Court of Appeal Supreme Court New South Wales

• Medium Neutral Citation: Xu v Jinhong Design & Constructions Pty Ltd [2011] NSWCA 277
• Hearing dates: 18 and 19 July 2011
• Decision date: 08 September 2011
• Before: Basten JA at [1]; Macfarlan JA at [33]; Sackville AJA at [117]

Decision

(1)Appeal allowed in part.

(2)Set aside orders 1 to 5 inclusive made at first instance on 10 June 2010.

(3)Remit the proceedings to the Common Law Division, to be heard by a judge other than the primary judge, to determine the respondent's contract claim but only insofar as it claims damages of $147,159 in respect of part of the original contract sum unpaid and $90,000 arising out of an alleged written variation of the building contract entered into in November 2004, and to make consequential orders.

(4)Direct that:

(a)within seven days of the date of this judgment the appellants file and serve written submissions as to the costs orders that should be made in respect of the proceedings at first instance and on appeal;

(b)the respondent file and serve its submissions as to those orders within seven days thereafter; and

(c)the appellants file and serve any reply within a further seven days.

[Note: The Uniform Civil Procedure Rules 2005 provide (Rule 36.11) that unless the Court otherwise orders, a judgment or order is taken to be entered when it is recorded in the Court's computerised court record system. Setting aside and variation of judgments or orders is dealt with by Rules 36.15, 36.16, 36.17 and 36.18. Parties should in particular note the time limit of fourteen days in Rule 36.16.]

• Catchwords: CONTRACT - whether primary judge erred in finding that the appellants promised for consideration to sign forms of guarantee; CONTRACT - guarantees - whether form of guarantee of obligations under building contract covered oral variations to building work when building contract required variations to be agreed in writing; CONTRACT - building - whether Home Building Act requires variations as to the work to be performed under a contract to be in writing - Home Building Act 1989 s 6 and s 7 considered; TRADE PRACTICES - misleading and deceptive conduct - builder contended that directors of property owner represented that they would sign forms of guarantee when they had no intention of doing so - whether primary judge erred in finding that representations made and constituted misleading and deceptive conduct
• Legislation Cited: Builders Licensing Act 1971; Building Services Corporation Act 1989; Fair Trading Act 1987; Fair Trading Amendment (Australian Consumer Law) Act 2010; Home Building Act 1989; Home Building Regulation 2004; Uniform Civil Procedure Rules 2005
• Cases Cited: Abalos v Australian Postal Commission [1990] HCA 47; (1990) 171 CLR 167; Bill Acceptance Corporation Ltd v G.W.A. Ltd (1983) 78 FLR 171; Biogen Inc v Medeva plc [1997] RPC 1; Briginshaw v Briginshaw [1938] HCA 34; (1938) 60 CLR 336; Costa v The Public Trustee of New South Wales [2008] NSWCA 223; Davis v Veigel [2011] NSWCA 170; Edwards v Sydney Building Group Pty Ltd [2011] NSWCA 154; Fox v Percy [2003] HCA 22; (2003) 214 CLR 118; Global Sportsman Pty Ltd v Mirror Newspapers Ltd (1984) 2 FCR 82; HTW Valuers (Central QLD) Pty Ltd v Astonland Pty Ltd [2004] HCA 54; (2004) 217 CLR 640; Kalokerinos v HIA Insurance Services Pty Ltd [2004] NSWCA 312; Liebe v Molloy [1906] HCA 67; (1906) 4 CLR 347; Lumbers v W Cook Builders Pty Ltd [2008] HCA 27; (2008) 232 CLR 635; Pavey & Matthews Pty Ltd v Paul [1987] HCA 5; (1987) 162 CLR 221; Rejfek v McElroy [1965] HCA 46; (1965) 112 CLR 517; State Rail Authority (NSW) v Earthline Constructions Pty Ltd (In liq) [1999] HCA 3; (1999) 73 ALJR 306; Shimokawa v Lewis [2009] NSWCA 266; Update Constructions Pty Ltd v Rozelle Child Care Centre Ltd (1990) 20 NSWLR 251; Warren v Coombes [1979] HCA 9; (1979) 142 CLR 531; Zavodnyik v Alex Constructions Pty Ltd [2005] NSWCA 438; (2005) 67 NSWLR 457; Zhao v Goodman [2010] NSWCA 2
• Texts Cited: Meagher, Gummow and Lehane's Equity: Doctrine and Remedies, 4th ed (2002) Butterworths LexisNexis
• Category: Principal judgment
• Parties: Yi Nuo Xu (First Appellant); Cheng En Zhu (Second Appellant); Jinhong Design & Constructions Pty Ltd (Respondent)
• Representation: B W Rayment QC/ D A Smallbone/J M Baxter (Appellants); J J Garnsey QC/C Moschoudis (Respondent); Pancific Legal (Appellants); Ren Zhou Lawyers (Respondent)
• File Number(s): CA 2007/260539

Decision under appeal

• Citation: Jinhong Design & Constructions Pty Limited v Xu and Anor [2010] NSWSC 523
• Before: Johnson J
• File Number(s): SC 2007/260539

HEADNOTE

[This headnote is not to be read as part of the judgment]

The respondent Builder sued the appellants, who were directors of the property Owner, for damages representing the amount allegedly owing by the Owner to the Builder in respect of part of the contract sum and variations under a building contract (the "Second Building Contract"). The Builder alleged that the appellants had orally promised to, or alternatively represented that they would, sign the form of guarantee contained in that contract. An earlier building contract (the "First Building Contract") had been abandoned.

The principal issues for determination on the appeal were whether the primary judge erred in finding:

(i) that the appellants promised for consideration to sign the guarantee in the Second Building Contract;

(ii) that the appellants represented that they would sign the guarantee in the Second Building Contract and that those representations constituted misleading and deceptive conduct and knowingly false representations of fact;

(iii) that if the appellants had signed the form of guarantee they would have been liable to indemnify the Builder, inter alia, in respect of amounts owing pursuant to variations to the building work that were agreed between the Owner and the Builder, whether agreed orally or in writing.

The Court held, allowing the appeal and remitting the proceedings to the Common Law Division on a limited basis:

In relation to (i):

1. Errors that the primary judge made in relation to the two principal factors upon which his Honour relied in concluding that the appellants had made the alleged promises vitiated that conclusion: [12], [80], [117].

Discussion by Basten JA of the circumstances in which an appellate court should intervene in relation to credit-based findings: [14] - [17].

2. The Builder's contract claim should be remitted for redetermination: [17], [85], [118].

In relation to (ii)

3. The primary judge's findings that the appellants made the alleged representations were vitiated for the same reasons as were applicable to his Honour's findings that the appellants made the relevant promises: [19], [86], [117].

4. In any event, as the alleged representations were as to the future and were not alleged to have been made without a reasonable basis, the Builder's claims failed because it did not show that at the relevant time the appellants did not intend to do what they allegedly represented they would do, that is, sign forms of guarantee: [19], [99], [117].

Global Sportsman Pty Ltd v Mirror Newspapers Pty Ltd (1984) 2 FCR 82 at 88; HTW Valuers (Central QLD) Pty Ltd v Astonland Pty Ltd [2004] HCA 54; (2004) 217 CLR 640 referred to.

In relation to (iii)

(Per Basten JA and Macfarlan JA; Sackville AJA not deciding)

5. The Home Building Act 1989 required variations to the building work under the Second Building Contract to be in writing. As only one variation (to an alleged value of $90,000) was in writing, the Owner's liability under the Second Building Contract for variations was to a maximum amount of $90,000 and the appellants' liability under the putative guarantees would have been correspondingly limited: [25], [105], [113].

Home Building Act 1989, s 6 and s 7 considered.

(Per Basten JA and Sackville AJA, Macfarlan JA not deciding)

6. The putative guarantees would not in any event have covered amounts payable pursuant to variations agreed between the Builder and the Owner only orally as:

(a) the putative guarantees only covered amounts agreed to be paid by the Owner "under this contract": [22], [120].

(b) as the Second Building Contract required variations to be agreed in writing, an amount due pursuant to an oral variation was not due "under this contract" and was therefore not covered by the guarantees: [20], [128].

Update Constructions Pty Ltd v Rozelle Child Care Centre Ltd (1990) 20 NSWLR 251 considered.

(By the Court)

7. As the appellants would not have been liable to indemnify the Builder in respect of amounts owing pursuant to oral variations to the Second Building Contract even if they had made the promises as alleged, the remission of the proceedings should be limited to determining whether the appellants are liable in contract to the Builder in respect of the amount of $147,159 alleged to be owing in respect of part of the original contract sum unpaid, together with $90,000 alleged to be owing in respect of the variation agreed in writing: [20], [113], [118].

Judgment

1 BASTEN JA : Subject to what follows, I agree with Macfarlan JA.

Promise to guarantee second contract

2 In late November 2004 a company associated with the appellants, Ausino Art Ceramic Development Pty Ltd ("the owner") entered into a contract with the respondent ("the builder") to construct a building at Sylvania Waters for a contract price of $2.385 million. In the course of the construction work, a number of variations were agreed between the parties, although only one such variation was in writing, as required by cl 17 of the standard form "Building Contract for New Home Construction".

3 Of the contract price, the builder admitted payments in an amount of $2,237,841, leaving a balance outstanding when the last payment was received of $147,159. In addition, the builder claimed an amount of $244,096.15, on account of variations, giving a total amount payable by the owner of $391,255.15.

4 By the time proceedings were commenced in 2007, the owner was in liquidation. The proceedings were brought by the builder against the appellants as persons who had promised to guarantee amounts payable by the owner under the contract.

5 The standard form building contract included, at p 26, a form of guarantee with space for execution by two guarantors. There were two copies of the contract dated 23 November 2004 in evidence. Exhibit 9 (each page of which was initialled by Mr Huang on behalf of the builder) contained all the relevant details, except that p 26 was left blank and item 15 in Schedule 1 (Particulars of Contract) headed "Guarantors (refer to page 26)" was also blank. A second copy of the contract (Exhibit B) contained all the same details, with two important additions. First, each page had been initialled, not only by Mr Huang, but also by three directors of the owner, including the appellants and Mr Lin. Further, on p 26, the name, address and ABN of the owner had been written in the space for the name, address and ABN of the guarantors. Again, the boxes provided for the signatures of the guarantors and their witnesses were blank. There was no other document purporting to evidence or contain the guarantees.

6 The primary judge, Johnson J, concluded that neither of the appellants had executed a personal guarantee: Jinhong Design & Constructions Pty Ltd v Xu [2010] NSWSC 523 at [79](v). He did, however, make further findings in the following terms:

"44 I am satisfied, on the balance of probabilities, that Mr Xu and Mr Zhu stated to Mr Huang that personal guarantees would be given by each of them with respect to Ausino's liability under the contract to the [builder] at the time when the second contract was signed and initialled by each of them. ...

...

78 ...

(u) the [owner] would not have entered into the second building contract on about 23 November 2004 without personal guarantees being offered as part of the contractual arrangement by Mr Xu and Mr Zhu."

7 When his Honour came to consider the cause of action for breach of contract, his Honour concluded at [85]:

"I am satisfied that the [builder] has established the elements of the cause of action for breach of contract, starting with the finding that each [appellant] made promises to Mr Huang in October-November 2004 that personal guarantees would be given by each of them to secure Ausino's liability to the [builder] under the second building contract. The promises made by the [appellants] were supported by consideration and there was intention to enter into legal relations. The [builder], through Mr Huang, relied upon the promises of the [appellants] in entering into the second building contract which he would not have done if personal guarantees had not been promised by each [appellant]. Each [appellant] breached his promise by refusing or failing to give a personal guarantee, or denying that a personal guarantee had been promised."

8 If there were a contract on the part of each director to provide a personal guarantee, it must have been agreed on or before the signing of the building contract by each party. Because it was intended that each guarantee be in the form provided in the contract, why, if there were an agreement to guarantee payments, Mr Huang did not fill in the relevant details and require the relevant signatures is quite obscure. Further, there does not appear to be any explanation in the judgment as to why the primary judge rejected Mr Zhu's evidence that he was not asked to give a personal guarantee and never offered to give one.

9 In his principal affidavit, dated 14 January 2008, Mr Huang identified a meeting at his office on 25 October 2004 as the only occasion prior to signing the second contract on which Mr Zhu agreed to "personally guarantee that you will be paid" and requested him to restart the project again as soon as possible: par 26.

10 In his judgment at [46] the primary judge expressed satisfaction "that Mr Xu and Mr Zhu consistently maintained to Mr Huang that personal guarantees form part of the second contractual arrangement". That, however, may have referred to conduct which occurred after the signing of the second contract. The factors which persuaded his Honour that personal guarantees had been given were that:

(a) Mr Xu (though not Mr Zhu) had signed a personal guarantee in respect of the first building contract, entered into in October 2004;

(b) each of the directors initialled the pages of the second building contract, including at the foot of page 26, containing space for personal guarantees;

(c) page 26 was not struck out, and

(d) Mr Huang's evidence that Mr Xu in particular had promised on several occasions prior to signing the second contract that both he and Mr Zhu would provide personal guarantees.

11 The evidence which tended against the giving of promises to provide personal guarantees included:

(a) the fact that the second building contract was executed without the details of the individual guarantors being entered;

(b) the fact that no guarantees were signed at the time the contract was otherwise executed;

(c) the recommencement of work by the builder, despite Mr Huang's evidence of his own statements that work would not recommence until the personal guarantees were provided, and

(d) Mr Huang's failure to insist upon the provision of personal guarantees at any time during the course of the building contract, prior to handing over the keys on completion.

12 As explained by Macfarlan JA, the fact (if it be the case) that Mr Xu had signed a guarantee in respect of the first building contract provided little support for the conclusion that Mr Xu would have promised to execute a further guarantee in relation to the second contract, given the changes in circumstances, which were not addressed by the primary judge. Secondly, as explained by Macfarlan JA, initialling, rather than striking out, the blank page providing for the guarantees gave little support for the conclusion that promises to execute such guarantees had been made. On the other hand, the failure to fill in the names of the guarantors at any time prior to, at or after the execution of the contract (other than the inclusion of the owner's name in the place for the name of the guarantors in one version of the contract) was entitled to be given significant weight in the balance against the likelihood that Mr Huang had "insisted on personal guarantees being given as part of the replacement contract": at [39].

13 The central question on the appeal is, therefore, whether this Court can and should intervene in respect of the findings made by the trial judge in accepting the oral evidence of Mr Huang and rejecting the contrary evidence of Mr Xu and Mr Zhu.

14 The circumstances in which a court exercising appellate jurisdiction by way of rehearing, but in circumstances where witnesses are not recalled, can intervene has been the subject of too much anxious analysis to warrant repetition: see, eg, Costa v The Public Trustee of New South Wales [2008] NSWCA 223. At least once in every decade, there has been a reassessment by the High Court: see, eg, Warren v Coombes [1979] HCA 9; 142 CLR 531; Abalos v Australian Postal Commission [1990] HCA 47; 171 CLR 167; State Rail Authority (NSW) v Earthline Constructions Pty Ltd (In liq) [1999] HCA 3; 73 ALJR 306 and Fox v Percy [2003] HCA 22; 214 CLR 188. Some cases emphasise a deferential, non-interventionist approach based on judicial restraint and emphasising the primacy of the trial. Other judgments emphasise the entitlement of a dissatisfied party to a full review on the merits in accordance with the terms of the relevant statute, without the imposition of implied constraints. Since Fox v Percy , there has been a tendency to distinguish between errors which are described as credit-based and those where the demeanour of the witness does not constitute a substantial element in the fact-finding. In relation to the former category the test commonly applied, as identified by Macfarlan JA at [66] below, is to require, as a precondition to intervention, "incontrovertible facts", uncontested testimony, compelling inferences to the contrary or a conclusion that the finding is "glaringly improbable".

15 However, while such guidelines are helpful, the supposed categories are so porous that no definitive test is possible. In most trials, the material facts do not depend upon the assessment of a witness, based upon demeanour alone, but on the complex interaction of documentary material, elements of testimony from different witnesses and matters of emphasis, none of which readily appear from reading a transcript. This fact, sometimes referred to as the "disadvantage" suffered by the appellate court, is, of course, widely appreciated and is articulated by reference to the oft-cited passage in the speech of Lord Hoffmann in Biogen Inc v Medeva plc [1997] RPC 1 at 45. As explained by Gleeson CJ, Gummow and Kirby JJ in Fox v Percy at [41]:

"No judicial reasons can ever state all of the pertinent factors; nor can they express every feature of the evidence that causes a decision-maker to prefer one factual conclusion over another."

16 It is clear that a nuanced approach is often required: see, eg, Shimokawa v Lewis [2009] NSWCA 266 at [176]-[188] (Giles JA) and the authorities there referred to. The present case was one in which his Honour did make findings based on the oral testimony of three key witnesses. Nevertheless, in careful and clearly articulated reasons, the primary judge explained the limited role that demeanour had played in his assessment and further explained his reasons by reference to the oral testimony and other considerations. In these circumstances, I agree with the analysis and conclusions of Macfarlan JA at [65]-[85].

17 There may appear to be an inconsistency between a conclusion on the part of this Court that his Honour's finding that certain representations were made was flawed, but that the Court cannot form an affirmative view of its own. By contrast, in Percy v Fox [2001] NSWCA 100, having concluded that the critical finding of the primary judge was inconsistent with facts incontrovertibly established by the evidence, the judgment in favour of the plaintiff/respondent was set aside and a judgment for the appellant/defendant substituted (cf 214 CLR 118 at [19]). While a substituted judgment may be possible in some cases, it is also possible to detect error in the trial court's findings without being satisfied that a contrary result is appropriate, in which case, if further satisfied that there has been a substantial miscarriage of justice, a retrial is required: Uniform Civil Procedure Rules 2005 (NSW), r 51.53.

18 I do not, however, join in proposed order 3, in so far as it directs that the proceedings be heard by a judge other than the primary judge. The circumstances in which the judgment is to be set aside may well suggest that that is the appropriate course. However, absent some particular reason to the contrary, this Court should not interfere in the administration of a trial division. In the normal course, if the matter were reallocated to the primary judge, it would be a matter for the appellants to take objection on the basis of a reasonable apprehension of pre-judgment. There may be reasons, not agitated in this Court, why the appellants would not take such an objection. In any event, the issue not having been agitated, this Court should, in my view, not bind the parties and the Court below to such a course.

Misleading and deceptive conduct: deceit

19 I agree with the reasons of Macfarlan JA at [86]-[100] in respect of these issues.

Operation of Home Building Act

20 Because the matter is to go back for a retrial, it is necessary to determine the scope of the new trial. Thus, if the builder has no claim against the appellants, as guarantors, in respect of work done pursuant to oral variations of the written contract, the new trial should be limited in quantum to the amount claimed in respect of a written variation ($90,000) and any amount outstanding under the written contract. As Sackville AJA has explained, this issue can be resolved by accepting that the terms of the putative guarantees were not wider than those which would have been provided under the written contract. In substance, the guarantee was limited to the payment of "all monies agreed to be paid by the owner under this contract " (italicised words as in original). That would include payment of the price identified in the contract, together with the price of variations agreed under the contract. While the contract permitted variations, clause 17 provided:

"A variation occurs if:

(a) this contract deems a variation ; or

(b) the builder and the owner agree in writing to a variation ."

21 Deemed variations arise under a number of provisions, including a problem caused by the contract documentation (clause 6), planning and building approvals (clause 7), the need to obtain a survey of the site (clause 10), the provision of all weather access (clause 11) and sub-surface conditions (clause 12). None of these was relied upon in the present case and it is not necessary to discuss the circumstances in which they may arise. (Some deemed variations require written instructions.) Clause 17 provides that the price of a variation is due and payable at the next progress payment after it is carried out, unless a different time is agreed: clause 17.6. From that it may be inferred that the price of a variation is covered by a guarantee in the terms noted above. On the other hand, payment for work required to be done pursuant to oral instructions, not constituting a "variation" within the meaning of clause 17, will not be moneys agreed to be paid by the owner "under this contract". Indeed, there may be an issue as to whether they are moneys "agreed" to be paid at all. They may constitute moneys which are payable pursuant to a quantum meruit entitlement in the builder arising under law, and not by way of agreement. It is not necessary to determine the last point.

22 As explained by Sackville AJA, that is a sufficient finding in respect of the scope of any claim under the putative guarantee in relation to payments not falling due under the original written agreement.

23 I also agree with Sackville AJA that the current form of regulation of residential building work was not fully explored in the course of argument and its effects are not self-evident. The predecessor to the Home Building Act (which commenced its life as the Building Services Corporation Act 1989 (NSW)) repealed the Builders Licensing Act 1971 (NSW). The regulation of licensed builders under s 45 of the 1971 Act stated that a contract under which a licensed builder carried out any building work was "not enforceable against the other party to the contract unless the contract is in writing ...". It was that legislation which was held, in Pavey & Matthews Pty Ltd v Paul [1987] HCA 5; 162 CLR 221, to prevent recovery by the builder of moneys payable under the contract, but not to preclude recovery by it on a quantum meruit for the value of work done and materials supplied pursuant to an oral agreement.

24 The equivalent provision in the Home Building Act is s 10, set out at [103] below. It has been accepted that a claim for payment under an oral agreement to undertake residential building work is not enforceable; nor is any payment claimed pursuant to an oral variation of such a contract enforceable: see Edwards v Sydney Building Group Pty Ltd [2011] NSWCA 154, although these principles were assumed in the circumstances under review in that case: cf Zhao v Goodman [2010] NSWCA 2 at [142] (Tobias JA, Macfarlan JA and McClellan CJ at CL agreeing), but see Zavodnyik v Alex Constructions Pty Ltd [2005] NSWCA 438; 67 NSWLR 457 at [3] and [12]-[13] (Handley JA, Mason P and Latham J agreeing); Kalokerinos v HIA Insurance Services Pty Ltd [2004] NSWCA 312 at [32]-[36] (Bryson JA, Santow JA agreeing).

25 The grammatical structure of s 6 is awkward: the "undertaking to do residential building work" referred to in s 6(1)(b) must be the undertaking which arises as a result of the chapeau to the subsection, taken together with paragraph (a). The "contract" referred to in the chapeau must be the agreement pursuant to which residential building work is undertaken. If any work is to be given to paragraph (b), the term "contract" in the chapeau must apply to an agreement to vary the scope of the undertaking identified in the principal contract. Accordingly, I agree with Macfarlan JA, that the requirements in respect of such a contract, in particular the requirement of writing in s 7(1), must apply to the contract to vary the undertaking to do residential building work, including a variation provided for by the original contract.

26 I agree with the analysis given by Sackville AJA of the judgments of this Court in Update Constructions Pty Ltd v Rozelle Child Care Centre Ltd (1990) 20 NSWLR 251. As explained by Priestley JA, the reasoning of the arbitrator in that case, referring to work done "outside the contract", was to be understood by reference to the judgment of Griffith CJ in Liebe v Molloy [1906] HCA 67; 4 CLR 347 at 354. The language of "implied contract" used in Liebe v Molloy is also ambiguous, although the ambiguity did not matter prior to statutory provisions rendering oral agreements unenforceable.

27 The respondent drew attention to the following passage in the judgment of this Court in Zhao v Goodman [2010] NSWCA 2 at [142]:

"I would be inclined to reject any submission by the respondents that a variation of that contract was unenforceable by the appellant by virtue of s 10(1) of the [Home Building] Act because it was not in writing. I would also doubt that any such variation was irrecoverable for non-compliance with clause 12 of the Home Building contract where otherwise it was agreed by the parties that the work was to be, and was in fact, performed."

28 It is clear that these remarks were obiter and did not form part of the decision. In relation to the first sentence, there was no analysis of the scope or operation of s 10(1), nor any discussion of the operation of s 6(1), and in particular paragraph (b), from which a contrary view might follow. Further, there was no consideration of the operation of s 7E, which must be read with cl 12 and Schedule 2, Part 1, item 1 of the Home Building Regulation 2004 (as in force for the purposes of this agreement). The effect of s 7E is that, where a regulation requires that a contract contain a clause in prescribed terms, it is taken to include that clause, and any term inconsistent with that clause is unenforceable. Clause 12 of the Regulation requires that certain conditions are included in contracts, as provided by Schedule 2; Schedule 2, cl 1 requires that all plans and specifications for work to be done under a contract are taken to form part of the contract and continues:

"(2) Any agreement to vary this contract, or to vary the plans and specifications for work to be done under this contract, must be in writing signed by or on behalf each party to this contract."

29 It would follow that a residential building contract cannot permit a variation which is not in writing. An oral variation which would itself involve residential building work cannot be enforced as a separate contract because that contract would not be in writing. The tentative view set out in the first sentence of the passage cited from Zhao is not correct.

30 Reference in the second sentence of the passage cited from Zhao to whether "such variation was irrecoverable" is presumably a reference to the question whether an amount payable in respect of work done pursuant to such a variation is unable to be recovered in any circumstances. The possibility of recovery, not under the contract, but by way of quantum meruit, remains open: Home Building Act , s 11.

Costs

31 The appellants have been successful in having the judgment of the primary judge set aside. There is no reason not to order that the respondent pay their costs of the appeal. No submissions were made as to why that order should not follow if the appeal were allowed. The fact that there is to be a new trial, although limited to particular amounts, does not qualify the appellants' success on the appeal. It does, however, suggest that the costs of the first trial should await the outcome of the further trial (unless the parties agree to settle, given that the amount in dispute is much reduced). The suggestion that further costs should be incurred by allowing submissions on costs, is unattractive. If the parties take a different view of the exchange near the completion of the hearing, the dissatisfied party (or both) can seek to vary the order within 14 days: see Tcpt, 19/07/2011 at 67(40)-68(20).

Orders

32 In my view the Court should make the following orders:

(1) Allow the appeal and set aside orders 1-5 made in the Common Law Division on 10 June 2010.

(2) Order that there be a new trial, limited to the amounts claimed by the respondent in its claim to be payments due and unpaid under the contract, including in respect of the work the subject of the variation in writing.

(3) Order that the respondent pay the appellants' costs of the appeal.

(4) Direct that the costs of the first trial be the subject of consideration at the new trial.

(5) Grant the respondent a certificate under the Suitors' Fund Act 1951 (NSW), if not disqualified pursuant to s 6(7).

33 MACFARLAN JA :

NATURE OF CASE AND CONCLUSIONS

34 On 12 October 2004 the respondent, Jinhong Design & Constructions Pty Ltd (the "Builder"), and Ausino Art Ceramic Development Pty Ltd (the "Owner") executed a form of contract entitled "NSW Residential Building Contract for New Dwellings" (the "First Building Contract"). The contract provided for the Builder to complete the construction of "18 townhouses/shops/offices" at Sylvania Waters in Sydney. The contract price was specified to be $2,385,000 (inclusive of GST). The Owner engaged the Builder to replace another builder that had previously been engaged to construct the project.

35 The contract was signed on behalf of the Builder by its principal director, Mr Jin Hong Huang, and on behalf of the Owner by two of its directors, Ms Xue Yuan Li and Mr Ye Nuo Xu. Signatures appearing to be those of Ms Li and Mr Xu are on the form of Deed of Guarantee and Indemnity contained in the contract. The authenticity of the purported signature of Mr Xu was in issue in the present proceedings.

36 In the following weeks Ms Li departed Australia and was removed as a director of the Owner. The parties to the contract then took the view that a replacement contract needed to be executed. As a result the Builder and Owner executed another form of building contract in November 2004 (the "Second Building Contract"). The form of guarantee embodied in this contract was not signed by any guarantors but the Builder contended in the present proceedings that it executed the contract upon the basis of promises by Mr Xu and another director of the Owner, Mr Cheng En Zhu, who are the appellants before this Court, that they would later sign the form of guarantee.

37 The building works proceeded to practical completion but, so the Builder alleges, an amount of $391,255.15 remains owing under the Second Building Contract by the Owner to the Builder. In the present proceedings the Builder claimed, in contract, damages from Mr Xu and Mr Zhu for breach of their alleged promises to give personal guarantees in respect of the Owner's obligations. Alternative claims were made under the misleading and deceptive conduct provisions in s 42 Fair Trading Act 1987 (as the section appeared prior to enactment of the Fair Trading Amendment (Australian Consumer Law) Act 2010, Schedule 1) and in deceit.

38 The proceedings were heard in February and March 2010 by Johnson J, sitting in the Common Law Division of the Court. In a judgment dated 25 May 2010 his Honour found in favour of the Builder and awarded compensatory damages of $391,255.15, together with exemplary damages of $25,000 on the deceit cause of action. Messrs Xu and Zhu have appealed to this Court against that judgment.

39 For the reasons given below, I have reached the following conclusions:

(a) Mr Xu affixed his signature to the form of guarantee in the First Building Contract but, due to a change of circumstances between October and November 2004, that fact did not provide any significant support for the primary judge's finding that in November 2004 the appellants promised to guarantee the Owner's obligations under the Second Building Contract (see [55] - [64] and [74] - [79] below);

(b) The primary judge was in error in concluding that the form, and manner of execution, of the Second Building Contract supported his Honour's conclusion that in November 2004 the appellants promised to guarantee the Owner's obligations under the Second Building Contract (see [68] - [73] below);

(c) These errors vitiated the primary judge's conclusion that the appellants made such promises as these were the two principal factors upon which his Honour relied in reaching that conclusion (see [80] below);

(d) As a redetermination of the Builder's contract claim would involve credit issues, that claim should be remitted for a redetermination in the Common Law Division (see [84] - [85] below);

(e) The builder did not make good its claims for misleading and deceptive conduct and in deceit (see [86] - [100] below);

(f) The Home Building Act 1989 required variations to the building work under the Second Building Contract to be in writing. As only one variation (to an alleged value of $90,000) was in writing, the Owner's only liability under the contract for variations, as distinct from liability on a quantum meruit claim, was to a maximum amount of $90,000 (see [101] - [106] below);

(g) The guarantees that the appellants allegedly promised to give related only to the Owner's liability under the Second Building Contract and not to any liability that it had on a quantum meruit claim. As a result, the remission of the Builder's contract claim to the Common Law Division should be limited to determining whether the appellants are liable in contract to the Builder in the total sum of $237,159, representing $90,000 in respect of the variation in writing and $147,159 in respect of part of the original contract sum unpaid (see [107] - [113] below).

THE JUDGMENT AT FIRST INSTANCE

40 The primary judge summarised his findings of fact as follows:

"78 ...

(a) Ms Li introduced Mr Huang and the Plaintiff to the Sylvania Waters project in 2004 in circumstances where Ausino wished to bring a new builder into the project;

(b) Mr Huang provided a quotation on behalf of the Plaintiff for the Sylvania Waters project on 9 October 2004, together with a draft contract;

(c) between 9 and 12 October 2004, Mr Xu and Ms Li considered the terms of the proposed contract in their entirety and fully understood what was sought, including personal guarantees from each of them;

(d) on 12 October 2004, Mr Xu and Ms Li executed a contract on behalf of Ausino and signed personal guarantees as part of the contractual arrangement with the Plaintiff, with each of them having a full understanding of the nature and obligations of a personal guarantee;

(e) upon the basis of the 12 October 2004 contract, the Plaintiff and Mr Huang commenced work on the Sylvania Waters project and a deposit was paid for that purpose;

(f) on about 24 October 2004, Mr Xu informed Mr Huang that Ms Li was no longer a director and secretary of Ausino and had left Australia;

(g) it was agreed between Mr Huang and Mr Xu that a new contract would be prepared for signature, with personal guarantees to be required from Mr Xu and another person in place of Ms Li;

(h) thereafter, discussions took place between Mr Xu and Mr Huang in which Ausino sought provision for liquidated damages to be included in the replacement contract, an arrangement accepted reluctantly by Mr Huang;

(i) Mr Huang made clear to Mr Xu and Mr Zhu that personal guarantees were required from each of them as part of the second contractual arrangement, and both Mr Xu and Mr Zhu assured Mr Huang that this formed part of the arrangement to be entered into;

(j) on about 23 November 2004, the second contract was signed by Mr Huang on behalf of the Plaintiff and by Mr Xu and Mr Zhu on behalf of Ausino with Mr Xu and Mr Zhu also initialling every page of the contract, including the guarantee page - this was indicative of a willingness on the part of Mr Xu and Mr Zhu to give personal guarantees, although the particulars of the guarantors were not included in the document at that time;

(k) following November 2004, work progressed on the Sylvania Waters project, with progress payments being made and work continuing;

(l) at no time did Mr Xu or Mr Zhu inform Mr Huang that it was not their intention to provide personal guarantees as part of the second contractual arrangement - in the context of discussions in 2005 concerning delays in the making of progress payments, each of Mr Xu and Mr Zhu repeated statements to Mr Huang that personal guarantees were part of the arrangement;

(m) there were some delays associated with the Sylvania Waters project, usually arising from delays in payment;

(n) broadly speaking, the quality of the work undertaken by the Plaintiff with respect to the Sylvania Waters project was satisfactory;

(o) by the time that the Plaintiff handed over the keys to the units and shops contained within the Sylvania Waters project to Ausino, a sum in excess of $391,000.00 remained payable under the contractual arrangements as between the Plaintiff and Ausino;

(p) in April-May 2006, the directors and investors associated with Ausino took steps to purchase units and shops within the Sylvania Waters project so as to obtain funds to pay out their creditors, Hastings Capital Limited and Hastings Mezzanine Limited, under lending arrangements which included personal guarantees by Mr Xu and Mr Zhu;

(q) steps taken by Mr Xu and Mr Zhu involved the acquisition of the sole asset of Ausino by them, family members and associates, with the proceeds of sale of the units and shops being used to discharge indebtedness to their creditors, whilst themselves obtaining the benefit of ownership of the relevant units and shops within the Sylvania Waters project;

(r) Mr Xu and Mr Zhu were aware that the inevitable consequence of this course of action was that Ausino would be put into liquidation and this is what resulted in September 2006;

(s) Mr Xu and Mr Zhu did not inform the Plaintiff or Mr Huang that this was the approach being taken to discharge Ausino's indebtedness to its creditors, and this course of conduct left Ausino as an unsecured creditor with respect to the outstanding sum payable to the Plaintiff under the second building contract;

(t) the Plaintiff would not have entered into the first building contract on 12 October 2004 without personal guarantees being given by Mr Xu and Ms Li;

(u) the Plaintiff would not have entered into the second building contract on about 23 November 2004 without personal guarantees being offered as part of the contractual arrangement by Mr Xu and Mr Zhu;

(v) Mr Xu and Mr Zhu did not execute personal guarantees fully and finally as part of the second contractual arrangement, although they initialled the guarantee page of the contract;

(w) at the least, at the time when each of Mr Xu and Mr Zhu made representations to Mr Huang that personal guarantees would be given by each of them as part of the second contractual arrangement, there was an absence of a genuine belief on the part of each of them that the representation was true, or recklessness as to whether it was true or false: Jeans v Cleary [2006] NSWSC 647 at [24]-[25]" (Judgment [78]).

41 The primary judge upheld the Builder's claim in contract upon the basis that by failing to provide written personal guarantees, the appellants breached a contract that they had made with the Builder whereby the appellants promised, in return for the Builder entering into the Second Building Contract with the Owner, to provide signed personal guarantees of the Owner's liability under that contract. His Honour found that the amount outstanding under the Second Building Contract represented the Builder's loss that was caused by the appellants' breaches.

42 The primary judge also upheld the Builder's claim under s 42 Fair Trading Act 1987. His Honour expressed his conclusions as follows:

"93 ... In substance, I have found that each Defendant made representations to Mr Huang in October and November 2004 to the effect that each would give a personal guarantee as part of the second contractual arrangement. The making of these representations induced Mr Huang, on behalf of the Plaintiff, to enter into the second contractual agreement. Thereafter, each Defendant made statements to Mr Huang reassuring him that personal guarantees from each of them formed part of the second contractual arrangement.

94 On the totality of the evidence, I have found that each of Mr Xu and Mr Zhu did not take appropriate action to complete relevant documentation to give these personal guarantees. Parts of documents were completed in a manner which lent support to the oral representations being made to Mr Huang by Mr Xu and Mr Zhu. The conduct of Mr Xu and Mr Zhu in 2006 and, indeed, in the conduct of these proceedings, points strongly to a conclusion that neither of them ever intended to provide a personal guarantee, although they were prepared to say that they did.

95 At the least, I am satisfied that each of Mr Xu and Mr Zhu made representations in this respect to Mr Huang without caring whether they were true or not at the time. I am satisfied that this is a sufficient foundation for orders to be made in favour of the Plaintiff under the statutory claim as a result of the misleading and deceptive conduct of each of the Defendants."

43 His Honour found that the amount of damages applicable to the contract cause of action also represented the Builder's loss caused by the appellants' misleading and deceptive conduct (Judgment [96]).

44 The primary judge also found in the Builder's favour upon its claim in deceit. His Honour expressed his conclusions as follows:

"I have made findings of fact with respect to statements made by Mr Xu and Mr Zhu to Mr Huang in and after October 2004 concerning their preparedness to furnish personal guarantees as part of the second contractual arrangement. I am satisfied that each of Mr Xu and Mr Zhu made representations of fact which were conveyed to Mr Huang by their respective words and conduct. I am satisfied that, at the time when Mr Xu and Mr Zhu made these statements, each was, at the least, reckless as to whether the statement was true or false. In effect, I am satisfied that each of Mr Xu and Mr Zhu was prepared to state that they would give a personal guarantee as part of the second contractual arrangement, but each of them hoped that he may be able to get by without giving effect to these representations. I am satisfied that each of Mr Xu and Mr Zhu intended that Mr Huang should act upon their representations. I am satisfied that Mr Huang was induced to act upon the basis of these representations to enter into the second contractual agreement. I am likewise satisfied that the Plaintiff suffered damage as a result of the reliance upon the representations of Mr Xu and Mr Zhu" (Judgment [101]).

45 In respect of this cause of action the primary judge awarded the same amount of $391,255.15 as compensatory damages. He also awarded $25,000 as exemplary damages, basing this award principally upon the appellants' participation in the Owner's sale of units at the Sylvania Waters project. The Owner used the proceeds of these sales to discharge debts to other creditors. His Honour held that this occurred "in contumelious disregard" of the Builder's rights (Judgment [136] - [137]).

46 The primary judge did not find it necessary to resolve the Builder's claim based upon equitable estoppel. As the Builder did not file a Notice of Contention seeking to have this Court uphold the claim, it does not arise for consideration on appeal. The appellants challenge his Honour's findings in respect of each of the other causes of action.

47 The primary judge then proceeded to deal with issues relating to the quantum of the Builder's claim against the appellants.

48 His Honour took the view that the Builder's loss was to be assessed by reference to the terms of the guarantees that the appellants would have provided if they had fulfilled their promises. This would have involved them signing the form of guarantee contained in the Second Building Contract, of which the relevant portion was in the following terms:

"In consideration of the owner and the builder entering into this contract , the guarantor:

(a) guarantees to the builder the payment of all monies agreed to be paid by the owner under this contract " (Exhibit B).

49 The primary judge took the view that the words of the guarantee would have precluded the appellants raising any matter by way of set-off or cross-claim in opposition to a claim by the Builder against them as guarantors, on the basis that the appellants guaranteed payment of the contract price, without any deduction. His Honour concluded that for this reason the appellants were not entitled to raise the various matters concerning quantum that were identified in a Scott Schedule that his Honour directed be filed (Judgment [117]). I note in passing that this conclusion is difficult to understand as most of the issues listed in the Scott Schedule (with the exception of that in Part C relating to a claim by the Owner for liquidated damages for delay) appear to have related not to matters by way of set-off or cross-claim, but to the quantum of amounts outstanding under the Second Building Contract. His Honour had earlier recognised that it was necessary for the Builder to prove its entitlement to be paid such amounts by the Owner (Judgment [110]).

50 The primary judge then proceeded to consider alternative submissions that the appellants made, lest his Honour be wrong in his view that none could be relied upon by the appellants for the reason to which reference has just been made.

51 His Honour rejected the appellants' submission that the Home Building Act 1989 (which the parties conceded was applicable to the Second Building Contract) precluded the Builder's claim against the appellants to the extent that the Builder's claim was based upon the price or value of oral variations to the Second Building Contract. The appellants had submitted that that Act required variations to be in writing. Without deciding whether that was so, the primary judge held that the Act did not in any event preclude reliance upon oral variations in a claim against the putative guarantors, even though it may have done so in a claim against the Owner. His Honour said:

"... I accept the Plaintiff's submission that an argument based upon the Home Building Act 1989 (NSW) does not avail the Defendants as guarantors. This is not a claim against Ausino. It is a claim by way of different causes of action against the Defendant" (Judgment [120]).

52 In further response to the appellants' reliance upon the Home Building Act and to a requirement of the Second Building Contract that any variations to the Contract be in writing (Clause 17), his Honour said the following:

"Further, the factual circumstances of this case establish that Mr Xu and Mr Zhu were relevantly the minds and hands of Ausino in its dealings with the Plaintiff. Mr Huang's quotation of 9 October 2004 (Exhibit K) laid down the parameters of the contract - what was included in the quoted price and what was not included in that price. I accept that variations occurred thereafter as a result of discussions and agreements between Mr Huang for the Plaintiff and Mr Xu and Mr Zhu for Ausino, and (as I have found) for themselves as guarantors. I am satisfied that the process of variation undertaken was consistent with the terms of the second building contract but that, even if it was inconsistent in some respects, the Defendants ought be estopped in this specific respect from attempting to avoid their obligations to the Plaintiff. In addition, it cannot be said that there had been some variation to the second building contract, and consequently to the obligations of the Defendants as guarantors, without their knowledge or consent so as to potentially discharge their liability under the guarantee: Hancock v Williams (1942) 42 SR (NSW) 252" (Judgment [121]).

53 The primary judge then considered the appellants' alternative submissions in respect of items set out in Parts A and B of the Scott Schedule. His Honour did not deal with the details of these submissions. Rather, he dealt with them in a compendious fashion by saying that he accepted the evidence of Mr Huang and the Builder's submissions with respect to them (Judgment [122] - [123]).

54 Part C of the Scott Schedule contained a claim for liquidated damages at the rate of $200 per day for 165 working days. His Honour found that this claim was answered by Mr Huang's evidence and that as a result the Owner did not have any claim by way of set-off or cross-claim for liquidated damages (Judgment [124] - [127]). It followed that, at least for this reason, the appellants could not rely upon any such set-off or cross-claim.

THE GUARANTEE IN THE FIRST BUILDING CONTRACT

55 The Builder did not make any claim against Mr Xu on the guarantee, allegedly signed by Mr Xu, contained in the First Building Contract. The proceedings were conducted on the basis that the parties to that contract effectively abandoned it after Ms Li departed Australia, apparently because they thought that Ms Li's departure somehow invalidated it.

56 Nevertheless the question of whether Mr Xu knowingly signed that form of guarantee is of importance for two reasons.

57 First, it is relevant to the credit of Mr Huang and Mr Xu because they gave sharply conflicting evidence in relation to the making of both the First and Second Building Contracts. Mr Huang said that Mr Xu signed the form of guarantee contained in the First Building Contract following discussions with Mr Xu and Ms Li about giving guarantees, whilst Mr Xu denied that any such discussions occurred and, at least initially, denied that he signed the form of guarantee. After seeing a report of Mr Gary Storey, a handwriting expert who the Builder retained, Mr Xu accepted that it was possible that he signed the form of guarantee but asserted that if he had done so his action was inadvertent.

58 Secondly, the question of whether Mr Xu (and Ms Li) signed the form of guarantee in the First Building Contract is important because the answer is of potential relevance to the likelihood of Mr Huang having insisted, as he asserted but the appellants denied, on the appellants providing guarantees in respect of the Second Building Contract.

59 In his report dated 28 May 2008, Mr Storey expressed the expert opinion that "there is very strong support for the proposition that the writer" of the specimen signatures of Mr Xu (which Mr Storey was given for the purposes of completing his report) also wrote the signature purporting to be that of Mr Xu on the form of guarantee in the First Building Contract (at [28]). Despite the initial hearing date of the proceedings being vacated to give the appellants an opportunity to consider and, if they wished, to call evidence in response to, Mr Storey's report, the appellants did not call any expert evidence to contradict that of Mr Storey. Mr Storey was however cross-examined in some detail.

60 Although the primary judge recognised that there were a number of issues concerning Mr Storey's evidence, "largely as a result of the unsatisfactory manner in which he had been retained and provided with documents in the first place", his Honour was satisfied that Mr Storey's opinion ought to be accepted (Judgment [27]).

61 I do not consider that any of the matters that the appellants advanced on appeal by way of challenge to this conclusion give sufficient reason to doubt its soundness. The appellants' principal submission in this context focused upon an assumption that Mr Storey made that Mr Xu admitted that he was one of the two signatories on behalf of the Owner of the First Building Contract (p 8 of that contract). The appellants correctly submitted that Mr Storey was not asked to make this assumption. However in my view there can be no doubt on the whole of the evidence that Mr Xu did in fact sign the contract on behalf of the Owner. Although he did not admit that he did, he did not deny it. In my view the assumption made by Mr Storey was in substance an appropriate one and its literal incorrectness did not affect the reliability of his report.

62 The primary judge rightly treated Mr Storey's expert evidence as the most important evidence before him on the question of whether Mr Xu signed the form of guarantee in the First Building Contract. That was evidence that was in my view sufficient to, and did, justify his Honour's affirmative answer to that question in circumstances where his Honour's view of Mr Xu's credibility and reliability was such that he concluded that he "would require independent corroboration of any evidence [Mr Xu] gave before making a finding in [Mr Xu's] favour on any disputed issue" (Judgment [123]) and there was no other evidence to support the view that Mr Xu did not sign the form of guarantee.

63 I add that in my view his Honour was in error in finding support for his conclusion in the fact that Mr Xu had the form of the First Building Contract in his possession from 9 October 2004 until 12 October 2004 when execution of it was completed (see for example Judgment [23] and [29]). His Honour considered that this was important in indicating that Mr Xu must clearly have understood by 12 October 2004 that he was expected to give a guarantee. However the form of contract that Mr Xu had in this period did not name him as a guarantor. As Mr Huang said in his evidence, that information was only inserted at the meeting of 12 October 2004 (Transcript p 131.10 - 131.21). This error does not however undermine his Honour's conclusion. It simply removes one element of support for the conclusion. Ample support remains.

64 I also add that in the circumstances of this case his Honour's own comparison of the disputed signature with admitted signatures of Mr Xu should not, contrary to his Honour's apparent view, have been regarded as providing significant support for his Honour's conclusion. Taking account of the limited value that I would attribute to my own observations of the disputed and admitted signatures in this case and of the fact that there was uncontradicted expert handwriting evidence I do not think that his Honour's lay comparison of the signatures should have been treated as of any significance. Again this error only removed one element of support for his Honour's conclusion. What remained was sufficient.

WHETHER THE APPELLANTS PROMISED TO PROVIDE GUARANTEES

65 Mr Huang and the appellants gave conflicting evidence on this issue. All three gentlemen are of Chinese background. Mr Huang and Mr Xu, but not Mr Zhu, gave evidence with the assistance of an interpreter. His Honour correctly said:

"The fact that key witnesses gave evidence through an interpreter limits the ability of a tribunal of fact to assess demeanour as an aid to fact finding. Further, great care must be exercised in making demeanour findings where witnesses are from a different cultural and ethnic background to that with which the Judge is familiar: Goodrich Aerospace Pty Limited v Arsic [2006] NSWCA 187; 66 NSWLR 186 at 190 [21]-[22]. It is necessary to weigh impressions as to demeanour carefully against the probabilities and to examine whether the disputed evidence is consistent with incontrovertible facts, facts that are not in dispute and other relevant evidence in the case: Goodrich Aerospace Pty Limited v Arsic at 191 [27]" (Judgment [10]).

66 Whilst in these circumstances it can be inferred that his Honour's reliance upon his views of the witnesses' demeanour was limited, it is apparent that that factor was not entirely excluded and that his Honour's conclusions must be regarded as at least in part credit based, attracting the need for the appellants to surmount the hurdle identified in Fox v Percy [2003] HCA 22; (2003) 214 CLR 118 in order to challenge his Honour's conclusions successfully. In substance it is thus necessary for the appellants to satisfy this Court that his Honour's findings were contrary to "incontrovertible facts or uncontested testimony", "glaringly improbable" or "contrary to compelling inferences" (ibid at [28] - [29]). It is sufficient in this respect for an appellant to demonstrate that a primary judge has treated objective circumstances as providing material support for the credibility or reliability of a witness when those circumstances cannot reasonably be regarded as providing that support (see Shimokawa v Lewis [2009] NSWCA 266 at [181] and Davis v Veigel [2011] NSWCA 170 at [42]).

67 I turn then to consider the principal matters upon which the primary judge relied in resolving the conflict between the evidence of Mr Huang and the appellants.

The documentary evidence

68 The following statements of the primary judge indicate that his Honour attached considerable significance to the form, and manner of execution, of the Second Building Contract.

"... Mr Xu, Mr Zhu and Mr Lin, another Ausino director, initialled each page of the second contract, as did Mr Huang for the Plaintiff. Mr Xu, Mr Zhu, Mr Lin and Mr Huang all initialled the guarantee page of the second contract (Exhibit B, page 26). However, neither Mr Xu or Mr Zhu signed as guarantors on the second contract. This is a point of difference between the first and second contract. (Judgment [43])

...

The second contract was prepared with all pages being initialled by Mr Xu, Mr Zhu and others. The guarantee page was not struck out. To the contrary, it was left in with Mr Xu and Mr Zhu initialling the bottom of the page. This conduct is not consistent with an unwillingness to give personal guarantees. It is the fact that neither Mr Xu nor Mr Zhu signed at the relevant position on the guarantee page of the second contract ... (Judgment [45])

...I accept that Mr Huang did not assiduously demand prompt signature and presentation of signed guarantees. However, he was told that that was part of the arrangement and the documentation was not inconsistent with that view. Importantly, the guarantee part of the second contract had not been struck out and had been initialled by Mr Xu and Mr Zhu ... (Judgment [46])

... As already noted, the initials of Mr Xu and Mr Zhu appear at the foot of page 26 and that is a significant feature of the evidence, as is the fact that page 26 has not been struck out. If the account of Mr Xu and Mr Zhu was to be accepted, then the circumstances prevailing in November 2004 ought to have seen neither of them initial that page which, on Mr Xu's account, had been rejected once and for all on 12 October 2004 (Judgment [47]).

...

on about 23 November 2004, the second contract was signed by Mr Huang on behalf of the Plaintiff and by Mr Xu and Mr Zhu on behalf of Ausino with Mr Xu and Mr Zhu also initialling every page of the contract, including the guarantee page - this was indicative of a willingness on the part of Mr Xu and Mr Zhu to give personal guarantees, although the particulars of the guarantors were not included in the document at that time (Judgment [78](j))."

69 In my view the primary judge was in error in attaching significance to the fact that the guarantee page of the Second Building Contract had not been struck out and that Messrs Xu and Zhu had initialled that page.

70 Their initials appeared adjacent to the printed words "Owners' initials" at the foot of the page where there was also provision for the "Builder's initials". The provisions for initials appeared in a like manner on each of the pages of the substantive part of the contract. Messrs Xu and Zhu, (and also another director of the Owner, Mr Ling Lin), placed their initials on each of those pages (including the guarantee page), as did Mr Huang, who signed the contract on behalf of the Builder. The contents of the guarantee page did not suggest that Mr Xu or Mr Zhu was to be a guarantor and did not contain any reference to either of those persons. The form on the page was blank save that in the copy of the Second Building Contract retained by the Builder (Exhibit B) there appeared in handwriting the name of the Owner, its address and its Australian Business Number. These details appeared in the form at the place where the name of any guarantor was to appear. On Mr Huang's evidence they were inserted by Mr Huang prior to signature of the contract by Messrs Xu and Zhu (Transcript pp 206.28 and 206.46).

71 In these circumstances the fact that the appellants initialled the guarantee page was in my view of no, or at least very limited, significance in determining whether the appellants promised to give personal guarantees. Their initialling of the page was consistent with them simply doing so as directors of the Owner, who had signed the contract on behalf of the Owner, for the purpose of identifying the pages forming a part of it. Mr Lin's signature on the guarantee page reinforces this conclusion. The evidence of Mr Xu (Transcript p 354.6 - .10) and Mr Zhu (Transcript p 416.1 - .22) was that they believed that in signing on behalf of the Owner they were required to initial every page of the contract. The assent that they thereby indicated to the inclusion of the guarantee page in the contract did not involve any assent to a proposition that they would, or did, give a guarantee, as that page said nothing about any such role for them. Nor did any other part of the form of contract identify either of them as an actual or potential guarantor.

72 Likewise, the fact that the guarantee page was not struck out should not have been regarded as being of any significance. In an ideal world that page would have been struck out if no guarantee had been intended to be given and this might well have occurred if the parties had employed lawyers to assist them in negotiating and executing the contract. However the appellants were lay people and from a non-English speaking background. There being no reference to either of them in the form of guarantee, or elsewhere in the contract, it is unrealistic to have expected them to have struck the page out and to have drawn an adverse inference against them because they did not do so.

73 I consider that the primary judge attached such importance to the form, and manner of execution, of the Second Building Contract that his error as to what inferences should be drawn from these matters vitiated his Honour's conclusion that the appellants promised to provide guarantees. Indeed the primary judge should have regarded the fact that the appellants did not sign the form of guarantee in the place providing for guarantors' signatures when they signed the contract document on behalf of the Owner as a significant factor pointing against Mr Huang's version of events concerning the execution of the Second Building Contract.

The relevance of Mr Xu's guarantee in relation to the First Building Contract

74 The primary judge's conclusion that Mr Xu guaranteed the obligations of the Owner under the First Building Contract had the potential to be a significant factor in favour of a conclusion that the appellants, and in particular Mr Xu, promised to guarantee the Owner's obligations under the Second Building Contract. However that potentiality could only become a reality if the further conclusion were reached that the circumstances of the parties had not changed in a significant way between the times at which the First and Second Building Contracts were signed. The primary judge recognised this when saying:

"... No good reason is suggested by the evidence as to why Mr Huang would alter his position, to his detriment, with respect to personal guarantees. The commercial context surrounding the arrangement was one which emphasised the commercial desirability of personal guarantees to be given with respect to Ausino's contractual liability. The fact that Ms Li departed the scene, in my view, would reinforce Mr Huang's wish for personal guarantees with respect to Ausino's liability. Mr Huang had known Ms Li for some time, but had only recently met Mr Xu. All of this, in my view, supports a conclusion that Mr Huang insisted on personal guarantees being given as part of the replacement contract as well" (Judgment [39]).

75 In my view, however, the circumstances in which the Second Building Contract came to be executed were sufficiently different from those in which the First Building Contract was executed to deprive the fact that Mr Xu gave a guarantee in relation to the First Building Contract of any particular significance in determining what was agreed in the context of the Second Building Contract. Therefore I consider that the primary judge erred in regarding it as "an important factor" in that process of determination (Judgment [44]). The following circumstances obtaining in November 2004 are relevant in this respect.

76 First, Ms Li had suddenly departed the country. Mr Huang said that the appellants told him that "Miss Li should no longer be involved in any way in the contract because she stole almost a hundred thousand dollars from the company" (Transcript p 178.22). Ms Li was the person who initially contacted Mr Huang about his company becoming involved in the project. Mr Huang said that as a result of her departure the appellants requested him to stop work on 24 October 2004 and "to clean up all the sums with Miss Li, to see whether I paid any moneys to Miss Li. I said I didn't pay any commission to Miss Li" (Transcript p 195.42).

77 This of itself constituted a quite different climate relevant to the likelihood of Mr Huang requiring directors of the Owner to provide personal guarantees and of those guarantees being promised: the director who had apparently recommended the engagement of Mr Huang's company had left under a cloud, allegedly having stolen a large amount of money from the company, and Mr Huang's financial dealings with her were to be investigated.

78 Secondly, Mr Huang gave evidence that by this stage he had "put a large amount of money in [to the project] and the footings [were] already finished ... I did remember that what I have done already exceed what their deposit money were" (Transcript p 179.10 - .16). Mr Huang laid out substantial moneys that may have been at risk if the project did not proceed to completion. That Mr Huang's bargaining position had been lessened between the execution of the First and Second Building Contracts is suggested by the fact that he "reluctantly" agreed to the insertion of a penalty provision in the Second Building Contract.

79 The primary judge's error in regarding Mr Xu's execution of the earlier contract as "an important factor" in determining whether the appellants later promised to provide guarantees in connection with the Second Building Contract was in my view also sufficient to vitiate his Honour's determination of that issue.

Conclusion on contract claim

80 The two matters to which I have referred, namely, the form of the documentation for the Second Building Contract and Mr Xu's signature of a guarantee in respect of the First Building Contract, were the two matters upon which the primary judge relied to support his conclusion that Mr Huang's version of events was to be preferred and that the appellants had promised to provide guarantees in relation to the Second Building Contract. For the reasons that I have given, they did not in fact provide any significant support for that conclusion, with the result that the conclusion cannot stand.

81 In my view the primary judge also erred in not attaching significance to the fact, as his Honour described it, "that Mr Huang did not assiduously demand prompt signature and presentation of signed guarantees" (Judgment [46] quoted at [68] above). Whilst the primary judge recognised that to be the fact, he does not appear to have attached any significance to it (ibid). It was however a significant objective circumstance pointing against a conclusion that the appellants had made the alleged promise.

82 Particularly is this so when it is recognised that his Honour's description gave a rather understated view of Mr Huang's conduct. The position according to Mr Huang's principal affidavit dated 14 January 2008 was as follows:

On 25 October and during early November 2004 Mr Huang stated on a number of occasions that the Builder would not restart the then suspended building work unless the appellants signed the personal guarantees ([24] - [35]).

Nevertheless the Builder recommenced work on the project on 11 November 2004 despite not having received signed guarantees ([37]).

Mr Huang's next request for provision of a signed guarantee was on 18 September 2005, following non-payment of the 8 th progress claim ([47]).

He asked for the guarantees a number of times thereafter ([49], [50] and [59] - [62]).

83 Despite not receiving signed guarantees from the appellants the Builder continued to work on the project through until its practical completion in about March 2006 (Judgment [65]).

84 Regrettably this Court is not able to reconsider the issue and to form its own conclusion. Such a reconsideration would have had to involve the formation of views concerning the credit of Mr Huang and the appellants. Not having heard the witnesses give their evidence, this Court is unable to form those views. Whilst the objective factors to which I have referred might be regarded as not simply being neutral but in fact pointing against the Builder's version of events, a court hearing the oral evidence might be sufficiently impressed by Mr Huang's evidence, and unimpressed by the appellants' evidence, to nevertheless find in the Builder's favour. The Builder cannot be denied the opportunity to achieve this result.

85 The result is that the Builder's contract claim must be remitted to the Common Law Division for determination. As the primary judge has already formed views concerning the credit of the relevant witnesses in the context of drawing inferences from objective evidence that in my view cannot reasonably be drawn, the remission should not be to the primary judge.

THE MISLEADING AND DECEPTIVE CONDUCT CLAIM

86 The conclusions that I have reached in relation to the contract claim apply equally to the Builder's misleading and deceptive conduct claim as the foundation of the latter claim is that, by the same statements that were alleged in the contract claim to amount to promises, the appellants represented that they would give personal guarantees in respect of the Second Building Contract. The primary judge's finding that these statements were made was flawed for the reasons that I have given (see [65] - [85] above).

87 There are however the following additional difficulties with the primary judge's finding that the Builder is entitled to succeed on its misleading and deceptive conduct claim.

88 The Builder did not contend that the representations that the appellants made were ones as to future matters and that the appellants did not have reasonable grounds for making those representations (s 41 Fair Trading Act as then in force). Rather, its case was that the representations were misleading and deceptive because the appellants did not, at the time that they made the representations, intend to do what they represented they would do, that is, provide signed guarantees ( Global Sportsman Pty Ltd v Mirror Newspapers Pty Ltd (1984) 2 FCR 82 at 88; HTW Valuers (Central QLD) Pty Ltd v Astonland Pty Ltd [2004] HCA 54; (2004) 217 CLR 640 at [13]). Whilst the primary judge found that there were later representations also, the representations which he found induced Mr Huang (on behalf of the Builder) to act were made prior to the Second Building Contract being entered into in November 2004. His Honour held that Mr Huang relied upon those representations in causing the Builder to enter into that contract.

89 The primary judge therefore needed to assess the appellants' states of mind as at November 2004.

90 The primary judge however said the following with reference to the time at which the Second Building Contract was executed and to the fact that neither of the appellants "signed at the relevant position on the guarantee page of the second contract":

" ... The Plaintiff submits that this indicates a willingness on their part to say one thing, but do another from that early point. It is not crystal clear, in my view, that Mr Xu and Mr Zhu had embarked upon a course of conduct from that time to intentionally mislead Mr Huang concerning the personal guarantee issue. It is clear, however, that Mr Xu and Mr Zhu were motivated wholly by self interest, a pattern which became more apparent at a later point in the dealings between the parties" (Judgment [45]).

91 This suggests that the primary judge was not affirmatively satisfied that at the date of execution of the Second Building Contract the appellants had no intention of doing what his Honour found that they represented they would do. It is important to note in this respect that a finding, whether in the context of a misleading and deceptive conduct claim or elsewhere, that a person made a knowingly false statement inducing the person to whom the statement was made to act in a particular way is a finding of dishonesty which should only be made if due regard is had to the gravity of the finding ( Briginshaw v Briginshaw [1938] HCA 34; (1938) 60 CLR 336; Rejfek v McElroy [1965] HCA 46; (1965) 112 CLR 517 at 521-2).

92 As noted above, in dealing with the Builder's misleading and deceptive conduct claim the primary judge said:

"94 ... The conduct of Mr Xu and Mr Zhu in 2006 and, indeed, in the conduct of these proceedings, points strongly to a conclusion that neither of them ever intended to provide a personal guarantee, although they were prepared to say that they did.

95 At the least, I am satisfied that each of Mr Xu and Mr Zhu made representations in this respect to Mr Huang without caring whether they were true or not at the time ... "

93 His Honour's reference to the conduct of the appellants in 2006 appears to have been a reference to the appellant's involvement in the disposal of the Owner's assets (see [45] above). There is no reason in principle why subsequent conduct such as this might not shed light upon the states of mind at an earlier point of time of persons who were involved in the conduct ( Bill Acceptance Corporation Ltd v G.W.A . Ltd (1983) 78 FLR 171 at 178 - 9). However I do not think that the appellants' conduct in supposedly acting to benefit themselves in 2006 in the manner that the primary judge found can rationally be regarded as shedding any significant light on whether at the time of making the alleged representations that they would give guarantees, near to two years earlier (in November 2004), that they had no intention to do so.

94 It is of course the case that "[t]he non-fulfilment of a promise when the time for performance arrives does not of itself establish that the promisor did not intend to perform it when it was made ... " ( Global Sportsman Pty Ltd v Mirror Newspapers Pty Ltd at 88). In the circumstances of this case I do not think that such non-performance was even of any particular significance in establishing that matter. The appellant's failure to provide written guarantees was consistent with them taking advantage of Mr Huang's lack of pressure to provide them and did not necessarily indicate that they would not provide those guarantees if appropriately pressed. Their conduct concerning the disposal of assets in 2006 was in my view too remote in time from the relevant time, November 2004, to justify an adverse inference upon the point in question.

95 In [95] of his judgment the primary judge made what was in effect a finding of recklessness (see [92] above). Where the issue is as to a person's own state of mind I have difficulty seeing the relevance of the concept of recklessness. If the person thought at the relevant time that he or she might not do what the person represented he or she would do, then the representation that the person would do it was false.

96 The primary judge's comments in considering the Builder's deceit claim reveal what his Honour had in mind in finding that the representations that he found that the appellants made were misleading and deceptive. His Honour said that the appellants were each "at the least, reckless" as to whether the statements forming the basis of both the deceit and misleading and deceptive claim were true or false. His Honour said "[i]n effect ... each of [the appellants] hoped that he may be able to get by without giving effect to these representations" (Judgment [101] quoted in [44] above).

97 Taking together what the primary judge said in Judgment [45], [94] and [101] it is in my view clear that his Honour was not saying that he was affirmatively satisfied to the requisite degree that when the appellants made the relevant statements in November that they did not intend to do what they said they would do but rather that the appellants made the statements hoping that they "may be able to get by" without giving guarantees. This was in my view insufficient to demonstrate that the appellants were, in effect, dishonest in making the statements in November. I accordingly do not consider that the primary judge's findings establish that the appellants were guilty of misleading and deceptive conduct.

98 Mr Huang was of course not able to, and did not, give evidence as to the appellants' states of mind when they allegedly made the relevant statements in November 2004. Accordingly formation of a view as to the appellants' states of mind does not involve the same issue of credit that arose in choosing between the evidence of Mr Huang and the appellants as to whether the statements were made. As a result it is not necessary for the misleading and deceptive conduct claim to be remitted to the primary judge for further consideration. This Court can resolve it.

99 In my view the evidence did not establish that the appellants had the requisite states of mind at the time they made the alleged statements to have constituted the making of those statements misleading and deceptive conduct. The Builder's misleading and deceptive conduct claim accordingly fails.

The claim in deceit

100 The views that I have expressed in relation to the Builder's misleading and deceptive conduct claim also lead to the conclusion that the Builder's deceit claim fails. Even if the appellants made the representations upon which the Builder relies, the Builder did not establish that they were knowingly false, that is, that at the time that they made them the appellants did not intend to provide the guarantees that they represented that they would provide.

THE HOME BUILDING ACT ISSUE

101 It is relevant to the terms of the remission to the primary judge of the contract claim to determine whether the appellants' argument based upon the provisions of the Home Building Act 1989 is correct. That argument started with the proposition that the Builder was precluded from recovering from the appellants all but $90,000 of its claim in respect of variations because, with one qualification, the Builder's variations claim against the Owner was not enforceable as it arose out of oral variations to the contract. The appellants argued that the Home Building Act required any such variations to be agreed in writing between the Builder and the Owner and that save for one variation valued at $90,000, that did not occur. The appellants then argued that they would not have been liable under the guarantees that they allegedly promised to give for any amounts for which the Owner was not liable.

102 As the parties agreed that the Home Building Act was applicable to the subject contract, the first question that arises is whether that Act requires variations as to the work to be performed under the contract to be in writing.

103 Relevant provisions of the Act are as follows:

" 6 Application of requirements for contracts

(1) Sections 7-7E apply to a contract under which the holder of a contractor licence undertakes:

(a) to do, in person, or by others, any residential building work or any specialist work, or

(b) to vary any such undertaking to do residential building work or any specialist work or the way in which any such work is to be done.

...

7 Form of contracts

(1) A contract must be in writing and be dated and signed by or on behalf of each of the parties to it.

(2) A contract must contain:

(a) the names of the parties, including the name of the holder of the contractor licence shown on the contractor licence, and

(b) the number of the contractor licence, and

(c) a sufficient description of the work to which the contract relates, and

...

(3) The contract must comply with any requirements of the regulations.

(4) If the contract price is known, it must be stated in a prominent position on the first page of the contract.

(5) If the contract price is not known or may be varied under the contract, the contract must contain a warning to that effect and an explanation of the effect of the provision allowing variation of the price. The warning and explanation must be placed next to the price if the price is known.

...

7A Offence

A person must not contract to do work under a contract unless the requirements of section 7 in relation to the contract are complied with.

...

10 Enforceability of contracts and other rights

(1) A person who contracts to do any residential building work, or any specialist work, and who so contracts :

...

(b) under a contract to which the requirements of section 7 apply that is not in writing or that does not have sufficient description of the work to which it relates (not being a contract entered into in the circumstances described in section 6 (2)), or

...

is not entitled to damages or to enforce any other remedy in respect of a breach of the contract committed by any other party to the contract, and the contract is unenforceable by the person who contracted to do the work. However, the person is liable for damages and subject to any other remedy in respect of a breach of the contract committed by the person.

...

11 Other rights not affected

This Division does not affect any right or remedy that a person (other than the person who contracts to do the work) may have apart from this Act."

104 At the hearing of the appeal reference was made to the Home Building Regulation 2004 which, subject to exceptions, requires residential building contracts to contain a provision that any variation of a home building contract must be in writing signed by the parties (Clause 12 of the Regulation and Clause 1 of Schedule 2). An exception is made in the case of "developers" as defined in s 3A of the Home Building Act (see Clauses 13 and 16 of the Regulation). As the Owner appears to fall within that definition, the Regulation is not presently relevant in this respect. Nevertheless I note in passing that the Second Building Contract did contain such a provision, in the following terms:

"17.1 A variation occurs if:

(a) this contract deems a variation ; or

(b) the builder and the owner agree in writing to a variation ".

105 Section 6(1)(b) of the Act in my view clearly indicates that the requirement of writing imposed by s 7 applies to variations, as here, of the ambit of the residential building work. The breadth of operation of s 6(1)(b) is indicated by the fact that it is expressed to apply to the variation of "any such undertaking to do residential building work ... or the way in which any such work is to be done" and not simply to the variation of the contract under which such undertaking is given. This supports the view that the subsection operates on an agreement to change the nature or quantum of building work even if that is made under a provision of the building contract dealing with variations in the work and does not involve a variation of the building contract itself. To construe the subsection otherwise would be to render it largely inoperative.

106 In these circumstances the Builder can have no claim in contract against the Owner in respect of the oral variations to the building work. Nevertheless it is likely to have (or have had) a quantum meruit claim to recover the value of the work done in pursuance of the oral variations ( Pavey & Matthews Pty Ltd v Paul [1987] HCA 5; (1987) 162 CLR 221). A claim of that type is one to restitution or one based on unjust enrichment and is not based upon the existence of an implied contract ( Lumbers v W Cook Builders Pty Ltd [2008] HCA 27; (2008) 232 CLR 635 at [83] - [84]).

107 The next question is whether the unenforceability against the Owner of the Builder's claim in respect of the oral variations precludes its enforcement against the appellants as guarantors.

108 As noted earlier the primary judge found that it did not, because the claim against the appellants was a different one from that against the Owner, relying upon different causes of action (see Judgment [120] quoted in [51] above). This reasoning did not in my view answer the appellants' point. Rather, consideration must be given to the terms of the guarantee that would have been applicable. The appellants did not in fact sign a guarantee but the primary judge assessed damages upon the basis that their promises were to execute a guarantee in the form contained in the Second Building Contract. As noted earlier that relevantly provided that the guarantor:

"guarantees to the builder the payment of all monies agreed to be paid by the owner under this contract ".

109 The Builder submitted in this context that in Update Constructions Pty Ltd v Rozelle Child Care Centre Ltd (1990) 20 NSWLR 251 this Court treated work done pursuant to oral variations as work "within the contract" notwithstanding that the contract required variations to be in writing. That was not however a contract to which the Home Building Act applied, and accordingly the view was available that the proprietor was estopped by the conduct of its agent from relying upon the requirement in the contract for writing.

110 In the present case the requirement of writing was statutory and could not be overcome by the agreement or conduct of the parties to the building contract. It was open to the parties to conduct themselves in such a way as to give rise to a restitutionary claim by the Builder against the Owner but the Owner's liability under such a claim was not a liability under the Second Building Contract and thus fell outside the terms of the putative guarantee.

111 The Builder submitted that to permit the appellants to escape responsibility for the value of the oral variations in this fashion would be to permit them to use the Home Building Act as an "instrument of fraud" (Appeal Transcript, 19 July 2011 p 52.41 and 55.42). The Builder referred in this contention to the well known principles stated in Meagher, Gummow and Lehane's Equity: Doctrine and Remedies , 4 th ed (2002) Butterworths LexisNexis at [12-100].

112 I do not agree with the Builder's submission. The primary judge treated the form of guarantee contained in the Second Building Contract as defining the extent of the appellants' responsibility. His Honour did not find that they had at any stage promised to give a broader guarantee. The primary judge's findings in Judgment [121] (see [52] above) did not extend that far, nor do I consider that there would have been any basis in the evidence for them to do so. Certainly the appellants' participation in the oral variation agreements would have precluded them asserting as putative guarantors that any variations to the building contract (if they had validly occurred) were made without their knowledge and consent. However that does not mean that the appellants agreed to extend their putative guarantees to cover liabilities of the Owner arising outside the Second Building Contract. Nor does it mean that the appellants made representations that estopped them from relying on the limited ambit of the form of guarantee.

113 As the Builder's claim under the Second Building Contract is not enforceable (except for the amount of $90,000 referable to the written variation and $147,159 in respect of part of the original contract sum unpaid) against the Owner, it would not have been enforceable against the appellants if they had given guarantees as they allegedly promised to do. In consequence the claim, to that extent, cannot form part of the Builder's loss resulting from breach of the alleged promises. The remission of the Builder's contract claim should accordingly only relate to the total amount of $237,159.

114 I add that I do not accept the appellants' alternative submission that the Home Building Act , in precluding a person in the position of the Builder from enforcing "any other remedy in respect of a breach of the contract committed by any other party to the contract" (s 10), would relevantly have precluded enforcement of guarantees against the appellants, if they had given them. The enforcement of a guarantee is not in my view the enforcement of a "remedy" of the type referred to in that section. To my mind the section is concerned with remedies against the person for whom the residential building work is done (that is, the other party to the building contract), not a person who is not a party to that contract, even if that person has assumed some contractual obligations (for example by way of guarantee) as a result of signing a document that happens to form part of the same documents as constitute the residential building contract.

QUANTUM ISSUES

115 In light of my conclusions above, the alternative reasons that the appellants gave for contending that they were not liable for damages referable to the value of the oral variations do not arise. It is not appropriate that I nevertheless proceed to consider those arguments as this Court does not have the benefit of any detailed analysis of the arguments by the primary judge. As noted above, the primary judge dealt with them only in a compendious fashion (Judgment [122] - [124] referred to at [53] above).

ORDERS

116 At the hearing of the appeal the parties requested that in the event that neither party had complete success on the appeal they be given the opportunity to make submissions on costs. I accordingly allow for that in the following orders that I propose be made:

(1) Appeal allowed in part.

(2) Set aside orders 1 to 5 inclusive made at first instance on 10 June 2010.

(3) Remit the proceedings to the Common Law Division, to be heard by a judge other than the primary judge, to determine the respondent's contract claim but only insofar as it claims damages of $147,159 in respect of part of the original contract sum unpaid and $90,000 arising out of an alleged written variation of the building contract entered into in November 2004, and to make consequential orders.

(4) Direct that:

(a) within seven days of the date of this judgment the appellants file and serve written submissions as to the costs orders that should be made in respect of the proceedings at first instance and on appeal;

(b) the respondent file and serve its submissions as to those orders within seven days thereafter; and

(c) the appellants file and serve any reply within a further seven days.

117 SACKVILLE AJA : I agree with the conclusions expressed by Macfarlan JA at [39] (a), (b), (c), (d) and (e) and with his Honour's reasons for those conclusions.

118 I also agree that the Builder's claim should be remitted to the Common Law Division and that the remitter should be limited to determining whether the appellants are liable insofar as it concerns the claim for variations, to the Builder in the amount of $90,000. However, my reasons for reaching this conclusion differ from those of his Honour. In my respectful opinion, the conclusion follows from the terms of the guarantee that the appellants (on the Builder's case) agreed to provide and from the terms of the Second Building Agreement. I reach this conclusion independently of the operation of the Home Building Act 1989.

119 The Builder claims damages for breach of an agreement by the appellants to execute a guarantee in the form annexed to the Second Building Contract. As Macfarlan JA has pointed out (at [48]), this form of guarantee, if executed, would have guaranteed to the Builder:

"the payment of all monies agreed to be paid by the owner under this contract '.

120 In my opinion, any monies that the Builder might have been entitled to recover from the Owner by reason of the oral variations of the Second Building Agreement cannot be characterised as " monies agreed to be paid by the owner under the contract" for the purposes of the alleged agreement between the Builder and the appellants.

121 The Second Building Contract, cl 17.1 provided that:

"A variation occurs if:

(a) this contract deems a variation ; or

(b) the builder and the owner agree in writing to a variation ."

Clause 17 established a regime requiring the Builder to respond in writing to any request by the Owner for a variation and requiring the Owner to accept in writing any offer by the Builder to perform the requested work (cl 17.2-17.4). The price of a " variation " was due and payable at the next progress payment after it was carried out (cl 17.6).

122 As Macfarlan JA has pointed out (at [109]), the Builder cited Update Constructions Pty Ltd v Rozelle Child Care Centre Ltd (1990) 20 NSWLR 251, as authority for the proposition that work done by a Builder pursuant to an oral variation of a contract may constitute work " within the contract ", even if the contract requires variations to be in writing. However, Update Contractions does not decide that any liability of the Owner to pay monies to the Builder by reason of the oral variations to the Second Building Contract can be described as a liability to pay " monies agreed to be paid by the owner under this contract".

123 In Update Constructions, the building contract obliged the builder to comply with certain requirements imposed by public authorities. If compliance necessitated a variation from the contract drawings or specifications, the builder had to give the proprietor written notice specifying the reasons for the variation. If the builder followed the contractual procedures, the extra costs occasioned by the compliance measures were payable by the proprietor (see at 273-274, per Priestley JA, with whom Samuels JA agreed). In fact, the builder did not follow the prescribed contractual procedures, but nonetheless sought to recover from the proprietor the additional costs of complying with the regularity requirements.

124 Priestley JA addressed whether the additional work performed by the builder was to be regarded as " outside the contract ". He undertook this inquiry in order to determine whether the builder's claim fell within the principles stated by the High Court in Liebe v Molloy (1906) 4 CLR 347. In that case, the High Court held (as Priestley JA explained, at 272):

"that if the proper inferences from the facts were (i) that the [owner] had actual knowledge of the extra works as they were being done, (ii) knew that they were outside the contract and (iii) knew that the builder expected to be paid for them as extras, then a contract to pay for them could properly be implied. However, if the fact was that the owner did not know the particular works were extras or did not know or believe that the builder expected to be paid for them, then it would be proper to conclude that no contract to pay for them should be implied".

125 Priestley JA held that the work done by the builder in Update Constructions was not " outside the contract " for the purposes of the principle in Liebe v Molloy. The critical point was that the contract in Update Constructions obliged the builder to do the compliance work; it did not have the option of declining to perform this work (at 274). The contractual procedure was designed to give the owner an opportunity to ascertain whether the variation was really required and to discuss the issue with the builder. If the builder did not follow the contractual procedure it could not claim the compliance costs under the principle in Liebe v Molloy, since that principle related to an implied contract to perform work outside the original building contract.

126 Priestley JA pointed out (at 274) that the facts in Update Constructions were quite different from those in Liebe v Molloy :

"The extra work there was not done because of the requirement of any public authority but, so far as can be seen from the report, solely because the proprietor's architect ordered it. On this basis it was work not in any sense having to be done to complete the contract, it was in every sense additional to what was necessary to be done to carry out the contract work for the contract price."

127 Priestley JA's reasoning in Update Constructions demonstrates that if an owner and a builder orally agree to variations to a contract, but the contract requires all variations to be in writing, any additional work performed by the builder is not work " under the contract " for the purposes of the Liebe v Molloy principle. If the requirements stated in Liebe v Molloy are satisfied, the builder may have a contractual claim against the owner. However, that claim would not be under the original contract unless perhaps the owner was estopped from denying that the work was performed under that contract. ( Update Constructions itself was decided on the basis of estoppel.)

128 In the present case, it was not suggested that the Second Building Contract required the Builder to carry out the work the subject of the oral variations. That work, unlike the work in Update Constructions, was additional to the work the Builder was obliged to perform by the terms of the Second Building Contract. Since the Second Building Contract provided that any variations had to be in writing, the additional work was " outside the contract ".

129 The Builder might have had remedies against the Owner to recover the costs of the additional work the subject of the oral variations. But whether those remedies were contractual (on the Liebe v Molloy principle), restitutionary or otherwise, they did not involve enforcing the Second Building Contract against the Owner. Any monies due by the Owner due to the Builder in respect of the additional work could not be described as monies agreed to be paid by the Owner under the Second Building Contract. It follows that the guarantee which, according to the Builder, the appellants agreed to provide would not have covered payments due by the Owner to the Builder for additional work performed pursuant to the oral variations.

130 Accordingly, even if the Builder succeeds in establishing that the appellant agreed to provide a guarantee in the form attached to the Second Building Contract, the damages for any breach could not include the losses attributable to a failure by the Owner to pay monies due to the Builder in respect of work performed pursuant to the oral variations to the Second Building Contract.

131 I do not think it is necessary to determine whether the same result would be reached on the basis of the Home Building Act. I would prefer to leave that question to a case where it has to be decided.

132 I agree with the orders proposed by Macfarlan JA.

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Decision last updated: 08 September 2011