FEDERAL COURT OF AUSTRALIA

Management 3 Group Pty Ltd (In Liq) v Lenny’s Commercial Kitchens Pty Ltd [2011] FCAFC 162

THE COURT ORDERS THAT:

1.    The appeal be allowed.

2.    The appellants bring forward short minutes of order.

Note:    Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011.

REASONS FOR JUDGMENT

THE COURT:

1    The first appellant, Management 3 Group Pty Ltd (In Liquidation) (M3G), was at the relevant time a building contractor. It went into administration on 7 April 2009, and on 21 May 2009 it was ordered to be wound up in insolvency. The second and third appellants are the joint and several liquidators of M3G.

2    The first respondent (Lenny’s) was a manufacturer of kitchens and a supplier of kitchen items. The second respondent (Sino), at the relevant time, owned the Fortescue River Construction Camp (Site), which was a camp being constructed to accommodate workers who were constructing Sino’s Magnetite Plant.

Facts

3    On 2 July 2008 M3G and Sino entered into a construction contract for M3G to construct the mining accommodation at the Site (Contract). On 12 August 2008 M3G entered into a purchase agreement with Lenny’s for Lenny’s to supply and install a kitchen, items for a wet mess, and an ice room at the Site.

4    This is an appeal against an order of a judge of this Court dismissing the appellant’s claim against Sino’s conversion of unaffixed goods which were described in the proceeding as the “additional goods” (Additional Goods).

5    The appellants’ claim against Lenny’s for a breach of s 440C of the Corporations Act 2001 (Cth) (Corporations Act) and for conversion of various kitchen goods (Kitchen Goods) also failed, but the appellants did not seek to reagitate their claim as against Lenny’s. Lenny’s is no longer a party to the appeal. Nothing more needs to be said about Lenny’s involvement.

6    The Contract provided for M3G to supply and install the Additional Goods, which comprised laundry machines and wall vents, hot water units, fire extinguishers and carpets. M3G acquired the Additional Goods from suppliers other than Lenny’s.

7    As at 7 April 2009, the date when M3G went into voluntary administration, some of the Additional Goods had not been affixed at the Site. Although there was a dispute as to the number of goods which remained unaffixed, the trial judge found that the Additional Goods comprised 37 laundry machines and wall vents, 16 hot water units, 40 fire extinguishers and 30% of the carpet. That finding is not challenged on the appeal.

8    Some time after 7 April 2009, Sino installed the Additional Goods at the Site.

9    The question before the primary judge and on appeal is whether M3G or Sino owned the Additional Goods as at 7 April 2009. If they were owned by M3G then Sino’s actions constitute a conversion of the Additional Goods. If they were owned by Sino at that time there was no conversion.

10    The primary judge was of the opinion that Sino owned the Additional Goods at 7 April 2009. She held that title to the Additional Goods had passed to Sino pursuant to clause 42.2 of the Contract in circumstances where Sino had paid the full value of the Additional Goods prior to 7 April 2009, in December 2008.

11    The appellant contends that the primary judge was wrong to reach that conclusion, and that she should have found that as at 7 April 2009 M3G owned the Additional Goods, and that Sino had converted those goods to its own benefit. Sino, it argues, is therefore liable to M3G for the total value of those goods at the date of conversion, namely $236,000.

12    On 15 December 2009 Finkelstein J granted leave to Sino nunc pro tunc to install and use the Additional Goods upon Sino’s undertaking that the damages sought by the appellants would be assessed by reference to the ownership of the goods on 7 April 2009, and by reference to the value of the Additional Goods in the place they were located and in the state they were in on that date.

13    The primary judge did not, because of her finding that Sino owned the Additional Goods, address the question of their value. She did however consider the value of other goods of the same kind that had been supplied by Lenny’s and installed by Sino after M3G went into administration. In respect of those goods she was of the opinion that their value onsite was 40 to 50% of their invoice value.

14    Sino contends that the primary judge was right for the reasons she gave, but that if Sino is liable in conversion the value of the items is overstated at $236,000. It claims that the value of the Additional Goods at 7 April 2009 was between $95,001.93 and $118,752.41, which represents approximately 40 to 50% of their invoice value.

15    Sino argued in the alternative that if there was a conversion of the Additional Goods the damages payable were between $1,045.02 and $1,306.27. That argument relies on a further finding that the primary judge made, which was that on any understanding Sino had paid 98.9% of the value of the Additional Goods, and so at most Sino would have converted 1.1% of the value of the Additional Goods.

16    M3G’s complaint on this appeal is that the primary judge was wrong to find that Sino had paid M3G an amount which included the full value of the Additional Goods prior to 7 April 2009. It argues that the evidence was against such a finding. It submits that the appropriate finding that should have been made was that Sino had not paid for any of the Additional Goods at the relevant time, and in those circumstances Sino was not entitled to deal with those goods in denial of M3G’s interests in the goods as owner of the goods.

17    M3G contends that Sino could not by making a progress payment pursuant to the Contract become the owner of the Additional Goods: Egan v State Transport Authority (1982) 31 SASR 481; R J Grills Pty Ltd v Dellios [1988] VR 136.

18    Sino answered that contention by relying upon clause 42.2 of the Contract, which provided:

Unfixed Plant and Material

The Principal shall not be obliged to pay for any item of unfixed plant and materials which is not incorporated in the Works unless

(a)    that item is listed in Annexure Part A;

(b)    the Contractor provides the amount of additional security stated in Annexure Part A separately approved by the Principal under Clause 5.3; and

(c)    the Contractor establishes to the satisfaction of the Superintendent that the Contractor has paid for the item, the item is properly stored, labelled the sole and exclusive property of the Principal and is adequately protected and insured.

Upon payment to the Contractor of the amount which includes the value of the item, and upon the release of any security, the item shall be the property of the Principal free of any lien or charge.

Any additional security provided for any item of unfixed plant and materials shall be released in accordance with Clause 5.9.

19    M3G argued that clause 42.2 had no application and that Sino could not rely upon those parts of the clause which follow after paragraph (c). Clause 42.2 refers to items listed in Annexure Part A. It was contended by M3G that there were no items listed in Annexure Part A, and that therefore clause 42.2 had no effect or operation. It also argued that clause 42.2 only applied to allow the Principal to make payment for any item of unfixed plant and materials when all three conditions in paragraphs (a), (b) and (c) of clause 42.2 were met.

20    Sino on the other hand argued that it was entitled to rely upon the last two sentences of the clause without reference to the preceding paragraphs, and if it had made full payment for the Additional Goods it was entitled to the ownership of the goods and to deal with them as it liked.

21    Sino conceded before the primary judge and on appeal that it could only avoid being held liable in conversion if it was entitled to rely upon clause 42.2 in the manner for which it contended. It did not attempt to argue that there was a separate agreement whereby it acquired ownership of the Additional Goods.

22    The primary judge accepted that the language and structure of the clause supported the appellants’ construction. However, she found that “a literal construction would… produce a result unlikely to have been intended by the parties.” She further found at [162]:

[162]    On the applicants’ construction, because there are no items of unfixed plant and material which satisfy the preconditions of its obligations to pay, the construction contract would make no provision at all for the transfer to the Principal of any unfixed plant and materials in respect of which it voluntarily paid the value. If the second paragraph of clause 42.2 does not apply to such unfixed items, the Principal could acquire no property in them pursuant to the terms of the construction contract even if it had paid the value and had released any security. It is, in my view, improbable that the parties intended that consequence or the relative rights of the parties under such transactions to be uncertain or left to be resolved by the general law or a separate agreement.

23    Her Honour said that notwithstanding that a literal construction would better accord with the appellant’s interpretation, “the clause must be read in the context of the construction contract as a whole which, as a commercial contract, should be robustly construed in order to avoid irrational or unintended results”: at [163].

24    She concluded at [164]-[165]:

[164]    On that basis, in my opinion, the failure to specify any items in Annexure Part A Item 47 did not deprive clause 42.2 of all operation. The second paragraph is capable of independent application to unfixed items which are not subject to Sino’s obligation to pay imposed by the first paragraph. On a robust construction, according to the applicable principles, paragraph 2 of clause 42.2 in my view extends to unfixed plant and equipment for which Sino was not obliged to pay.

[165]    The second paragraph assumes that, on payment to the Contractor, the item shall be the property of the Principal free of lien or charge. The application of clause 42.2 thus appears limited to unfixed plant and equipment in relation to which the Contractor can pass property to the Principal.

25    Her Honour found at [169] in relation to the construction of clause 42.2:

[169]    Therefore, on the better view, if Sino paid M3G an amount including the value of unfixed items such as the kitchen goods and such additional goods as were still unfixed (given there was no evidence that there was any security), in my opinion, property in such goods passed to Sino pursuant to clause 42.2 of the construction contract.

26    There was a dispute as to whether Sino had paid the full amount, which was decided adversely to M3G. Her Honour made the following finding at [184]:

[184]    I am satisfied that Sino, prior to 7 April 2010, paid M3G an amount which included the full value of the kitchen goods and the additional goods, and that title in those goods therefore passed to Sino pursuant to clause 42.2 of the construction contract. In my opinion, Sino paid M3G the full value of items 1 to 4 as at December 2008, save for $422,344.00. I accept Mr Stoney’s evidence that the withheld amount did not relate to the kitchen goods or the additional goods and therefore did not detract from Sino’s payment of the full value of those goods.

27    Mr Stoney assisted and was later nominated as the representative of the Superintendent under the Contract, Mr McFie. The primary judge described him at [8]:

[8]    … Together with CPMM’s Project Director, Graham Harris, and its Project Director of Services, John Bonnette, Mr Stoney was the principal point of contact with M3G’s representatives in relation to its performance of the construction contract.

The primary judge described Mr Stoney as an impressive witness: at [132] and [135].

28    Mr Stoney’s evidence was that the Contract originally required Sino to make payments to M3G according to a payment schedule which related to milestone events. However, when it became obvious that M3G had cashflow problems, Mr Stoney negotiated with Mr Robertson of M3G for an amended payment schedule. That amended payment schedule was confirmed by Mr McAdam on 17 December 2008 (Amended Payment Schedule).

29    There was no dispute that items 1 to 4 of the Amended Payment Schedule included the Additional Goods. Mr Stoney’s evidence was that:

Items 1 to 4 of the Amended Payment Schedule included the supply of all the building modules required for the FRRCC [the Site] in a “fitted out” condition as manufactured, including the modules comprising the kitchen. The value of the modules was $8,446,892, as recorded in both the Price Schedule and the Amended Payment Schedule in Appendix A of the Contract.

30    He said that by 5 March 2009, save for $422,344.00 which was withheld, Sino had paid M3G for all of the works comprising Items 1 to 4 of the Amended Payment Schedule. He said that the amount withheld did not relate to the Kitchen Goods, but to the further fitout and installation works required to obtain shire approval of occupancy of the entire Site, including the accommodation units and the central buildings.

31    His evidence was that:

The kitchen Assets had already been paid for by Sino and the only outstanding payments due to M3G related to further fit-out and installation works required in respect of those Assets in order to ensure the fitness for occupation of the accommodation units at the FRRCC.

32    Mr Stoney said that after 5 March 2009, on 3 April 2009, Sino paid Lenny’s $93,500.00 at the request of M3G, which reduced the amount withheld to $337,344.00. Mr Stoney said that the amount withheld was less than the value of undelivered goods and incomplete installation and fitout works attributed to Items 1 to 4 of the Amended Payment Schedule, which he identified as follows:

Loose Furniture     $155,909

Gym Equipment     $100,000

Televisions    $    9,200

Installation of kitchen equipment     $  63,380

Installation of coolroom and bar    $ 5,750

Beer garden roof/ shade sails    $ 46,875

TOTAL    $381,114

33    M3G argued that the certificate issued by Mr Stoney was not in respect of any particular building or goods and it was irrelevant how Mr Stoney subjectively arrived at his assessment. It argued that there was no evidence before the primary judge as to the date that Mr Stoney certified M3G’s interim progress claim, the amount of work still to be performed by M3G as at 19 December 2008, and whether or not Mr Stoney had over certified or under certified the amount of M3G’s entitlement as at that date.

34    Therefore it contended it was not open to the primary judge to find that Sino had paid for all of the Additional Goods.

35    In the alternative, M3G argued that if Sino had paid the full value of the Additional Goods on 19 December 2008, that did not remain the case. It argued that the Amended Payment Schedule was never given contractual force by the parties as it remained subject to Sino’s approval. Insofar as Mr Stoney acted in accordance with the Amended Payment Schedule it was because he wrongly believed that the Amended Payment Schedule bound him.

36    When Mr Stoney further certified on 5 March 2009 because of his erroneous belief he under certified the amount payable to M3G, and as a result if there previously had been a payment for all of the Additional Goods the under certification meant that they had no longer been paid for.

37    M3G argued that her Honour was wrong to conclude that if the Additional Goods had been paid for that action could not be retrospectively reversed by reason of any later miscalculations or rectifications.

38    There was an additional complication in this proceeding, and that relates to the question of damages, the quantum of which was a live issue before the primary judge and on appeal. In a claim for conversion the plaintiff’s damages are to be assessed as at the date of the conversion by reference to the value of the property at that date: Associated Midland Corporation Ltd v Bank of New South Wales [1983] 1 NSWLR 533 at 550 per Mahoney JA. The only evidence led by the appellants as to the value of the Additional Goods in the place they were located and the state they were in on 7 April 2009 was the invoices that had issued when M3G had purchased the goods.

Consideration of Appeal

39    Clause 42.2 has to be construed in the context of the Contract as a whole because the other provisions may reveal the proper meaning of the clause under consideration. If the words are plain and unambiguous they must be given their plain meaning, even if that leads to a capricious or unreasonable result. However, if the ordinary meaning of the words is inconsistent with other clauses of the Contract, that may be a reason to depart from the plain meaning. If the words are ambiguous then the words should be given a meaning that is not “capricious, unreasonable, inconvenient or unjust”: Australian Broadcasting Commission v Australasian Performing Right Association Ltd (1973) 129 CLR 99 at 109 per Gibbs J. A commercial contract should be construed in accordance with business commonsense: MLW Technology Pty Ltd v May [2005] VSCA 29.

40    The Contract required M3G to execute the works identified in the Contract in accordance with the terms of the Contract. The Contract contained as Schedule 1 the “Australian Standard General Conditions of Contract for Design and Construct” (Standard).

41    The Standard covers the following type of project procurement methods:

(a)    Design and Construct Contract.

(b)    Design Development and Construct Contract.

(c)    Design, Novate and Construct Contract.

42    Clause 3.1 of the Contract provides that the Contractor (M3G) shall execute and complete the work under the Contract in accordance with the requirements of the Contract. The work under the Contract is defined to mean “the work which the Contractor is or may be required to execute under the Contract and includes the Contractor’s Design Obligations, variations, remedial work, Constructional Plant and Temporary Works”. The “works” is defined to mean “the whole of the work to be executed in accordance with the Contract, including variations provided for by the Contract, which by the Contract is to be handed over to the Principal”.

43    Clause 5.1 provides for the Contractor to give security for the purpose of ensuring the due and proper performance of the Contract. Clause 5 states that the security required to be provided is identified in Annexure Part A.

44    Clause 5.9 addresses the release of security if security is being given by the Contractor. It provides:

If the Contractor has provided security then the Principal shall release it when required by Clause 42.6. If the Contractor has provided additional security for any item of unfixed plant and materials pursuant to Clause 42.2, the Principal shall release that additional security within 14 days of the incorporation into the Works of the unfixed plant or materials.

45    Clause 42 deals with certificates and payments. Clause 42.1 provides for the regime whereby the Contractor is to deliver the Contractor’s claims for payment. It relevantly provides:

At the times for payment claims stated in Annexure Part A and upon the issue of a Certificate of Practical Completion and within the time prescribed by Clause 42.5, the Contractor shall deliver to the Superintendent claims for payment supported by evidence of the amount due to the Contractor and such information as the Superintendent may reasonably require. Claims for payment shall:

(a)    include the value of work carried out by the Contractor in the performance of the Contract to that time together with all amounts then otherwise due to the Contractor arising out of or in connection with the Contract or for any alleged breach thereof;

(b)    include the total amount previously certified pursuant to this Clause 42.1;

(c)    include the amount of the Contract Sum being claimed by the Contractor; and

(d)    separately identify work attracting GST and work which does not attract GST.

46    Once the Contractor has submitted a claim for payment the Superintendent, who was defined in clause 2 to mean the person stated in Annexure Part A as the Superintendent, must consider the claim and provide a payment certificate in respect of that claim.

47    Clause 42.1 specifically provides that payment made under clause 42.1 does not prejudice the right of either the Contractor or the Principal (Sino) to dispute that the amount paid was properly due and payable. It also provides that payment of monies shall not be an admission of liability or evidence that the work has been executed satisfactorily. The clause also allows the Superintendent to correct any certificate given if an error is demonstrated. Lastly, it provides that the issue of a certificate does not prevent the Contractor having the dispute resolved in accordance with clause 47. Clause 47 provides for dispute resolution.

48    We have already identified clause 42.2. Clause 42.4 “Effect of Certificates” is also relevant. It provides:

The issue of a payment certificate or a Certificate of Practical Completion shall not constitute approval of any work or other matter nor shall it prejudice any claim by the Principal or the Contractor.

Prior to and as a condition precedent of the granting of a Certificate of Practical Completion, the Contractor shall (at its own cost, and in a manner approved by the Principal), assign full right, title and interest in and to any part of the Works in respect of which property has not already passed to the Principal.

49    Clause 42.6 requires the Superintendent to issue a final certificate in the time prescribed in clause 42.6.

50    Clause 43.5 allows the Principal at the request of the Contractor to make payments on behalf of the Contractor directly to any worker or subcontractor.

51    Appendix A is the “Price & Payment Schedule”. The Buildings Schedule within Appendix A identified 12 separate types of buildings that were to be constructed on the Site at a cost of $8,446,892. The services which were to be provided by M3G were separately identified in the sum of $3,807,275. Lastly, Appendix A provided for installation costs of $11,600,000, making a total contract price of $23,854,167.

52    Appendix A also contained a payment schedule, and insofar as it related to the buildings it provided:

2.    PAYMENT SCHEDULE

Buildings (Total AUD $8,446,892)

1.    30% deposit being AUD $2,534,068 due within 7 days of receipt of invoice when the contract has been executed;

(N.B. The following payments are being made whilst the Contract is being executed:

    USD $600,000 direct to CIMC China as a deposit on the first 30 accommodation units; and

    AUD $300,000 to M3g to assist with their cashflow requirement for the project).

The balance of the funds required to make up the 30% deposit being approximately AUD $1,602,628 will be paid within 7 days, upon receipt of invoice after the contract has been executed by both parties.

2.    50% being AUD $4,223,446 within 7 days of receipt of invoice, upon receipt of Meinhardt Inspection certificate prior to despatch ex China;

3.    10% being AUD $844,689 within 30 days of receipt of invoice, upon arrival of buildings onsite; and

4.    10% being AUD $844,689 within 30 days of receipt of invoice, upon receipt of shire approval for occupancy;

Contractor is to provide a Bank Guarantee for 2.5% of the total value of the buildings being AUD $211,172 valid for the 12 month duration of the Defects Liability period.

53    The installation schedule does not need to be addressed.

54    Annexure Part A states that it is to be “attached to General Conditions of Contract and shall be read as part of the Contract”. It consists of a number of items which are referred to in the General Conditions, including the law to be applied; the contract sum; the deposit which had to be paid by the Principal; the security which had to be provided by the Contractor; and the amount of public liability insurance to be effected by the Contractor.

55    Item 47 of Annexure Part A provides:

Unfixed plant and materials for which payment claims may be made before they are incorporated in the Works: (Clause 42.2).

No unfixed plant and materials were identified.

56    Item 13 required M3G to provide security in the amount of 2.5% of the contract sum. Annexure Part A was silent as to additional security.

57    M3G submitted its claims for payments in accordance with the Contract and the Superintendent certified those claims from time to time. The claims were accompanied by invoices which identified the amount of the claim.

58    Evidence was led before the primary judge of a side agreement between M3G and Sino for Sino to pay a subcontractor of M3G direct in accordance with clause 43.5. The parties agreed at that time when Sino paid that amount directly to the subcontractor that:

6.    Pursuant to clause 42.2 of the Agreement, we confirm once payment is made all goods supplied by CIMC shall be the property of Sino.

59    The evidence was not led for the purpose of establishing post-contractual behaviour that bore upon the construction of the Contract. It is not clear to us for what purpose the evidence was tendered. Indeed counsel was unable to assist as to the relevance of that evidence, and we have disregarded it in our consideration of the issues on the appeal.

60    The Contract is for the carrying out of the Works, and it is not a contract for the sale of goods. As we have mentioned, Sino expressly conceded that unless it obtained property in the Additional Goods pursuant to clause 42.2 it would be liable in conversion. Sino did not argue that property in the goods passed by operation of law because of the payment made by Sino and because there had been a delivery of the goods to Sino. Sino limited its claim for an entitlement to the Additional Goods to any contractual right given by clause 42.2. We have approached the appeal on that basis. We have not considered whether Sino was otherwise entitled to ownership of the Additional Goods.

61    The Principal’s obligation to pay the Contractor in respect of the buildings, services and installation is in accordance with the Payment Schedule. That Schedule recognises four different occasions when Sino must pay M3G in respect of the buildings. Those payment occasions do not reflect the purchase or delivery of unfixed items or materials. The payment occasions are fixed by the parties to recognise the progress of the works generally. Apart from clause 42.2 there is no obligation on Sino to pay for any particular items or materials at any time. Its obligations for payment are contained within the Payment Schedule. Unless clause 42.2 operates, Sino cannot be required to pay any monies to M3G except in accordance with the Payment Schedule. As we have already noted Sino may, if requested by M3G, agree to pay a worker or subcontractor directly: clause 43.5. However, there is no obligation on Sino to do so. It would make that payment if requested at its own election.

62    Clause 42.2 provides that the Contractor can require the Principal to pay for an item of unfixed plant and materials if the Contractor complies with paragraphs (a), (b) and (c) of clause 42.2. Clause 42.2 has the effect that if the Contractor can satisfy paragraphs (a), (b) and (c) the Contractor can oblige the Principal to pay for unfixed items and materials. Clause 42.2 is unlike clause 43.5 in that the Contractor can require the Principal to make payment so long as the Contractor has complied with paragraphs (a), (b) and (c). It is not in the case of this clause a matter of election on the part of the Principal.

63    When the Contractor requires the Principal to pay for the items of unfixed plant and materials the Principal is protected so that when the security that is taken is released the item of unfixed plant and materials become the property of the Principal, free of any lien or charge.

64    There is no suggestion in this case that M3G acted so as to oblige Sino to make the payment in accordance with the clause. Indeed it could not have done so because no items were listed in Annexure Part A. Nor was an amount of additional security included in Annexure Part A. M3G could not in those circumstances ever comply with paragraphs (a) and (b) even if it complied with paragraph (c) which, as a matter of fact in this case, it did not.

65    Unless at the time of the execution of the Contract Annexure Part A provides for items of unfixed plant and materials, and for additional security, clause 42.2 in our opinion can have no operation. If the parties have not addressed paragraphs (a) and (b) of clause 42.2 in the Annexure Part A, the Contractor can never comply with the clause, so it cannot operate. Clause 42.2 cannot operate unless paragraphs (a) and (b) are addressed at the time of the execution of the Contract.

66    Both paragraphs (a) and (b) require the parties to apply their minds to whether or not clause 42.2 should operate at the time of the execution of the Contract. Paragraph (c) would apply if items of plant and materials had been listed in Annexure Part A and the Contractor had provided the additional security stated in Annexure Part A, and, during the currency of the Contract, the Contractor established to the satisfaction of the Superintendent the matters in paragraph (c).

67    We see no difficulty with that construction because if Annexure Part A does not include any item of plant and materials then clearly the parties intended that the Contractor could not require the Principal to pay for any items of unfixed plant and materials during the currency of the Contract.

68    We disagree with the primary judge that the words which follow paragraph (c) have any operation independently of paragraphs (a), (b) and (c). In our opinion, the words which follow paragraph (c) are a consequence of the actions in paragraphs (a), (b) and (c), and provide protection to the Principal if the Contractor complies with paragraph (c) and the Contract has at the time of execution recognised paragraphs (a) and (b) in Annexure Part A. The Principal requires the protection that clause 42.2 provides where the Principal is being compelled to pay for items of plant and materials. The items of plant and materials which the Principal is being compelled to pay for may or may not have been manufactured or may or may not be on site when the Principal has to pay for the items, and so the Principal has to be protected. The protection is in the parties recognising that property in the items has passed to the Principal free of any lien or charge.

69    We think that is the plain meaning of the words in the clause.

70    The words which follow paragraph (c) in clause 42.2 speak about “the amount”, “the item”, and “the release of any security”. “[T]he amount” which is referred to is the amount to be paid for the unfixed plant and materials which have been identified in Annexure Part A, for which security has been given in accordance with Annexure Part A, and where the Contractor has satisfied paragraph (c). “[T]he item” is the item which is identified in the opening words of clause 42.2, and must be an item which is identified in Annexure Part A. “The security” which is referred to is the security identified in Annexure Part A and referred to in paragraph (b). The last paragraph in the clause, which refers to the release of security, also refers to the security mentioned in paragraph (b).

71    We do not agree with Sino’s contention that the words after paragraph (c) can stand by themselves for the further reason that if they operated independently of paragraphs (a), (b) and (c) of clause 42.2, the parties would never know whether property in unfixed plant and materials had passed to Sino without knowing exactly how the Superintendent had arrived at a particular certificate.

72    It was not the parties’ objective intention that Sino could, without reference to M3G, purchase from M3G, independently of the works, items of unfixed plant and materials without reference to M3G: Pacific Carriers Ltd v BNP Paribas [2004] HCA 35; (2004) 218 CLR 451 at [22]; Toll (FGCT) Pty Ltd v Alphapharm Pty Ltd [2004] HCA 52; (2004) 219 CLR 165 at [40].

73    We do not see any difficulty with the construction we give clause 42.2. We think the construction is consistent with business commonsense. Ordinarily property in unfixed plant and materials does not pass to the Principal until such time as it is incorporated in the works: Egan v State Transport Authority. Clause 42.2 provides for a regime whereby property might pass in those items in other circumstances, but it does not otherwise detract from the general rule that property in unfixed plant and materials will not pass until incorporated in the works.

74    We also disagree with the primary judge that the Contract does not provide for the passing of property. Clause 42.4 expressly provides that prior to and as a condition precedent of the granting of a Certificate of Practical Completion, the Contractor shall (at its own cost, and in a manner approved by the Principal), assign full right, title and interest in and to any part of the works in respect of which property has not already passed to the Principal.

75    For those reasons, the construction contended for by M3G must be accepted, and in those circumstances, because of the concession made, Sino must be held liable for conversion.

76    That leaves only the question of damages. As we have said, M3G relied upon the invoices which show the cost to M3G of the purchase of the Additional Goods. No other evidence was adduced in relation to the value of the Additional Goods.

77    It is true, as Sino has contended, that in relation to the Kitchen Goods her Honour found that those goods had depreciated in value and only had a value of between 40% and 50% of their cost value at the date that Sino obtained the property in those goods. However, there were particular reasons for the depreciation in the value of the Kitchen Goods. They were custom built for the Site and therefore had little value to other parties apart from Sino.

78    In the case of the Additional Goods Sino had undertaken to Finkelstein J that the value of the goods should be assessed as their value at the Site on 7 April 2009. In our opinion, the goods had the value contained in the invoices which was demonstrated by the fact that Sino paid for those goods at that price by reason of the Superintendent’s certificate. That does not mean of course that property passed, but the Superintendent recognised their cost at that time as cost price.

79    Insofar as Sino has paid a sum of monies that reflects the cost of the Additional Goods, Sino can prove in the administration of M3G for that amount. Sino will rank with the other unsecured creditors for the cost of those items reflected in the judgment of this Court. It was not argued by Sino that any amount it had paid to M3G pursuant to the certificates certified by Mr Stoney could reduce the damages otherwise payable: see Associated Midland Corporation Ltd v Bank of New South Wales at 550-554 per Mahoney JA.

80    For all of those reasons, we would allow the appeal and enter a judgment for M3G in the amount claimed. The parties have not addressed the question of pre-judgment interest, and the parties should be entitled to address that issue by providing short minutes of order. The costs of the appeal have to follow the event. The parties may wish to be heard on the question of costs of the trial having regard to the fact that M3G’s claim against Lenny’s failed.

Associate:

Dated:    12 December 2011