JIAWAN HOLDINGS PTY LIMITED v DESIGN COLLABORATIVE PTY LIMITED [1993] NSWCA 145

JIAWAN HOLDINGS PTY LIMITED v DESIGN COLLABORATIVE PTY LIMITED

SUPREME COURT OF NEW SOUTH WALES — COURT OF APPEAL

PRIESTLEY JA, MEAGHER JA and HANDLEY JA 18 March, 16 April 1993

[1993] NSWCA 145

FACTS: A joint venture, essentially comprising a financier, Mr Dalley, a builder, Mr Stanborough and a supervisor, Mr Russell, set out to build two developments — "Lantern Lodge" at Thredbo and the "Staff Village" at Jindabyne. The contract for the former was signed on 6 August 1987 for the fixed price (no rise or fall clause) of $1.85 million. The second contract was signed on 21 January 1988 for the fixed price of $2.14 million. The architect, Mr Emerson, played a limited role in the first project. He neither drew up the plans, agreed to supervise the project nor set nor independently assessed the price. An offer to act as supervising architect was rejected. He drew up the plans for the second development at Jindabyne, but again neither undertook to supervise, nor assess the price. The situation in question, where the builder was a part-owner who set the price and this builder's profits being available in the event of cost overruns, is in contrast to the normal situation in which the architect is the intermediary between the owner and the builder.

§.52 Trade Practices Act s.42 Fair Trading Act

The architect did, on November 17 or shortly thereafter, agree to provide certificates following a conversation with Mr Russell. Mr Dalley had provided his own funds to the builder, but had decided to obtain finance for the project from the Advance Bank. The Advance Bank required certificates before they would repay Mr Dalley. The certificates were to state a) what moneys so far the builder had spent on the projects; b) how that was spread amongst the trades; and c) what was the difference between moneys spent to date and the contract sum.

Ultimately, there were enormous cost overruns and extended delays in completion.

HELD: (per curiam)

(1) The contract between the joint venturer and the architect to provide certificates to the Advance Bank was a limited engagement of the architect, and did not involve the independent assessment of costs. Moneys had already been advanced to the builder prior to the agreement to provide certifcates. The contract, on Mr Russell's own version required certification of amounts spent against the fixed contract price, rather than an independently assessed reasonable price. There is therefore no breach of contract. In light of the limited engagement, there was no negligence on the part of the architects in not ascertaining actual costs to complete. Likewise there is no case against the defendants under s.52 of the Trade Practices Act, or s.42 of the Fair Trading Act.

Priestley JA. I have had the benefit of reading Meagher JA's reasons in draft. I agree with each of the steps in his reasoning and with the orders he proposes.

Meagher JA. The plaintiffs, who are the present appellants, sued the defendants, who are the present respondents, in various causes of action in contract, tort and statute for (in effect) carelessly certifying builders" work at two building projects, one called Lantern Lodge at Thredbo and one called the Staff Village at Jindabyne. The defendants cross-claimed for the balance of moneys owing for professional fees. Cole J found for the defendants both in the action

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and in the cross-action. The plaintiffs have appealed. In my view, Cole J was correct on all points and the appeal must fail.

The plaintiffs are a building owner and the defendants are architects.

The erection of a building normally involves a tripartite series of relations between the building owner, the builder and the architect.

The architect is usually the middleman between the building owner and the builder. He prepares plans and specifications for the building work, estimates the price, calls for tenders, employs (as agent for the building owner) the builder for the price agreed between him and the owner, supervises the building work, and issues certificates from time to time against which the owner pays the builder.

In the present case, the defendant architect played no such role. The building owner, in respect of each project was a joint venture, which (if one may disregard the corporate shells) consisted of three parties: a Mr Dalley, who was to finance the contract (principally by borrowing from other financiers); Mr Russell and his solicitor Mr Tzovaras, who were to supervise the project in each case, and Mr Stanborough, who was the builder. Instead of the builder being at arm's length from the owner, therefore, it was (in effect) part-owner, a situation which had disastrous effects.

Another unusual feature of the arrangements between the plaintiffs and the defendants was that the defendant, although architects, did not fix — and were not even consulted about — the building price agreed between the owner and the builder in respect of either building. The price for Lantern Lodge ($1.85m) was fixedon about 6 August 1987, the price for Jindabyne ($2.14m) on about 21 January 1988. The plaintiff's engagement of the defendants took place on or about 17 November 1987. Nor were the contents of either building contract made known to the defendants, even although part of the contents of each contract named the defendants as architects to the project.

This is perhaps made more explicable if one realizes that the contract price in respect of each building was a lump sum price, which was fixed without rise and fall provisions; and more explicable still when one realizes that the price, and apparently all the terms of the contract, were advanced by the builders.

Indeed, the architects" involvement was more limited still. They had nothing at all to do with the planning of the Jindabyne project, and less than usual architectural involvement with the Thredbo project. In particular, they were never asked to make any independent assessment of the contract price of either project. They offered to provide the full range of architectural services in respect of both projects, but their offer was refused. This penny-pinching attitude of the owners can, I think, be understood. Not only was there a generalized desire to save money, even to the extent of eliminating essential services; but also, from the builder's point of view, there was freedom from architectural interference; whilst from the point of view of the joint venturers other than the builder, there was a general insouciance about price, because they expected the profits on eachproject to be so great that any payments made in excess of the contract price could be debited against the builder's share in the joint venture. It never occurred to anyone, apparently, that the price might be hopelessly miscalculated or the profits not as exorbitant as expected or that the payments in excess of the contract price might exceed not only the builder's share of the profits but all other venturers" share of the profits as well.

As far as financing the projects was concerned, Mr Dalley initially paid the builder various amounts and sought recovery from his financier, Advance Commercial Finance Limited. The latter were prepared to advance moneys but

URWWAN HOLDINGS PTY LIMITED v DESIGN COLLABORATIVE PTY LIMITED (Meaghes JA)

only against an architect's certificate. By the end of October 1987, the builder had already been paid by Mr Dalley sums of money totalling $246,925.00. (It will be remembered that at this stage no arrangement had been made with the defendant).

It is against this background that one must assess the evidence relating to the defendant's retainer. His Honour based his findings in this regard firmly on the evidence of one of the plaintiffs witnesses, Mr Russell, relating to a conversation between him and Mr Emerson of the defendants on 17 November 1987. In part, it ran as follows:

Russell:"'We need to have the means of knowing we are keeping within our budget and that any claim by Stanborough is a legitimate one. We have to know that the funds we are advancing are being directly employed for the works and for no other purpose. Wewill need someone to do certification for the Advance Bank ....'

Emerson:""The method I would lean to and one that I have used before is to set out a schedule of trades for the total contract price of the work. That is, with respect to the contract price of approximately $1.9m which price I now understand Stanborough to be giving as his estimate to construct Lantern Lodge at cost, I would propose to get Stanborough to be given the split up of how these moneys would be proposed to be spent on the various trades ... Then the certifications I would give would be based on the proportion of work done on each trade from time to time. So this method will give you the value of work done and obviously the difference would be the cost to complete ....'

Accordingly, then, with the parties" agreement, the architects" certificates were of a somewhat specialized kind. They were not documents which enabled the owner to know what moneys he owed the builder, but rather documents which enabled the financier to know what moneys to repay the owner. Apart from that all they told the owner was (a) what moneys so far the builder had genuinely spent on the projects (b) how that was spread amongst the trades, and (c) what was the difference between moneys spent to date and the contract sum.

The certificates actually issued by the defendant conformed with this analysis. Certificate no. 1 relating to Lantern Lodge is an example. It was dated 17 February 1988. It was addressed to Advanced Commercial Finance Ltd It said:

The value of work carried out on the above site up to Thursday 7 January 1988 has been assessed as not exceeding $466,000.00.

The value of work outstanding on the above site is $1,484,000.

At the time of inspection the building was being constructed in accordance with the proposed plans, specifications and architect's instructions.'

The plaintiff/appellant's allegations can now be assessed. In contract, it was alleged that the defendant architect was in breach of contract in issuing misleading certificates to its client, the plaintiff, in reliance on which the latter paid the builder. This fails at all points. The certificates were issued to the plaintiff's financier, not to the plaintiff. They had nothing to do with payments by the plaintiff to the builder: for example, at the date certificate No. 1, which I have just quoted, was issued, $1,043,178.00 had already been paid by the plaintiff to the builder. They regulated the payments which the financier would make to the plaintiff.

Again, in contract, so it was alleged, the defendant was in breach in, contrary to its obligations, certifying amounts necessary to complete the works which, if it had exercised reasonable care, it would have known were wildly unreasonable. For example, in the certificate I have quoted, they certified that it would cost the

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plaintiffs another $1,484,000.00 to complete the project at Lantern Lodge, knowing or able to know this was not true. But, this is to misconstrue the contract. On Mr Russell's own version of the architect's retainer, the figure $1,484,000.00 is no more than the difference between the amount certified as having been spent inaccordance with the contract ($466,000.00) and the fixed sum contract price($1.9m).

In negligence, I cannot see any circumstances which required the architects to ascertain what true figure would be required to complete the works, and there was therefore no breach of duty in failing to inform the plaintiffs of the true figure. These considerations also dispose of the alleged case against the defendants under s 52 of the Trade Practices Act, or s 42 of the Fair Trading Act.

The appeal should be dismissed with costs.

Handley JA. I agree with Meagher JA.

(1) Appeal dismissed with costs. Counsel for the appellant: B Rayment QC/ J Kelly Solicitors for the appellant: R L Kremnizer and Co Counsel for the respondent: V Bruce QC/ M Williams

Solicitors for the respondent: Ebsworth and Ebsworth