Mann up! High Court holds innocent party to a repudiated contract and bins alternative quantum meruit claims

For at least 115 years it has been the law in Australia that where a contract is repudiated the innocent party can recover damages either in accordance with that contract or upon a quantum meruit. Predictably, such claimants have always asked for whichever was the higher of the two available measures and this has sometimes involved shrugging off the contract price as irrelevant.

That all changed yesterday when the High Court delivered its decision in Peter Mann v Paterson Constructions [2019] HCA 32.

The seven judges delivered three judgments spanning 99 pages. In a nutshell, they  agreed that the contractual measure of damages should be the ceiling on damages and that the former long-standing position is, in the words of Keifel CJ, Bell and Keane JJ, based on “fallacious reasoning … which may give rise to serious mischief”.

In Peter Mann v Paterson Constructions, property owners contracted with a builder for the construction of two townhouses in Blackburn, Victoria. The contract price for the development was $971,000. The work was largely completed and $946,000 of the contract price had been paid before the relationship ended in acrimony with each party accusing the other of repudiation and purporting to accept such repudiation.

Their dispute then went to VCAT where Senior Member Walker held that the owners had wrongfully repudiated the contract, the builder had accepted that repudiation, the contract was at an end, and that the builder as the innocent party was entitled to recover damages calculated by reference to the market value of the building work and labour delivered to the owners. He assessed that value at $1.6 m.

After allowance for the $946,000 already paid, he held that the builder was entitled to damages from the owners of $660,000. Hence the bottom line financially at VCAT was that the owners were liable to  the builder for about 165 per cent of the original contract price because of their repudiation of that contract.

The owners appealed unsuccessfully to a single judge of the Supreme Court and then to the Court of Appeal before winning seven judges to nil in the High Court.

Following  yesterday’s decision, where a building contract in Australia (or other contract for work and labour done) is terminated for repudiation or breach, damages for breach of that contract will generally be the sole remedy.

What now? The High Court has remitted  Mann  back to VCAT for its recomputation of the builder’s damages. More than three years after he first heard the matter, that recalculation might be done by Senior Member Walker as the owners’ submission to the High Court that he should not hear the remitter was rejected.

The wash-up? Three thoughts occur to me.

First, the High Court’s decision will be big news for building and construction lawyers,  as it overturns a century of established law. But it won’t be a big surprise to those who remember Sopov v Kane [2009] VSCA 141 in which Victoria’s Court of Appeal unanimously expressed sympathy for the owners’ predicament in a similar case but nevertheless found for the builder on the basis that treating repudiated contracts as a ceiling on quantum meruit claims was “a step which the High Court alone can take”.

Second, until yesterday builders and others stuck in unprofitable contracts had a powerful financial incentive to terminate for breach by their counterparty in the expectation that they would be able to reprice their work retrospectively with a quantum meruit claim in the subsequent litigation. That financial escape route has just been soundly shut by the High Court.

Third, the decision is also bad news for quantity surveyors. Demand for their expert evidence as to the ‘as built’ value of construction works is likely to take a hit.

The LPP cat that got out of the bag – hear the barristers’ perspectives

Last week I blogged about the High Court’s recent dismissal of a legal professional privilege claim over some lawyers’ documents mischievously leaked to the media and the tax man.

That blog is immediately below this one but now there is an opportunity to hear more about the case direct from two barristers who appeared for the opposing camps. Walters Kluwer have announced a webinar about Glencore International AG v Commissioner of Taxation [2019] HCA 26 for next Monday, 2 September 2019.

You will be able to stream it live or watch the video for 6 months afterwards. It’s worth a CPD point and it’s free.  Further details here.

High Court refuses to order escaped legal professional privilege cat back into the bag

Legal professional privilege is a legal immunity but it is not an independent cause of action. So ruled the full bench of the High Court last week in a joint judgment in Glencore International AG v Commissioner of Taxation [2019] HCA 26.

Does the distinction matter?

It was probably crucial for the disappointed plaintiff, vast Swiss-British miner Glencore in its continuing tussle with the Australian Taxation Office.

As you might recall from global media coverage at the time, in 2017 millions of documents were leaked from the Caribbean-based law firm Appleby in an episode that became known as ‘the Paradise Papers.’ Appleby specialises in tax minimisation involving tax havens. Its recent clients include Glencore.

Some of Appleby’s Glencore advice and related documentation leaked its way to the ATO which took a very deep interest in it.

This ATO attention was sufficiently embarrassing for Glencore  to invoke the High Court’s original jurisdiction and seek an injunction against the ATO retaining, relying upon or referring to any of the stolen Appleby documents relating to Glencore.

The High Court noted that there was no issue that the documents stolen from Glencore’s lawyers were  subject to legal professional privilege. But the seven judges unanimously found that this meant only that the documents were exempt from production by court process (eg discovery or subpoena) – it did not necessarily mean that the ATO could be injuncted from using documents which had come into its possession independently of such court processes.

The Court stated [at paras 12 – 13]

Fundamentally [Glencore’s application] rests upon an incorrect premise, namely that legal professional privilege is a legal right which is capable of being enforced, which is to say that it may found a cause of action. The privilege is only an immunity from the exercise of powers which would otherwise compel the disclosure of privileged communications…

It is not sufficient to warrant a new remedy to say that the public interest which supports the privilege is furthered because communications between client and lawyer will be perceived to be even more secure. The development of the law can only proceed from settled principles and be conformable with them. The plaintiffs’ case seeks to do more than that. It seeks to transform the nature of the privilege from an immunity into an ill-defined cause of action which may be brought against anyone with respect to documents which may be in the public domain.

Apart from there not being a cause of action, there was the further difficulty that the cat was already well and truly out of the bag in any event. Para 33:

The relief sought by the plaintiffs points to further difficulties….[including] the fact that the information the subject of the claimed privilege is now in the public domain. In the latter respect the circumstances of this case identify a particular problem were an injunction to be granted. It is that the defendants would be required to assess Australian entities within the Glencore group to income tax on a basis which may be known to bear no real relationship to the true facts.

Ouch. That sounds like there might be a nasty revised tax bill in the pipeline to Glencore.

The Owners Corporation Act – sometimes near enough really is good enough

 

If a tree falls in the forest and nobody hears it, does it really make a sound?

And if an owners corporation sacks its manager without strictly complying with the Owners Corporation Act, has that manager really been terminated? And until that question is resolved is the spurned manager required to hand over the OC’s records and funds to some new manager that the OC claims to have installed as the first manager’s place?

In Jenkins & Ors v OCVM Commercial Pty Ltd [2019] VCAT 1078 the tribunal did not answer the tree question but it did serve up some unwelcome news (and an adverse costs order) to a jilted owners corporation manager in answer to both of the OC questions.

An OC manager had been appointed by a subdivision’s  developer. The manager’s budget was approved at $170,000. The development was then mainly sold off to private lot owners. The new private lot owners quickly became disgruntled with the cost and quality of the OC management services they were receiving and found an alternative manager at almost half the originally-budgeted cost. They voted overwhelmingly to change managers. But the incumbent manager refused to hand over the OC’s records and funds to the new kids.

Was this explained by truculence or a fair reading of the Owners Corporation Act?

At last month’s VCAT hearing, the spurned manager argued that it had never been validly removed by the private lot owners and hence did not have to deliver up the OC’s records and funds to the putative new manager. VCAT’s Member Rowland was never more than tepidly sympathetic in her written reasons published today. True, the sacked manager had been misnamed in the formal ballot removing it. True also, that 86 per cent of the private lot owners who voted unanimously to eject the manager were non-financial at the time of that ballot. (And, yes, that did make the ballot’s quorum problematic.)  And true again, a subsequent special general meeting did not expressly ratify the manager’s removal (although the sentiment was clear enough from related votes at that meeting).

But such non-compliance with formal requirements of the Owners Corporation Act did not necessarily invalidate the OC’s coup against its manager ruled Member Rowland

The nub of the reasoning appears at paras 45 – 47:

I do not consider invalidating every decision made in breach of the [Owners Corporation] Act serves the purpose of [the Owners Corporation Act]….the Act recognizes that a breach may be substantial or trifling. Each breach needs to be examined in its own context to determine what remedy, if any, is fair…. Not every breach will justify a remedy.

Member Rowland concluded that although the OC had not strictly complied with the Owners Corporation Act in removing its manager the breaches were not matters that, of themselves, had caused any prejudice to the manager nor to any private lot owners and that the manager’s removal had subsequently been ratified in any event.

The decision concludes with the observations that –

  • OC managers are bailees of their clients’ records and funds and obliged to deliver them up to those client OCs upon demand;
  • This obligation is not changed by a manager’s view that it has not been validly terminated; and
  • The sacked OC manager had “comprehensively lost the technical arguments” and should pay the costs.

 

The lessons?

Strict compliance with the Owners Corporation Act is always desirable.  But, in reality, sometimes it is also unnecessary.

This is because some breaches of the Owners Corporation Act have no automatic consequences. Moreover, breaches of the Act can often be rescued by subsequent ratification by the OC concerned or by VCAT simply exercising its discretion to take no action about those breaches.

Lawyers typically assess statutory compliance as a binary exercise: did a particular action comply with the applicable legislation or didn’t it? Jenkins is a reminder that the complexities of the Owners Corporation Act call for some additional filters:

  • Does the Owners Corporation Act prescribe any consequences for the particular statutory non-compliance in issue?
  • If not, is there any practical reason why VCAT might exercise its discretion to intervene?

In Aussie Rules footy, infractions are very commonly waived under the ‘advantage rule’, where the umpire’s intervention would unnecessarily interrupt and impede play.  VCAT can exercise a similar discretion to shrug off even clear breaches and call “Play on!”

Swiss bank accounts, Australian commercial litigation and the privilege against self-incrimination revisited

Switzerland pic 310817

In happier times the De Lutis brothers built up a Melbourne property empire worth (according to this Age story) $500 million. But now the pair has fallen out.

Younger brother Paul wants his share of the financial pie and is suing older brother Colin in the Victorian Supreme Court. It seems that the pie includes $18 million which has sloshed through various bank accounts in Switzerland, Singapore, the British Virgin Islands and Hong Kong since the 1980’s.

As plaintiff, Paul wants to detail these funds and transactions to the judge now trying the matter but is apparently concerned that his evidence might attract some unwelcome scrutiny from the Australian Taxation Office.

What to do?

Section 128 of the Evidence Act permits a court to issue a certificate which will prevent a witness’s evidence being directly or indirectly used against that witness in a subsequent criminal prosecution. The section is predicated (see s. 128(1)) upon the witness objecting to giving evidence on the ground that such evidence might tend to prove that the witness has herself committed an offence or be liable to a civil penalty.

Paul has already received one s. 128 certificate about an unrelated matter in this litigation. Last week he sought another concerning the itinerant $18 mil.

This week, the trial judge Justice James Elliott refused that application.

In a pithy ruling (De Lutis v De Lutis & Ors [2017] VSC 505) Elliott J observed that in civil litigation a plaintiff is free to prosecute his own case if and how he chooses. As there is no element of legal compulsion in the evidence Paul might choose to give in chief, he can scarcely choose to give evidence of a particular matter and simultaneously object to doing so.

Absent a valid objection to the giving of evidence, a witness has no entitlement to a s. 128 certificate. Hence no s. 128 certificate for Paul concerning his proposed evidence in chief.

Elliott J also observed that the cat was arguably out of the bag anyway. The $18 million had already been referred to in evidence earlier in the proceeding and “… where so much of the subject matter had [already] been disclosed voluntarily, it is difficult to see how this further [proposed potentially self-incriminating] evidence would materially alter Paul’s position.”

The lessons from this? Several occur to me:

  1. Prospective civil litigants in commercial litigation should weigh up the potential longer term ramifications of their evidence. In particular, will they be embarrassed (or worse) if the transcript from a civil trial finds its way into the tax man’s hands? If so, steering clear of commercial litigation might be a prudent way to minimise the risk of a later criminal prosecution.
  2. The risks of having an application for a s.128 certificate refused apply to both prospective plaintiffs and defendants but are probably more pronounced for plaintiffs who are almost by definition volunteering from the very outset to give their evidence. Similarly, different considerations are likely to apply to evidence given by a witness under cross-examination rather than during evidence in chief.
  3. If your client might need a s. 128 certificate, seek it early. Don’t run the risk of having the judge rule that the self-incrimination horse has already bolted. (Also, even an early failed128 certificate application might have forensic advantages given the possibility of such failed objections being retrospectively upheld – see 128(6) of the Evidence Act.)
  4. Finally, any family that has had $18 million lying idle in its various Swiss and Caribbean bank accounts for decades is clearly long overdue for a holiday together skiing in Zermatt or sailing off Barbados. Inter alia, both destinations are likely to be much more entertaining and much less expensive than a protracted intra-family dispute in the Supreme Court.

The Turkish purge fails in VCAT

Image

erdogan 090517Since last year’s failed coup attempt against Turkish president Recep Tayyip Erdogan (pictured), his regime has ousted 4,238 judges and prosecutors, purged 95,000 public servants, jailed at least 81 journalists and sought to remove one sitting member from a VCAT domestic building case.

Yes, all extraordinary numbers but let’s focus here on that last and most local statistic. It made it on to the public record only yesterday via VCAT’s decision in Mackie v Republic of Turkey [2017] VCAT 620.

VCAT is currently 25 hearing days (!) into a domestic building dispute. Another 10 hearing days are anticipated. In it, a builder is claiming payment for constructing a house in Toorak Road, Toorak, for the Turkish government. The Republic of Turkey has  counterclaimed and also joined the project’s architect to the action.

Things cannot be going well for the Turks because, together with the architect, they used a long adjournment last month to seek an order from VCAT’s president to have the VCAT senior member hearing the case removed from it.

That senior member is not identified in yesterday’s decision. His removal was sought  on two alternative grounds.

Member “ill-suited”

The first was that the member concerned was “ill-suited” to this particular building case and accordingly the Tribunal should be reconstituted pursuant to s 108 of the Victorian Civil and Administrative Tribunal Act.

Evidence in support of the reconstitution application was by affidavit derived,  among other things,   from approximately 2,000 pages of transcript. The complaints against the member included,  among much else,  his own statement during the hearing that he had “little experience” in construction law,  his apparent unfamiliarity with some building concepts and terminology (such as the difference between a civil engineer and a structural engineer),  and a comment during the litigation describing it as  “a nightmare”.

Apprehension of bias

The second limb of the reconstitution application was that the member had created a reasonable apprehension that he was biased in favour of the builder.

Evidence in support of this contention was said to include some stern words from the member to the architect’s principal witness about the architect’s repeated failure to give responsive answers in cross-examination,  the poor success rate by the architect and Republic’s respective counsel in making objections to evidence when compared to the builder’s counsel’s equivalent run rate,   and the member’s solicitude for the health and comfort of the builder’s 74 year-old, laryngitis-suffering witness while giving vive voce evidence.

All of these complaints were in support of a contention that a fresh member should replace the incumbent for the remainder of the hearing. It seems that the  architect (who made the formal application) and the Republic (which supported it) were hoping that the current hearing would then trundle on,  with the new VCAT member relying for his/her decision in large part on a truckload of transcript and no direct memory of what was said in evidence during the marathon hearing.

Decision – unsuitability

VCAT President Justice Greg Garde’s decision is unlikely to improve President Erdogan’s view of the rule of law as administered by a securely-tenured and independent judiciary.

Garde J dismissed the argument that the member was ill-suited. Among other things, he stated that cherry-picking certain remarks by the member from 25 days’ worth of transcript was not persuasive about the competency of the member when it was conceded that no single remark was, of itself, demonstrative of the member’s alleged unsuitability.

As to the member’s professed inexperience, Garde  J stated a VCAT member is entitled to be unfamiliar with industry jargon and concepts. Indeed, members in such a situation should not be bashful about it – they are under a duty to speak up and seek assistance from counsel as appropriate.

Decision – apprehended bias

Applying the High Court’s two-step test in Ebner v Official Trustee in Bankruptcy (2000) 205 CLR 337,   Garde J dismissed the bias argument too.

He stated that VCAT members are entitled to take up issues with counsel and the parties “and express robust views and opinions without prejudgment” and that in this case there was not sufficient evidence that the member did not “apply the same standards to all witnesses or act appropriately to progress the hearing and the determination of the proceeding….  I hold that if a fair-minded lay observer were asked whether he or she might reasonably apprehend that the senior member might not bring an impartial mind to the resolution of the issues and the questions which arise in the proceeding, the answer would be ‘no’.”

Garde J dismissed the application and ordered that the hearing resume next Monday before the same senior member who has heard it to date.

Four thoughts occur to me on this:

  1. VCAT members can be removed under s.108 of the VCAT Act during the running of a case but neither professed unfamiliarity with the subject matter nor a robust approach from the bench will of themselves be sufficient grounds for a successful application.
  2. If you are going to make a s.108 application best make it early. An application too far into the hearing is much more likely to expose the applicant to failure (and potentially grave costs consequences too).
  3. Isn’t it cheering to live under the rule of law where humble builders can take on foreign governments secure in the knowledge that the tribunals of law and fact won’t be distracted in their deliberations by the prospect of mass (or even targeted) judicial sackings?
  4. Blogging about a case involving the Republic of Turkey is a tenuous but sufficient excuse to reprint a famous limerick (below) about the censorious President Erdogan. It won its author, Boris Johnson, the prize in The Spectator magazine’s 2016 ‘President Erdogan Offensive Poetry Competition’.  (You will recall that Johnson subsequently became Britain’s  Foreign  Secretary and, as such, today remains in charge of his nation’s diplomatic relations with Turkey.) Enjoy.

There was a young fellow from Ankara

Who was a terrific wankerer

Till he sowed his wild oats

With the help of a goat

But he didn’t even stop to thankera.

 

ADDENDUM

VCAT Senior Member Robert Davis delivered his decision in the substantive litigation on 25 August 2017. The decision is Mackie v Republic of Turkey & Tectura [2017] VCAT 129. The Republic of Turkey was ordered to pay the builder $693,824.58 and its counterclaim against the builder was dismissed. The Turks did have a win against the architect. It was ordered to pay the Republic of Turkey $119,664.65.

(Presumably the next issue for the builder will be actually collecting on the judgment. Some successful VCAT litigants find this a problematic exercise against even Victorian residents. Registering and enforcing a VCAT decision against a distant authoritarian sovereign state with an elastic approach to the rule of law is likely to prove a challenge indeed.)

 

When winners are not grinners – who gets paid first when the winning litigant goes bust?

Commercial litigation is often ultimately uncommercial. And when things turn really sour solicitors will often have a personal stake in the question of who is to miss out financially.

This issue arose in an insolvency context last week in a Supreme Court tussle between mega firm DLA Piper and the liquidators of their former client Windemac Pte Ltd.

Back in 2013 Windemac won a Supreme Court judgment for $312,000 plus interest and costs. It was perhaps a Pyrrhic victory as DLA’s bills to Windemac totalled almost $360,000. Windemac went bust two years later still owing DLA Piper more than $100,000.

After Windemac went into liquidation there still remained a costs order for almost $98,000 in Windemac’s favour to be enforced against the defendants. Was that money to go to Windemac’s liquidators or to the short-paid solicitors?

Associate Justice Derham held that the solicitors were entitled to an equitable lien over the proceeds of the costs order on established ‘fruits of the action’ principles and that the solicitors’ rights had priority over the claims of Windemac’s other creditors in the insolvency.

The decision contains a useful extract on solicitor’s liens for costs extracted from Elliot J’s decision in Oakley Thompson & Co v Maisano (No 2) [2015] VSC 210 at 77. Here (with citations omitted) is Elliot J’s summary:

(1)     At common law, a solicitor has a general possessory lien for all professional costs due by her or his client.  This entitles the solicitor to keep in her or his possession all property of the client which comes into the solicitor’s possession during the course of her or his professional employment until the solicitor’s costs have been paid.

(2)     A solicitor has no lien for costs over any property which has not come into her or his possession.

(3)    If a client obtains a judgment for the payment of money (including a judgment for costs),  the solicitor acquires a right to have her or his costs paid out of the money payable, such right being an equitable right to be paid.  This right is not dependent upon an order having been made to recognise the right, or upon a taxation having occurred.

(4)    If the solicitor gives notice of the right to the person who is liable to pay the money, only the solicitor, and not the client, can give a good discharge to that person for an amount of the money equivalent to the solicitor’s costs.

(5)    If the person liable to pay has notice of the solicitor’s right, but refuses to pay the solicitor, the solicitor may obtain a “rule of court” directing that the costs be paid to the solicitor and not to the client.  (In this context, a rule of court is a reference to an order or a direction of the court.)

(6)    If the client and a judgment debtor make a collusive arrangement in order to defeat the solicitor’s right, the court will enforce that right against the judgment debtor notwithstanding the arrangement and notwithstanding that no notice of the solicitor’s claim has been given to the judgment debtor prior to the arrangement.

Associate Justice Derham’s decision is DLA Piper Australia v Official Receiver of Singapore (as liquidators of Windemac Pte Ltd) [2017] VSC 216.

The lesson from this? Solicitors’ liens are good and can trump a liquidator. But solicitors getting their money into trust up-front on account of fees is even better. After all, the solicitors here might have chalked up a win but they still took a haircut on the fees which had been outstanding to them for over four years.