Walker Group Constructions Pty Ltd v Tzaneros Investments Pty Ltd [2017] NSWCA 27

What the court decided

Walker Group Constructions Pty Ltd (WGC) built the terminal under a design and construct contract with P&O Trans Australia Holdings Ltd, which at the time leased the land [1], [2]. It was common ground that the pavement did not meet the contractual specifications [1]. Cracks appeared as early as September 2003 and grew worse [37].

On 2 December 2005 a P&O subsidiary assigned the leasehold to Tzaneros Investments Pty Ltd (Tzaneros), and by a deed made that day P&O purported to assign to Tzaneros the benefit of WGC's building warranties [15]. Clause 3.1 assigned "absolutely all of the benefit of the Building Warranties" to Tzaneros [19]. The assignment took effect on completion of the sale, on 2 December 2005 [20]. In an earlier draft of the deed, the warranties were defined to include, for the avoidance of doubt, "any cause of action" [31].

In December 2004 Mr Tzaneros, who was the company's sole director at the acquisition, had toured the site with Peter Watt of P&O, who mapped areas of cracking and spalling [15], [37]. A judge of the Equity Division found WGC liable to Tzaneros for $11,612,013.53 [1]. On appeal, Bathurst CJ gave the reasons, with which Beazley P and Gleeson JA agreed [241], [242].

Bathurst CJ construed clause 3.1 by asking what a reasonable businessperson would have understood its terms to mean [96], [97]. On its face, an assignment of all the benefits of the warranties would appear to cover a right to sue for an existing breach as well as for future breaches [98]. The words fixing the date from which the assignment operated marked when Tzaneros' rights arose, and did not confine the assignment to later breaches [98]. A narrower construction would have deprived the assignment of significant commercial purpose, and nothing suggested that P&O or Tzaneros intended to release WGC from potentially substantial liability [101], [102].

WGC relied on Geroff v CAPD Enterprises, in which the Queensland Court of Appeal held that debts already accrued under a franchise agreement had not passed under an assignment of that agreement [104]. Bathurst CJ distinguished it, observing that a debt has an existence at law independent of the underlying transaction, whereas recovering for breach of a contractual warranty requires suing on the contract [105]. The ultimate question was whether the deed, properly construed, assigned the right to sue for past breaches, and here it did [111].

On the drafting history, Bathurst CJ treated ambiguity as a precondition to the exception that Mason J suggested in Codelfa Constructions Pty Ltd v State Rail Authority of NSW [118]. Clause 3.1, read in context, was not ambiguous [119]. Even if it were, there was no suggestion that the parties to the deed had mutually concurred in rejecting an assignment of past breaches [119], [120]. Deleting those words from the draft was not an acknowledgment that accrued causes of action were excluded [120].

On loss, WGC relied on a principle said to derive from Allianz Australia Insurance Ltd v Waterbrook at Yowie Bay Pty Ltd that a successor in title who buys a building with full knowledge of its defects is not caused loss by them [123]. Bathurst CJ said there was much to be said for the dissenting view of Giles JA in that case, but found it unnecessary to consider whether it was correctly decided [150], [151].

First, Tzaneros sued as assignee of contractual warranties, including the right to sue for past breaches [152]. As was said in Renold Australia v Fletcher Insulation, the assignee could recover damages of the same kind as the assignor, and in Bathurst CJ's opinion it was irrelevant whether the assignee knew of the breaches [152]. An assignee's own act, such as using excess loads on the pavement, might break the chain of causation, but acquiring the terminal with knowledge of the defects would not [153].

Second, the principle required knowledge of the significance of the defects as well as their existence, and it could not be said that Tzaneros had it [155]. Mr Tzaneros knew of the cracks, but the trial judge found that he did not know of a design defect when Tzaneros acquired the terminal [156]. At that time WGC had alleged that P&O's use of the terminal caused the damage, and WGC employees had told Mr Tzaneros that the cracks were surface or shrinkage cracks [157]. Bathurst CJ did not consider that any principle derived from Allianz extends to an assignee with only constructive knowledge from failing to investigate the extent of a patent defect [158].

On damages, Bathurst CJ restated the Bellgrove v Eldridge measure: the cost of making the work conform to the contract, provided the work is necessary and a reasonable course to adopt [186]. Citing Tabcorp Holdings Ltd v Bowen Investments Pty Ltd, he noted that the test of unreasonableness is met only in "fairly exceptional circumstances" [186]. This was not a case in which rectification would not be carried out, and a sale of the property does not necessarily disentitle the owner to the cost of rectification, if doing the work is reasonable [187].

WGC argued that Tzaneros' loss was limited to its repair obligations under its later sale of the leasehold [188]. Bathurst CJ held that it was not unreasonable for Tzaneros to recover the full replacement cost, as the defective design affected the whole pavement and the trial judge's rejection of the evidence of WGC's expert on the panels needing replacement had not been challenged [189]. Subject to the trial judge's exclusion of the pavement under the awnings, replacing the whole pavement was not unreasonable [191]. The fact that some panels might never crack did not alter the position, and Tzaneros could decline to bear that risk [191].

On betterment, no cheaper method of repair that would produce a pavement complying with the contract was identified [201], [202]. Bathurst CJ agreed with the trial judge that a pavement properly designed for a minimum life of 20 years would not be expected to become unusable when that period ended [204]. The replacement design also allowed the terminal to keep operating, so avoiding consequential loss [205]. WGC's proposed percentage reduction had been rejected by the majority in Hyder Consulting (Australia) Pty Ltd v Wilhelmsen Agency Pty Ltd, Giles JA calling it a "crude percentage discount" [206].

On costs, the trial judge had ordered indemnity costs from the day after an offer of compromise made by Tzaneros in December 2010 [210], [215]. In Bathurst CJ's view, WGC's complaint that it had not been given particulars of why the breach occurred did not require a different order, as Tzaneros had identified the defects said to be the breach [229]. As the claim depended on proving that the pavement could not carry the contracted loads for 20 years, the cause of the failure was to that extent irrelevant, and the trial judge did not err in the exercise of his discretion [234]. As Tzaneros had not renewed its offer after the trial, the court made the usual costs order on the appeal [237], [239]. The appeal was dismissed, and WGC was ordered to pay Tzaneros' costs of the appeal [240].

Why it matters

The decision turned on the construction of a particular deed. Here, an assignment of all the benefit of the builder's warranties, read in its commercial setting, was construed to carry claims for breaches that had occurred before the assignment, and the court drew a distinction between accrued debts and claims for breach of warranty. Drafting history did not assist the builder where the clause was unambiguous and nothing showed that the parties to the deed had agreed to reject the wider meaning.

On loss, the court treated the assignee as standing in the assignor's shoes, so its knowledge of cracking at acquisition did not answer the claim, and knowing that cracks exist was in any event distinct from knowing their significance. The court left open whether Allianz was correctly decided. On damages, the test remained whether rectification was a reasonable course, and on these facts neither the sale of the property nor the repair obligations the owner took on to its buyer made it unreasonable to award the cost of replacing the pavement, where the rectification was to be carried out and the defective design affected the whole pavement.

Readers should check later authority before relying on the decision.

Numbers in square brackets are paragraph numbers of the judgment. This note summarises a decided case for education and is not legal advice. See how the notes are written.