Group Konstrukt Pty Ltd v Arrow International Ltd [2011] ACTSC 14 (4 February 2011)

Last Updated: 10 February 2011

GROUP KONSTRUKT PTY LTD v ARROW INTERNATIONAL LTD

[2011] ACTSC 14 (4 FEBRUARY 2011)

PRACTICE AND PROCEDURE – pleading – action by subcontractor against builder – defence and counterclaim – counterclaim failed to set out material facts relied on – previous similar defects – whether point reached where counterclaim should be struck out – defendant given final opportunity to produce draft defence and counterclaim in satisfactory form

Court Procedures Rules 2006 (ACT), rr 21, 405, 406, 430, 431, 441 and 470.

Aon Risk Services Ltd v Australian National University (2009) 239 CLR 175

Canberra Data Centres Pty Ltd v Vibe Constructions (ACT) [2010] ACTSC 20

Bruce v Odhams Press Ltd [1936] 1 KB 697

Banque Commerciale SA (in liquidation) v Akhil Holdings Ltd [1990] HCA 11; (1990) 169 CLR 279

Mulltigroup Distibution Services v TNT Australia Pty Ltd [1996] ATPR 41-552

McMahon v John Fairfax Publications Pty Ltd [2010] NSWCA 308

No. SC 359 of 2008

Judge: Master Harper

Supreme Court of the ACT

Date: 4 February 2011

IN THE SUPREME COURT OF THE )

) No. SC 359 of 2008

AUSTRALIAN CAPITAL TERRITORY )

BETWEEN: GROUP KONSTRUKT PTY LTD

ACN 111 141 336

Plaintiff

AND: ARROW INTERNATIONAL LTD

ABN 081 136 352

First Defendant

ORDER

Judge: Master Harper

Date: 4 February 2011

Place: Canberra

THE COURT ORDERS THAT:

1. The defendant have until 4 April 2011 to deliver to the plaintiff’s solicitors a draft further amended defence and counterclaim in conformity with these reasons.

2. Each party be at liberty to have the matter listed in the Friday applications list on seven days’ notice to the other.

1. Proceedings in this building case were commenced on 9 May 2008. The application presently before the court is brought by the plaintiff seeking relief in relation to what it submits is a defective defence and counterclaim. There is also a dispute about security for costs.

2. The claim arises from the refurbishment during 2007 and 2008 of the Chisholm Village Shopping Centre in the southern suburbs of Canberra. The shopping centre, which included a Coles Supermarket as lead tenant, was and may still be owned by Over Fifty Funds Management Ltd. That company engaged the defendant as head contractor to undertake substantial building work at the site. The defendant engaged the plaintiff as a subcontractor to provide carpentry and associated works.

3. The plaintiff claims some $250,000.00 as payable under the subcontract, plus interest and costs.

4. The subcontract was wholly in writing, and consisted of a document entitled MBAV Copyright Form SC 6 Subcontract Document, numbered 219100CA and dated 16 May 2007. The defendant says that the subcontract between the parties included a quotation from the plaintiff and a letter of acceptance from the defendant. The contract referred to the head contract between the owner and the defendant which the plaintiff acknowledged having inspected or at least having had a reasonable opportunity to do so.

5. It was a term of the subcontract that the plaintiff would carry out and complete the work described in the first schedule to the subcontract.

6. The plaintiff asserts in the statement of claim that the subcontract amount payable to the plaintiff for carrying out the works was $282,401.00. The defendant says that the subcontract sum was $272,401.00, a difference of $10,000.00. The lower figure appears in a copy of the subcontract in evidence. My provisional view is that the lower figure arose from a mistake and that the intention of the parties was to agree upon the higher figure, so that the mistake is capable of rectification. It is unnecessary for me to do more than express that provisional view for the purposes of this application.

7. The subcontract provided that the defendant was to pay the plaintiff by progressive monthly payments. The subcontract provided that the defendant could deduct 10% from each progressive payment, up to a total of 5% of the subcontract sum, to form a retention fund. The defendant says that the retention was to be in the sum of 2.5% of the value of the contract works. The balance in the retention fund was to be paid to the plaintiff on practical completion.

8. Work was carried out, and progressive payments made, from July to October 2007. From November 2007 until February 2008, the defendant paid less than the amount claimed for each month. The plaintiff asserts that the subcontract works reached practical completion in February 2008. The shortfall claimed by the plaintiff amounts to $248,621.94.

9. The defendant was late in filing its notice of intention to respond, and suffered default judgment in June 2008. This was set aside in September 2008, and a defence and counterclaim filed. There have been applications by the plaintiff before the court for orders striking out the defence and counterclaim or portions of them. In January 2010, at the end of some two and a half hours of submissions by counsel for the parties, I identified particular paragraphs of the document which required amendment if they were to stand. In March 2010 the defendant filed an amended defence and counterclaim. A further application by the plaintiff came before me in October 2010. The plaintiff was on that occasion represented by Mr M J Walsh of counsel and the defendant by Mr B A Meagher of senior counsel. After a full day of argument, I informed counsel that I was persuaded that the counterclaim in particular was not adequately intelligible, and that it required further amendment. I was not persuaded that the defendant should be deprived of its opportunity to defend the action or pursue its counterclaim. I made orders about security for costs, and gave the defendant a further opportunity to amend the defence and counterclaim.

10. The solicitors for the defendant provided a further draft defence and counterclaim to the plaintiff’s solicitors and a form of bank guarantee in relation to security for costs. The plaintiff did not accept either of these as satisfactory. The application came before me again on 24 November 2010 when I was able to devote a further one and a half hours to submissions. Mr Walsh appeared for the plaintiff. The defendant was represented by Mr Madden, a solicitor with the Canberra agents for the defendant’s Melbourne solicitors.

11. In essence, Mr Walsh submitted that, having regard to rule 21 of the Court Procedures Rules 2006 (ACT) (the Rules), and the observations made about the effect of that rule by the High Court of Australia in Aon Risk Services Ltd v Australian National University (2009) 239 CLR 175, the defendant’s time for getting its pleadings right should be seen as having run out. There remained defects in the draft further amended defence and counterclaim, and the defendant should not be permitted to file it. The defence and counterclaim should be struck out and judgment should be entered for the plaintiff. At the least, the counterclaim should be severed from the claim, and the plaintiff should be permitted to proceed immediately with its action against the defendant, rather than be subjected to further delay until a counterclaim in satisfactory form might be achieved.

12. As to the bank guarantee, in relation to security for costs, there were three problems with it. The first was that, presumably having been obtained by the defendant from its bank in Melbourne, the form used included a clause that the guarantee was to be subject to the laws of the State of Victoria. The second was that the guarantee was expressed to be in force for a period of twelve months only, not an indefinite period. Twelve months would probably be inadequate having regard to the state of the lists in this court. The third problem was that the guarantee form had been drawn up to show the court as the “favouree” or principal rather than the plaintiff.

13. I expressed the provisional view that I was not particularly concerned by the nomination of Victoria as the governing jurisdiction for the guarantee, expecting that the laws of the Australian Capital Territory and those of Victoria would be little different in their application to such a document.

14. As to the termination date, I expressed the view that a period of two years would be preferable but that it was to be expected that a bank would want to have a known date when its potential liability under such a guarantee would be at an end. Whether the bank accepted a two-year period, or insisted upon a maximum of one year, it would be open to the plaintiff to require the provision of a substitute guarantee at the end of the period specified, in the absence of which the court would retain the power to require the payment of money into court by way of security for costs.

15. I was more concerned about the nomination of this court as the favouree or principal under the guarantee, particularly as the printed form refers to the guarantee being given in connection with a contract or agreement between the principal and customer. Clearly there is no contract or agreement between the defendant and this court. The defendant is aware through Mr Madden of my observations in this regard and I shall if necessary make appropriate orders, if the defendant has not already provided the plaintiff with a substitute bank guarantee.

16. As to the present draft further amended defence and counterclaim, I propose to make some observations.

17. Firstly, the paragraphs of the defence have been re-numbered so that certain paragraphs, for example from 14 to 20 inclusive, have been deleted and replaced. The replacement paragraphs have been numbered, for example 14A, 15A. This is unnecessary. The ultimate defence and counterclaim which go to trial should be numbered consecutively. It will be unnecessary, as it might be with an Act of Parliament, to go back and work out what was said in a paragraph of an earlier draft.

18. In the proposed paragraph 20B, the defendant simply denies all of the allegations in paragraphs 22 to 26 inclusive of the statement of claim. This is unsatisfactory in relation to paragraphs 22 and 24 of the statement of claim. A simple denial, in relation to each of those paragraphs, is inadequate. The plaintiff in paragraph 22 asserts that the defendant was not entitled to deduct any amount from the December claim, the January claim or the February claim, for the retention fund. A simple denial does not identify the issues for trial in relation to this paragraph. If the defendant proposes to assert an entitlement to deduct any amount from any of those claims, each such amount should be identified. Paragraph 24 of the statement of claim asserts a failure on the part of the defendant to pay to the plaintiff each of five identified amounts. Again, a blanket denial of the facts asserted in the paragraph does not isolate the issues to be determined by the court. It is unclear whether the defendant proposes to establish that all or some of the amounts said not to have been paid were in fact paid; whether all or some of the amounts are said not to have been payable; or precisely what the defendant says in response to the assertions. The defendant should plead to paragraph 24 of the statement of claim in precise terms, responding to each factual assertion contained in the paragraph.

19. In paragraph 21, in purported answer to the whole of the statement of claim, the defendant asserts that pursuant to clauses 5 and 6 of the subcontract, the defendant was required to pay only an amount representing the value of the work detailed and executed to its reasonable satisfaction for each progress payment claim. In paragraph 22, the defendant says that the work carried out by the plaintiff was not executed to its reasonable satisfaction and the amount claimed did not represent the value of the work. This does not enable the plaintiff, or the court, to know what is really in issue between the parties. The defendant refers to particular aspects of the work said to be defective or otherwise unsatisfactory, but it is not possible for the plaintiff or the court to follow readily, in relation to each progress payment in dispute, how much of the work was accepted by the defendant as satisfactory and how much was not, or how much of each claim related to the satisfactory work and how much related to the defective or unsatisfactory work. In paragraph 22A, the defendant refers to the particulars of defective and incomplete work set out in paragraph 30 of the counterclaim. This is inadequate. The counterclaim is separate from the defence. The defence should enable the plaintiff, and the trial judge, to know what is really in issue between the parties.

20. In passing I point out that in paragraph 23 of the proposed defence, it is asserted in particular (a) that the original contract price between the parties was $272,401.00 plus GST, a total of $310,641.00. Assuming a GST rate of 10%, the total is consistent with a price before GST of $282,401.00. I have already expressed my provisional view about the discrepancy in the contract price.

21. In clauses 24A and 25A of the proposed defence, the defendant refers to the counterclaim and asserts a set-off of the losses it claims to have suffered as set out in the counterclaim. This is impermissible. The defence should be capable of standing alone if the counterclaim is dismissed or severed. If there is a defence of set-off it should be properly pleaded, and it should be made clear whether it is said to be a set-off at law or in equity. The principles, including the differences between a set-off and counterclaim, are usefully summarised by Dr B.C. Cairns in Australian Civil Procedure, 8th edition, Law Book Co at paragraph [7.180] and following.

22. The principal fault with the counterclaim is found in paragraph 30. The defendant in paragraph 29 sets out a number of obligations undertaken by the plaintiff under the agreement, generally in words quoted from the subcontract. The defendant then at clause 30 asserts that wrongfully and in breach of the terms of the agreement, the plaintiff failed to carry out the works in compliance with each of those obligations. For example, the defendant says that the plaintiff failed to carry out its works in compliance with the provisions of the head contract required to be observed by the defendant, as far as they related or applied to the subcontract works. The clause does not identify which provisions of the head contract are said not to have been complied with, or the way in which those provisions are said not to have been complied with. In other words, the paragraph does not set out the material facts on which the defendant will be relying in establishing this aspect of the counterclaim.

23. Similarly, the defendant asserts that the plaintiff failed to carry out its works in a proper and tradesmanlike manner, and using suitable new materials. It does not identify which part of the works carried out by the plaintiff are said to have been carried out in an improper or untradesmanlike manner. It does not identify which parts of the work are said to have been carried out using unsuitable or old materials. Again, it does not plead the material facts on which the defendant will rely.

24. Further, the paragraph asserts that the plaintiff failed to carry out its works so as to comply with any Act of Parliament or any regulation or by-law of any local authority or any public service company authority [sic] having any jurisdiction with regard to the works. No such Acts or regulations or by-laws are identified, still less any breaches of any Acts, regulations or by-laws.

25. Having simply listed the wording of the various terms of the subcontract already listed in paragraph 29, paragraph 30 then descends to some nine pages of particulars of asserted breaches of the subcontract by the plaintiff. Perhaps these are in large part intelligible to a building construction professional, but they fall far short of informing the plaintiff or the court adequately of the material facts on which the defendant will be relying in making out the counterclaim. They are not expressed in a form which lends itself to a conventional pleading response by the plaintiff which would enable the court to understand precisely what the defendant is alleging, and which of those allegations the plaintiff admits, denies, or responds to by asserting additional material facts.

26. These defects amount to more than a technical failure to adhere to the requirements of pleading in the Courts Procedures Rules. Those requirements are set out in part 2.6 of the Rules and practitioners are expected to be familiar with them. I do not propose to refer to all of those which may be presently relevant, but mention rules 405 (formal requirements), 406 (statements in pleadings), 430 (all necessary particulars must be included), 431 (use of Scott schedule), 441 (denials and non-admissions) and 470 (counterclaim - conduct and pleading). There is considerable authority in relation to pleadings, much of it recently and helpfully summarised by Refshauge J in Canberra Data Centres Pty Ltd v Vibe Constructions (ACT) [2010] ACTSC 20 at [24] to [50], where his Honour quoted from seminal decisions including Bruce v Odhams Press Ltd [1936] 1 KB 697, Banque Commerciale SA (in liquidation) v Akhil Holdings Ltd [1990] HCA 11; (1990) 169 CLR 279, and Mulltigroup Distibution Services v TNT Australia Pty Ltd [1996] ATPR 41-552.

27. The issue of greatest practical concern in the present matter is that the court cannot tell from the proposed counterclaim what the defendant says happened. I was informed of the course of argument that the owner terminated the head contract with the defendant before work was completed, and engaged another builder to finish the job. I had the impression that the defendant would be seeking to blame the plaintiff for this outcome, but none of this appears from the pleadings. It is not pleaded that any particular breach by the plaintiff caused the defendant to be in breach of the head contract leading to termination of the head contract by the owner. The defendant does not plead an entitlement to recover any loss from the plaintiff because of facts such as these. One would gain the impression from the counterclaim that the defendant engaged another or others to complete the work it says the plaintiff had not carried out satisfactorily, but again this is not pleaded. The court can only speculate as to whether the counterclaim will include amounts the defendant says it has had to pay out to finish work which should have been done by the plaintiff in order to comply with its contractual obligations to the owner, or whether its case will be that the defective work was never rectified but simply that it should not have to pay the plaintiff for defective or unsatisfactory work. It will be necessary for the court (or perhaps referee) hearing the counterclaim to be satisfied as to the facts which the defendant will say led to its loss or damage. The purpose of pleadings is to inform the other side, and, equally important, by the court, of the material facts which the party whose pleading it is proposes to prove on hearing. The proposed further amended defence and counterclaim, despite attempts at redrafting, still fails to achieve that purpose.

28. Counsel for the plaintiff urges the court to strike out the defence and counterclaim, not to permit further amendment, and to direct entry of judgment for the plaintiff. Counsel relies on Aon Risk Services, mentioned above, and on a recent decision of the NSW Court of Appeal, McMahon v John Fairfax Publications Pty Ltd [2010] NSWCA 308, per Allsop P and Giles and Young JJA. The court unanimously dismissed that appeal from a single judge in a defamation action which had been dismissed after a series of unsuccessful attempts by the plaintiff to get his statement of claim in order. Whilst I accept the principles expressed by the court in that decision, whether or not to bring a claim or a counterclaim to an end for pleading deficiencies remains a discretionary decision. One factor in McMahon not present here is that it was a defamation case. As Allsop P said at [35]:

Defamation cases should be brought on with all the despatch required by the Civil Procedure Act. Vindication of reputation if traduced should occur promptly. That is why the defamation list exists.

Whilst all litigation should be dealt with as promptly as the demands upon the court allow, a building case between corporations does not share that characteristic with a defamation action.

29. In the circumstances I propose to allow the defendant one more opportunity to get its pleading into order. I acknowledge that the pleading, whilst not necessarily of great complexity, will necessarily descend into considerable detail. In this regard I note that the plaintiff’s solicitors, in relation to an earlier draft, in May 2010 forwarded to the defendant’s solicitors a request for particulars of the then defence and counterclaim running to 135 pages. I refer to that document not with any approval but simply to illustrate the level of detail involved in the matter.

30. I think it reasonable to allow the defendant a further two months to prepare a further amended defence and counterclaim consistently with these reasons. The filing of that document will require consent or leave. To avoid the expense of a further formal application for leave, I shall grant liberty to each of the parties to apply on seven days’ notice by letter to the other to place the matter in my Friday applications list. This will be relevant to the further draft amended defence and counterclaim, the bank guarantee in relation to security for costs, and the costs of the hearing on 24 November 2010. As to the latter, my provisional view is that the plaintiff should have the benefit of an order for those costs, but I shall hear any submissions the defendant wishes to make before I make a formal order to that effect.

I certify that the preceding thirty (30) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Master.

Associate:

Date: 4 February 2011

Counsel for the plaintiff: Mr M J Walsh

Solicitors for the plaintiff: Meyer Vandenberg

Counsel for the defendants: Mr J L Madden

Solicitors for the defendants: Slater & Gordon agents for Meier Denison Guymer (Victoria)

Date of hearing: 24 November 2010

Date of judgment: 4 February 2011