manholes by the plaintiff. During negotiations before the subcontract was entered into Mr Filardo told Mr Marks that the plaintiff would have only two men on site to construct the manholes being himself and his brother. An additional arrangement was made for the plaintiff to provide an excavator with an operator, at a charge per hour and a guaranteed minimum number of hours. That arrangement has no bearing on the issues in the appeal.

5. [10]

   Mr Marks gave evidence that Mr Filardo was provided with the defendant’s safety induction materials and that Mr Filardo read them and signed them. Mr Filardo did not admit that he had been given all the defendant’s safety induction documents but accepted that the prohibition upon positioning oneself under a suspended load was an important rule of safety. He said that a copy of the “Golden Rules of Safety” was hung on the mess room wall. The learned magistrate found that Mr Filardo and his brother:

Breaches of the subcontract relied upon by the defendant

1. [11]

   Mr Filardo commenced work at manhole 16 on 13 March 2016. The manhole pit and a trench leading into it had been excavated. According to Mr Marks’ affidavit the trench had not been shored and it was therefore a safety requirement that workers on site should not enter the trench. Mr Marks deposed that Mr Filardo went into the trench and used it as access to the pit for manhole 16, in which he was to form up the base. Mr Marks instructed him not to walk through the trench as it was unsafe. Twenty minutes later he saw Mr Filardo walk through the trench again and repeated the instruction, this time in harsher terms. Shortly afterwards he observed Mr Filardo walking down the batter of the pit excavation and told him he would be removed from site for failing to follow a safety instruction if he did this one more time.

2. [12]

   Mr Filardo acknowledged in his evidence that he was told not to use the trench as access but said this occurred only once and that he “duly obliged”. He disputed that walking through the trench was an unsafe practice and said that the defendant’s own employees walked through it.

3. [13]

   On 14 March 2016 the concrete was poured for the base of manhole 16. The plaintiff's internal dimensions were 3 m by 3.2 m. The concrete was placed in a skip or kibble attached to the boom of an excavator. The width of the skip was about 1 m. It was lowered into the pit by the excavator. Mr Filardo stood in the bottom of the pit and gave directions to a spotter or dogman at the top of the pit, to be relayed to the excavator operator who manoeuvred the skip into the correct position. Mr Filardo was required to stand in a corner of the pit to avoid being under the load as it was lowered in. When the skip was in position Mr Filardo released the hatch at the bottom of it to allow the concrete to pour into place.

4. [14]

   In order to avoid being under the suspended load Mr Filardo was required to remain in the corner the pit until the empty skip had been lifted clear. According to Mr Marks’ evidence, when the first load of concrete had been emptied Mr Filardo stepped forward while the skip was being raised. He did this in order to shovel and place the concrete. Mr Marks warned him to wait until the skip had been lifted right out of the pit. However Mr Filardo did the same thing on the next three skip loads, with Mr Marks’ warnings becoming stronger each time. On the last occasion Mr Filardo was told that if he continued this practice his subcontract would be terminated on safety grounds.

5. [15]

   The excavator operator, Mr Urquhart, confirmed that Mr Filardo had placed himself under the skip. According to Mr Urquhart, both Mr Marks and the spotter told Mr Filardo to get out from under the load to a safe position in the pit on several occasions but after each direction he did the same thing. Mr Urquhart was an independent contractor under subcontract to the defendant. He was concerned about the risk of a serious accident occurring as a result of Mr Filardo’s unsafe conduct and his failure to desist from it when directed. He asked Mr Marks to speak with Mr Filardo about this.

6. [16]

   On the morning of 15 March 2016 a pre-start safety meeting was held, with 14 workmen present. Mr Marks reminded all of those present of the importance of not working under a suspended load and of following the defendant’s safety rules and instructions. The written record of this meeting included the following under the heading “Issues to Note”:

7. [17]

   Mr Marks also spoke to Mr Filardo individually outside the meeting and said that moving under a suspended load as had occurred the preceding day could not happen again and would not be tolerated. The record of the pre-start meeting recorded this under the heading “Directions and Instructions”, in these terms:

8. [18]

   In his affidavit sworn 19 December 2016 Mr Filardo disputed that he worked directly under the skip during the pour at manhole 16 on 14 March 2016. He disputed that he received warnings about it during the pour or at the pre-start meeting the next morning. Mr Filardo asserted that Mr Marks was overbearing in his supervision, that he gave unnecessary safety directions for no purpose other than to assert his own authority and that he had fabricated allegations of unsafe practice by Mr Filardo in order to drive the plaintiff off the job because of the conflict between the two of them as to whether the defendant was constructing the sewer line to proper specifications.

9. [19]

   On 17 March 2016 concrete was poured in manhole 17. Mr Filardo was the only worker on site for the plaintiff, as his brother had travelled interstate for four days. Again Mr Filardo repeatedly placed himself in danger under the skip. Each time he was warned not to, initially by Mr Urquhart communicating with the spotter over a UHF radio and the spotter relaying the instruction. Mr Filardo disregarded these instructions. Mr Marks heard them over the radio and came to see what was going on. An hour later a second delivery of concrete was brought to the site and further skip loads were deposited into the pit. On two further occasions Mr Filardo moved under the suspended load and was reminded by Mr Marks of the earlier instructions and warned that he could be removed from the site. Mr Filardo disputed that these safety breaches occurred or that warnings were given in respect of them on 17 March 2016.

10. [20]

    On the subject of Mr Filardo’s repeated unsafe positioning of himself under the suspended skip and his failure to abide by specific directions to desist from this practice, his Honour accepted the evidence of Messrs Marks and Urquhart, as follows:

Termination of the subcontract

1. [21]

   On 18 March 2016 the defendant delivered to Mr Filardo written notice of termination of the subcontract, citing three matters as the basis of this action. The third of them was:

2. [22]

   The plaintiff’s breaches of safety requirements, through the actions of Mr Filardo, were contraventions of cll 4.2, 7.2 and 15.2.1. Those contraventions fell within cl 23.1.1 and entitled the defendant to exercise its powers under cl 23.2. However there was no evidence that the defendant had given notice to the plaintiff to remedy its breaches, pursuant to cl 23.2, and hence the defendant did not become entitled under that clause to exercise the power of termination in cl 23.2.3.

3. [23]

   In his reasons for decision the learned magistrate said that:

4. [24]

   As referred to above, his Honour did find a “safety breach” and later in his reasons he quoted parts of cl 23. However his Honour did not purport to find that cl 23 had been implemented and instead held as follows:

Ground 3 - finding of repudiation on common law principles

1. [25]

   His Honour then cited Koompahtoo Local Aboriginal Land Council v Sanpine Pty Limited (2007) 233 CLR 115; [2007] HCA 61 at [54] (Gleeson CJ, Gummow, Hayden and Crennan JJ) for the proposition that:

2. [26]

   This passage was concerned with intermediate terms of a contract. The plurality in the High Court explained such terms as those of which some breaches will deprive the innocent party of substantially the whole benefit intended to be obtained from the contract, thus constituting repudiation which may be accepted by the innocent party and entitle him or it to bring the contract to an end. Other breaches of intermediate terms will be of less seriousness and sound in damages only.

3. [27]

   His Honour said:

4. [28]

   Later his Honour said he was satisfied that the subcontract “does identify safety compliance as a condition of that contract”. Thus, although not entirely clear, it appears that his Honour determined the plaintiff’s obligation of the subcontract to comply with safety policies and directions was a condition or fundamental term, such that any breach would entitle an innocent party to treat the contract as having been repudiated and to accept that repudiation and terminate.

5. [29]

   I would respectfully disagree and classify the plaintiff’s obligations with respect to safety, under cll 4.2, 7.2 and 15.2.1, as intermediate terms. Some breaches could be relatively minor. The test of whether a breach of such a term will entitle innocent party to bring the contract to an end was stated in Koompahtoo Local Aboriginal Land Council v Sanpine Pty Limited at [44] in these terms (with some abridgment and with citations omitted):

6. [30]

   It is not material that his Honour found the contractual safety requirements to be conditions, meaning that any breach would be repudiatory. That is because in any event his Honour found that the particular breach was of that character. He was fully justified in this. Mr Filardo was one of only two people who were designated to perform the subcontract in the name of the plaintiff. At the time of the second round of egregious safety breaches, on 17 March 2016, he was the only person on site and that situation was to continue for the next two days as well. Further, Mr Filardo was the managing director of the plaintiff and was its on-site representative, in control of its manner of performing the subcontract. Persistent, apparently defiant, breaches of safe work practices by Mr Filardo were the actions of a person who for all practical purposes was the mind and will of the plaintiff. It was not as if the breaches were those of a casual or otherwise dispensable employee, who could be removed from the site to create a reasonable expectation that plaintiff would adhere to safety rules in future.

7. [31]

   The breaches found by the learned magistrate created risk of serious injury to Mr Filardo but also created serious risk of exposure of the defendant and its other subcontractors, particularly Mr Urquhart, to liability in negligence and investigation and possible prosecution by WorkCover. In the event of serious accident the defendant could reasonably expect that the site would be shut down during investigation, with immediate economic impact under the defendant’s head contract with Young Shire Council. Repeated breach of the safety obligations, of the nature found by his Honour, would reasonably be taken by a party in the position of the defendant as evincing an unwillingness of the plaintiff to perform the subcontract substantially in accordance with its terms. Workplace safety assumes such prominence on construction sites, particularly in the performance of potentially dangerous work such as was being undertaken, that a refusal to work according to safety directions must be regarded as substantial nonconformity with obligations.

Ground 1 - cl 23 did not exclude the right of termination at common law

1. [32]

   In Stocznia Gdanska SA v Latvian Shipping Co [1998] 1 WLR 574 at 585; [1998] 1 All ER 883 at 893 Lord Goff referred to:

2. [33]

   In Concut Pty Ltd v Worrell [2000] HCA 64 at [23] Gleeson CJ, Gaudron and Gummow JJ applied that principle. That case concerned an employment contract but the principle is of general application. Applying it to the present case I find no clear words to indicate that the parties intended to abandon the remedy of terminating the contract for repudiation which arises by operation of law. This is a question of construction. Far from there being any such clear words there are significant indications that there was no intention to confine the right of termination and the method of exercising it to the prescriptions of cl 23.

3. [34]

   Most significantly, cl 23 fails to provide a mode of termination suitable to repudiatory breaches which may create an urgent situation on site. For such breaches an allowance of three days within which to commence corrective action would be unreasonable. With respect to safety breaches of the nature found by the learned magistrate in this case, it would mean the defendant would have to allow the plaintiff to continue its unsafe practices for three days before it could be expected to commence to remedy its default. Shortly stated, cl 23 is not in terms apt to cover situations which must be taken to have been in the contemplation of the parties when the subcontract was made. This is a strong counter-indication to the plaintiff’s argument that cl 23 covers the field with respect to termination for breach.

4. [35]

   The plaintiff cited Tan Hung Nguyen v Luxury Design Homes Pty Ltd [2004] NSWCA 178 as an example of a case in which it was held that an express provision for termination of the contract provided the exclusive grounds and mode of such termination and excluded the right to terminate under the common law. The Court of Appeal’s decision on a clause worded differently from cl 23 and located in a contract of a different type is obviously not binding as a precedent to the present case. The contract in that case was between an owner and a builder for the construction of a home. The clause in question empowered the owner to terminate the contract for certain events of default. It also governed financial adjustments between the owner and builder in the event of termination.

5. [36]

   The builder had occupancy and control of the site under the contract considered in Tan Hung Nguyen v Luxury Design Homes Pty Ltd. That contract contained no clauses similar to 4.2, 7.2 and 15.2 of the subcontract before me in this appeal. The builder was not under an obligation to conform to safety policies and directives from the owner. There was no question of the builder having to conform to safety requirements for the protection of the owner or of other subcontractors on the site. The grounds of termination specified in the home building contract were only concerned with non-performance or unsatisfactory performance of the building work. That case is simply not comparable to the present and does not assist the plaintiff.

6. [37]

   On a fair reading of the learned magistrate’s decision he did not treat cl 23 as the exclusive source of the defendant’s rights of termination for breach but instead applied the common law, in the manner referred to above. I consider that he made no error in this.

Ground 2 - failure to find that cl 23 was not complied with

1. [38]

   I have concluded that the learned magistrate made no error determining the case on common law principles and that he did not purport to find that the prerequisites of cl 23 were fulfilled, or that it was necessary they should be in order for the termination to be valid. Therefore ground 2 does not arise for consideration.

Orders

1. [39]

   For these reasons the orders the Court will be:

   1. (1)

      Leave to appeal is granted so far as is necessary.

   2. (2)

      The summons is dismissed.

   3. (3)

      The plaintiff is to pay the defendant’s costs of the summons.

   4. (4)

      I grant liberty to the Defendant to file an application for indemnity costs by Friday 14 December 2018.

   5. (5)

      The plaintiff to file any evidence in reply by 21 December 2018.