Interpretation of Construction Contracts: The latest from the NSWCA

On 1 March 2017, the NSWCA (Bathurst CJ, Beazley P and Gleeson JA) delivered judgment in Walker Group Constructions Pty Ltd v Tzaneros Pty Ltd [2017] NSWCA 27.

The judgment considers questions of construction of contracts, assignment of building warranties, the limits of the principle in Allianz Australia Insurance Ltd v Waterbrook at Yowie Bay Pty Ltd, causation and betterment.

The Facts

The appellant, Walker Group Constructions Pty Ltd (WGC) was responsible for the design and construction of a container terminal at Port Botany (Terminal).

The Terminal was built in 2003 and 2004 on land owned by Sydney Ports Corporation, which, at the time, was leased to P&O Trans Australia Holdings Ltd (P&O). A contract for the design and construction of the terminal (Contract) was entered into between WGC and P&O. A subsidiary of WGC engaged the second respondent, AMT Engineers Pty Limited (AMT) to design the concrete pavement that formed part of the Terminal.

In 2004, P&O transferred its leasehold interest in the land to a subsidiary. In 2005, that entity transferred its leasehold interest to the first respondent Tzaneros. On the same day, P&O purported to assign by deed to Tzaneros the warranties given by WGC in connection with the construction of the terminal (Deed). WGC provided a letter of consent to the assignment.

The Contract provided for the construction of five warehouses and the laying of various types of pavement. Following the laying of the pavement, cracks and spalling began to develop in some pavement types. Tzaneros claimed from WGC and AMT the cost of replacing the defective pavement.

The Issues

The issues raised by the notice of appeal included:

(1)   Whether on a proper construction of the terms of the Deed and the letter of consent from WGC, there was an assignment by P&O to Tzaneros of any accrued cause(s) of action for breach of the building warranties.

(2)   Whether construction of the relevant documents by reference to the surrounding circumstances was permissible.

(3)   Whether Tzaneros acquired the terminal with knowledge of the defects and therefore suffered no loss as a consequence of those defects.

(4)   Whether Tzaneros was entitled to recover damages for the cost of full replacement of the pavement.

(5)   Whether a reduction in the sum of damages awarded to Tzaneros for betterment should have been made.

The Findings

The Court held (Bathurst CJ, Beazley P and Gleeson JA agreeing), dismissing the appeal:

Construction

• Recourse may be had to deleted words or clauses in a contract for the purpose of construing ambiguous language. The fact of the deletion of words can only be used to negative an inference sought to be drawn from the surrounding circumstances, where the evidence shows the parties mutually concurred in rejecting that meaning: [117]-[118] (Bathurst CJ); [241] (Beazley P); [242] (Gleeson JA) (Codelfa Constructions Pty Ltd v State Rail Authority of NSW (1982) 149 CLR 337; [1982] HCA 24; Gee Dee Nominees Pty Ltd v Ecosse Property Holdings Pty Ltd [2016] VSCA 23; 260 Oxford Street Pty Ltd v Premetis [2006] NSWCA 96; Burger King Corporation v Hungry Jack’s Pty Ltd [2001] NSWCA 187; Esso Australia Ltd v Australian Petroleum Agents’ & Distributors’ Association (1999) 3 VR 642 applied)
• The meaning of the terms of a commercial contract is to be determined by what a reasonable business person would have understood those terms to mean, taking into account the language, surrounding circumstances and commercial purposes of the contract: [96]-[97] (Bathurst CJ); [241] (Beazley P); [242] (Gleeson JA) (Electricity Generation Corporation v Woodside Energy Ltd (2014) 251 CLR 640; [2014] HCA 7; Mount Bruce Mining Pty Limited v Wright Prospecting Pty Limited (2015) 256 CLR 104; [2015] HCA 37applied).

Assignment

• Applying the relevant principles of construction to the Deed, on its face, the express assignment of all the benefits of the building warranties would include a right to sue for an existing breach as well as any future breaches. This construction was held to be consistent with the recitals to the assignment deed and the terms of the consent given by WGC. A construction which excluded the right to sue for past uncompensated breaches would produce an uncommercial result: [97]-[103] (Bathurst CJ); [241] (Beazley P); [242] (Gleeson JA) (Electricity Generation Corporation v Woodside Energy Ltd (2014) 251 CLR 640; [2014] HCA 7; Mount Bruce Mining Pty Limited v Wright Prospecting Pty Limited (2015) 256 CLR 104; [2015] HCA 37applied).
• While debts have an existence at law independent from the underlying transaction, the same cannot be said for breaches of contractual warranties. To recover for such breaches it is necessary to sue on the contract. The ultimate question is whether or not as a matter of construction the right to sue for past breaches has been assigned: [105], [111] (Bathurst CJ); [241] (Beazley P); [242] (Gleeson JA) (Geroff & Ors v CAPD Enterprises [2003] QCA 187 distinguished).

Cause of loss

• Where there has been an assignment of contractual warranties, including the right to sue for past breaches, the assignee is entitled to recover damages of the same kind as the assignor could have recovered and steps into the shoes of the assignor for the purpose of pursuing the right vested in the assignor. It is irrelevant whether the assignee knows of the breaches or otherwise: [152] (Bathurst CJ); [241] (Beazley P); [242] (Gleeson JA) (Renold Australia v Fletcher Insulation [2007] VSCA 294 applied; Lambert v Lewis [1982] AC 225 distinguished).
• The principle in Allianz Australia Insurance Ltd v Waterbrook at Yowie Bay Pty Ltd [2009] NSWCA 224, that a successor in title who acquires a building in full knowledge of its defects suffers no loss from the existence of those defects, requires that the successor has full knowledge of the existence of the defects and their significance. It could not be said that Tzaneros had such knowledge. The principle in Allianz does not extend to an assignee who has constructive knowledge by reason of failing to properly investigate the extent of a patent defect: [155]-[158] (Bathurst CJ); [241] (Beazley P); [242] (Gleeson JA) (Allianz Australia Insurance Ltd v Waterbrook at Yowie Bay Pty Ltd [2009] NSWCA 224 distinguished).

Damages

• It was not unreasonable for Tzaneros to recover the total cost of replacement of the pavement. The whole of the pavement suffered from defective design. The fact that certain panels may not in fact crack does not alter the position. Tzaneros could decline to bear that risk and rather seek compensation sufficient to ensure the pavement is repaired in conformity with the contract: [189], [191] (Bathurst CJ); [241] (Beazley P); [242] (Gleeson JA). (Bellgrove v Eldridge (1954) 90 CLR 613; [1954] HCA 36; Tabcorp Holdings Ltd v Bowen Investments Pty Ltd (2009) 236 CLR 272; [2009] HCA 8; Scott Carver Pty Ltd v SAS Trustee Corporation [2005] NSWCA 462; De Cesare v Deluxe Motors Pty Ltd (1996) 67 SASR 28; Westpoint Management Ltd v Chocolate Factory Apartments Ltd [2007] NSWCA 253; UI International Pty Ltd v Interworks Architects Pty Ltd [2008] 2 Qd R 158; [2007] QCA 402; Cordon Investments Pty Ltd v Lesdor Properties Pty Ltd [2012] NSWCA 184 applied).

Betterment

• No allowance should be made for betterment. The contract provided for a pavement with a minimum life of 20 years and it would not be expected the pavement would be unusable immediately on expiration of that period. The proposed replacement has been designed to ensure the terminal can continue in operation thus avoiding consequential loss that would otherwise have flowed from the breach: [204]-[205] (Bathurst CJ); [241] (Beazley P); [242] (Gleeson JA). (Tyco Australia Pty Ltd v Optus Networks Pty Ltd [2004] NSWCA 333; British Westinghouse Electric and Manufacturing Company Ltd v Underground Railways Company of London Ltd [1912] AC 673; Hyder Consulting (Australia) Pty Ltd v Wilhelmsen Agency Pty Ltd [2001] NSWCA 313 applied).