Australian Dream Homes Pty Ltd v Stojanovski
[2016] VSCA 133
•10 June 2016
SUPREME COURT OF VICTORIA
COURT OF APPEAL
S APCI 2015 0099
| AUSTRALIAN DREAM HOMES PTY LTD (ACN 089 782 990) | Applicant |
| V | |
| ILIJA STOJANOVSKI and ZAGORKA STOJANOVSKI | Respondents |
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| JUDGES: | ASHLEY, OSBORN and KAYE JJA |
| WHERE HELD: | MELBOURNE |
| DATE OF HEARING: | 31 May 2016 |
| DATE OF JUDGMENT: | 10 June 2016 |
| MEDIUM NEUTRAL CITATION: | [2016] VSCA 133 |
| JUDGMENT APPEALED FROM: | Stojanovski v Australian Dream Homes [2015] VSC 404 (John Dixon J) |
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ADMINISTRATIVE LAW – Appeal from Victorian Civil and Administrative Tribunal – Domestic building dispute – Termination of contract by owners on failure of builder to rectify defects specified in default notice – Clause 20 of Victorian Master Builders Association New Homes Contract (HC-6 addition 1 - 2009) – Meaning of ‘substantial breach’ in clause 20.1 – Whether owners acted unreasonably in terminating contract based on default notice allowing 14 days to rectify defects – Remediation works estimated to take 6 weeks
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| APPEARANCES: | Counsel | Solicitors |
| For the Applicant | R De Meyrick | Lovegrove Smith & Cotton Solicitors |
| For the Respondents | R Andrew and N Phillpott | Noble Lawyers |
ASHLEY JA:
I agree in the reasons of Kaye JA, and with the orders which his Honour proposes.
OSBORN JA:
I agree with Kaye JA. The trial judge was correct to conclude that the Tribunal erred in law in reaching conclusions that were not open to it.
KAYE JA:
The applicant seeks leave to appeal a decision of a justice of the Trial Division,[1] which allowed an appeal from a decision of the Victorian Civil and Administrative Tribunal (‘the Tribunal’) that the respondents pay the applicant the sum of $21,914.85.[2]
[1]Stojanovski v Australian Dream Homes [2015] VSC 404.
[2]Australian Dream Homes Pty Ltd v Stojanovski [2014] VCAT 975 (‘Tribunal decision’).
The proceedings before the Tribunal concerned a domestic building contract dated 21 August 2011 by which the applicant agreed to construct a new single storey brick veneer dwelling for the respondents in Reservoir for the sum of $320,000. The building works commenced in late October or early November 2011 with a prescribed construction period of 296 days. The building permit for the works was issued on 16 October 2011, so that the earliest due date for completion of the works was 7 August 2012.
Clause 8.4 of the building contract required the applicant to bring the works to completion on the completion date. By cl 10.1 of the contract, the applicant gave to the respondents the warranties, contained in s 8 of the Domestic Building Contracts Act, 1995, including that:
The Builder will carry out the Works in a proper and workmanlike manner and in accordance with the Plans and Specifications set out in the contract.
By cl 11.8 of the building contract, the respondents agreed to make progress payments to the applicant as follows:
Deposit $16,000 Base stage $32,000 Frame stage $48,000 Lock up stage $112,000 Fixing stage $80,000 Completion stage $32,000
Clause 20.1 provided for the respondents to serve a default notice, the relevant parts of which were as follows:
If the builder:
• …; or
•fails to proceed with the works with due diligence or in a competent manner; or
• unreasonably suspends the carrying out of the work; or
•refuses or persistently neglects to remove or remedy defective work or improper materials, so that by the refusal or persistent neglect the works are adversely affected; or
•refuses or persistently neglects to comply with this contract (including the requirements of municipal or other authorities); or
•is unable or unwilling to complete the works or abandons the contract; or
•is in substantial breach of this contract;
then the owner may give written notice by registered post to the builder:
• describing the breach or breaches of the contract by the builder; and
•stating the owner’s intention to terminate the contract unless the builder remedies the breach or breaches of this contract within a period of fourteen (14) days after the builder’s receipt of the above notice.
Clause 20.2 of the contract provided that if the builder failed to remedy the breach or breaches of the contract stated in a default notice served under cl 20.1, the owner may give further written notice by registered post to the builder immediately terminating the contract.
Clause 20.3 provided:
The owner may not terminate this contract unreasonably or vexatiously or if the owner is in substantial breach of this contract.
On 17 April 2012, the respondents served a default notice on the applicant, pursuant to cl 20.1 of the contract, alleging that the applicant was in substantial breach of the contract. The default notice required the applicant to remedy the breach within 14 days. On 4 May 2012, the respondents served a notice of termination of contract on the applicant pursuant to cl 20.2 of the contract.
The principal issues before the tribunal, and, on appeal before the judge, were whether the applicant was in substantial breach of the contract, and, if so, whether the respondents terminated the contract unreasonably. In order to address the matters raised on this application, it is necessary to set out the background facts in a little detail.
The background facts
In early November 2011, the concrete slab was poured. In December 2011, the respondents paid the sum of $24,000 out of a total base stage progress claim of $32,000. On 15 November 2011, the respondents, by letter, raised with the applicant a number of concerns relating to the construction of the works. On 24 November 2011, a building consultant, engaged by the respondents, attended a site meeting with the applicant, in which they discussed several issues about the state of the works.
On 13 April 2012, the applicant issued the respondents with the Lock-up Stage progress claim for $112,000. On 17 April 2012, the solicitors for the respondents served a ‘Notice of Intention to Terminate the Contract’ on the applicant (‘the default notice’) pursuant to cl 20.1 of the contract. The notice alleged that the applicant was in substantial breach of the building contract in that:
1You have failed to carry out the works in a proper and workmanlike manner and in accordance with the plans and specifications set out in the building contract.
…
2You have failed to carry out the works in accordance with all laws and legal requirements.
…
3 You have failed to carry out the works with reasonable care and skill.
… .
The notice stated that the respondents intended to terminate the building contract, unless the applicant remedied the breaches of contract within a period of 14 days after receipt of the notice. In the case of each of the three breaches alleged in the notice, particulars were provided, stating that the works were defective, and that particulars of the defective works were set out in the attached report of the respondents’ building consultant, Mr Cheong of Resi-Check Building Consultants dated 5 April 2012.
There then followed a series of correspondence between the solicitors for the applicant and the respondents between 17 April and 4 May 2012.
On 17 April, the applicant’s solicitors responded to the notice by a letter informing the respondents that the applicant was referring the notice to its own building consultant, and that a response would be provided within the 14 day period. The letter concluded:
In the interim we have been instructed to forward to you our client’s tax invoice for works undertaken to Lock-up Stage. Our client requires payment of the tax invoice be forwarded to this office within the next 14 days.
On 19 April 2012, the respondents’ solicitors wrote a letter to the applicant’s solicitors, stating that the respondents had no liability to pay the Lock-up Stage payment claim, in circumstances where the Lock-up Stage had not been completed by the applicant. The letter stated that there were still significant defects that remained unrectified and that they had been brought to the applicant’s attention before the applicant’s invoice was issued.
On 19 April 2012, the applicant’s solicitors wrote a letter to the respondents’ solicitors asserting that the works were at Lock-up Stage. The letter stated:
The defects outlined in your client’s building report are not admitted and we are currently arranging for our client’s expert to view the works and we shall provide you with our report shortly.
If your client does not pay our client’s tax invoice within the agreed 14 day period then we place you on notice that our client will cease any further works at the property and we shall serve you with a notice of intention to terminate the contract.
At that stage the applicant changed solicitors. On 27 April 2012, the new solicitors for the applicant sent a letter to the respondents’ solicitors stating that:
(i)The applicants were in substantial breach of the contract by their failure to pay the Lock-up Stage claim that was overdue.
(ii)The applicant remained ‘ready, willing and able to complete the building work subject to being paid monies outstanding’.
(iii)Because the respondents’ building consultant’s report, on which the defects notice was based, was not current, the defects notice was ‘without merit and cannot be relied upon’ and ‘the allegations therein are disputed’.
(iv)The applicant was arranging for an inspection of the site by an expert building consultant.
On 2 May 2012, the applicant’s solicitors sent an email to the respondents’ solicitors stating that an expert building consultant had been engaged and that the expert sought access to the site for an inspection on 11 May 2012. On the following day, 3 May 2012, the applicant’s solicitors advised the respondents’ solicitors by email that the applicant’s expert building consultant would inspect the site on 11 May 2012.
The applicant’s building consultant did not attend the site between service of the default notice (on 17 April) and 2 May 2012. On 4 May 2012, the respondents’ solicitors served a notice of termination on the applicant stating that as the substantial breaches of the contract had not been remedied within 14 days of the receipt of the default notice, the respondents thereby immediately terminated the building contract.
Proceedings before the Tribunal
The applicant commenced proceedings in the Tribunal on 30 May 2013. In its points of claim, it sought payment of the Lock-up Stage payment claim, or, alternatively, an award of damages for the fair value of all the works carried out for which the applicant had not been paid up to the date of termination.
In response, the respondents, by their amended points of claim, alleged that the applicant had failed to remedy the substantial breaches identified in the default notice within the 14 days specified, and that the respondents had terminated the contract pursuant to cl 20.2 of the contract. The respondents claimed the costs of rectifying and completing the defective and incomplete work, together with an amount for loss of use and enjoyment of the works, totalling $208,933.24.
The decision of the tribunal
The hearing before the Tribunal took place over five hearing days. In a reserved decision, the Member of the Tribunal found that the applicant was not entitled to the Lock-up Stage payment claim, because that stage had not been completed. The Member then addressed the question whether the respondent was in substantial breach of the contract as alleged in the default notice.
The principal defects, referred to in the default notice, included a number of defects in the brick works performed by the applicant. Ultimately, it was common ground between the respondents’ expert and the applicant’s expert that the defects in the brick works were of such dimension that the most economical and efficient remedy was to completely demolish the brick work and re-build it. The Tribunal Member therefore accepted that the defective brick work constituted ‘a significant defect in the works undertaken by the builder’. However, the Member held that, nevertheless, the applicant was not in substantial breach of the contract as alleged in the termination notice.
The Member reached that conclusion because the works had only been completed to a stage nearing Lock-up Stage, and accordingly there was significant time left under the contract for the defective works to be remedied. The Tribunal Member considered that the chain of correspondence, involving the parties between 17 April and 4 May 2012, indicated that the applicant was, in all likelihood, prepared to act upon the allegations of the defective work set out in the report of the respondents’ report.
The Member concluded the issue as follows:
Importantly … that chain of correspondence does not indicate an intention on the part of the builder that it was not willing to rectify the defects in Mr Cheong’s report. That being the case, I do not find that the builder’s conduct constitutes an anticipatory breach.
Further, I do not consider that the builder was in substantial breach, merely because there were defects in work in progress, notwithstanding the fact that some of those defects were significant. The builder was still under contract and had a contractual right and obligation to rectify those defects during the contractual period. As I have indicated, the default notice did not allege that the builder had refused or persistently neglected to rectify the defects. On the contrary, it had engaged the services of a building consultant to inspect the works and to provide it with advice to enable it to respond to the default notice, either by effecting repairs or denying their existence. In my view, to say that the builder was in substantial breach was premature and I do not accept that this was the case.[3]
[3]Tribunal decision [42]–[43].
The Member then turned to the question whether, in any event, the respondents had acted unreasonably in terminating the contract by the notice of termination dated 4 May 2012, and thus had not complied with cl 20.3 of the contract.
In respect of that issue, the Member noted that the building experts of both the applicant and the respondents had given evidence that it would take approximately six to eight weeks to remedy all of the defects. The Member asked the rhetorical question how the right to terminate could be reasonable if a builder is given a default notice that is physically impossible to comply with. The Member considered that it was unlikely that cl 20.1 was intended to set an ‘upper time limit’ in which to remedy a default under the contract. Rather, the reference to a 14 day period, in cl 20.1, construed in context, prescribed a ‘minimum period of 14 days’ in which to remedy a breach, but did not necessarily prescribe the upper limit.
The Member noted that the purpose of cl 20.1 was to give a defaulting party an opportunity to remedy a breach of contract. That purpose would be defeated if a notice, served under the clause, was incapable of being complied with. The Member considered that insufficient time had been given to the applicant to carry out the remedial work set out in the default notice. Accordingly, he held that the respondents had not acted reasonably in terminating the contract, and that their purported termination of the contract was ineffective.
The Tribunal Member further held that the conduct of the applicant, in responding to the default notice, was not such as to constitute a repudiation by it of the contract, entitling the respondents to terminate the contract at common law. He further found that the conduct of the respondents, in serving and acting on the notice of termination dated 4 May 2012, demonstrated an unwillingness on their part to perform the contract. Accordingly, he found that the respondents had repudiated the contract, which was accepted by the applicant.
The Member then found that the applicant was entitled to payment on a quantum meruit basis, less the cost of rectifying the defects in the building. He found that the respondents were not entitled to damages for the increased cost to complete the works. He decided that the reasonable value of the works completed, but not paid for, was $89,381.32, and that the reasonable cost to the respondents of having that work rectified was $67,466.27. Accordingly, the Member ordered that the net balance, of $21,914.85, was payable by the respondents to the applicant.
Proceedings before the Trial Judge
The respondents, by leave, appealed the decision of the Tribunal to a trial judge pursuant to s 148 of the Victorian Civil and Administrative Tribunal Act 1998 (Vic).
The appeal was heard on 30 July 2015, and the judge delivered judgment on 17 August 2015. His Honour held that the Tribunal erred in concluding that the defects in the building works did not constitute a substantial breach of contract by the applicant, and in concluding that the respondents had acted unreasonably by serving the termination notice on 4 May 2012. Accordingly, the judge held that the Tribunal should have concluded that the respondents validly terminated the contract by that notice.
The judge’s reasons
The first question addressed by the judge was whether the applicant was in substantial breach of the contract. In determining that question, the judge noted that cl 20.1 contemplated that the builder might remediate the breach in the time provided by the default notice. Thus, his Honour considered that the prospect that a breach might be remediated, after service of a default notice, did not resolve the issue whether the builder was in substantial breach when the notice was served.
The judge then considered the meaning of the word ‘substantial’ in cl 20.1. His Honour noted that it was inappropriate to substitute synonyms for the terminology chosen by the parties in the contract. He considered that the proper approach was to identify the term or terms of the contract that were breached, and to evaluate the breach by considering its nature and the consequences of the breach. His Honour observed that by cl 10.1, the builder provided an important warranty to the owner, and the requirement that the works be carried out in a proper and workmanlike manner is ordinarily fundamental to a building owner.[4] His Honour noted that the Tribunal Member had characterised the defective brick work as a ‘significant defect’ in the works. However, the Tribunal fell into error when it reasoned that the significant defects were not a substantial breach of the contract, because the time for completion had not arrived. The judge observed that the exterior brick works are a major feature of a brick veneer home. Thus, the fact, that they be constructed in a manner that required demolition, justified the conclusion that, at the time of the service of the default notice, the applicant was in substantial breach of his obligation under cl 10.1.[5]
[4]Reasons [56].
[5]Reasons [59]–[60].
The judge then turned to the question whether the respondents had acted reasonably in serving the termination notice on 4 May 2012. His Honour noted that, before the Tribunal, the debate in respect of that issue was incorrectly focused on whether the respondents had acted unreasonably in specifying the period of 14 days for remediation of the defects, given that the rectification work would take at least six weeks.[6] His Honour observed that the obligation, not to terminate the contract unreasonably or vexatiously, governed the owner’s conduct when serving a termination notice under cl 20.2, not when serving a default notice under cl 20.1. His Honour stated:
The specification of the period in the default notice during which the builder is required to remedy the substantial breach of the contract is different conduct antecedent to that which the parties have agreed must be exercised reasonably. The parties have not agreed that the obligation not to act unreasonably or vexatiously governs the act of serving a default notice and in particular in determining the time to be allowed for remediation before the power to terminate will be exercised. The exercise of the power to serve a default notice should be discharged in good faith but it is not in issue on this appeal.[7]
[6]Reasons [62].
[7]Reasons [63].
The judge therefore concluded that it was unnecessary to determine whether the owner could serve a notice specifying a longer period. Rather, the issue was whether the respondents had acted unreasonably in serving the termination notice when they did. The judge then stated:
To the extent that the tribunal addressed that question, it concluded that the owner acted unreasonably when terminating the contract because the rectification work could not be completed within 14 days of the notice. In so concluding the tribunal evaluated the conduct of the owner in serving the default notice rather than the conduct of the owner in terminating the contract. As a result, the tribunal determined the legal question of whether the notice of termination was effective by reference to the wrong considerations.[8]
[8]Reasons [66].
The judge then stated that, in determining whether the owner had acted reasonably in the circumstances, the court must examine not just the default notice and its context, but also the responses of the builder and the owner after service of the default notice up to the time of service of the termination notice. Accordingly, his Honour examined the correspondence that passed between the parties during that period.[9]
[9]Reasons [67]–[68].
The judge then concluded:
[69]The only conclusion that may reasonably be drawn from this correspondence is that initially the builder stated its intention to investigate the defects alleged within the limited timeframe provided by engaging a building consultant. The builder did not admit or deny the existence of the defective work. However, it must be borne in mind that the builder’s lockup stage progress claim was served on the owner 4 days prior to the owner’s default notice and the builder, consistently in its responses to the default notice, was demanding payment of the progress claim. The owner responded stating that they had no contractual obligation to pay that progress claim. The tribunal agreed and its finding is not now challenged. The tribunal failed to take into account the relevant consideration that, at the time it was stating it would investigate the alleged defects, the builder insisted that if the progress claim was not paid, it would cease any further work at the property and serve a notice of intention to terminate the contract.
[70]Then, 10 days into the period set by the default notice, the builder again stated that the progress claim was overdue for payment and qualified its statement that it remained ready, willing and able to complete the building works as subject to payment of moneys outstanding. Further, at this stage, the builder stated that the default notice was without merit and the allegations in the attached building consultant’s report were disputed. Although the builder was in possession of the site, it sought from the owner an opportunity for its building consultant to inspect the works. The tribunal found that the builder always intended to have the allegation of defects independently investigated but accepting that to be so does not provide a basis for concluding that the owner acted unreasonably when serving the termination notice. The builder was stating that it would not remedy any defects unless the progress claim was paid and was imposing conditions on its performance of the contract that were inconsistent with its contractual rights.
[71]The period specified by the default notice expired on 1 May 2012. On 2 May 2012, the builder informed the owner that a building consultant had been retained and would inspect the works on 11 May 2012. The owner served the termination notice on 4 May 2012.
[72]On these uncontested facts, it was not open to the tribunal to hold that the conduct of the owner in serving the termination notice was unreasonable. During the 14 day period, all that the builder did was state its intention to investigate the alleged defect within the period specified, which it then failed to do. Although it initially neither admitted nor denied that the work was defective, from 27 April 2012 the builder’s stated position was that the default notice was without merit and that the defects in the works were denied. After the default period expired, the builder stated that an inspection would occur on 11 May 2012.
[73]The owner acted reasonably in refusing to pay the progress claim and the question of whether the owner acted unreasonably because the necessary rectification works would take at least 6 weeks never arose, because the builder’s response was to dispute the defects rather than the time allowed for remediation. The builder was dilatory when a timely response was required.[10]
[10]Reasons [69]–[73].
The judge concluded that the only finding open to the Tribunal was that the respondents had not acted unreasonably in exercising their power to terminate the contract pursuant to cl 20.2. Having reached those conclusions, the judge noted that it was unnecessary to consider the remaining questions relating to the termination of the contract at common law. Accordingly, the judge set aside the orders of the Tribunal, and remitted the proceeding to the Tribunal for further hearing and determination in accordance with his reasons.
Grounds of application for leave to appeal
In its notice of application for leave to appeal, the applicant relies on five proposed grounds:
1(The judge) erred in law in holding that it was not open to the tribunal to hold that the conduct of the respondents in serving the termination notice was unreasonable.
2(The judge) erred in law in failing to take into account relevant considerations, namely:
(i)the applicant had continued to perform works at the subject premises after the date of the respondents’ default notice;
(ii)the applicant had not proffered up the building works as complete at the time of the default notice;
(iii)there was still approximately three months remaining in the original construction period under the building contract and the respondents had the benefit of contractual protection in the form of a defects liability period and an entitlement to liquidated damages for builder delay;
(iv)the applicant had formally engaged a building consultant to investigate and respond to the 43 page building report enclosed with the respondents’ default notice and had advised the respondents of a date when the applicant’s building consultant would inspect the building work; and
(v)(The judge) failed to have any or any proper regard to the relevant consideration that before the tribunal it was common ground that the defects alleged in the default notice could be rectified only after allowing a period of not less than six weeks.
3(The judge) erred in law and/or misdirected himself in regard to the proper time to assess the reasonableness of the factual grounds underpinning a right to terminate the contract, because the default notice and termination notice are part of the same termination procedure and these notices should not be viewed in isolation from each other.
4(The judge) misdirected himself in interpreting the letter from Lovegrove Solicitors (for the Applicant) dated 27 April 2012 in that the letter did not state that the applicant would only rectify any genuine defects found to exist if the lockup stage claim was paid, and the letter did not claim that there was no defects in the building works.
5(The judge) erred in law by disturbing findings of fact of the tribunal made in the tribunal’s decision of 7 August 2014, as follows:
(i)the tribunal found at paragraph [42] of its decision as follows: ‘… that chain of correspondence [between 17 May 2012 and 4 May 2012] does not indicate an intention on the part of the builder that it was not willing to rectify the defects in Mr Cheong’s report’. However (the judge) has found that the chain of correspondence demonstrated that the builder was unwilling to rectify any defects unless the lockup stage claim was paid to it.
(ii)at paragraph [29] of the decision of (the Associate Justice (dated 30 October 2012)) it was stated: ‘the Senior Member concluded that the owners repudiated the contract because they had evinced an intention not to be bound by the terms of it. That involves at its core the determination of a question of fact’. However, (the trial judge) has disturbed this question of fact when deciding an appeal restricted to a question of law.
In response, the respondents have served a notice of contention, that the judgment of the court should be affirmed on a ground of fact or law not decided in the court below, namely, that the Tribunal erred in law in finding that the applicant was entitled to accept the respondents’ repudiation and terminate the contract at common law, in circumstances in which the applicant was itself in substantial breach of the contract.
Substantial breach of contract
The two principal conclusions by the judge were, first, that the Tribunal erred in not finding that the applicant was in substantial breach of the contract, and, secondly, that the Tribunal erred in finding that the termination of the contract by the respondents, by notice dated 4 May 2012, was unreasonable. The proposed grounds of appeal, contained in the application for leave to appeal, and which I have set out above, are not directed to the first issue. The applicant did not address that issue in its written case. However, at the commencement of oral argument, counsel for the applicant ventured to address that issue, but he acknowledged and accepted that it was not the subject of any of the proposed grounds of appeal.
Nevertheless, before considering the proposed grounds of appeal, it is convenient first to refer, briefly, to the question of substantial breach, for the purposes of cl 20.1 of the contract, as the nature of the defects in the building, found by the judge to be a substantial breach, are relevant to some of the issues raised in the proposed grounds of appeal.
Although the matter was not the subject of argument, the judge was clearly correct to conclude that the Tribunal had erred in determining that, because the contract had three months to run, the significant defects in the workmanship in the building did not constitute a substantial breach of the builder’s obligation under cl 10.1 of the contract. As the judge stated, the question, whether the builder was in substantial breach of the contract, was to be evaluated at the time that the default notice was sent. Clause 20.1 requires that a default notice must allow the builder to have 14 days to address the defects or breaches referred to in the notice. Thus, the judge was correct to conclude:
… the prospect that a breach might be remediated after service of a default notice cannot resolve the question of whether the builder was in substantial breach when the notice was served. In this respect, the tribunal’s reasoning was in error.[11]
[11]Reasons [42].
The defects described in the report of the respondents’ building expert Mr Cheong, and found by the Tribunal, were properly characterised by the Tribunal Member, and by the judge, as significant. In his report, Mr Cheong identified some 20 building defects. They were clearly described in his report, and were amply illustrated by photographs and sketches in the report.
Nine of the defects related to the brick work. Those defects were not in issue before the tribunal. They included that: the wall ties connecting the brick work to the timber frame did not comply with the requirements of the Building Code and the applicable Standard; control joints, depicted on the contract plans, were not installed to the locations shown on the plans, and many were totally omitted; the steel lintel, installed above the sliding door frame opening of one of the bedrooms, was not installed parallel to the frame head or level, because the brick work was significantly out of level; the piers integrated into the front walls on either side of the entry were not constructed according to plan; the parapets at the front and rear of the garage did not finish as depicted on the plans; the north east end of the parapet above the rear east roof was visibly distorted out of line and plumb; the arches were not correctly constructed; and foil insulation wrap was not overlapped to a minimum of 150 millimetres to provide the required thermal insulation. As I have stated, it was common ground that it was more economical and practical to demolish and re-build the whole of the brick work, rather than to rectify it in a piecemeal manner.
There were a number of other defects identified by Mr Cheong, which included the following. The concrete slab rebate did not follow the building line exactly, and, in addition, the levels at which the damp course had been installed required render to finish below the brick work and over the edge of the concrete slab. In a number of locations, the gutters and/or the fascias had been left too close to the brick work, so that they had to be removed and refixed. The applicant had not constructed the roof in accordance with the architectural plans, so that the roof was required to be modified by extending the roof line higher, changing the frame, and reconstructing the roof so as to better represent that which was depicted in the architectural drawings. The roofing iron, over a relatively small section of the roof, had not been securely clipped, was of minimum gauge, and appeared to flex excessively. That defect was to be addressed by replacing all of the roofing sheets. The capping to the ridge line on the south face of the roof was metal, rather than tiled, as required by the architectural drawings. The box gutters and valley gutters had not been installed to be laid on a 20 millimetre marine ply base as specified. That defect was to be addressed by removing the treated pine timber, and replacing it with marine ply as a base for the valley and box gutters. After the roof tiling scaffolding was removed, some of the anti-ponding boards were not refitted and sarking was not extended to the last tile spacing. In order to remedy that defect, it was necessary to re-install 21 metres of the anti-ponding boards and sarking.
It is indisputable that the construction of the dwelling, with those defects, and in particular the defective brick work, constituted a substantial breach by the applicant of its obligations, under cl 10.1 of the building contract, to carry out the works in a proper and workmanlike manner and in accordance with the plans and specifications contained in the contract.
It is in that context that I turn to the proposed grounds of appeal. It is convenient to deal with those grounds in a different order than that in which they are listed in the application for leave to appeal.
Ground 3
Ground 3 is directed to the passages in the judge’s decision set out at paragraphs 35 and 36 above.[12] In those passages, the judge concluded that the Tribunal had incorrectly addressed the question, whether the applicants had acted unreasonably for the purposes of cl 20.3 of the contract, by considering whether the time, specified in the notice of intention to terminate the contract, dated 17 April 2012, was reasonable.
[12]Reasons [63], [66].
On behalf of the applicant, it was submitted that the judge erred in that conclusion, because the Tribunal Member did not confine himself to a consideration of the period of time specified in the notice of intention to terminate the contract, when considering whether the termination of the contract, by notice dated 4 May 2012, was unreasonable. In that respect, counsel referred to paragraph 42 of the decision of the tribunal, in which the Tribunal Member concluded that the chain of correspondence that followed the service of the notice of intention to terminate did not indicate an intention on behalf of the applicant that it was not willing to rectify the defects set out in Mr Cheong’s report. Counsel further referred to a later passage, in paragraphs 57 and 59 of the decision of the tribunal, in which the member found that the response by the applicant, to the default notice, did not constitute a disavowal by the applicant of its obligations under the contract. Counsel submitted that those two passages demonstrated that the Tribunal Member did not base his conclusion, that the service by the respondents of the termination notice was unreasonable, solely on the fact that the default notice specified 14 days for the applicant to remedy the defects referred to in the notice.
I do not accept that submission. A plain reading of the decision of the Tribunal demonstrates that the judge correctly construed and understood the member’s reasons. In paragraph 44 of the decision, the Member noted the contention by the applicant that the purported termination was unreasonable because insufficient time had been given to the applicant to make good the defects stated in Mr Cheong’s report. As I have already set out, the Member then reasoned that the purpose of cl 20.1 was to give a defaulting party an opportunity to remedy a breach of contract, and that that purpose would be defeated if notice under the clause was incapable of being complied with. The Member then concluded the issue, of the reasonableness of the service of the termination notice, as follows:
In the present case, it is common ground that the Default Notice was incapable of being complied with prior to the purported contractual termination. Insufficient time had been afforded to carry out the remedial works set out in the Default Notice prior to the purported contractual termination. In my view, that renders the purported contractual termination ineffective.[13]
[13]Tribunal decision [54].
Those passages make it clear that the Member determined that the termination notice, served by the respondents on 4 May 2012, was unreasonable, because insufficient time had been afforded to the applicant to carry out the remedial works set out in the default notice. Thus, contrary to the submissions made on behalf of the applicant, the judge did not err in concluding that the Tribunal had determined the question, whether the notice of termination was effective, by reference to the wrong considerations.
Neither of the passages in the Tribunal’s decision, relied on by the applicant, were directed to the issue whether the respondents had acted unreasonably in serving the notice of termination. The passage, relied on by the applicant’s counsel, in paragraph 42 of the Tribunal’s decision, related to a different issue determined by the Member, namely, whether the conduct by the applicant constituted an anticipatory breach of the contract. It did not form part of the reasoning of the Tribunal Member on the issue whether the respondents had acted reasonably in serving the notice of termination of contract for the purposes of cl 20.3 of the contract.
In the passages contained in paragraphs 57 and 59 of the Tribunal’s decision, relied on by the applicant, the member considered that the applicant’s response, after service of the default notice, did not constitute a disavowal by it of its obligations under the contract. That passage was directed to the specific issue whether the conduct of the builder had constituted a repudiation by it of its obligations under the contract. That passage did not form part of the reasoning of the Tribunal in respect of the question that is now at issue, namely, whether the conduct of the respondents in serving the termination notice was unreasonable.
For those reasons, the judge correctly understood the Tribunal Member to have determined the issue, of the reasonableness of the service of the termination notice, by reference solely to the period of time specified in the default notice for remediation of the defects alleged in that notice. Counsel for the applicant correctly conceded that if the Tribunal determined that issue solely by a reference to the time specified in the default notice, it was in error. It follows that the judge correctly concluded that the Tribunal erred in determining that question.
Accordingly, ground 3 of the proposed ground of appeal must fail.
Ground 4
Ground 4 is directed to the observation by the judge, in paragraph 70 of his reasons,[14] that in correspondence with the applicant after service of the default notice, the applicant stated that it would not remedy any defects unless the progress claim was paid, and the applicant thereby imposed conditions on its performance of the contract that were inconsistent with its contractual rights.
[14]Paragraph 38 above.
Ground 4, and the submissions contained in the applicant’s written case, are based on the proposition that, in that passage, the judge was reflecting the contents of the applicant’s letter dated 27 April 2012. The assumption in that contention is, I consider, wrong. The applicant’s argument takes the passage from the reasons of the judge, relied on, out of context. In the previous paragraph of his reasons, the judge correctly paraphrased the substance of the applicant’s solicitors’ letter dated 17 April, in which the applicant’s solicitor stated that the applicant insisted on payment of its progress claim (to which it was not entitled), and that it would cease any further work at the property, and serve a notice of intention to terminate the contract, if that claim was not paid. The judge then noted that, ten days into the default period, the builder’s solicitors wrote the letter dated 27 April, in which the applicant categorically asserted that the defect notice ‘… is without merit and cannot be relied upon … and the allegations therein are disputed’. That correspondence, taken together, was, in my view, fairly and accurately summarised by the judge in the last sentence in paragraph 70 of his reasons, which is the subject of ground 4. Accordingly, I consider that there is no substance in that ground. It should be dismissed.
Ground 5
The first part of ground 5 also focuses on the same passage in the reasons of the judge. It is contended that that passage is inconsistent with the factual finding made by the Tribunal Member at paragraph 42 of its decision, that the chain of correspondence (between 17 April and 5 May 2012) ‘does not indicate an intention on the part of the builder that it was not willing to rectify the defects in Mr Cheong’s report’.
As I stated, that section of the decision of the tribunal related to a different question, namely, whether the conduct of the builder, after receipt of the default notice, constituted an anticipatory breach by the applicant of the contract. The Tribunal Member concluded that the chain of correspondence between the parties did not indicate that the applicant was not willing to rectify the defects in Mr Cheong’s report. That finding, by the Tribunal, was expressed in the double negative, as the basis of the rejection of the proposition that the applicant had repudiated the contract. It was not inconsistent with the observation by the judge that, in its correspondence with the respondents’ solicitors, the applicant was stating that it would only remedy those defects, if the progress claim for the lock-up stage was paid.
The second aspect, of ground 5, does not address a relevant issue on the application, and indeed is not entirely intelligible. The judge did not address the issue whether the respondents had repudiated the contract, because it was unnecessary for his Honour to do so. Accordingly, there is no basis to that part of ground 5.
Ground 1
By ground 1, the applicant contended that the judge erred in law in holding that it was not open to the Tribunal to hold that the conduct of the respondents, in serving the termination notice, was unreasonable.
The submissions in support of that ground were directed to the observation, in paragraph 72 of the judge’s reasons, that in the 14 day period following service of the default notice, ‘… all that the builder did was state its intention to investigate the alleged defect within the period specified, which it then failed to do’.[15] Counsel for the applicant submitted that, during the 14 day period after service of the notice, the applicant did more than state its intention to investigate the alleged defects. In particular, the applicant, through its solicitor, advised the respondents’ solicitor that the applicant’s expert builder would inspect the site on 11 May. In addition, it was submitted that, in light of the finding by the Tribunal that the applicant was, in all likelihood, ‘desirous’ of actioning the allegations of the defective work, the judge made an error of law in concluding that it was not open on the facts for the Tribunal to conclude that the service of the termination notice was unreasonable.
[15]See paragraph [38] above.
As I have already concluded, the judge was correct in determining that the Tribunal had erred in reaching its decision, that the service of the termination notice was unreasonable, on the sole basis that the respondents had not allowed the applicant sufficient time within which to remedy the defective works, and in particular the defective brick work, specified in the report attached to the default notice. It was that finding, by the tribunal, that the judge, correctly, set aside. The observation by the judge, referred to above, was not relevant to that conclusion.
However, and in any event, the observation by the judge at paragraph 72 of his reasons, that is the subject of ground 1, is clearly correct. If the Tribunal had construed cl 20.3 of the contract correctly, the conduct of the applicant following the service of the default notice, was such that it was not open to the Tribunal to hold that the conduct of the respondents in serving the termination notice was unreasonable.[16]
[16]S v Crimes Compensation Tribunal [1998] 1 VR 83, 90–‘1 (Phillips JA).
As the judge noted, the initial response of the applicant, to the default notice, was contained in its solicitor’s letter dated 19 April 2012. That letter made it plain that, if the respondents did not pay the claim for the lock-up stage (which, in fact, was not due), then the applicant would cease further works at the property and serve a notice of intention to terminate the contract. The subsequent letter from the applicant’s new solicitors, dated 27 April 2012, did not resile from that position. It specifically stated that the applicant remained ready, willing and able to complete the building works, but subject to being paid ‘monies outstanding’, that is, the claim for the lock-up stage. The letter unequivocally rejected the contents of Mr Cheong’s report, describing the default notice as ‘without merit’, and stating that the allegations in the report ‘are disputed’. While the applicant’s solicitors, in that letter, and in subsequent emails dated 2 May and 3 May, referred to the desire of the applicant to have his expert inspect the works, at no time did the applicant’s solicitors state that the defects would be remedied, or that the further works under the contract would be carried out, without payment by the respondents of the lock-up stage claim.
In those circumstances — accurately described by the judge as ‘uncontested facts’ — the judge was correct to conclude that ‘… it was not open to the Tribunal to hold that the conduct of the owner in serving the termination notice was unreasonable’. It is clear on the facts, accurately outlined by the judge, that no other conclusion was available, particularly bearing in mind the significant nature of the defects in the applicant’s building works, as described by Mr Cheong, and as ultimately found by the tribunal. In essence, the applicant had constructed the works with significant defects, which were so substantial that an important part of them (the whole of the brick work) needed to be demolished and re-built. The applicant served a lock-up stage claim, and insisted on payment of it, before it proceeded to carry out any further works. The applicant unequivocally disputed and rejected each item of defect described by Mr Cheong in his report, notwithstanding that a number of them were plainly obvious. Taking those circumstances together, the only appropriate conclusion available to the tribunal, and the judge, was that the respondents did not act unreasonably in exercising their power to terminate the contract pursuant to cl 20.2. I therefore reject ground 1.
Ground 2
The applicant did not address any separate submissions, either in its written case, or orally, in relation to ground 2.
The first point relied in ground 2 is not relevant. The fact that the applicant continued to perform works at the subject premises is not relevant to the question of the applicant’s response to the default notice, and to whether, in light of that response, the conduct of the respondents in serving the termination notice was reasonable.
The second point, relied on in ground 2, is ambiguous. The applicant did proffer up the works as complete to lock-up stage at the time of the default notice. The judge took that factor into account, as it was a relevant factor in relation to the reasonableness of the respondents in serving the termination notice. It was not relevant, to the question of whether the respondents’ service of the termination notice was reasonable, as to whether or not the whole of the building works had been proffered up as complete or not.
Similarly, the third point, relied on in ground 2, does not address the issue as to whether, in light of the applicant’s response to the default notice, the conduct of the respondents in serving the termination notice was reasonable. The fact that there were three months remaining in the original construction period was not relevant, in light of the response of the applicant to the defects specified in the default notice.
The judge did take into account the fourth matter relied on in ground 2. In paragraph 69 of the reasons, the judge noted that the applicant sought an opportunity for his builder consultant to inspect the works, and noted that the Tribunal had found that the applicant always intended to have the allegation of defects independently investigated. However, as the judge found, that fact did not affect the circumstance that the applicant was maintaining it would not remedy defects, unless the progress claim was paid.[17]
[17]Reasons [70].
Similarly, the fifth point, referred to in the second ground, is not to the point. It was not relevant to take into account that the defects in the building works could only be rectified after a period of at least six weeks, in circumstances in which the judge had correctly concluded that the applicant had evinced an intention not to carry out the remedial works, unless it was paid the lock-up stage claim, to which it was not, in fact, entitled.
In those circumstances, there is no substance to ground 5.
Conclusion
For the foregoing reasons, I do not consider that any of the proposed grounds have a real prospect of success.[18] I therefore would not grant the applicant leave to appeal.
[18]Cf Kennedy v Shire of Campaspe [2014] VSCA 47 [12].
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