Court of Appeal Supreme Court New South Wales

• Medium Neutral Citation: Cordon Investments Pty Ltd v Lesdor Properties Pty Ltd [2012] NSWCA 184
• Hearing dates: 1 & 2 February 2012
• Decision date: 21 June 2012
• Before: Bathurst CJ at [1]; Macfarlan JA at [233]; Meagher JA at [234]

Decision

1. Appeal dismissed with costs.

2. Cross-appeal dismissed with costs.

[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: CONTRACTS - building and construction - clause requiring execution of strata plan - construction - whether obligation arose only on completion of works - meaning of 'completion' - whether requiring only 'practical completion'; CONTRACTS - building and construction - entire contract - whether doctrine of substantial performance applicable -whether obligations substantially performed; PRACTICE AND PROCEDURE - references - adoption of referee's report - whether referee erred in construction of contract; CONTRACTS - waiver - forbearance abandonment and election - whether taking possession of incomplete building works constituted waiver of right to completion; CONTRACTS - construction - implied obligation of good faith - content of obligation - whether obligation capable of altering express contractual terms - whether breach of obligation.; CONTRACTS - termination - repudiation - whether renunciation of contract; RESTITUTION - availability of recovery on quantum meruit - whether action for damages by innocent party enlivens claim by defaulting party for recovery on quantum meruit; CONTRACTS - building and construction - damages - measure of damages - Bellgrove v Elridge - Tabcorp Holdings Ltd v Bowen Investments - whether rectification work reasonable - relevance of probability work would not be carried out.
• Cases Cited: ACN 002 804 702 (formerly Brooks Building) v McDonald [2009] NSWSC 610; Agricultural & Rural Finance Pty Limited v Gardiner [2008] HCA 57; (2008) 238 CLR 570; Alcatel Australia Limited v Scarcella (1998) 44 NSWLR 349; Australian Broadcasting Commission v Australasian Performing Right Association [1973] HCA 36; (1973) 129 CLR 99; Baltic Shipping Company v Dillon (1993) 176 CLR 344; Bellgrove v Eldridge [1954] HCA 36; (1954) 90 CLR 613; Bolton v Mahadeva [1972] 1 WLR 1009; Buildev Development Pty Limited v PIC Sales Pty Limited (2004) 11 BPR 21-445; Burger King Corporation v Hungry Jack's Pty Limited [2001] NSWCA 187; (2001) 69 NSWLR 558; Central Coast Leagues Club Ltd v Gosford City Council (NSWSC, 9 June 1998, unreported); Chocolate Factory Apartments v Westpoint Finance & Ors [2005] NSWSC 784; Codelfa Construction Pty Limited v State Rail Authority of NSW [1982] HCA 24; (1982) 149 CLR 337; Connor v Stainton (1924) 27 WALR 72; Decro-Wall International SA v Practitioners In Marketing Ltd [1971] 1 WLR 361; Friend v Brooker [2009] HCA 21; (2009) 239 CLR 129; GEC Marconi Systems Pty Limited v BHP Information Technology Pty Limited [2003] FCA 50; 128 FCR 1; Godfrey Constructions Ltd v Kanangra Park Pty Limited [1972] HCA 36; (1972) 128 CLR 529; H. Dakin & Co. v Lee [1916] 1 KB 566; Highmist Pty Limited v Tricare Ltd [2005] QCA 357; Hoenig v Isaacs [1952] 2 All ER 176; Iezzi Constructions Pty Limited v Watkins Pacific (Qld) Pty Limited [1995] 2 Qd R 350; International Air Transport Association v Ansett Australia Holdings Ltd [2008] HCA 3; (2008) 234 CLR 151; Koompahtoo Local Aboriginal Land Council v Sanpine Pty Limited [2007] HCA 61; (2007) 233 CLR 115; Laurinda Pty Limited v Capalaba Park Shopping Centre Pty Limited [1989] HCA 23; (1989) 166 CLR 623; Lumbers v W Cook Builders Pty Ltd (In liquidation) [2008] HCA 27; (2008) 232 CLR 635; Luna Park (NSW) Ltd v Tramways Advertising Pty Ltd [1938] HCA 66; (1938) 61 CLR 286; Mackay v Dick (1880-1881) 6 LR App Cas 251; Macquarie International Health Clinic Pty Limited v Sydney South West Area Health Service [2010] NSWCA 268; McDonald v Dennys Lascelles Limited [1993] HCA 25; (1933) 48 CLR 457; Mertens v Home Freeholds Company [1921] 2 KB 526; Pacific Carriers Ltd v BNP Paribas (2004) 218 CLR 451; Pavey & Matthews Pty Limited v Paul (1987) 162 CLR 221; Pierce Bell Sales Pty Limited v Frazer [1973] HCA 13; (1973) 130 CLR 575; Renard Constructions (ME) Pty Limited v Minister for Public Works (1992) 26 NSWLR 234; Robinson v Harman (1848) 1 Exch 850; Royal Botanic Gardens & Domain Trust v South Sydney City Council [2002] HCA 5; (2002) 240 CLR 45; Sargent v ASL Developments Limited (1974) 131 CLR 634; Service Station Association Pty Limited v Berg Bennett & Associates Pty Limited (1993) 45 FCR 84; Shepherd v Felt & Textiles of Australia Ltd (1931) 45 CLR 359; Sopov v Kane Constructions Pty Limited (No 2) [2009] VSCA 141; (2009) 24 VR 510; Sumptor v Hedges [1898] 1 QB 673; Tabcorp Holdings Ltd v Bowen Investments Pty Limited [2009] HCA 8; (2009) 236 CLR 272; Tan Hung Nguyen v Luxury Design Homes Pty Ltd [2004] NSWCA 17; Toll (FGCT) Pty Limited v Alphafarm Pty Limited [2004] HCA 52; (2004) 219 CLR 165; Tricontinental Corporation Ltd v HDFI Ltd (1990) 21 NSWLR 689; United Group Rail Services Ltd v Rail Corporation (NSW) [2009] NSWCA 177; (2009) 74 NSWLR 618; Vodafone Pacific Limited v Mobile Innovations Ltd [2004] NSWCA 59; Walter Construction Ltd v Walker Corporation Ltd [2001] NSWSC 283; Wenham v Ella [1972] HCA 43; (1972) 127 CLR 454; Western Export Services Inc v Jireh International Pty Limited [2011] HCA 45; (2011) 282 ALR 604; Westpoint Management Ltd v Chocolate Factory Apartments Ltd [2007] NSWCA 253; Williamson v Murdoch (1912) 14 WALR 54
• Texts Cited: A F Mason "Contract, Good Faith and Equitable Standards in Fair Dealing" (2000) 116 LQR 66; Hudson's Building and Engineering Contracts 11th ed (1995) Street & Maxwell; Hudson's Building and Engineering Contracts 12th ed (2010) Street & Maxwell
• Category: Principal judgment
• Parties: Cordon Investments Pty Ltd (First Appellant/First Cross Respondent); Ghassan Ghosn (Second Appellant/Second Cross Respondent); Habib Ghosn (Third Appellant/Third Cross Respondent); Lesdor Properties Pty Ltd (Respondent/Cross Appellant)
• Representation: Counsel; F Corsaro SC and B Bradley (Appellants/Cross Respondents); T Hale SC and M White (Respondent/Cross Appellant); Solicitors; CCS Legal Pty Ltd (Appellants/Cross Respondents); Solari & Stock (Respondent/Cross Appellant)
• File Number(s): 2006/26868-10

Decision under appeal

• Citation: [2010] NSWSC 1073
• Date of Decision: 2010-10-29 00:00:00
• Before: McDougall J
• File Number(s): 2006/268618

Judgment

1 BATHURST CJ: At the time of the events giving rise to the proceedings, the first appellant ("Cordon") was a property developer and commercial builder. The second and third appellants ("the guarantors") were directors of Cordon.

2 At the relevant time the respondent ("Lesdor") was the registered proprietor of premises known as 621-635 Kingsway Miranda ("the property").

3 By a Deed dated 2 September 2002 as varied by Deeds dated 19 August 2003, 19 November 2003 and 18 December 2003 ("the Agreement"), Cordon and Lesdor entered into a joint venture agreement to develop the property. The relevant provisions of the Agreement are set out below. By cl 32B of the Agreement the guarantors agreed to indemnify Lesdor against any loss suffered by it as a result of default by Cordon under the terms of the Agreement.

4 Disputes arose between the parties and on 7 August 2006 Lesdor purported to terminate the Agreement. Cordon asserted this amounted to repudiation by Lesdor and brought the proceedings the subject of this appeal seeking damages for the losses which it claimed to have suffered as a result. Lesdor denied that it had wrongfully repudiated the Agreement saying it was entitled to terminate by virtue of Cordon's default. It cross-claimed against Cordon and the guarantors seeking damages it claimed to have suffered as a result of such default.

5 The proceedings raised many issues for determination by the primary judge. In a careful and comprehensive judgment he found the Lesdor was entitled to terminate the Agreement and as a consequence he dismissed Cordon's claim: Cordon v Lesdor [2010] NSWSC 1073. He also found that Lesdor had not suffered the bulk of the damage it alleged to flow from Cordon's default. He summarised his conclusions as follows (at [371]):

"In summary, I have concluded that:

(1)Cordon breached the deed, and repudiated its obligations thereunder, both in relation to completion and in relation to the refinancing of the NAB facility;

(2)Lesdor was entitled to, and did, accept that repudiation as terminating the deed and discharging it from further performance;

(3)Lesdor did not, thereby, itself repudiate the deed; nor did it breach the deed in the way that it dealt with NAB;

(4)Lesdor's exercise of its right to terminate was not vitiated by failure to comply with any applicable duty of good faith or reasonableness;

(5)Lesdor breached the IMA, but this results in no loss to Cordon;

(6)Cordon has no entitlement to be paid on a restitutionary or quantum meruit basis;

(7)Lesdor is entitled to damages, but it should have mitigated its loss by selling the residual lots within 12 months after the date of termination of the deed;

(8)had Lesdor acted properly to mitigate its loss, there would have been sufficient net proceeds of sale to discharge entirely the amount borrowed from Macquarie to pay out the NAB facility, and a probable surplus of at least $330,000.00;

(9)Cordon has no entitlement as to damages; and

(10)the referee's report should be adopted without qualification."

6 In the result the orders ultimately made were that each of the claim and cross-claim be dismissed with costs, the costs to be set-off.

7 By its appeal Cordon challenged the conclusions referred to in pars [371] (1)-(4) inclusive, [371] (6), [371] (9) and [371] (10) of the judgment of the primary judge. Its challenge to the conclusion referred to in par [371] (5) was abandoned at the outset of the hearing of the appeal. By notice of cross-appeal Lesdor challenged the finding of the primary judge that it was precluded from claiming damages for the cost of rectification of defects on that part of the property which became common property following registration of a strata plan (the "Strata Plan") over the project.

Overview of proceedings

8 This overview is based on the findings by the primary judge in pars [22]-[25] and [46]-[65] of his judgment. Those findings were accepted by each of the parties subject to Cordon disputing the manner in which Lesdor came into possession of the newly developed commercial offices.

9 The nature of the joint venture as ultimately resolved upon is set out in cl 2(a) of the Agreement as varied by the Deed of Variation dated 19 August 2003. This clause as varied provided as follows:

"Clause 2(a) - the words contained therein shall be deemed to be deleted and replaced with the following words -

'The parties acknowledge that it is the intention of them to provide two floors of commercial offices and one level of car parking on the lower level and a Penthouse residential Unit No. 25 with double garage to be side by side (on the upper floor of parking, the unit to incorporate the roof area above the unit and a staircase (for which the Council approval must be received no later than the time that the staircase is to be constructed) from the living room of the Unit to the roof terrace over along with a small room at the roof level to provide weather-proof entry/exit (Lesdor at its cost and expense is to seek such approval from Sutherland Shire Council) and to provide additional twenty-seven (27) residential units of which Lesdor is to retain Unit 20 and double garage to be side by side and Unit 21 with one lock up garage space and to provide for the benefit of Cordon the remaining twenty-five (25) residential units and one level of residential carparking on the upper level of the carparking (excluding garages for the Penthouse residential unit and Units 20 and 21) and to refurbish the existing commercial building for Lesdor as part of the building works.'"

10 It will be necessary to set out a number of the provisions of the Agreement in detail later in this judgment but for present purposes the structure of the Agreement may be described as follows:

(a)Cordon was to be responsible for the costs of construction of the project, being reimbursed for such costs and a profit margin out of the proceeds of sale of the 25 units to which Cordon was entitled under the Deed.

(b)The project would be financed on an ongoing basis by a loan from a lending institution obtained by Cordon. The loan would be drawn down from time to time to meet the ongoing costs of construction and would be paid out of the proceeds of the sale of the units to which Cordon was entitled.

(c)Lesdor was entitled to retain the balance of the property.

11 It seems that at some stage prior to the entry into the Agreement it was envisaged that a building contract would be entered into. However this was not done.

12 As contemplated by the Agreement a loan facility was arranged in the sum of $8,252,000 with the National Australia Bank ("the NAB facility"). The borrower was Cordon, whilst Lesdor guaranteed Cordon's obligation under the facility and gave a mortgage over the property to secure its obligations as guarantor.

13 Approvals to the Building Works were given by Sutherland Shire Council on 17 December 2003, 19 March 2004 and 15 July 2004. Marketing of the Residual Lots (the lots to which Cordon was to have the benefit) commenced in approximately June 2005 and from about October 2005 some contracts for the sale of those lots were exchanged.

14 On 1 December 2005 the Sutherland Shire Council issued an occupation certificate and completion report. At that stage Cordon gave Lesdor possession of the two new floors of commercial offices, one level of the new car parking space and residential lots 20, 21 and 25 with their associated car parking spaces. The existing commercial premises remained in Lesdor's possession as had been the case since the Agreement was made. As noted above, the circumstances by which Lesdor came into possession of the buildings were the subject of dispute between the parties. This issue is addressed at pars [113]-[125] below.

15 From January 2006 there were discussions concerning claims by Lesdor that the works were incomplete, defective and non-conforming with the relevant plans and specifications (the "Plans and Specifications"). On 3 February 2006 Lesdor's solicitor gave Cordon 28 days notice to rectify the alleged defective works threatening that if this was not done Lesdor would terminate the Deed and sue for damages.

16 On 15 February 2006 Sutherland Shire Council approved the Strata Plan for all lots. Lesdor was requested by Cordon to sign the Strata Plan but it declined to do so until the works had been completed in accordance with the Plans and Specifications and in a proper and workmanlike manner. Lesdor's signature was necessary to enable the sale of the units to be completed and for Cordon to thereby receive its contractual consideration. Negotiations as to the appropriate amount to be retained by Lesdor in return for its signature of the Strata Plan pending resolution of the issue of defective workmanship proved unsuccessful.

17 On 12 April 2006 Cordon commenced the proceedings the subject of the appeal. It sought on an interlocutory basis an order by way of specific performance that Lesdor execute the Strata Plan and accompanying instruments. That application was dismissed by Barrett J (as his Honour then was) on 5 May 2006: Cordon Investments Pty Ltd v Lesdor Properties Pty Ltd [2006] NSWSC 481. Barrett J took the view that the concept of completion in the Agreement was "due and entire accomplishment of each and every step appearing from the plans and specifications" (at [10]) and that the work did not in all respects conform with the Plans and Specifications.

18 By the end of July 2006 the NAB facility had fallen due and the bank was threatening to appoint a receiver over the property to enforce its rights under the mortgage. On 1 August 2006 NAB terminated the facility and made demand on the guarantors. Thereafter Lesdor repaid the NAB facility out of a loan of $9 million granted to it and two associated companies by Macquarie Bank Limited.

19 On 8 August 2006 Lesdor gave a Notice of Termination of the Agreement relying upon alleged repudiation by Cordon.

The relevant provisions of the Agreement

20 I have set out above cl 2(a) of the Agreement. In addition, the following provisions are relevant to the determination of the issues raised in the proceedings.

21 Clause 1 of the Agreement contained the following definitions:

"'Approvals' the Development Approval and the Building Approval."

"'Building' means the strata residential and commercial buildings to be constructed on the Land in accordance with Development Approval, Building Approval, the Plans and Specifications and includes any addition, alteration, modification or extension to that Building and each item of plant or equipment, fixture, fitting or chattel annexed to the Building or on the Land."

"'Building Approval' means the approval to be obtained by Cordon from the Council for the construction of the Building and includes any Construction Certificate issued by Council."

"'Building Works' means the construction work comprised in the Plans and Specifications necessary to construct the Building on the Land and to refurbish the existing building."

"'Development Approval' means the approval of a mixed development building comprising residential units and commercial units and incorporating two levels of car parking and the refurbishment of the existing building and to be issued by the Council and to built [sic] on the Land."

"'Loan' shall mean the financial accommodation provided by the Lending institution to Cordon for the construction of the Project and for payment of all fees incidental thereto and to be secured by first registered mortgage on the Land. The loan to be for a sum to be approved of by the lending institution for the purpose of the project and to be drawn down at such times and for such amounts as approved by a Quantity Surveyor acceptable to the lending institution. Such loan not to incorporate a profit margin for Cordon (whether by way of a Builders profit margin or otherwise). Lesdor will sign such documents and do such things as are required of it by the Lending Institution."

"'Strata Plan' means the Strata Plan which will be created upon registration at LPINSW prepared by Cordon's surveyor upon completion of the Building Works."

22 The expressions "Plans and Specifications" and "Residual Lots" were defined in cl 1 of the Agreement as amended by the Deed of Variation of 19 August 2003 in the following terms:

"Plans and Specifications means the plans and specifications of the Building the subject of the Development Approval and Building Approval as lodged with Sutherland Shire Council and a copy of which has been inspected by the parties and initialled by them for identification and lodged with the solicitors for Lesdor for the benefit of the parties and for reference to by the parties as required."

"Residual Lots shall mean all the residual Lots and residential carparking (with the exception of the penthouse Unit No 25 with a double garage to be side by side and Unit No 20 with a double garage to be side by side and Unit No 21 with one lockup garage) which shall comprise of twenty five (25) residential units and garages in the Strata Plan."

23 I have set out cl 2(a) as amended above. Clause 2(b) of the Agreement, which dealt with Cordon's obligation to complete the project and Lesdor's reciprocal obligations, provided as follows:

"2(b)(i)In consideration of Cordon undertaking the Building Works upon the Land in accordance with the Plans and Specifications, Lesdor shall subject to these terms and conditions, direct the purchasers of the Residual Lots to pay to Cordon or as it shall in writing direct the whole of the proceeds of sale in respect of the Residual Lots.

(ii)Lesdor shall not (other than as provided in this deed) assign, Mortgage or charge their interest in the Land or this Deed without the prior written consent of Cordon.

(iii)Cordon shall borrow such funds (hereinafter referred to as 'the borrowed funds') as are necessary to meet the costs of construction for and to complete the building works and shall be liable for repayment of such borrowed funds.

(iv)That Lesdor will provide by way of guarantee and security for the borrowed funds to be obtained by Cordon a first registered mortgage over the land to the Lending Institution on such reasonable terms and conditions as it shall require."

24 Clause 5.1(a) of the Agreement imposed an obligation on Cordon to complete the work in accordance with the plans and specifications. So far as relevant cl 5.1 provided as follows:

"5.1Cordon which is a licensed builder will carry out the Building Works on the Land at its own cost and expense and subject to the following:-

(a)The works will be completed in accordance with the plans and specifications."

25 Clause 7 of the Agreement required Cordon to comply with legislation relevant to the development of the property. This clause provided as follows:

"7.Cordon shall comply with all requirements and conditions of all legislation as may be required by any Government Department or Statutory Authority which has jurisdiction over the Building Works and are in force at the time of execution of the Building Works and Lesdor shall give all such notices as may be required to comply therewith to Cordon and to competent authorities and shall indemnify and keep indemnified Lesdor in respect of all matters referred to in this Clause."

26 Clause 11 required Cordon to complete the works within the time specified in the contract. The clause provided as follows:

"11.Cordon shall diligently proceed with and complete the Building Works in accordance with the Approvals in a good and workmanlike manner within twenty (20) months of the Commencement Date and supply all materials in accordance with good building practice and comply with all relevant Australian Building Standards."

27 Clause 13 contained various provisions relating to the ongoing development. It provided as follows:

"13.1In consideration of the covenants on the part of Cordon to carry out or to arrange to have carried out the Building Works hereunder Lesdor hereby irrevocably appoints Cordon as their attorney for the following purposes:

(i)Subject to Clause 3.1, to lodge with the Council, development and building applications in respect of the Building Works and any plan of subdivision, Strata Plan and accompanying instrument relative to the Land from the Council.

(ii)To obtain the release of the Development Approval, Building Approval, any plan of subdivision, Strata Plan and any accompanying instrument relative to the land from the Council.

(iii)To arrange the promotion of the sale of the residual lots on the Strata Plan and to appoint Semken Real Estate or its conjunction agent to assist in such promotion and marketing.

(iv)To sign any Contract for the sale of the residual lots at such price and containing such terms and conditions as Cordon shall in its absolute discretion determine and to sign any transfer for the conveyance of the title of any of the residual lots to the purchasers thereof and to arrange discharge of any mortgage held by the Lending Institution over the Land and to do all such acts, matters and things as may be necessary for and incidental to the sale of the residual lots in the Strata Plan.

(v)To appoint solicitors or such other professionals as Cordon shall deem fit to act for Lesdor in relation to the sale and conveyance of the Residual Lots.

(vi)That the Power of Attorney is deemed revoked forthwith upon the completion of the sale of the last residual Lot.

13.2The Power of Attorney hereby conferred on Cordon shall be irrevocable and may be relied upon by any third person dealing with Cordon.

13.3Notwithstanding the preceding provisions of this clause, Lesdor shall execute any plan of subdivision, the Strata Plan any accompanying instruments and such Contract, Contracts, Transfer or Transfers for the conveyance of the title of the residual lots to such persons or corporation as Cordon shall nominate and shall deliver such plans, instruments and such Contract, Contracts, Transfer or Transfers to Cordon forthwith upon request.

13.4If required by Cordon at any time before completion of this Agreement, Lesdor shall execute a Power of Attorney in favour of Cordon in a form consistent with the form referred to in the Conveyancing Act and containing the powers referred to in the preceding provisions of this clause 13."

28 Clause 15 to the Agreement imposed an obligation upon Cordon to register the Strata Plan. It provided as follows:

"15.Cordon shall at its own expense use its best endeavours to have the Strata Plan approved by the Council and registered at LPINSW as expeditiously as possible following completion of the Building Works and Lesdor shall do all such things as shall be reasonably required of it to give effect to this."

29 Clause 21 of the Agreement was a defects liability provision. It provided as follows:

"21.Any defects or other fault which may appear and be notified in writing to Cordon within a period of:

(a)Three (3) months from the date upon which Lesdor shall have taken possession of the refurbished existing building and the commercial offices and the one level of car parking or within three (3) months from the date on which Cordon shall have notified Lesdor that such are available for occupation (whichever is the earlier);

(b)Three (3) months from the date of completion of any sale of a residential unit in the project by Lesdor for the occupation as a residence of any residential unit in the project provided however that the obligations in this regard shall cease after twelve (12) months after the registration of the Strata Plan.

Due to any materials or workmanship not being in accordance with this Deed or arising from faulty workmanship or defective materials shall be rectified and made good by Cordon at its own cost PROVIDED THAT this shall not apply to minor settlement cracks or shrinkage usually associated with building works of this type."

30 Clause 34 of the Agreement as amended by Deed of Variation made on 19 August 2003, provided that Semken Real Estate was to be the exclusive selling agent for the residual lots and that all of the residual lots were to be put on the market for sale before or at the date of the registration of the Strata Plan.

The grounds of appeal

31 The grounds of appeal seek to re-agitate most of the issues determined by the primary judge. They can be summarised as follows.

32 Grounds 1 and 2 relate to the construction of cl 13 of the Agreement. Essentially it is contended that Cordon was entitled, by virtue of cl 13.3, to call on Lesdor to deliver a signed Strata Plan in respect of the property at any time or at least after approval of the plan by Sutherland Shire Council. In particular it is contended that the primary judge was incorrect in concluding that the obligation to deliver the Strata Plan did not arise until completion of the works. Cordon contends that as a consequence Lesdor was in breach of its obligation under the Agreement when it declined to sign the Strata Plan presented to it by Cordon.

33 Grounds 3 and 4 of the notice of appeal relate to the construction of cl 15 of the Agreement. Cordon contends that the primary judge was incorrect in determining that 'completion of the Building Works' meant completion in accordance with the plans and specifications, and that he should have determined that completion referred to practical completion or completion to the stage that Council approval to the Strata Plan could be obtained. This is said to have two consequences. First, Lesdor was not entitled to refuse to sign the Strata Plan when presented to it. Second, Cordon was not in breach of the Agreement at the time Lesdor purported to terminate it.

34 Grounds 5-9 of the notice of appeal contend that the primary judge was in error in concluding that the obligation of Cordon to bring the works to completion was a precondition to Lesdor executing the Strata Plan and thereby enabling it to receiving its contractual consideration, namely, the proceeds of sale of the residual lots. Cordon contends that the primary judge should have found the Building Works were substantially performed and that Lesdor had taken the benefit of them.

35 Allied to this contention are three other contentions made by Cordon. The first is that the primary judge erred in finding that the referee who was appointed to inquire into the defects had held that the works were not reasonably fit for completion. The second is that Cordon was denied procedural fairness in relation to the referee's findings or that the primary judge fell into error by adopting pars [421] and [424] of the referee's report in the belief they were not challenged by Cordon. The third relates to certain matters, which the primary judge held constituted defects. In that regard the following contentions are made on the appeal:

(a)The primary judge erred in failing to find that it was impossible to construct the existing commercial building foyer in accordance with the plans and specifications. Cordon submits that in those circumstances he should have found that Cordon had a residual discretion to vary the plans to ensure the works were completed in accordance with the statutory requirements.

(b)The primary judge erred in finding that the referee's opinion was that the parapet over the existing commercial building needed to be raised for safety reasons but rather should have found that the raising of the parapet was of no functional or aesthetic consequence.

(c)The primary judge erred in finding that the awning frame that covered the walkway at the front of the building was required to be hot dipped galvanised as distinct from powder coated.

(d)The primary judge erred in finding that Cordon was required to place gravel on the rooftop save for the area taken up by the installation of a skylight.

36 The matters referred to in the immediately preceding paragraph are the subject of grounds 25-31 of the notice of appeal.

37 Grounds 10 and 11 of the notice of appeal contend that the primary judge should have found that Lesdor demanded and took possession of the works to which it was entitled under the Agreement by February 2006 and in doing so waived any right it had to insist on entire completion of the Building Work prior to performing its obligations under the Agreement.

38 Grounds 12-14 challenge the finding by the primary judge that Lesdor was entitled to terminate the Agreement by virtue of the failure of Cordon to bring the works to completion in accordance with the Plans and Specifications and by virtue of the conduct of Cordon in failing to state unequivocally whether it would or would not pay out the NAB facility when it expired.

39 Grounds 15-18 contend that the primary judge erred in failing to hold that Lesdor breached an implied obligation of good faith in adopting a strategy aimed at thwarting Cordon's right to the benefit of the Residual Lots.

40 Grounds 20-24 assert errors by the primary judge in dealing with the claims of Cordon for damages and a quantum meruit.

41 Having regard to the issues raised, it is convenient to deal first with the issues so far as they relate to the construction of cll 13.3 and 15 of the Agreement, then the issues raised by grounds 5 to 9 as to substantial performance coupled with the challenges to the findings of the primary judge in relation to the defects in the work. It is then convenient to deal with the challenges to the findings of the trial judge on the question of waiver, breach by Lesdor of an implied obligation of good faith and Lesdor's right to terminate. Finally to the extent necessary, I will deal with grounds of appeal so far as they relate to damages and quantum meruit.

Grounds 1-4: The construction of cll 13 and 15 of the Agreement

The findings of the primary judge

42 The primary judge dealt with cl 15 of the Agreement prior to dealing with cl 13. He rejected the contention that the expression 'completion' in that clause meant practical completion, notwithstanding the use of that expression in the specifications. He concluded that the specifications were ancillary to the Agreement and brought into existence by Cordon in pursuance of its design and documentation obligations. The primary judge rejected the contention that a construction of the Agreement which required completion of the work in accordance with the Plans and Specifications produced an absurd or commercially inconvenient result. He stated that the works were wholly within the control of Cordon and it was open to it to perform them to whatever standard of perfection it might have contracted to achieve. He pointed out that under the Agreement, Cordon was to be paid for the actual cost of the work done by it by drawing down from time to time on the NAB facility. He noted that Lesdor was a guarantor of the facility but did not have any retention fund from which it could recoup the costs of repairing defects. Nor did Lesdor have any mechanism, apart from withholding its signature to the Strata Plan, to force Cordon to complete in accordance with the Plans and Specifications. He rejected the submission that cl 21 of the Agreement led to a contrary conclusion, concluding that cl 21 only related to a period of time after Cordon had complied with its contractual obligations (see at [93]). Further, he emphasised that the Agreement provided no standard by which practical completion could be measured (at [95]).

43 The primary judge also concluded that cl 13.3 of the Agreement did not affect the position. He stated that the obligation to deliver documents "forthwith upon request" necessarily implied that the request should be one that Cordon contractually was entitled to make (at [101]). He concluded that as Cordon had no right to request an executed Strata Plan until completion of the works, cl 13.3 had no application.

The submissions of the parties

44 The appellant contended that cl 13.3 imposed an obligation on Lesdor to deliver the documents referred to therein, including the Strata Plan, not on "completion" but "forthwith upon request". It submitted that cl 15 of the Agreement did not expressly relate to the delivery of the Strata Plans, whereas cl 13.3 did. It submitted that cl 13.3 was more than a mere machinery provision, relating as it did not only to an obligation to deliver the Strata Plan, but also to transfers and contracts (presumably of Residual Lots).

45 It also submitted that the word "notwithstanding" in cl 13.3 indicated it was to operate independently of the other provisions in cl 13 and thus stood apart from those provisions which could be regarded as dealing with matters of machinery. On the hearing senior counsel for Cordon submitted that the plans encompassed by cl 13 were any plans necessary to give effect to the joint venture. He submitted that cl 13.3 not cl 15 was the provision dealing with the delivery of plans. He contended that the definition of Strata Plan in cl 1 of the Agreement did not lead to a contrary conclusion, submitting that notwithstanding the terms of the definition, the Strata Plan was in fact created prior to registration so that the definition could not be read literally. He submitted it was evident that the signed plan had to be delivered prior to registration. It was submitted that by failing to execute and deliver the plan, Lesdor prevented Cordon from fulfilling its obligation under cl 15 to have the Strata Plan registered as expeditiously as possible.

46 So far as cl 15 was concerned, Cordon contended that the primary judge was required to give it a business like construction and a sensible commercial operation. It referred to the evidence before the Court of pre-contractual negotiations as relevant to establish the commercial aim and purpose of the Agreement, which it said was for Cordon to complete the Building Works to the stage where it could move forward to get approval and then register the Strata Plan, followed by final completion after a defects liability period. It stated that this could also be ascertained from post-contractual negotiations and in particular the terms of the NAB facility, which were consistent with what it described as "the antecedent commercial aim and purpose to complete the Building Works to a stage of 'practical completion' followed by final completion after a defects liability period". Cordon submitted that in that context completion meant either practical completion or completion to a stage necessary to obtain approval and registration of the Strata Plan.

47 Cordon submitted that the primary judge was in error in finding that Lesdor would have no remedy in respect of defects had it handed over the Strata Plan prior to completion of the Building Works. It referred in this regard to the guarantees and indemnities contained in cll 32B and 33 of the Agreement, as amended by Deed of Variation on 19 August 2003. It also contended that the primary judge was incorrect in limiting the operation of the defects liability period in cl 21 stating that cll 21(a) and 21(b) related to the period in which written notification of defects was to be provided to Cordon but did not operate so as to exclude defects or other faults that were apparent before completion. On the hearing senior counsel for Cordon submitted that cl 21 did not operate to limit Cordon's liability for damages for defective work to those appearing during the specified period.

48 Cordon reiterated its submission, made in the Court below, that the construction found by his Honour led to an uncommercial and unreasonable result, as Cordon would be denied the benefits to which it was entitled until such time as even the most minor defects within any of the lots had been rectified.

49 Further, Cordon submitted that the primary judge had not dealt with its submissions that completion was completion to a stage necessary to enable approval and then registration of the Strata Plan. It stated that cl 5.1(a) of the Agreement, which provided for completion of the works in accordance with the Plans and Specifications, had to be construed contextually with cl 7, which provided that Cordon would comply with all requirements and conditions of the relevant legislation. It also relied in support of this proposition on cl 11 of the Agreement, which stated that the Building Works were to be completed in accordance with the Building Approvals. In this context senior counsel for Cordon submitted that completion in cl 15 and in the definition of Strata Plan meant completion to the stage where a plan could be prepared and lodged with Council for approval. He stated this gave a sensible commercial operation to both the definition of Strata Plan and cl 15.

50 Lesdor relied primarily on the reasoning of the trial judge and the reasoning of Barrett J (as his Honour then was) in Cordon Investments Pty Limited v Lesdor Properties Pty Limited [2006] NSWSC 481 in support of the proposition that there was no obligation to hand over the Strata Plan until completion of the works. In particular it relied on the definition of "Strata Plan" to which I have referred above, stating that it could only be prepared, created and registered upon completion of the Building Works. It submitted that in those circumstances the obligation under cl 13.3 of the Agreement did not arise until completion of the Building Works.

51 Further it submitted that that construction was supported by the reasons given by the primary judge in pars [84]-[90] of his judgment. It submitted that the fact that Lesdor had the benefit of guarantees did not render the construction contended for by Lesdor uncommercial or unbusinesslike. To the contrary, it submitted that the fact that the obligation to execute the Strata Plan only arose after completion of the Building Works provided protection to Lesdor to assure that Cordon properly complied with its obligations.

Consideration

52 The principles underlying the construction of written contracts are well established and it is not necessary to deal with them at length. A contract is to be construed by reference to what a reasonable person would understand by the language in which the parties have expressed their agreement having regard to the context in which the words appear and the purpose and object of the transaction: Pacific Carriers Ltd v BNP Paribas (2004) 218 CLR 451 at [22]; Toll (FGCT) Pty Limited v Alphafarm Pty Limited [2004] HCA 52; (2004) 219 CLR 165 at [40]; International Air Transport Association v Ansett Australia Holdings Ltd [2008] HCA 3; (2008) 234 CLR 151 at [53]. At least in the case of ambiguity, resort can be had to the surrounding circumstances known to the parties in interpreting the particular provision: Codelfa Construction Pty Limited v State Rail Authority of NSW [1982] HCA 24; (1982) 149 CLR 337 at 352; Western Export Services Inc v Jireh International Pty Limited [2011] HCA 45; (2011) 282 ALR 604.

53 In the present case cl 15 of the Agreement obliged Cordon to have the Strata Plan (a defined term) approved by Council and registered following completion of the Building Works, that is, having regard to the definition of Building Works, after completion of the 'construction work comprised in the Plans and Specifications'.

54 It follows that the obligation to have the Strata Plan approved and registered only arose after the work comprised in the Plans and Specifications had been completed. Thus, the implied obligation on Lesdor to co-operate to enable Cordon to carry out its obligations under cl 15 (see Mackay v Dick (1880-1881) 6 LR App Cas 251) by delivering the signed Strata Plan only arose after the completion of such works, which were required by cl 11 of the Agreement to be completed in a proper and workmanlike manner.

55 That interpretation is consistent with the definition of Strata Plan, which refers to a plan being prepared by Cordon's surveyor on completion of the Building Works. Whether or not it is correct, as contended by Cordon, that the definition misconceived the time the plan was created (see par [45] above) the fact remains that the clause envisages the Strata Plan being prepared after completion of the Building Works.

56 That interpretation also operates harmoniously with cl 5.1(a) of the Agreement, which obliged Cordon to complete the works in accordance with the Plans and Specifications. Clause 15 operated once the works had been so completed and the surveyor had prepared a Strata Plan upon completion of such works.

57 Further, I do not think that cl 13.3 leads to a different conclusion. Although that clause imposed an obligation on Lesdor to deliver the Strata Plan forthwith upon request, once again that obligation is limited by the definition of Strata Plan, which relates to a plan prepared following completion of the Building Works. It follows, in my opinion, that Cordon could only make a request under cl 13.3 following completion of the Works in accordance with the Plans and Specifications.

58 Nor do I think the word completion can be read as meaning practical completion of the Building Works or completion to a stage necessary to enable approval of the Strata Plan to be obtained from Council. The word completion seems to me to be unambiguous and there is no justification for reading it down to require something less than what was in fact agreed to.

59 Nor do I think Cordon's contention that completion in this sense leads to an arbitrary or uncommercial result affects the position. That is because even if the construction to which I have referred would lead to that result, this would not justify a different construction being placed on the provision unless it was ambiguous and a different construction was available as a matter of interpretation: Australian Broadcasting Commission v Australasian Performing Right Association [1973] HCA 36; (1973) 129 CLR 99 at 105, 109. There is no ambiguity in the present case.

60 Further, I do not believe that the construction leads to a result which is arbitrary or capricious. Cordon was advanced the cost of carrying out the work through the NAB facility, which was secured over Lesdor's property. It was entitled to the benefit of the Residual Lots in the Strata Plan on completion of the work it contracted to do. There seems to me nothing uncommercial in such a result. It provides a form of protection for Lesdor against non-completion in circumstances where Lesdor would otherwise be left to sue Cordon or the guarantors for damages. Such protection would not be provided by the defects liability provision in cl 21 of the Agreement as, in my opinion, it only related to defects which may appear in the period set out in cl 21(a) and (b) and not uncompleted or defective work which appeared prior to that time.

61 It should be added that the respondent correctly conceded that de minimis departures from the Plans and Specifications would not provide a basis for refusing to deliver the Strata Plan to Cordon. This is because such departures would not mean the work had not been completed. However, in the present case the appellant accepted that the defects, whilst said to be minor, were not de minimis.

62 It follows, in my opinion, that the primary judge was correct in concluding that Lesdor was not required to hand over the Strata Plan until the works had been completed as required by the contract, namely in accordance with the plans and specifications (cl 5.1(a)) and in a proper and workmanlike manner (cl 11).

63 In these circumstances grounds 1-4 of the grounds of appeal are not made out.

Grounds 5-9, 25-31: Substantial Performance and the challenge to the adoption of the referee's report

The findings of the primary judge

64 The primary judge expressed the view that it was difficult to see how the concept of substantial performance was of any relevance in circumstances where the issue, as he perceived it, was whether on the proper construction of the relevant provisions of the Agreement Cordon brought the works the subject of the Deed to completion in accordance with approved Plans and Specifications (see at [162]).

65 He accepted that there was some authority which suggested that the doctrine of substantial performance could have application to an "entire contract", that is one under which full and complete performance by one party of its obligations is necessary before that party is entitled to receive the agreed consideration: Tan Hung Nguyen v Luxury Design Homes Pty Ltd [2004] NSWCA 178. He recognised that, where the doctrine was available, a party who completes performance of its obligations under the contract but does so in a defective way may be entitled to payment of the contractual consideration unless the defects are so extensive as to mean that in truth it did not perform its obligations at all.

66 However, the primary judge concluded that the difficulty was that Cordon's performance of its obligation to bring the works to completion was not a condition of its entitlement to receive the contractual consideration (see at [168]). He stated that it was a condition precedent to the obligation of Lesdor to sign and deliver the Strata Plan. He said to apply the doctrine of substantial performance in those circumstances would effectively involve rewriting the contract.

67 Further, the primary judge held that to the extent it was necessary to do so, he would have found that the contract was not substantially performed. In this regard he pointed first to what he described as five significant instances of departure from the plans and specifications. Each of these items were identified as defects in the report of Lesdor's consultant, Mr Childs, dated 14 October 2005. The first of those related to the alignment of the existing commercial building. The primary judge stated that the approved plans called for the frontage to be realigned with the intent to provide pedestrian access along a colonnade running parallel to The Kingsway and leading to Wandella Road. This colonnade was to be tiled so that it linked by stairs to a plaza "in front of the new commercial building" (see pars [125]-[126]). He noted that it was common ground that this work was not completed (at [128]). He rejected Cordon's submission that the departure from the plans could be excused because they could not be carried into effect. He held that even if the existing commercial building could not have been refurbished in the way required by the plans, Cordon was not entitled to depart from them without the prior consent of Lesdor, which had not been obtained (at [132]).

68 Cordon submitted in the court below that it was impossible to comply with the plans for two reasons. The first was that it was necessary to construct a fire door to comply with appropriate standards. The primary judge described the evidence on this point as "scanty" but did not make an express finding on the issue, presumably because of the view he took that Cordon in any event had no right to make an unapproved variation.

69 The second reason relied upon by Cordon for asserting that it was impossible to comply with the plans was, as the primary judge described it, "that there was some problem with the column which was said to lend support to the other storeys of the building" (at [128]). He stated that the evidence on this point consisted of no more than assertion and counter-assertion (at [136]).

70 The primary judge found that the second substantial defect was that the parapet on the roof of the existing commercial building had not been raised to the height of the parapet on the adjoining new commercial building. The primary judge adopted the referee's report in this regard where she stated that it was necessary to raise the parapet for safety reasons. He rejected Cordon's submission that this part of the referee's report should not be adopted because it had not been raised at the hearing, stating that it was a matter of commonsense (at par [138]).

71 The third significant defect found by the primary judge was that the awning structure that had been constructed in front of the building was not constructed from hot dipped galvanized steel but from powder coated steel. He rejected Cordon's contention that this was in accordance with the specifications, stating that the awning frame was caught by the requirement to galvanize because it was exposed steel. He also rejected Cordon's contention that what was done was functionally equivalent to what was called for by the specifications, relying in that regard on the evidence of a Professor Hoffman that powder coating was not as effective in resisting damage and ensuring serviceability as hot dipped galvanizing.

72 The fourth substantial defect found by the primary judge was that the roof of the new structure (ie, the roof above the residential lots) had not been finished with gravel as required by the specifications. He rejected Cordon's contention that the agreed variation to install a skylight in an area of the roof was "in lieu of the installation of a bitumen and gravel surface". He stated that the variation dealt with only a relatively small portion of the roof and should not be seen as having affected the extent of Cordon's obligation in relation to the rest of the roof (at [152]).

73 The fifth significant defect was what was described as the "pebblecrete issue". This referred to the fact that Cordon had tiled over the pebblecrete surface where the walkway was to go and provided ramping down to the shop floors, rather than doing what the referee said was necessary, namely, removing the pebblecrete surface and retiling so that the tiles in the shop floors were on the same level. The primary judge concluded that this resulted in the colonnade outside the front of the old commercial building being higher than the level immediately inside (at [153]). He held this posed two problems. The first was a safety issue, namely, that people may trip when they left the shop and the second was that water may enter and pond in the shop. The primary judge rejected the contention that what was done was done at the direction of Lesdor.

74 So far as the referee's report was concerned, the primary judge found that it was logical and coherent and demonstrated that the referee had a detailed understanding of the issues, the argument and the evidence. He said that in those circumstances there was a strong disposition in favour of its adoption. He rejected the contention that the referee had failed to consider the question of whether the defects were minor in nature by reference to the extent to which they rendered the works unfit for occupation or use. He stated that the referee had held that the defects which existing as at 23 February whether considered individually or in combination were not minor and would prevent the works from being reasonably fit for occupation or use (at [365]).

75 His Honour also rejected the contention that the referee had denied Cordon natural justice in finding that the roof area over the residential lots was trafficable. He stated that that question was in issue before the referee and Cordon had had the opportunity to put submissions.

The submissions of the parties

76 Cordon contended that the question of whether a contract was an entire contract in the sense, in the present case, that complete performance of Cordon's obligation was a condition of Lesdor's obligation to hand over the Strata Plan was a question of construction. It submitted that on the true construction of the Agreement in the present case, Lesdor was not entitled to withhold counter performance because of some departure from the terms of the Agreement unless the work done was of no benefit to Lesdor, or the work was entirely different from the work Cordon was contracted to do, or Cordon had abandoned the work and left it unfinished.

77 Cordon submitted that it was not appropriate to construe cl 15 as having the effect that completion of the Building Works was a condition precedent to Cordon's right to receive the signed Strata Plan from Lesdor. In that regard senior counsel for Cordon submitted that the statements as to the necessity for strict compliance with conditions precedent made by Samuels JA in Tricontinental Corporation Ltd v HDFI Ltd (1990) 21 NSWLR 689 at 703-704 and 705 had no application to the issue so far as it related to building contracts. Cordon relied in this regard on what was said in H. Dakin & Co. v Lee [1916] 1 KB 566 at 569, 574. Senior counsel for Cordon submitted building undertakings of the type in question in the present case are not and should not ever be taken as being capable of exact performance. In addition to what was said in Dakin v Lee supra, he relied for support of this submission on Hoenig v Isaacs [1952] 2 All ER 176; Bolton v Mahadeva [1972] 1 WLR 1009 and ACN 002 804 702 (formerly Brooks Building) v McDonald [2009] NSWSC 610. In this regard Cordon submitted that substantial performance was a question of fact and degree and that having regard to the referee's findings that the total value of all defective, incomplete and inconsistent work as at January 2008 was $260,683.50 in circumstances where Cordon submitted the value of the Building Works as at April 2008 was $11,899,670, it could not be said substantial performance had not occurred.

78 Cordon sought to distinguish the decision of the Queensland Court of Appeal in Highmist Pty Limited v Tricare Ltd [2005] QCA 357 on the basis that in that case the contract itself defined "substantially", so as to permit a limited deviation from the plans and, therefore, it was not possible to go outside the permitted deviation. It relied on dictum of Latham CJ in Luna Park (NSW) Ltd v Tramways Advertising Pty Ltd [1938] HCA 66; (1938) 61 CLR 286 at 304 to the effect that in some cases it was proper to consider a contract as requiring substantial compliance with its conditions. Cordon stated that this applied particularly in relation to construction contracts. In that regard it relied on the following statement in Hudson's Building and Engineering Contracts 12th ed (2010) Street & Maxwell at [3-073]:

"Construction contracts however, with their special characteristic of fixing and incorporation of work into the land of the Employer, could not provide a satisfactory theory of acceptance to be derived from the mere fact of the incorporation of defective or incomplete building work into an Employer's land, and so might create a special and real injustice where a Contractor had bona fide completed a project but subsequent defects, quite possibly minor, were raised as a defence to the whole price by an Employer unwilling to pay even a part of it."

79 Senior counsel for the appellant submitted that the so-called doctrine of substantial performance could apply even where the contract was an entire contract. Further he submitted it was not limited merely to payment but was capable of extending to obligations such as the obligation to hand over the Strata Plan. It relied in support of these propositions on the judgment of Campbell J (as his Honour then was) in Buildev Development Pty Limited v PIC Sales Pty Limited (2004) 11 BPR 21-445 at [11]-[12]. Senior counsel for Cordon accepted that in the present case the defects which existed were more than de minimis but said the doctrine could apply to minor defects.

80 So far as the departure from the plans and specifications was concerned Cordon challenged the conclusion of the primary judge that even if it was not possible to complete the works in accordance with the plans, Cordon was not entitled to depart from the plan without an agreed variation.

81 Cordon also challenged the conclusion of the primary judge that the referee had determined that as at 23 February 2006 there were a number of defects which were not minor and which rendered the premises unfit for occupation. It submitted that the referee in fact found that "none of the patent defective or incomplete works notified by Lesdor as at 23 February 2006 or 31 July 2006 rendered the works as being unfit for occupation or use" (emphasis added). Cordon submitted that the primary judge erred in accepting the referee's report in full. It submitted that the reference was conducted on a false basis, as it was an inquiry as to whether the Building Works were completed strictly in accordance with the Plans and Specifications and did not consider whether those plans were varied by either party, required modification to comply with statutory obligations or were entitled to be modified in accordance with what was described as "Cordon's design obligation". It submitted also that the referee did not consider whether it was reasonable to rectify the defects.

82 Cordon also raised the following specific challenges to the adoption of the report:

(a)It submitted that the primary judge was mistaken in concluding that the issue of whether the roof was trafficable was an issue before the referee. This was apparently for three reasons. First, Cordon's expert had concluded the area above the new residential building was not a trafficable area and the issue was not ventilated in the joint conclave nor raised as an issue by the referee as a matter for submission. Second, it stated that the primary judge was mistaken in understanding the referee to have found the parapet to the existing commercial building needed to be raised for safety reasons. Third, it submitted that the evidence of Mr Ghosn, which the primary judge indicated he preferred to that of Mr Semken, was that Mr Semken said on 13 January 2006 that this particular problem need not be rectified. As a result it submitted that the primary judged had erred in failing to find that Cordon had been denied procedural fairness before the referee.

In support of the contention that the primary judge was mistaken in understanding the referee found the parapet to the existing commercial building needed to be raised for safety reasons, senior counsel for Cordon pointed to the fact that the referee dealt with the parapet to the existing commercial building in pars [271]-[276] of her report and noted therein that the experts retained by the parties ultimately agreed the height difference was of no functional consequence. Notwithstanding this the referee held (at [276]) that in this regard the development as constructed had not been completed in accordance with the joint venture Plans and Specifications and that the cost to raise the parapet was $31,000. It should also be noted that the referee found that the concrete parapet around the roof perimeter to the new building was not to the correct height and was therefore defective (at [173]).

(b) Orally, senior counsel for Cordon referred to par [296] of the referee's report, which referred to the pebblecrete surface being defective because it militated against maintaining a dry interior. The referee found in that paragraph that the cost to rectify the defect by removing the tiles and pebblecrete and relaying the tiles at a lower level was $12,820. He also pointed to the fact that the defect on the referee's opinion, did not render the premises unfit for occupation.

(c)Cordon repeated its submission, made in the Court below, that the referee erred in finding that some of the defects were not minor by reference to the cost of rectification alone and not their impact or otherwise on occupation and use. It submitted the evidence established that the referee had found that none of the notified defects prevented occupation or use.

(d)Cordon repeated its submission that the referee misdirected herself in her construction of the specifications insofar as they dealt with the requirement for structural steel to be hot dipped galvanized. It submitted the specific dispute concerned an awning at the front of the existing commercial building and stated that the drawing forming part of this specification clearly contemplated that the external awnings were to be powder coated. It submitted that the requirement in the specification to galvanize external or exposed steel work was a default provision which only applied to steel work not otherwise treated. It stated that the awning was as a matter of fact treated with a powder-coated substance before delivery to the site and therefore need not be galvanized. It also relied in this regard on a second set of specifications dated December 2003 and in particular s 18, which provided for thermoset powder coating of external balustrades. Orally, senior counsel referred to a drawing of the south elevation of the development (CC0312-10/C) which stated "glass awning to existing building powder coat finish". He also referred to the February 2004 specifications which contained the following comment:

"External or exposed steelwork shall be sandblast cleared in accordance with AS1627 to Class 2½ standard 'Near White'. Immediately following sandblasting the steelworks shall be galvanized as follows."

It was submitted that this requirement only applied when galvanizing was otherwise specified and in the case of the awning in question, it was not.

Senior counsel for Cordon also pointed to cll 3.3.3-3.3.6 of the specifications of February 2004 which distinguished treatment by way of galvanizing and powder coating.

It was also submitted that the defect was not substantial because Professor Hoffman gave unchallenged evidence, that the only difference between the two forms of treatment was that galvanizing may have 25 years life but powder coating would be more effective in the 15 year period of its life.

(e)Cordon contended that the finding of the referee that the defects and incomplete work ultimately notified in 2009, if known at the time, would have rendered the works practically incomplete as at 2006, was irrelevant and without foundation, as there was no evidence that they were patent before termination in August 2006. Further, it submitted that no reasonable tribunal of fact could have concluded that the defective and incomplete items notified in February 2009 could have prevented occupation or use of the Building Works.

83 So far as the primary judge's conclusions concerning impossibility of performance were concerned (see at pars [67]-[69] above) Cordon submitted the primary judge was incorrect in finding that Cordon had no entitlement to vary the work in accordance with the approved Plans and Specifications and that he rather should have found that Cordon had a discretion to vary the design to ensure the works complied with statutory requirements. In oral submissions it was pointed out that there was no provision for variations in the Agreement and, indeed, the Agreement itself contained no specifications but merely a schedule of inclusions. Cordon submitted that it followed from this that it had a broad discretion on design questions. It further submitted that the primary judge was incorrect in finding that impossibility of performance was less than clear having regard to the referee's findings that "the design could not be constructed" and that the planned open walkway "must remain fictional".

84 Cordon ultimately submitted that Lesdor was obliged to accept any design of the entrance foyer to the new commercial building that was reasonable and did not necessitate structural alterations to the original commercial building. It submitted that Lesdor had no entitlement to withhold its approval of the design of the building ultimately built and to insist on an impossible design.

85 Cordon submitted that the statement in Hudsons Building and Engineering Contracts supra at [3-080] to the effect that a contractor who expressly or impliedly undertakes to complete the work or project according to the contract drawings and designs thereby impliedly warrants its ability to do so, had no application in the present case. It said in particular that this was because the Agreement was not between a principal and contractor but was rather a joint venture between experienced builders, because no drawings were supplied by Cordon at the time of entering into the joint venture and that the cases referred to by Hudson's involved the situation where the design could be built but by adopting unreasonable or more expensive means to do so, rather than an impossible design.

86 In addition Cordon submitted the joint venture was entered into before the Plans and Specifications were prepared and in those circumstances, the appellant could not be said to have accepted the risk that something not yet drawn could be built, particularly where the Agreement contained a warranty that Lesdor had "satisfied itself as to the layout, form and structure of the proposed Building Works" being the "construction work comprised of the plans and specifications necessary to construct the building on the land and refurbish the existing building" (cll 8(a) and 1 of the Agreement). It also relied on cl 3(a) of the Agreement, which required that the respondent could not unreasonably withhold its approval of the plans, drawings and designs necessary for obtaining approval from the relevant statutory authorities for the Building Works.

87 So far as the matter which the primary judge described as "some problem with a column, which was said to lend support to other storeys in the building", senior counsel for Cordon identified the column which he said supported the building by reference to a ground floor plan, CC0312-03F and a plan of the first and second storeys, CC0312-04/F. He pointed out by reference to the transcript of evidence of the proceedings before the referee which was in evidence before the primary judge, that the respondent had accepted that the column was supporting the building. He submitted in those circumstances it was impossible to achieve an open walkway consistent with the Plans and Specifications. He submitted that whatever was the extent of Cordon's obligations, it was not to reconfigure the building.

88 Cordon also submitted that the primary judge was mistaken in finding that Cordon was required to place gravel on the rooftop, as the referee's report, which was adopted, found that the work was completed in accordance with a variation directed by Lesdor.

89 Finally on this issue Cordon submitted that the primary judge should have considered whether it was reasonable to rectify the work.

90 Lesdor submitted the question of whether only substantial performance was necessary prior to the delivery of the executed Strata Plan was a question of construction and that as the contract required completion in accordance with the Plans and Specifications as a condition precedent to Lesdor's obligations, there was no room for the operation of the doctrine.

91 Further, Lesdor contended that there had not in fact been substantial performance. It pointed to the findings of the referee accepted by the trial judge that at both at February 2006 and 31 July 2006, there were defects such that the buildings would not be reasonably fit for occupation or use by an owner. It should be noted, however, that the findings referred to by Lesdor related to defects notified both prior to and after those dates.

92 Lesdor made the following submissions in relation to Cordon's specific challenges to the adoption of the report:

(a)The referee had observed correctly that the parties' experts agreed that the height of the parapet did not comply with the drawings and had found the reasonable costs for rectification was $4,500. The referee in that context noted that Cordon's expert stated this did not matter as it was not a trafficable area. The referee disagreed with this conclusion. Lesdor submitted she was entitled to do so particularly having regard to the fact that counsel for Cordon had acknowledged at the hearing that she was entitled to take her expertise into account in determining the issues before her.

(b)Senior counsel for Lesdor accepted that the primary judge was in error when he stated that the parapet to the old commercial building needed to be raised for safety reasons. He submitted, consistent with the referee's finding, that the issue was an aesthetic issue.

(c)Further, senior counsel for Lesdor said the dispute concerning hot dipped galvanizing did not concern an awning at the front of the existing commercial building but rather referred to galvanizing on the new concrete colonnade to the existing façade identified in Drawing CC0312-10/C. He submitted by reference to the referee's report (at [279]) that the issue was galvanizing of the steel frame of the awning on the colonnade..

(d)On the issue of whether the Plans and Specifications required the awning at the front of the building to be hot dipped galvanized, Lesdor pointed to the referee's conclusion (at [284]) that the steel was required to be hot dipped galvanized. The referee in reaching this conclusion noted the disagreement of the experts on the issue, rejected the conclusion that the specification was ambiguous in this regard and formed the view to which I have referred. Lesdor pointed out that the experts had agreed that the cost of compliance, if compliance was necessary, was $108,000.

(e)So far as the dispute concerning the requirement that Cordon was required to place gravel on the rooftop was concerned, Lesdor pointed to the referee's finding that this requirement was in accordance with the original Plans and Specifications. However, she left open the question as to whether this requirement had been varied.

(f)On the issue of whether or not it was impossible to comply with the plans so far as they related to the alignment of the existing commercial building, Lesdor pointed to the observation of the referee that it might be possible for an alternative design to be priced that achieved Lesdor's apparent principle design requirement (par [318]). It contended that Cordon had no authority to unilaterally vary the Plans and Specifications.

In oral submissions on this issue senior counsel referred to the report of the conclave of experts which was held during the course of the reference. The experts agreed that the shopfronts were not built in accordance with the drawings and that the fundamental departure from the plans was unrelated to fire egress. He submitted that the note of the conclave indicated that the experts estimated that the cost of rectification without essential engineering drawings was $44,640, which included demolition and structural support of two floors above the demolished structures.

Consideration

93 The principal issue in the present case, in my opinion, is whether the contract is to be construed as an entire contract; that is, one where complete performance is a condition precedent to payment or counter-performance: GEC Marconi Systems Pty Limited v BHP Information Technology Pty Limited [2003] FCA 50; 128 FCR 1 at [703]; ACN 002 804 702 (formerly Brooks Building) v McDonald supra at [100]. If the contract is an entire contract in that sense, then strict performance of the contractual obligation, in this case completion of the Building Works, is a necessary pre-condition to receiving the contractual consideration: TriContinental Corporation Ltd v HDFI Ltd (1987) supra at 705, 718; Highmist Pty Limited v Tricare Limited supra at [40]-[41].

94 In the case of contracts which at least on their face appear to be entire contracts, particularly lump sum building contracts, courts have been reluctant to construe complete performance of the works as an essential pre-condition for payment. Rather, in circumstances where there has been substantial performance, they have treated a failure to complete as a breach of a non-essential term of the contract not disentitling the builder to contractual payment for the work done but, rather, giving the proprietor a right of setoff or claim for damages for the cost of completing the work or rectifying any defects. The position was summarised by Denning LJ in Hoenig v Isaacs supra at 180-181:

"the first question is whether, on the true construction of the contract, entire performance was a condition precedent to payment. It was a lump sum contract, but that does not mean that entire performance was a condition precedent to payment. When a contract provides for a specific sum to be paid on completion of specified work, the courts lean against a construction of the contract which would deprive the contractor of any payment at all simply because there are some defects or omissions. The promise to complete the work is, therefore, construed as a term of the contract, but not as a condition. It is not every breach of that term which absolves the employer from his promise to pay the price, but only a breach which goes to the root of the contract, such as an abandonment of the work when it is only half done. Unless the breach does go to the root of the matter, the employer cannot resist payment of the price. He must pay it and bring a cross-claim for the defects and omissions, or, alternatively, set them up in diminution of the price. The measure is the amount which the work is worth less by reason of the defects and omissions, and is usually calculated by the cost of making them good. [Citation of authorities omitted.] It is, of course, always open to the parties by express words to make entire performance a condition precedent."

See also Dakin v Lee supra at 574, 578-579, 581-582; Connor v Stainton (1924) 27 WALR 72 at 73; Williamson v Murdoch (1912) 14 WALR 54 at 56-58; Bolton v Mahadeva supra at 1012-1013; ACN 002 804 702 (formerly Brooks Building) v McDonald supra at [100]-[106].

95 However, as was pointed out by Denning LJ in the passage in Hoenig v Isaacs to which I have referred above, the question is always one of construction of the relevant agreement. In the present case as I have indicated, the obligation to hand over the Strata Plan only arose on completion of the work. In those circumstances, in my opinion, there is no room for the operation of any doctrine of substantial performance.

96 It follows that it is strictly unnecessary to deal with the findings of the primary judge that Cordon did not substantially perform its obligations (at [169]). The primary judge reached that conclusion based on pars [421] and [424] of the referee's report, which he adopted, noting those paragraphs were not disputed by Cordon and based on his conclusion in relation to the five substantial defects. In my opinion, for the reasons set out hereunder, his Honour was correct in this approach.

97 In pars [421] and [424] of the referee's report, the referee concluded that the defects ultimately notified (that is notified post termination) were not minor and would have prevented the premises being reasonably fit for occupation both on 23 February 2006 and 31 July 2006.

98 Cordon indicated in its submission that in fact it contended that these paragraphs of the referee's report should not be accepted, but the only basis on which the submission was made was that the only defects which should be considered were those in fact notified prior to the date of termination. This does not seem to me to be correct. The issue is whether the works were completed. If they were not, the condition on which the Strata Plan was to be handed over had not been fulfilled.

99 Further, the primary judge identified what he described as five major defects which he said demonstrated that the work had not been done in accordance with the Plans and Specifications. The first of these was the street frontage was not constructed in accordance with the Plans and Specifications in that the walkway in front of the building had not been built. I have set out the parties' submissions on this issue above (see [83]-[87] and [92](f)). It is important to bear in mind in that context that whilst the referee found that it was not possible to build the walkway in accordance with the plan, it may have been possible for an alternative design to achieve Lesdor's design requirements. Her finding was as follows:

"[318]The fifth question referred out invited an estimate of the reasonable cost of rebuilding or modifying the work referred to in the second question so that the work complied with the JV plans and specifications. Because of the inaccuracies shown on the JV plans, on this particular item and on the evidence available, it was not and never would be possible to answer this question strictly. This is because the plans do not, for example, illustrate an existing structural column. This column is situated in the middle of and blocks the proposed open walkway. Because of this, the planned open walkway must remain fictional. With further evidence, however, it might be possible for an alternative design to be priced that achieves Lesdor's apparent principal design requirement, i.e. an open walkway continuing to the western end of the site. Any re-design, would, among other things, need to meet fire egress regulations and provide structural support to the two floors of the building hovering above the open walkway, once the offending column is removed. In order to test this possibility, considerable design input of an architectural, structural and fire egress nature would first be necessary. This additional input might, of course, lead to the conclusion that a continuous walkway is not feasible and that the design that has been constructed is the most feasible solution. Without at least architectural and structural input, the advice of a fire consultant would, in my view, be incomplete in any consideration of the issue. Although the fire egress evidence might provide the rationale for the current configuration, it would not necessarily establish that this configuration is the only reasonable or feasible design. For this further reason, I considered that the admission of evidence from a fire consultant, in isolation, would not have been of great assistance to the reference."

100 Further, in the proceedings before the referee the experts for both sides estimated that the cost of demolition of the column referred to in the referee's report and structural support of the floors above excluding engineering drawings was $44,600.

101 In these circumstances it does not seem to me that Cordon was entitled to unilaterally vary the plans in the manner in which it did. Whether or not the walkway could be built, it could only vary the plans with the consent of Lesdor. If there was no consent or if the parties could not agree on the proposed variation, the dispute could be referred to arbitration pursuant to cl 28 of the Agreement. Cordon did not avail itself of this course, rather it unilaterally varied the design. In doing so, in my opinion, it was in breach of the Agreement.

102 It follows, in my opinion, that the primary judge was correct in finding that Cordon failed to comply with its obligations in respect of the walkway to the street frontage of the commercial building.

103 The second issue raised by the primary judge was that the parapet on the roof of the existing commercial building had not been raised to the height of the parapet on the adjoining new commercial building. The trial judge initially correctly identified the issue as an aesthetic issue "to present a continuance appearance from the street level" (at [105]) but mistakenly concluded that the referee had considered it was a safety issue. I have set out the details of the referee's finding in par [82](a) above. In light of that the fact remains that notwithstanding the misapprehension of the primary judge, the referee found that the parapet was not built to the correct height and was, therefore, defective.

104 So far as the question of whether the awning structure that had been constructed in front of the building had to be constructed from hot dipped galvanized steel was concerned, the primary judge was entitled to accept the finding of the referee on this issue. The referee relied on the concluding words in par 18.5.3 of the February 2004 specification in concluding that hot dipped galvanizing was required (at [280]). I have set these words out above in par [82](c).

105 No contention appeared to have been made before the referee that there was another specification which dealt with the awning and in that respect she made no error of law in reaching her conclusions. The trial judge in these circumstances was entitled to accept her finding: see Chocolate Factory Apartments v Westpoint Finance & Ors [2005] NSWSC 784 at [7].

106 The third matter related to the question of why the new roof had not been finished with gravel. The issue was whether there was a variation such that this finish was no longer required. The referee expressly left that question open (at [166]). Having regard to the findings of the primary judge that no variations were agreed upon (at [118]), the primary judge was not in error in considering that the failure to finish the roof with gravel meant that the works were not completed in accordance with the plans and specifications.

107 The final issue was what was described as the pebblecrete issue, namely, whether the pebblecrete surface on which the floor tiles to the external walkway along Kingsway were laid should have been removed and retiled so that the tiles and shop floor were on the same level. The criticism of the finding seems to be that the referee should have found that this did not prevent occupation of the works.

108 The referee found that in this regard the works were not completed in accordance with the plans and specifications. Her finding was as follows:

"296While the awning provides considerable protection from weather, it does not necessarily protect against driving rain or against water used in cleaning the paving. To assist in keeping water out of buildings, typically external paving levels are lower than internal floor levels. The reverse, in my opinion, is inherently defective because it militates against maintaining a dry interior. If water enters, for example, it will not drain out. For this reasons, in my view, the level of the tiles is a defect and I so find. I adopt the agreement of the experts and find that the cost to rectify this defect by removing the tiles and pebblecrete and re-laying the tiles at a lower level is $12,820.00."

109 It was open to the judge to accept that finding.

110 In these circumstances the trial judge was justified in finding that in respect of the five substantial matters identified by him, the work was not completed in accordance with the Plans and Specifications. That coupled with the finding of the referee as to the defects which were ultimately found to have existed, also meant that he was justified in finding that to the extent relevant, practical completion had not occurred.

Grounds 10 and 11: Waiver

The findings of the primary judge

111 The primary judge rejected Cordon's contention that Lesdor had waived its right to require a higher level of completion than practical completion by virtue of forbearance or abandonment. He noted that at no time did Lesdor explicitly give up its claim that it was entitled to completion in accordance with the Plans and Specifications and free of apparent defects. He rejected the claim that the taking of possession by Lesdor of the new commercial offices and residential lots to which it was entitled amounted to an abandonment of such a claim. He stated that there was no evidence that that had happened because Lesdor demanded possession but rather that it appeared to be a voluntary act on Cordon's part. Finally, he concluded that any inference of forbearance or abandonment was refuted by the repeated insistence on completion in accordance with the Plans and Specifications in correspondence emanating from Lesdor's solicitors. The primary judge also rejected Cordon's contention of waiver on the basis of election.

112 In that context the primary judge noted that Cordon had not submitted that it had been prevented from achieving completion, in the sense which Lesdor contended, because it had given possession of part of the works back to Lesdor.

The submissions of the parties

113 Cordon submitted that Lesdor had by forbearance and abandonment waived any right it might have had to defect free completion of the works when it took possession of the works at an earlier stage. In oral submissions senior counsel for Cordon also submitted that in entering into possession Lesdor had elected between two inconsistent rights, namely, the right to take possession and what it said was an alternative right, namely, to have the building completed defect free. Cordon also disputed the finding of the trial judge that it voluntarily gave up possession. It submitted that it was entitled to vacant possession for the purpose of performing the Building Works and Lesdor abandoned the right to insist on defect free completion by demanding and taking possession of the residential lots and new commercial building in December 2005.

114 In support of the proposition that it had not voluntarily given up possession of the new commercial building and residential lots to Lesdor, Cordon relied first on two letters which it stated contained a demand from Lesdor to occupy the property on the works reaching the stage of practical completion. These letters were letters from Lesdor's solicitors dated 1 August 2005 and 1 September 2005 indicating, in the first letter, that Lesdor was negotiating with a substantial tenant and inquiring as to the date of practical completion and the date at which the tenant would be allowed into the premises to commence its fit-out. The second letter followed-up on this inquiry indicating it would be of assistance in negotiation with prospective tenants. These letters did not contain a demand for occupation of the premises.

115 Cordon also contended that on 22 November 2005 Lesdor demanded that keys be provided by 5.00pm on 25 November 2005, failing which Lesdor would change the locks. In this regard reliance was placed on a letter from Lesdor's solicitors in which they stated their client required access, not only for the purpose of showing the premises to tenants but also to enable them to undertake fit-out works. The letter requested keys for that purpose and indicated if they were not provided the locks would be changed. The letter also demanded an indication of Cordon's response to complaints about defects in the Building Works.

116 The third matter relied on in this context was the letter of 2 December 2005 indicating that Lesdor would take steps to have the locks changed. That letter also raised a series of complaints about the Building Works, threatened to sue for specific performance if the work was not completed and requested a programme of works.

117 Finally, Cordon submitted that the primary judge was in error in finding that Lesdor's solicitors had repeatedly insisted on the defects being rectified, stating that the first time that Lesdor insisted it was entitled to some higher standard of completion other than practical completion was on 31 March 2006, four months after it had taken possession and benefit of the works.

118 Lesdor submitted that forbearance was equivalent to estoppel and stated that Cordon had neither pleaded not proved detrimental reliance. Further it submitted that there was not an unambiguous or clear representation required to establish a waiver based on election, forbearance or abandonment. It pointed out that two of the letters upon which Cordon relied to constitute such a waiver, made a demand for completion of the Building Works.

Consideration

119 In its written submissions on this issue, Cordon relied on what it described as waiver by forbearance or abandonment: Agricultural & Rural Finance Pty Limited v Gardiner [2008] HCA 57; (2008) 238 CLR 570 at [86], [89]. The first matter relied on was what was described as the taking of possession of that part of the premises to which Lesdor was to be entitled on completion.

120 It is correct that by letter dated 22 November 2005, Cordon threatened to change the locks if it was not supplied with keys and by letter dated 2 December 2005, indicated it would proceed to change the locks and presumably thereafter took possession. It may well be that in those circumstances his Honour erred in saying Cordon voluntarily gave up possession.

121 Irrespective of this, there is nothing to suggest that by the taking of possession Lesdor was forbearing or abandoning its right to insist on completion in accordance with the terms of the contract. Although cl 9(a) in the Agreement required Lesdor to give possession of the land to Cordon on receipt of building approval, there is nothing to suggest that the retaking of possession by Lesdor hindered or prevented Cordon from completing the works or was relied on by Cordon in declining to do so: see Agricultural & Rural Finance Pty Limited v Gardiner supra, at [83]. Further, to the extent that abandonment was relied upon, contrary to abandoning its right to full completion Lesdor was insisting on it. Thus the letter of 22 November 2005 contained the following demand:

"3.We look forward to receipt from you of the response to the building reports concerning the premises. We believe that your client has had more than sufficient time to deal with these reports. We require a detailed response and program for doing the works by next Wednesday, 30 November 2005 or our client will take action to rectify the defects noted and will claim the costs associated therewith from your client. Our client reserves its position as to any loss of income arising from your client's delays."

122 Whilst in the letter of 2 December 2005, a demand to a similar effect was made:

"4.In relation to the defective building works and your assertions in point 3 of your letter under reply, we are instructed as follows:-

(a)Our client does not accept the contention that your client is currently attending to the finalising of incomplete and unfinished minor building works. On our instructions there has been little activity at the building site over the last couple of weeks;

(b)The building reports not only raise issues in relation to incomplete works but also defective works, some of which are significant. Our client has seen no evidence to suggest that any of these have been rectified by your client."

123 Thus, in my opinion, waiver in the sense of abandonment or forbearance was not made out.

124 Nor was there any waiver in the sense of election between inconsistent rights: Sargent v ASL Developments Limited (1974) 131 CLR 634 at 641. There does not seem to me to be any inconsistency between taking possession of part of the premises and insisting that Cordon complete its contractual obligations.

125 For these reasons, grounds 10 and 11 of the notice of grounds of appeal are not made out.

Grounds 15-18: Breach of implied obligation of good faith

126 In the proceedings below Cordon asserted that Lesdor acted in breach of an implied duty to act in good faith, providing four particulars (see par 11AA of the Second Further Amended Statement of Claim). These were as follows:

"(a)Lesdor refused to identify the work or works it maintained were defective or incomplete prior to serving its notice of termination.

(b)Lesdor insisted on defect free completion before executing and delivering the Strata Plans which was beyond the terms of the Joint Venture Agreement (as varied).

(c)Lesdor unreasonably refused to execute and deliver the Strata Plan in circumstances where it had taken the benefit of the works to which it was entitled under the Joint Venture Agreement (as varied).

(d)Lesdor intermeddled and interfered with Cordon's contractual relations with the NAB."

The findings of the primary judge

127 The primary judge did not deal in any detail with whether an obligation to act in good faith should be implied into the Agreement. This was because he was of the view that even if such a term was implied, the breaches contended for were not made out. As to the allegation of refusal to identify the allegedly defective or incomplete works, the primary judge accepted the evidence of Mr Solari, the solicitor for Lesdor, that he had sought from Lesdor's consultant, Mr Childs, a report in reply to the report of Cordon's consultant, Mr Austin, of 31 May 2006, but that Mr Childs had not produced such a report. This particular finding was not disputed by Cordon. The primary judge found that Lesdor's inability to obtain such a report did not amount to evidence of breach of an obligation to act in good faith, holding that such an obligation would not extend to retaining a new consultant. He emphasised that it was Cordon's contractual responsibility to complete the work in accordance with the Plans and Specifications and the relevant requirements of the Agreement and Cordon had not given an assurance that it would do so (at [204]).

128 So far as the insistence on defect free completion was concerned, the primary judge held that Lesdor did not act in bad faith in insisting on what were its contractual rights, particularly in circumstances where Barrett J, in an interlocutory decision, had confirmed that Lesdor's construction of the Agreement was correct. He similarly found that the refusal to execute and deliver the Strata Plan to Cordon could not amount to a breach of such an obligation when Lesdor was not contractually required to do so.

129 So far as the fourth particular of good faith was concerned, the primary judge found that on 17 May 2006 a Mr Hatter, a bank officer with NAB who had some responsibility for the NAB loan facility, indicated to Mr Solari, the solicitor for Lesdor, that Cordon had invited the bank to appoint a receiver as it, Cordon, believed that the NAB would be better able to deal with Lesdor (at [221]). This was confirmed at a meeting between Mr Solari, Mr Hatter and others from the NAB and representatives of Lesdor on 23 March 2006. At that meeting Mr Hatter said that the bank would consider extending the NAB facility for up to 60 days but once it expired the bank would cancel it, serve a demand on Cordon and then on the guarantors, allowing 24 hours to pay and in default of payment appoint a receiver.

130 Mr Solari said that as a consequence of this he advised Mr Paul Semken, a director of Lesdor, to arrange alternative finance.

131 The primary judge found that on 26 May 2006 the NAB wrote to Mr Solari, confirming it was the bank's intention to appoint a receiver and manager to the property, should an event of default occur. His Honour noted that on 31 May 2006 Cordon's solicitors wrote to Mr Solari indicating that the NAB was aware that Cordon would not be able to meet its commitments in the short term and suggesting it was not in the interests of either party to appoint a receiver. This is, of course, somewhat inconsistent with Mr Hatter's statement to Mr Solari that Cordon wished the bank to appoint a receiver.

132 On 22 June 2006 the solicitors for Cordon notified Mr Solari that the loan facility with NAB had been renewed until late July 2006 and that if agreement was not reached it was highly likely that NAB would take possession of the entire building premises. The primary judge recorded that that letter contained a misrepresentation in that the renewal in fact was arranged at the request and with the further support of Lesdor (at [239]).

133 The primary judge found that on 27 July 2006 Mr Solari enquired of Mr Hatter whether Cordon had made any arrangements to extend the NAB facility and was told that it had not. Mr Solari said that Mr Hatter confirmed that NAB would issue demands to Cordon on the expiry of the facility allowing 24 hours to pay and thereafter would make a demand on Lesdor. He noted that this statement was confirmed in a letter Mr Solari wrote to Mr Hatter on 31 July 2006.

134 The primary judge noted that Lesdor paid out the facility with funds borrowed from Macquarie Bank on 1 August 2006.

135 In that factual context the primary judge found that Lesdor had not acted unreasonably or in bad faith in refinancing the NAB facility. He stated that it was not correct to say that Lesdor interfered with or intermeddled in Cordon's relationship with NAB (at [259]). He stated that Cordon had effectively vacated that field by no later than 26 May 2006 when it informed NAB that its legal advice was not to renew the facility. In that context he rejected the proposition that Lesdor's conduct was designed to secure for it some advantage to which it was not contractually entitled (at [262]).

The submissions of the parties

136 Cordon contended that the Agreement contained an implied obligation that the parties would act in good faith and reasonably towards each other. It stated that such a term was both reasonable and necessary, as Cordon could only receive the benefit to which it was entitled with Lesdor's co-operation. It submitted that Lesdor breached such an implied duty by developing a strategy aimed at keeping the Residual Lots for itself, by insisting on an impossible level of completion and engineering the default of the NAB loan facility.

137 Cordon submitted that such a strategy could be inferred from three matters. First, the insistence by Lesdor on defect free practical completion. It submitted that the evidence of Mr Paul Semken, a director of Lesdor, was that it was his belief at least up to and until September 2005, that the works would be completed in accordance with "a regime of practical completion". It submitted that whether or not the construction contended for by Lesdor was correct was not to the point and the primary judge ought to have found that Lesdor did not hold that view in good faith and was motivated in adopting that view by a desire to keep the Residual Lots for itself. It placed reliance in that regard on the decision of Hunter J in Walter Construction Ltd v Walker Corporation Ltd [2001] NSWSC 283 at [304].

138 The second matter that Cordon relied on was what it described as Lesdor's unreasonable refusal to execute the Strata Plan. It submitted that Lesdor unreasonably refused to execute the Strata Plan in circumstances where it knew it was impossible to build the existing commercial foyer as depicted in the plans and to allocate an entire floor of car parking space to the commercial units. In this regard it relied on the following evidence from Mr Les Semken:

"Q.You can leave that aside, Mr Semken. I've just noticed something. Let's just go back. Throughout 2006, you were aware that it was physically impossible to build the front of those commercial premises as shown on the original drawings because of a fire issue; correct? We covered this yesterday?

A.The entrance, yes.

Q.Yes.

A.Yep.

Q.And you're also aware that it was physically impossible to comply with council approvals and give you all of the residential parking on one level; correct?

A.Yep.

Q.And you were aware that Cordon needed more than one space in the area below to comply with the council approval; correct?

A.Yes.

Q.And despite that knowledge, you were not prepared to sign the plans and specifications until Cordon actually built the front of the building as shown on the original drawings; correct?

A.I repeat: I needed the job to be finished.

Q.And you instructed your solicitor -

A.Not because of the car spaces at all, it was nothing to do with that. It was simply to get the job finished and let's get the thing sold and out of the way.

Q.And knowing of the impossibility of actually building the building as shown on the plans and specifications, you instructed Mr Solari, didn't you, to continually reject any request for you to deliver up the plans, the strata plans, on the understanding and basis that Cordon had to actually build the structure that it couldn't build; correct?

A.It had two years to do it.

Q.Is the answer to my question yes, Mr Semken?

A.They could build it, but they weren't prepared to build it. It was possible to build it."

And

"Q.And what your position was, was that Mr Solari had to make sure that Cordon was absolutely clearly of the view that no departure in any way from what was shown on the plans and specifications would be permitted by Lesdor, is that correct?

A.This was a - an attempt to get the job finished. To use as much pressure as we could in the letter to encourage them to get on with the job and bring it to a finish.

Q.But your position was, at the end of the day, what you wanted without any compromise was everything shown on that plan and specification, irrespective - it had to be absolutely complying, correct?

A.I wanted the job finished in accordance with the plans and specifications.

Q.And without any departures, correct?

A.Well, that's what I am saying. I wanted it finished, yes.

Q.And that included parts of the building that you knew simply could not be built, correct?

A.Could have been discussed."

139 Third, it repeated its submission before the primary judge that Lesdor had interfered with Cordon's contractual obligations with the NAB.

140 Cordon also submitted that Lesdor's strategy could be inferred from the following matters:

(a)The fact that at all times prior to 31 March 2006 the parties dealt with each other on the understanding that occupation would be granted on practical completion. In this regard Cordon relied on the letters from the solicitors for Lesdor inquiring when practical completion would occur for the purposes of negotiating with tenants. I have referred to these letters in par [114] above. It also relied on the fact that Lesdor only insisted on defect free completion following receipt of letters from Cordon's solicitors in March 2006 demanding the return of the executed Strata Plan.

(b)The fact that Lesdor demanded and took possession of the works on the council issuing its occupation certificate and completion report in December 2005. I have referred to this in par [115]-[116] above when dealing with the issue of waiver.

(c)That on 19 December 2005 Lesdor indicated that it was interested in retaining some of the residual units in the complex and withdrew its price list for the units. This submission somewhat misstates the position. In a letter dated 19 December 2005 the solicitors for Lesdor indicated that their client may be interested in retaining some of the residual residential units and invited Cordon to put any proposition it wished to in relation to that suggestion. That letter confirmed that price lists for the units were withdrawn as had been demanded by the solicitors for Cordon. It is difficult to see how any inference adverse to Lesdor can be drawn from that material.

(d)Lesdor's rejection of the offer made by Cordon of a retention fund of $30,000 and its insistence of a retention fund of $1 million and subsequently $1.5 million as a condition of executing the Strata Plan.

(e)Lesdor's failure to arrange for its consultant, Mr Childs, to confer with Mr Austin. Cordon, in its submissions, stated that the primary judge accepted that Lesdor had pressed Mr Childs for a report in reply, but no report was forthcoming. The submission makes no references to the reason his Honour found that such a report was not forthcoming or of his Honour's conclusion that this did not demonstrate lack of good faith.

(f)Evidence from Mr Paul Semken and Mr Les Semken which, it was said, conceded that Lesdor had adopted a strategy to keep all Residual Lots for itself. Having regard to the nature of the claim, it is necessary to set this evidence out:

(i) Mr Les Semken

"Q.At some stage, Lesdor decided it would not sell these residual units; correct?

A.Well, most of it we decided not to sell them. At one stage, I'm not sure what the date was, though.

Q.Do you remember when you decided not to sell?

A.I think just prior to getting the new loan - the -

Q.And by 'the new loan', you mean the Macquarie Bank loan?

A.Yes.

Q.You say to his Honour, do you, that just prior to getting the money from the Macquarie Bank -

A.Some time prior to that, yes.

Q.- you'd made the decision not to sell the units; is that right?

A.That's right, yeah.

Q.Was that a decision that you made in consultation with your son Paul?

A.I believe so.

Q.And was that because you saw the residual lots as being a potential for Lesdor to make a return based on their market value?

A.I don't believe there was any return on it. We were losing on it all the time."

(ii) Mr Paul Semken

"Q.As at June 2006 you'd struck on the strategy of trying to keep those residual lots in your hands, correct?

A.I suppose we refinanced the loan to stop the receivers coming in.

Q.Do you deny that as of June 2006 you and your father had made a decision to try and keep the residual units in your hands, do you deny that?

A.My father wasn't in the country at that time, I believe.

Q.Do you deny it?

A.As I said to you, the strategy was to refinance to keep the receivers out of Lesdor and then probably go into Cordon.

Q.Do you say on your oath as of June 2006 you did not have a strategy of trying to keep those residual lots in your hands. Do you deny that on your oath?

A.I don't deny that, no.

Q.Because the position was plain, wasn't it, that as of June 2006 you did have that strategy, correct?

A.That's right.

Q.And you did everything possible in June and July and August 2006 to force a situation where you put Cordon in a position where it could not extend so that you could take over the residual lots, correct?

A.Not correct."

(g)Lesdor's direction in April 2006 to cease marketing the units.

(h)Lesdor's further refusal to accept Cordon's offer to resolve the dispute on 31 May 2006, namely, a meeting of the parties' experts, $190,000 to be placed in a joint account and an independent determination of defects not agreed upon conditional upon Lesdor executing the Strata Plan.

(i)That after termination, the Strata Plan was registered without any work being done to rectify the defects.

(j)That on 26 May 2006 Lesdor objected to Cordon leasing out the residual lots. It should be noted that this letter was written in a context where Justice Barrett had determined that Lesdor was entitled to completion in accordance with the plans and specifications.

141 Lesdor seemed to accept in its submissions that this was a case where it was appropriate to imply an obligation of good faith, pointing out however that it did not require a party to act in the interests of the other party or to subordinate its own legitimate interest to the interests of that other party.

142 So far as the particularised breaches of the obligations contained in par 11AA of the Second Further Amended Statement of Claim are concerned (see par [126] above), Lesdor made the following submissions:

(i)Particular (a) related to the delay in obtaining a report in reply from Mr Childs. This delay was not due to the fault of Lesdor but rather to the unavailability of Mr Childs. In any event, the obligation to act in good faith did not extend to obtaining an expert to identify defects in construction.

(ii)Particulars (b) and (c) related to the failure to execute the Strata Plan. Lesdor was entitled to do this having regard to the terms of the Agreement.

(iii)So far as particular (d) was concerned, Lesdor pointed to the fact that Cordon had consented to Lesdor discussing the issue of the outstanding loan with NAB and submitted its contact with NAB was to avoid a receiver being appointed to the property and to make arrangements to refinance the property itself.

143 Lesdor submitted that a number of the alleged breaches of the implied obligation now sought to be relied on were not pleaded.

Consideration

144 Lesdor did not dispute that it was appropriate to imply into the Agreement an obligation that the parties would act in good faith towards each other. That is consistent with the approach adopted in a number of decisions of this Court: Renard Constructions (ME) Pty Limited v Minister for Public Works (1992) 26 NSWLR 234; Burger King Corporation v Hungry Jack's Pty Limited [2001] NSWCA 187; (2001) 69 NSWLR 558 at [186]; Alcatel Australia Limited v Scarcella (1998) 44 NSWLR 349 at 369; United Group Rail Services Ltd v Rail Corporation (NSW) [2009] NSWCA 177; (2009) 74 NSWLR 618 at [58]-[61]; Macquarie International Health Clinic Pty Limited v Sydney South West Area Health Service [2010] NSWCA 268 at [11]-[12], [146]-[147]. However, these decisions have emphasised that the obligation does not require a party to act in the interests of the other party or subordinate its own legitimate interests to those of the other party, although it does require it to have due regard to the rights and interests of the other party. The necessity for the implication of such terms in commercial contracts has not been universally accepted: Service Station Association Pty Limited v Berg Bennett & Associates Pty Limited (1993) 45 FCR 84 at 91-98; Royal Botanic Gardens & Domain Trust v South Sydney City Council [2002] HCA 5; (2002) 240 CLR 45 at [88], [155]. However, it is not necessary to discuss the matter further in the present case.

145 The content of the obligation has commonly been held to embrace three related matters:

1An obligation on the parties to co-operate to achieve the contractual objectives.

2Compliance with honest standards of conduct.

3Compliance with standards of conduct that are reasonable having regard to the interests of the parties.

A F Mason "Contract, Good Faith and Equitable Standards in Fair Dealing" (2000) 116 LQR 66 at 69; Alcatel Australia Limited v Scarcella supra at 367; Burger King Corporation v Hungry Jacks Pty Limited supra at [171]; Macquarie International Health Clinic Pty Limited v Sydney South West Area Health Service supra at [12]; [146].

146 Notwithstanding the existence of the implied term, I have difficulty in seeing that an insistence on a contractual obligation being complied with when that obligation is a pre-condition to counter performance could of itself amount to a breach of an obligation of good faith. An implied obligation of good faith could not extend to imposing obligations on the parties that were, in effect, inconsistent with the terms of the Agreement: Vodafone Pacific Limited v Mobile Innovations Ltd [2004] NSWCA 59 at [194], [208].

147 In the present case, Barrett J had clearly stated, albeit in an interlocutory judgment, that there was no obligation on Lesdor to deliver up the Strata Plan until completion of the Building Works and had refused Cordon an order for specific performance requiring its execution: see [2006] NSWSC 481. In that context, it does not seem to me that Lesdor's insistence on a judicially determined contractual right could amount to a breach of the implied obligation.

148 It follows that the breach of the obligation to act in good faith made in par 11AA(b) in the Second Further Amended Statement of Claim (insisting on defect free completion) was not made out.

149 The allegation of breach contained in par 11AA(a) of the Second Further Amended Statement of Claim, namely, refusal to identify defective works, is directed to the failure to provide a response to the report of Cordon's consultant, Mr Austin, relating to defects in the work. Having regard to the finding of the trial judge that a report was sought by Lesdor from its consultant, Mr Childs, but not produced (see [127] above) such failure in my opinion, would not be a breach of an implied obligation of good faith.

150 The third alleged breach, namely, insistence on defect free completion when Lesdor had taken possession of the works, does not seem to me to amount to a breach of an obligation of good faith, particularly in circumstances where there was no suggestion that Lesdor's conduct prevented Cordon from completing the works or was relied on by Cordon as a reason for not doing so.

151 The final breach of the implied obligation pleaded in the Second Further Amended Statement of Claim is that Lesdor interfered and intermeddled with Cordon's contractual relationship with the NAB. On appeal this was not relied on as a separate ground but in support of an allegation that at some time in 2006, Lesdor embarked on a strategy to deprive Cordon of the Residual Lots and keep them for itself. Insistence on defect free completion and interference with the NAB facility was said to form part of the strategy.

152 The trial judge did not deal with this submission holding that it did not fall within the pleadings (judgment [207]). However, there was no suggestion made by Lesdor that the case would have been conducted differently had the allegation been put in that way. In those circumstances, it is appropriate to deal with it.

153 If the allegation was made good, it would be open to conclude that Lesdor exercised its power of termination for a collateral or extrinsic purpose and otherwise than in good faith: see Vodafone Pacific Ltd v Mobile Innovations Ltd supra at [211]-[215], or for that matter engaged in conduct capable of being set aside in equity as unconscionable or unconscientious: see Godfrey Constructions Ltd v Kanangra Park Pty Limited [1972] HCA 36; (1972) 128 CLR 529 at 549: Pierce Bell Sales Pty Limited v Frazer [1973] HCA 13; (1973) 130 CLR 575 at 587.

154 In making this submission Cordon relied on the matters particularised as well as a number of other matters. It is convenient to deal with the additional matters prior to dealing with the allegations of interference with Cordon's relationship with NAB:

(a)The first matter relied on was Mr Paul Semken's belief up until September 2005, that the works would be completed in accordance with a regime of practical completion. Although Mr Paul Semken conceded that this was his view as at September 2005, there was no evidence that he continued to hold that view or that Mr Les Semken was of the same view. In this regard it must be remembered that it was put to Mr Paul Semken that the strategy complained of was devised in June 2006 (see the cross-examination referred to in par [140](f) above).

Further, at all times from 28 October 2005 when Cordon was given the report of Mr Childs, Lesdor demanded completion of the Building Works. The demands were made in letters of 28 October 2005, 22 November 2005, 2 December 2005, (prior to the decision of Barrett J) and thereafter on 8 May 2006, 12 May 2006, 26 May 2006 (prior to the time it was suggested that the alleged strategy was adopted) and 24 July 2006.

Having regard to this chain of correspondence, both before and after the alleged strategy was said to be adopted, it does not seem to me that a belief held by Mr Paul Semken in September 2005 provides any foundation for the allegation that Lesdor embarked on the strategy complained of.

(b)The next matter alleged was Lesdor's refusal to execute the Strata Plan in circumstances where it was suggested that it knew it was impossible to rebuild the existing commercial foyer as depicted in the Plans & Specifications and to allocate an entire floor of car space to the commercial units.

I have set out the cross-examination of Mr Les Semken relied upon in support of this allegation in par [138] above. In that cross-examination Mr Les Semken said first, that he wanted the job done, secondly that the structure could have been built and thirdly that the matter could have been discussed.

As I have indicated earlier, Cordon had no right to vary the plans without consultation with Lesdor. Further, it was not put to Mr Les Semken that his insistence on defect free completion was part of the strategy now asserted. In those circumstances that finding should not now be made.

(c)The indication by Lesdor in December 2005 that it may have been interested in retaining some of residual lots. I have referred to this in par [140](c) above. Even if that approach could in some circumstances be indicative of the conduct complained of, it cannot in circumstances where the suggestion was made some six months prior to the time the strategy was said to be devised.

(d)Lesdor's refusal to accept a retention fund rather than insisting on with completion of the Building Works prior to executing the Strata Plan. As I have indicated earlier, an obligation to act in good faith does not extend to being required to agree to something other than actual performance of the contract.

155 In considering the allegations concerning interference and intermeddling in the relationship between Cordon and the NAB, there are two matters which must be borne in mind. First, Lesdor had guaranteed the NAB facility and mortgaged its property to secure it. Secondly, the Agreement provided that Cordon was liable for repayment of the borrowed funds: see cl 2(b)(iii) of the Agreement.

156 In these circumstances, Lesdor had a real interest in seeing the NAB facility was either refinanced or repaid when it fell due.

157 The NAB facility initially fell due for payment on 31 May 2006. On 17 May 2006 Cordon, by letter, authorised the NAB to discuss the facility with Lesdor. Subsequently Mr Solari, Lesdor's solicitor, had a meeting with Mr Hatter of the NAB on 17 May 2006. Mr Hatter indicated to Mr Solari that Cordon "in effect had invited the bank to appoint a receiver". Although Ms Ghosn denied that this was Cordon's position, this was how it was conveyed to Lesdor.

158 On 23 May 2006 Mr Solari and Mr Paul Semken met with Mr Hatter. Mr Solari's notes disclosed that he said to Mr Hatter "We might be looking at the question of financing the bank's facility and then taking it over ourselves". His notes also record that at the end of the meeting it was agreed that NAB would speak to Cordon about extending the facility.

159 On 25 May Cordon sent a facsimile to NAB which concluded as follows:

"Would you please advise that the letter we discussed outlining the bank's concern, position and actions will be sent to both parties. Thank you."

160 On 26 May 2006 NAB wrote to Mr Solari indicating that it had agreed to extend the NAB facility for 60 days to afford Lesdor and Cordon an opportunity to resolve their dispute but that it would appoint a receiver to the property should a default occur. On the same day the NAB wrote to Cordon indicating that if the dispute was not resolved the bank would not further extend the facility, penalty interest of approximately $126,000 per month would be payable and that the bank would appoint a receiver.

161 On the same day Ms Ghosn faxed Mr Hatter indicating that her legal advice was not to renew the facility.

162 On 31 May 2006 the solicitors for Cordon wrote to Lesdor. That letter contained the following statement:

"We understand that the National Australia Bank has conferred with your client and has raised its concerns relating to the matter and has informed your client that Cordon will not be able to meet its loan commitments if this matter is not resolved in the short term and accordingly this could result in the NAB appointing a receiver to the property, the subject of the dispute.

In the interests of both parties and to avoid a receiver being appointed by the NAB and the NAB calling upon the guarantees, please provide us with your response within 7 days.

Our clients are required to keep the NAB informed of current progress in relation to a resolution of this matter and accordingly, your early reply is appreciated."

163 On 22 June 2006 the solicitors for Cordon wrote a further letter to Mr Solari relevantly to the following effect:

"Our client has had its loan facility with the NAB renewed until late July, 2006. We understand your client has guaranteed the extension of the said facility.

It is highly likely that the NAB will take possession of the entire building premises pursuant to its mortgage if some agreement is not reached between these parties before the expiration of the renewed loan facility.

Surely, you and your client must appreciate that if the Bank proceeds and takes possession of the subject premises, this could have the potential to cause drastic consequences for both your client and our client.

So as to avoid the NAB taking possession of the premises, we urge you to provide to us as soon as possible your expert's report from Childs in reply to that of Austin with the aim of the parties trying to achieve a resolution of the case."

164 On 29 June 2006 Macquarie Bank Limited offered alternative security to Lesdor. The offer was accepted on 31 July.

165 On 27 July 2006 Mr Solari indicated to NAB that Lesdor was in a position to pay out the facility. On 1 August 2006 NAB made demands on Lesdor and Cordon for repayment of the facility. On that day Cordon's solicitors wrote to Mr Solari to the following effect:

"So as to avoid the NAB taking possession of the subject premises and appointing a receiver, our client is still prepared to renew its offer made by letter dated 31 May 2006 to your client that it will set aside an amount of $190,000.00 (refer point 2 of our letter dated 31 May 2006) to cover the cost of works which your client still deems to be incomplete and/or defective with the release of those moneys to be applied pursuant to joint agreement by experts and if no agreement is reached by the experts, then by an independent building consultant who will determine the matter with the parties abiding by the said determination."

166 This chronology indicates clearly that Cordon had no intention or ability to repay or refinance the facility. Lesdor had only two choices, accept Cordon's proposal, which as I have indicated was not in accordance with the Agreement, or refinance itself. The fact that it chose the latter does not mean it failed to act in good faith.

167 It is in that context that the evidence of Mr Les Semken and Mr Paul Semken referred to in par [140(f)] above falls to be considered. The fact that they had devised a strategy to deal with Cordon's position that it would not refinance or honour what they perceived to be Cordon's contractual obligation, was neither unreasonable nor dishonest, nor did it demonstrate a lack of fidelity to the Agreement. In these circumstances the allegation of a breach of an implied obligation to act in good faith was not made out.

168 It follows that this ground of appeal also fails.

Grounds 12-14: Termination and repudiation

The findings of the primary judge

169 The trial judge was able to deal with these matters shortly having regard to the conclusions he reached on the issues which I have discussed above. He stated (at [113]) that Lesdor was entitled to adopt the position it did in relation to completion of the Building Works and that Cordon must be regarded as having stated that it was not prepared to perform its obligations in accordance with the Agreement, but only in accordance with its own interpretation or understanding of it. He found that Cordon did not acknowledge the possibility of error or adopt the position that if the Agreement was to be construed otherwise than in the manner for which it contended, it would perform its obligations accordingly. In those circumstances the primary judge held that Cordon had repudiated its obligations under the Agreement.

170 The primary judge also held that Lesdor had not acted improperly in relation to the NAB facility and that, conversely, Cordon had repudiated the Agreement by failing on reasonable notice to state whether it would or would not pay out the NAB facility and by failing to pay out that facility when it expired (at [263]).

The submissions of the parties

171 The appellant by and large repeated the submissions it made on the issues of construction of the Agreement and substantial performance, to which I referred above. It submitted that for Lesdor to be entitled to terminate, Cordon's conduct had to be such as to deprive Lesdor of a substantial benefit to which it was entitled under the Agreement, with the consequence of it being unfair to Lesdor to hold it to its bargain and leave it to its remedy in damages. It relied in this context on what was said by the High Court in Koompahtoo Local Aboriginal Land Council v Sanpine Pty Limited [2007] HCA 61; (2007) 233 CLR 115 at [45]-[49] and the dictum of Buckley LJ in Decro-Wall International SA v Practitioners In Marketing Ltd [1971] 1 WLR 361 at 380.

172 Further, it contended that the primary judge ought to have found that Cordon was prevented or hindered by Lesdor from completing the works in accordance with the Agreement. In this regard it relied on Lesdor's refusal to identify allegedly non-complying, defective or incomplete work with reference to the Plans and Specifications. It further relied on what it said was Lesdor's insistence on defect free completion when it knew that, first, it was impossible to construct the front of the existing commercial building strictly in accordance with the Plans and Specifications, secondly, that Council would not approve of an entire floor of car parking for the commercial offices and thirdly, that the scope of the work had been modified at Lesdor's direction. In this regard, Cordon relied in particular on Lesdor's insistence that Cordon provide the selected gravel finish to the roof of unit 25 notwithstanding a direction to vary the works to be performed, incorporating the skylight. It submitted that in those circumstances Lesdor had, by its own actions, prevented or rendered impossible defect free completion and thus was not entitled to rely on a failure to attain such completion as a ground for termination.

173 So far as the alternative basis on which the primary judge found that Cordon had repudiated the Agreement, Cordon disputed the primary judge's conclusion that it was 'unwilling' to do anything about the NAB facility and submitted that in fact the NAB had extended the NAB facility from 31 May 2006 to 31 July 2006 with the consent of both the parties. Cordon further submitted that it was under no obligation to discharge the loan facility other than from the proceeds of the Residual Lots.

174 Lesdor emphasised that its right to terminate the Agreement did not arise from a breach of a condition or a serious breach of a non-essential term but rather from the fact that Cordon's conduct indicated either an inability or an unwillingness to fulfil its obligations under the Agreement, or a willingness to fulfil them only in a manner substantially inconsistent with its contractual obligations and not in any other way. Lesdor submitted that this amounted to a renunciation of the Agreement, giving it the right to terminate.

175 In its submissions Lesdor referred to the correspondence between the parties up to the time of termination which, it submitted, indicated that Cordon was not prepared to complete the work in accordance with the Plans and Specifications, but rather only to do such additional work as Mr Austin, its consultant, held was necessary. It pointed to the fact that Cordon adopted this approach notwithstanding the interlocutory decision of Barrett J, which had held that completion for the purpose of cl 15 of the Agreement meant completion in accordance with the Plans and Specifications. Lesdor pointed to the fact that as at the date of termination, the five significant defects found by the trial judge had not been attended to, nor had the defects which the referee found had subsisted as at 31 July 2006. It submitted that an unwillingness to rectify these defects was conduct amounting to a renunciation of the Agreement. It submitted that there was no evidence to support the contention made by Cordon that Lesdor had hindered or prevented Cordon from completing the work.

176 In relation to the question of whether Cordon's refusal to refinance the NAB facility amounted to a repudiation of the Agreement, Lesdor adopted the findings of the trial judge on this issue and submitted that it was Cordon's obligation to refinance the NAB facility on or prior to its expiry. It submitted that after the judgment of Barrett J, Cordon knew the Strata Plan would not be executed and that the Residual Lots would not be sold until the Building Works were completed. In those circumstances, it submitted Cordon knew that to meet its financial obligations under the Agreement, it would have to refinance the NAB loan. Lesdor submitted that Cordon's failure to take any steps to do so amounted to a renunciation of its contractual obligations.

177 In support of his client's claim that the Agreement had been repudiated by Cordon, senior counsel for Lesdor referred to the finding of the trial judge that, based on the referee's report which the primary judge adopted, the amount of the claim for defective and incomplete works was $386,682.90 together with whatever might be found to be the costs of bringing the western end of the old commercial building into accord with the Plans and Specifications (at [328]). He accepted that this sum included many minor items as well as four of the five major defective items and that the total cost of the building was at least $8.2 million.

178 In supplementary written submissions, Lesdor emphasised that impossibility of performance was not pleaded by Cordon as an excuse for non-compliance with the Plans and Specifications and that no expert evidence had been served to support such a claim. It pointed out that cll 3(a) and 12(a) of the Agreement contemplated that the Plans and Specifications may be altered by consent but that no attempt had been made by Cordon to obtain any such consent.

Consideration

179 As Lesdor pointed out, it did not rely on a breach of any particular term or condition of the Agreement as grounding its right to terminate but rather on what was described in Koompahtoo Local Aboriginal Land Council v Sanpine Pty Limited supra at [44] as a renunciation of the contract, namely, an unwillingness or inability to render substantial performance of it.

180 The test of whether the conduct of Cordon amounted to such a renunciation, is whether its conduct was such as to convey to a reasonable person in the position of Lesdor renunciation of the contract as a whole or of a fundamental obligation under it: Koompahtoo Local Aboriginal Land Council v Sanpine Pty Limited supra at [44]; Laurinda Pty Limited v Capalaba Park Shopping Centre Pty Limited [1989] HCA 23; (1989) 166 CLR 623 at 634, 657-658.

181 In this context, the following facts should be considered. Barrett J gave judgment on 5 May 2006. On 8 May Mr Solari wrote to the solicitors for Cordon in the following terms:

"1.We require your client to attend to the completion of the works in accordance with the plans and specifications and any rectification works as soon as possible. Clearly, our client is not obligated to sign the strata plans until you have attended to this."

182 Cordon's solicitors responded on 10 May 2006 in a letter containing the following statement:

"Without admission of liability our client will under the guidance of its expert Mr Austin rectify defects. Please advise what arrangements can be made for these to be carried out."

183 Mr Solari responded on 12 May 2006 in the following terms:

"1.It is a matter for your client as to the procedure to be followed by your client in completing the works.

2.However, our client does not accept that Mr Austin's report accurately sets out the required rectification works.

3.As has been made clear to your client by the Court, your client has to COMPLETE THE WORKS IN ACCORDANCE WITH THE PLANS AND SPECIFICATIONS IN A PROPER AND WORKMANLIKE MANNER. This, on our client's understanding, means without deviation from the plans and specifications. As an example, in relation to the awning which was to be galvanised dipped, this is what our client insists on. Alternative solutions such as that proposed by Mr Austin are not acceptable.

4.We would suggest therefore that rather than your client working with Mr Austin as to solutions to defective works, your client get Mr Austin to analyse the plans and specifications and Mr Child's reports and provide your client with a works schedule identifying the works required to comply with your client's contractual obligations. In an attempt to minimise future disputes between the parties on this aspect, you could submit such works schedule to us. Our client could then analyse this and advise whether it accepts that works schedule or, if not, in what respects.

5.Your client should also provide to our client a time frame for completing the works.

6.In the event your client does not attend to completing the works in a prompt manner, our client would then have to consider this as a repudiation by your client of the contract."

184 Mr Solari again wrote to Cordon's solicitors on 26 May 2006, the letter relevantly contained the following statement:

"We also note that we have pointed out to you in prior correspondence your client's obligation to complete the works in accordance with the plans and specifications. We note you have advised that your client intends to complete the works in accordance with Mr Austin's report. That is, with all due respect, not in accordance with the plans and specifications. Would you please confirm by return that your client intends to comply with its obligations under the agreement and complete the works in accordance with the plans and specifications."

185 On 31 May 2006 Cordon provided a report from Mr Austin. That report disputed the need for rectification of some of the defects identified by Mr Childs and ultimately found to exist by the primary judge. On 16 June 2006 Mr Solari responded in the following terms:

"In particular, we refer to the proposal contained in your letter to this Firm dated 31 May 2006. We are instructed that our client does not agree to the proposed items 1-7 in your letter. Further, our client does not consider that Mr Austin can usefully progress the rectification of your client's defective works having regard to the fact that he acknowledges items of defective works, yet at the same time Mr Austin does not accept that such works must be carried out in accordance with the plans and specifications as required by the Deed (as varied).

In this regard, we confirm that his Honour Mr Justice Barrett has explicitly determined that your client cannot and will not have fulfilled its obligations under the Deed (as varied) in terms of carrying out the Building Works unless and until such works have been carried out in accordance with the plans and specifications (Cordon Investments Pty Limited v Lesdor Properties Pty Limited [2006] NSWSC 481 at [7] and [10] per Barrett J).

Neither your client, nor Mr Austin appear to be prepared to accept this.

Our client regards your client's continued failure and/or refusal to complete the Building Works in accordance with the plans and specifications and as required by the Deed (as varied) as a serious breach of your client's contractual obligations.

Our client requires your client to inform our client by no later than 5:00pm on Thursday, 22 June 2006 whether it is ready, willing and able to complete the Building Works duly and entirely in accordance with the plans and specifications as required by the Deed (as varied). If your client fails and/or refuses to confirm by 5:00pm on Thursday, 22 June 2006 that it is ready, willing and able to complete the Building Works duly and entirely in accordance with the plans and specifications and as required by the Deed (as varied), our client will regard and accept such conduct by your client as being repudiation by your client to perform its contractual obligations, and terminate the Deed (as varied).

In addition, and further to your letter to this Firm dated 31 May 2006 particularly in relation to your reference to the recent interest expressed by the National Australia Bank in this matter, our client has instructed us to remind you of your client's obligation under clause 2(b)(iii) of the Deed (as varied), namely that your client is responsible for borrowing the necessary funds to meet the cost of the Building Works and shall be responsible for the repayment of such funds. Clearly, your client is not in a position to meet its obligations with the National Australia Bank, and accordingly is in breach of the Deed (as varied).

Our client requires your client to inform our client by no later than 5:00pm on Thursday, 22 June 2006 whether it is ready, willing and able to meet its obligations with the National Australia Bank as required by clause 2(b)(iii) of the Deed (as varied). If your client fails and/or refuses to do so, our client will regard such conduct as being the repudiation by your client to perform its contractual obligation, and terminate the Deed (as varied)."

That letter clearly sets out Lesdor's position, both in relation to completion of the Building Works and the NAB facility.

186 Cordon did not give the assurances sought. On 22 June 2006 its solicitor responded in the following terms:

"Should your client proceed to terminate the Deeds, our clients will need to treat your client as having wrongfully repudiated the Deed(s) and will pursue to the full extent possible all damages arising from your client's breach."

I have set out the relevant provisions of this letter so far as it relates to the NAB facility above (see at [163]).

187 On 20 July 2006 Cordon's solicitors wrote to Mr Solari stating that Cordon was entitled to proceed on the basis that the work that Mr Austin recommended be attended to represented the outstanding work. That letter contained the following statement:

"We advise that our client is taking steps to complete the works as detailed in the report of Mr Austin and it is expected that such works will be completed shortly.

We would submit that our client is taking all proper and reasonable steps to attend to the outstanding works and given that we have not heard further from your client or its expert in relation to any other works that need rectification, that our client is properly entitled to proceed on the basis that the works recommended be attended to by Mr Austin are the outstanding works.

We would confirm that our client instructs that the attitude of the Bank is that it will only give until the end of this month for our clients to resolve the matter, failing which the Bank will take such steps as it deems appropriate. This is something that is of concern to our client and no doubt is of concern to yours."

188 On 31 July 2006 Cordon sent to Lesdor a letter from Mr Austin dated 28 July 2006, stating that the work he regarded as defective had been rectified. There was no undertaking to do any of the further work which had been identified by Mr Childs.

189 In this regard it must be remembered that the defects as found by the primary judge and by the referee were not said to be minor (see pars [97] and [110] above). The fact that some of the defects were discovered after termination does not mean they cannot be relied upon as demonstrating an unwillingness to perform the contract according to its terms: Shepherd v Felt & Textiles of Australia Ltd (1931) 45 CLR 359 at 371, 373, 377-378.

190 I have dealt with the position concerning the NAB facility above. In the circumstances which I have outlined, both in relation to completion of the work and the NAB facility, the conduct of Cordon would have conveyed to a reasonable person in the position of Lesdor that Cordon was not willing to complete the Building Works, except to the extent said to be required by Mr Austin and was unwilling or unable to either repay or co-operate in refinancing the NAB facility unless Lesdor accepted its view of the Agreement. In these circumstances Cordon exhibited an unwillingness or inability to perform the contract according to its terms and thereby renounced its contractual obligations. It follows that this ground of appeal has not been made out.

Grounds 20-23: Restitution and quantum meruit

The findings of the primary judge

191 The primary judge found that since Lesdor did not breach the Agreement, this claim had no prospects of success (at [309]). He stated that if it were held that some restitutionary claims should succeed or that Lesdor should make a payment on a quantum meruit basis, the quantification of any amount to be paid must take account of the fact that Cordon had been paid for substantially the whole of the actual cost to it of doing the work by draw downs from the NAB loan facility. He accepted that the actual cost of the work exceeded the amount of the facility by about $87,026 (at [310]). He stated that in these circumstances any consideration of payment on a quantum meruit basis would be limited to a profit and risk allowance (at [312]). Without finally deciding the point he said he had difficulty in seeing why the Court should award such an allowance when the parties' contract expressly provided for the way in which Cordon was to be remunerated over and above the actual costs of the work.

192 In a supplementary judgment delivered on 17 December 2010, the primary judge noted that in argument leading to the delivery of that judgment Cordon contended that in circumstances where it, Cordon, had breached the contract, Lesdor had the option of either taking the benefit of the work as it stood or suing for damages. He noted Cordon's submission that if Lesdor chose to sue for damages, it was required to give credit for the amounts that would have been payable to Cordon under the contract which, it was said, included not just the costs of the work but also the joint venture "profits" that Cordon would have made had the joint venture been carried through to completion (at [6]).

193 The primary judge held that there were three fundamental problems with Cordon's contentions. The first was that it was not the way the case was put at trial. The second was it was inconsistent with his reasons in his principal judgment, which rejected any claim to a quantum meruit and the third was that he did not regard it as clear that the authority relied on by Cordon in support of this contention (Tan Hung Nguyen supra at [52]-[54]) applied in circumstances where Cordon, as builder, was to be paid the cost of the work done by it but where the profit was derived from the joint venture itself. He did not express a concluded view on the latter question.

The submissions of the parties

194 Cordon first relied on its earlier contention that Lesdor was not entitled to terminate the Agreement. Alternatively it submitted that if the Agreement was properly construed as an "entire contract" any right to the benefit of valuable works not entirely completed by the Cordon without having to pay for them was lost when Lesdor sued for damages. It contended that a party who elects to sue for damages must give credit for what would have been due and payable to the builder for the work performed in accordance with the contract. It submitted that to the extent that there was a surplus over and above any alleged damages for defective work the primary judge ought to have given "restitution of that amount" to ensure that the parties were put in the same position they would have been had the contract been properly performed. In that context it placed reliance on the judgment of McColl JA in Tan Hung Nguyen supra. Cordon asserted, contrary to the finding of the primary judge, that this issue had been raised at trial.

195 At the hearing of the appeal senior counsel for Cordon accepted that all that was decided by McColl JA in Tan Hung Nguyen supra was that where a proprietor claimed damages for wrongful repudiation the builder was entitled to setoff a claim for work done based on quantum meruit against that claim. He conceded that what was being sought was an extension of what was decided by her Honour. However, he claimed that Cordon was entitled to the money "as a matter of equity and as a matter of justice", the claim being one "to recover a benefit gained at our [Cordon's] expense in circumstances where it would be unjust and unconscionable for the respondent [Lesdor] to retain it". He stated that this submission was supported by the decision of the Court of Appeal of Victoria in Sopov v Kane Constructions Pty Limited (No 2) [2009] VSCA 141; (2009) 24 VR 510.

196 So far as the quantification of a claim for a quantum meruit was concerned, Cordon emphasised that such a claim was not subject to any ceiling to be derived from the terms of the contract, but involved payment of an amount constituting fair and just compensation for the benefit or enrichment actually or constructively accepted. It submitted that ordinarily that would correspond to the fair value of the benefit provided. However, it submitted that in some cases it would be "to affront rather than satisfy the requirements of good conscience which inspire the concept or principle of restitution to determine what constitutes fair and just compensation for a benefit by reference only to what would represent a fair remuneration for the work involved or a fair market value of the material supplied": Pavey & Matthews Pty Limited v Paul (1987) 162 CLR 221 at 263.

197 On the assumption that Lesdor had wrongfully terminated the contract, Cordon calculated its quantum meruit claim on two alternatives. It first submitted that the primary judge ought to have found that assuming the proper measure of compensation was the reasonable price of the work performed by Cordon the value of the benefit to Lesdor was $2,371,519.30 as at 31 July 2006. It submitted the primary judge ought to have allowed Cordon that sum with interest. As an alternative, it submitted that the sum which should have been allowed was the value of the Residual Lots in the hands of Lesdor as at the date of repudiation, being calculated in an amount of $2,189,725.

198 On the assumption that Cordon's right to claim a quantum meruit arose as a result of Lesdor having sued for damages, it submitted that it should be awarded what it described as the surplus benefit to Lesdor as at 8 August 2007, namely, the sum of $1,958,441.

199 Lesdor submitted that Cordon was not entitled to claim restitution by way of quantum meruit for work done under a contract which it had breached, stating that the Agreement governed the contractual entitlements. Further, it stated that Cordon had not established that Lesdor had obtained a benefit. It submitted that it had never had the option to take or not take the incomplete and defective work and in that sense had not taken a benefit. It also submitted there had been no unjust acceptance or receipt of a benefit by Lesdor, as Lesdor had to refinance the NAB facility to preserve its property and incur the resultant debt and associated finance costs, as well as the costs of rectifying the defective and incomplete work.

Consideration

200 Cordon did not, as I understand, contend that in all circumstances where work had been performed by a party who subsequently renounces the contract, that party could maintain a claim for the value of the work done based on a quantum meruit. It submitted that the right only arose if the party not in breach sued for damages. In this regard it relied on the following passages from Hudson's Building and Engineering Contracts 11th ed (1995) Street & Maxwell at 476 [4.007] and 1033 [8.114] cited with approval by McColl JA in Tan Hung Nguyen supra at [52]:

"Thus where the contract is entire, the owner may get the benefit of valuable works not entirely completed by the builder without having to pay for them, unless the circumstances are such as to justify a quasi-contractual remedy. So a builder who has not fully completed the work, through no fault of the owner, cannot overcome his difficulty by ignoring the contract and sue on a quantum meruit for the work he has done. However, the rigours of this rule are often considerably reduced because, in a large number of cases where there is not entire performance, the owner may decide to sue the builder for damages for breach of contract. If he does, he will, on general principles of damages for breach of contract, have to give credit for what he would have had to pay had the contract been properly performed. But in a case where the owner decides not to sue he may derive considerable advantage from the foregoing rules, which are, however, an essential and necessary sanction to discourage the deliberate breaking or abandonment of contracts, which would be absent if in such cases the builder was entitled to demand partial payment notwithstanding his own breach ..."

and at 1033 (8.114):

"But it remains true that an owner should weigh carefully the damages recoverable, on the one hand, against the advantage he may derive under the [entire contract rule] from the builder's inability (depending on the state of the accounts) to sue for the balance of the price of the work, on the other, since if the owner decides to sue for damages he will have to give credit under the basic Robinson v Harman ... principle ... for what the work would have cost him if properly completed or performed."

201 In Tan Hung Nguyen supra at [53] McColl JA explained that what was described as the Robinson v Harman principle was the general principle that where a party incurs a loss by reason of a breach of contract, he or she is entitled to be put in the same position as if the contract had been performed: Robinson v Harman (1848) 1 Exch 850; see also Wenham v Ella [1972] HCA 43; (1972) 127 CLR 454 at 471.

202 It should be noted that neither the passages from Hudson's 11th ed referred to, nor the judgment of McColl JA, make any reference to the builder having a right to claim reimbursement by way of a quantum meruit. Nor does the authority cited in the relevant passages of Hudson's 11th ed support the proposition: Mertens v Home Freeholds Company [1921] 2 KB 526. That case concerned a claim for damages for failure to complete building works in the manner required by the contract. Lord Sterndale MR uncontroversially stated that the measure of damages recoverable for failure by a builder to complete work was the cost to the plaintiff of completion of the work less any amount that would have been payable to the builder had he complied with his obligations under the contract (at 535, see also Younger LJ at 540).

203 These authorities provide no support for the proposition that the commencement of proceedings by the party which has accepted the defaulting party's wrongful renunciation of a contract, enlivens a claim by the defaulting party for recovery of the value of the work claimed to have been done under the contract.

204 It is true that it has been accepted that a builder or a provider of services who has suffered loss by reason of the default of the other contracting party can claim either damages for breach of contract or for the value of the work done on a quantum meruit: Renard Constructions (ME) Pty Limited v Minister for Public Works supra at 277; Iezzi Constructions Pty Limited v Watkins Pacific (Qld) Pty Limited [1995] 2 Qd R 350 at 361; Sopov v Kane Construction Pty Limited (No 2) supra at [5]; Baltic Shipping Company v Dillon (1993) 176 CLR 344 at 354-355. However, none of these cases are authority for the proposition contended for by Cordon.

205 Further, the proposition sits oddly with the well-established principle that the effect of termination for breach is to discharge both parties from further performance of the contract although rights are not divested or discharged which have already been unconditionally acquired: McDonald v Dennys Lascelles Limited [1993] HCA 25; (1933) 48 CLR 457 at 476-477.

206 Such authority as there is suggests that a claim in quantum meruit is not available: Sumptor v Hedges [1898] 1 QB 673 at 674 (although this case proceeded on the assumption that restitution was founded in quasi contract).

207 To the extent that Cordon's submission is based on what was described as the principles of equity and good conscience underpinning restitutionary principles, it must be remembered that the High Court has stated on a number of occasions that the concept of unjust enrichment itself is not a principle which can be taken as sufficient premise for direct application in a particular case: Lumbers v W Cook Builders Pty Ltd (In liquidation) [2008] HCA 27; (2008) 232 CLR 635 at [80]; Friend v Brooker [2009] HCA 21; (2009) 239 CLR 129 at [7].

208 It follows that this ground of appeal is not made out. As I have concluded below that the cross-appeal must fail, any issue of giving credit for the value of the work does not arise.

209 In these circumstances grounds 20-23 of the grounds of appeal are not made out.

Ground 24: Damages

210 As I have concluded that Lesdor was entitled to terminate the contract by virtue of Cordon's renunciation of it, it follows that Cordon has no entitlement to claim damages from Lesdor. In these circumstances this ground of appeal fails.

Conclusion

211 It follows that, in my opinion, Cordon's appeal must be dismissed.

The cross-appeal

212 Lesdor cross-appealed from the primary judge's refusal to award it any damages for wrongful repudiation.

The findings of the primary judge

213 In his principal judgment, the primary judge noted that Lesdor claimed damages on two bases. First, on the basis that it suffered loss by reason of the fact that the value of the Residual Lots which it retained following its refinancing of the property with Macquarie Bank and the termination of the Agreement, was less than the amount that it was required to pay to Macquarie Bank. The primary judge rejected this contention concluding that had the Residual Lots been sold reasonably promptly, Lesdor would have received net of selling costs and GST more than enough to pay out the Macquarie Bank borrowing (at [329]). Without proceeding to a final calculation he concluded that there would have been surplus of the order of at least $330,000, subject to certain questions of capital gains tax and interest, after the Macquarie Bank facility had been paid out (at [339]). He stated that the surplus would have been available to apply to whatever damages Lesdor suffered by reason of Cordon's ineffective, incomplete and inconsistent work. This contention is not challenged on appeal.

214 Secondly, the primary judge noted that Lesdor claimed damages for the defective, incomplete and inconsistent work. In dealing with this claim, his Honour referred to the decisions of the High Court in Bellgrove v Eldridge [1954] HCA 36; (1954) 90 CLR 613 and Tabcorp Holdings Ltd v Bowen Investments Pty Limited [2009] HCA 8; (2009) 236 CLR 272 as authority for two propositions. First, that the measure of damages recoverable by a building owner for breach of a building contract is the difference between the contract price of the work contracted for and the cost of making the work conform to the contract together with consequential loss. Second, that this principle is subject to the qualification that the works undertaken to produce conformity must be necessary and in the circumstances the reasonable course to adopt, that question being a question of fact in every case. He concluded, consistent with those authorities, that necessary meant "apt to bring about conformity" between whatever had been done and the Plans and Specifications, whilst reasonableness was directed to the decision to undertake works to achieve compliance. Consistently with what was said in Tabcorp Holdings Ltd supra at [17], he concluded that the test of unreasonableness would be satisfied only in fairly exceptional circumstances.

215 His Honour also concluded, consistently with the decision of Giles J (as his Honour then was) in Central Coast Leagues Club Ltd v Gosford City Council (NSWSC, 9 June 1998, unreported) that if rectification work would never be undertaken, there was no loss. He also stated, relying on the decision of this Court in Westpoint Management Ltd v Chocolate Factory Apartments Ltd [2007] NSWCA 253 at [60]-[62], that if supervening events meant that the innocent party to the contract cannot carry out rectification work, then it cannot be found that the rectification work is reasonable to achieve the contractual objective (at [350]). In the present case, the primary judge noted that on registration of the Strata Plan, the common property in the premises, in which some of the defective work and much of the incomplete and non-conforming work appeared, was no longer owned by Lesdor but by the relevant owners corporation. In those circumstances, he concluded that the rectification work would never be undertaken, at least by Lesdor.

216 The primary judge accepted that Lesdor had a potential exposure to the owners corporation which came into existence on registration of the Strata Plan (at [351]). However, he found that there was no evidence of any complaint or any threat by that corporation to sue. In those circumstances he concluded that Lesdor had no right to damages based on the cost of rectification work within the common property.

217 The primary judge's ultimate conclusion in his principal judgment was that Lesdor was only entitled to recover damages for defective, incomplete or inconsistent work to the extent it was relevant to lots that it owned, subject to allowance for the surplus which would have remained after repayment of the Macquarie Bank facility had the Residual Lots been sold reasonably promptly.

218 In his supplementary judgment of 17 December 2010, the primary judge noted that senior counsel for Lesdor had conceded that the cost of such rectification work could not, on any view, exceed the amount of at least $330,000 that the primary judge had concluded would have remained after the discharge of the Macquarie Bank facility had the Residual Lots been sold promptly. In those circumstances, he dismissed the cross-claim.

The submissions of the parties

219 As I indicated Lesdor did not challenge the finding of the primary judge referred to in par [213] above, to the effect that had it promptly sold the Residual Lots, there would have been a surplus in the region of $330,000 after repayment of the Macquarie Bank facility. It accepted that in any assessment of damages credit would have to be given for this amount. However, it submitted that his Honour was in error in concluding that Lesdor was not entitled to damages measured by what it would cost to rectify the defective work on the common property.

220 In respect of the Strata Plans for the old and new commercial building, Lesdor emphasised that that whilst the owners corporation became the registered proprietor of the common property upon registration, as Lesdor owned all the lots, it controlled the decisions of that corporation. It also submitted that upon registration of the Strata Plan for the residential units, it controlled the owners corporation since it retained ownership of 20 of the 28 units. It submitted that consistent with what was said in Bellgrove v Eldridge supra and Tabcorp Holdings Ltd supra, it was contractually entitled to require the buildings erected upon its land to be constructed in accordance with the Plans and Specifications and that its loss could be measured only by ascertaining the amount required to rectify the defects and to deliver the buildings constructed in accordance with the Plans and Specifications. It emphasised what was said in Bellgrove v Eldridge supra at 620, namely that the fact that a party might not carry out the rectification works was quite immaterial. Whilst it accepted that the work undertaken must be a reasonable course to adopt, it emphasised, relying on what was said in Tabcorp Holdings Ltd supra at [17], that the test of unreasonableness would only be satisfied in fairly exceptional circumstances.

221 Further, whilst it did not dispute that an absence of intention to carry out the rectification work may be relevant to the test of reasonableness, Lesdor submitted that the facts in the present case did not satisfy that test, as the evidence did not establish that the rectification works could not or would not be carried out and because as a matter of commonsense Lesdor and the owners corporation would wish the rectification and completion of the Building Works as it enhanced the building both for leasehold and sale potential.

222 Lesdor also submitted that both Mr Paul Semken and Mr Les Semken rejected the suggestion that they would not do the work. However, the evidence relied upon in this regard is somewhat equivocal. Mr Les Semken stated that it was "crazy nonsense" to state that it was never his intention to change the configuration of the old commercial building to comply with the Plans and Specifications. However, when asked why that was the case he said it was because of a fault, being "the doors a foot apart". Immediately thereafter he withdrew that comment.

223 Mr Paul Semken was cross-examined as to whether he would dismantle the awning at the front of the premises and reconstitute it in galvanised steel. He stated he had had no discussions either way on that and that it was not functioning correctly at the moment.

224 Cordon submitted that even if Lesdor was entirely successful on its cross-appeal, the damages it would recover would be less than the surplus it would have received had the Residual Lots been sold reasonably promptly. For this reason alone, it submitted, the cross-appeal should fail.

225 So far as the question of reasonableness was concerned, Cordon submitted, relying on Central Coast Leagues Club v Gosford City Council supra that if the Court found that rectification work would never be undertaken, that finding would remove any ground for compensation.

226 It submitted that the trial judge had found as a fact that the rectification work would not be undertaken and that that finding was open on the evidence.

Consideration

227 In my opinion the primary judge was justified in concluding that the rectification work would not be carried out. As I indicated, the evidence of Mr Paul and Mr Les Semken was, at most, equivocal on this issue. Further, Lesdor had possession of the premises for more than four years before the hearing before the primary judge and none of the rectification work was carried out at that time. As Cordon pointed out there was a surplus of some $700,000 from the Macquarie Bank facility after repayment of the NAB loan which could have been applied to rectify the defects.

228 In addition, title to the common property is vested in the various owners corporations established on registration of the Strata Plans. Whilst it is true that Lesdor effectively controls those corporations, there is no evidence they propose to complete the work or make a demand on Lesdor to do so. In addition, it is difficult to see how the owners corporation could demand that the building be realigned.

229 Whilst I accept that a possibility that rectification work will not be carried out does not preclude a claim for damages: Bellgrove v Eldridge supra at 620, and that unreasonableness will only be established in exceptional circumstances: Tabcorp Holdings Ltd supra at [17], in the present case the carrying out of the work would be unreasonable in the sense described by Giles JA in Westpoint Management Ltd v Chocolate Factory Apartments Ltd supra (McColl and Campbell JJA agreeing). His Honour dealt with the issue in the following manner (at [59]-[61]):

"[59]Relevance of the plaintiff's intention to carry out the rectification work to reasonableness is accepted in, for example, Chitty on Contracts, 29th ed, at 20-016, and Hudson's Building and Engineering Contracts, 11th ed at 8-138. It appears to have been accepted in De Cesare v Deluxe Motors Pty Ltd - indeed, sale of the building may have relevance through whether or not the rectification work will be carried out. If truly going to reasonableness, I do not think consideration of whether or not the plaintiff will carry out the rectification work is inconsistent with Bellgrove v Eldridge, since the regard to it is part of arriving at the plaintiff's compensable loss. Once there is compensable loss, the court is not concerned with the plaintiff's use of the compensation.

[60]But the plaintiff's intention to carry out the rectification work, it seems to me, is not of significance in itself. The plaintiff may intend to carry out rectification work which is not necessary and reasonable, or may intend not to carry out rectification work which is necessary and reasonable. The significance will lie in why the plaintiff intends or does not intend to carry out the rectification work, for the light it sheds on whether the rectification is necessary and reasonable. Putting the same point not in terms of intention, but of whether or not the plaintiff will carry out the rectification work, whether the plaintiff will do so has significance for the same reason, and not through the bald question of whether or not the plaintiff will carry out the rectification work. That question is immaterial, see Bellgrove v Eldridge.

[61]So if supervening events mean that the rectification work can not be carried out, it can hardly be found that the rectification work is reasonable in order to achieve the contractual objective: achievement of the contractual objective is no longer relevant. If sale of the property to a contented purchaser means that the plaintiff did not think and the purchaser does not think the rectification work needs to be carried out, it may well be found to be unreasonable to carry out, the rectification work. An intention not to carry out the rectification work will not of itself make carrying out the work unreasonable, but it may be evidentiary of unreasonableness; if the reason for the intention is that the property is perfectly functional and aesthetically pleasing despite the non-complying work, for example, it may well be found that rectification is out of all proportion to achievement of the contractual objective or to the benefit to be thereby obtained."

230 The combination of the lack of intention to carry out the rectification work, the transfer of the property from Lesdor to the owners corporation and the absence of any evidence that the defects were affecting the use and occupation of the building or the common property leads, in my opinion, to the conclusion that it would be unreasonable to carry out the work and that damages for the cost of rectification should therefore not be awarded.

231 It follows that the cross-appeal should be dismissed.

Conclusion

232 In the circumstances, the orders I would make are:

1Appeal dismissed with costs.

2Cross-appeal dismissed with costs.

233 MACFARLAN JA: I agree with Bathurst CJ.

234 MEAGHER JA: I agree for the reasons given by Bathurst CJ that the appeal and cross-appeal should be dismissed, in each case with costs.

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Decision last updated: 21 June 2012