Barra Rosa Pty Ltd v O'Neall, R.J
[1990] FCA 179
•03 MAY 1990
Re: BARRA ROSA PTY LIMITED and ELRINGTONS
And: ROBERT JOHN O'NEALL and MARIE MARGARET O'NEALL
No. ACT G 29 of 1989
FED No. 179
Building Contract
COURT
IN THE FEDERAL COURT OF AUSTRALIA
AUSTRALIAN CAPITAL TERRITORY
DISTRICT REGISTRY
GENERAL DIVISION
Gallop(1), Neaves(2) and O'Loughlin(3) JJ.
CATCHWORDS
Building Contract - Contract for sale of land and dwelling-house in course of construction - Obligation to construct dwelling-house in good and workmanlike manner - Notice given by purchasers of defects in construction work - Failure of builder to rectify default - Meaning of relevant clause of contract - Whether contract validly terminated by purchasers.
HEARING
CANBERRA
#DATE 3:5:1990
Counsel for the appellants : Mr T.J. Higgins, QC
and Mr H.J. Marshall
Solicitors for the appellants : Elrington Boardman Allport
Counsel for the respondents : Mr B.T. Tamberlin, QC
and Mr T.M. Johnstone
Solicitors for the respondents : Crossin Power Haslem
ORDER
1. The formal order purporting to give effect to the
judgment of the Supreme Court of the Australian Capital Territory be varied by inserting before the words "IT IS ORDERED" the words and figures "IT IS DECLARED that the agreement dated 18 October 1985 made between the plaintiffs and the first defendant in relation to Block 2, Section 3, Division of McKellar in the Australian Capital Territory was validly terminated by the plaintiffs on or about 24 November 1986 and" and by deleting the orders numbered 4 and 5.
2. Otherwise the appeal be dismissed. 3. The first appellant pay the respondents' costs of the appeal.
Note: Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules.
JUDGE1
Barra Rosa Pty Limited ("the first appellant") has appealed to this Court from a judgment of the Supreme Court of the Australian Capital Territory (Miles C.J.) given on 27 April 1989 whereby judgment was entered in favour of Robert John O'Neall and Marie Margaret O'Neall ("the respondents") against the first appellant in the sum of $5,500.00 and the respondents were held entitled to certain other relief, including the return of certain moneys which they had deposited with Elringtons ("the second appellant") in circumstances to be mentioned.
The respondents, as plaintiffs had brought an action in the Supreme Court against the first and second appellants, as defendants, claiming a declaration that a certain agreement made between them and the first appellant and dated 18 October 1985 was validly terminated by the respondents on or about 24 November 1986, an order that the respondents recover the deposit of $14,521.00 paid under the agreement to the second appellant as stakeholder together with interest thereon and, as against the first appellant, damages, interest and costs. The first appellant, by its defence, denied that it had failed to comply with the terms of the agreement and, by counterclaim, sought a declaration that the agreement was repudiated by the respondents and claimed the amount of the deposit, damages and interest.
The second appellant took no active part in the proceedings in the Supreme Court. It has not filed a notice of appeal or sought any relief in this Court and has submitted to any order that this Court may make. It is, therefore, surprising that it has been named in the first appellant's notice of appeal as a party appellant. However, no question was raised on the hearing of the appeal that it should more properly have been joined as a party respondent and, in the circumstances, it is unnecessary to pursue the matter.
By the agreement dated 18 October 1985, the first appellant, described in the agreement as "the Seller", agreed to sell and the respondents (described therein as "the Buyer") agreed to buy as joint tenants the unexpired residue of the Crown lease of the land being Block 2, Section 3, Division of McKellar in the Australian Capital Territory and known as 25 Burns Circuit, McKellar. The agreement was in the standard form in use in the Australian Capital Territory (Agreement for Sale (Crown Leasehold)) to which had been added a number of special conditions.
The Crown lease contained a building and development covenant within the meaning of that expression in s.28 of the City Area Leases Ordinance 1936 (A.C.T.) which had not been complied with at the date of the agreement. That circumstance enlivened clause 15 of the agreement which provided:
"Where the Crown Lease contains a building and development covenant which has not been complied with at the date this agreement is made the Seller agrees that, in order to procure the issue of the Final Certificate and the Certificate of Lease Compliance referred to in clause 14, he will at his own expense prior to completion of this agreement and as soon as practicable
(1) complete the construction of the improvements in a good and workmanlike manner substantially in accordance with the plans and specifications now approved by the Building Controller under the Building Ordinance and
(2) do perform and complete all such other acts, matters and things as may be necessary to satisfy the Minister that the building and development covenant has been complied with." Clause 14 was in the following terms: "(1) Where the Crown Lease contains a building and development covenant the Seller shall hand over to the Buyer or his solicitor on completion
(a) a certificate as to fitness for occupancy and use or a certificate of completion (herein severally called the 'Final Certificate') issued pursuant to the Building Ordinance in respect of the improvements to which the building and development covenant applies and
(b) a certificate issued by or on behalf of the Minister certifying compliance for the purpose of the City Area Leases Ordinance 1936 with the building and development covenant (herein called the 'Certificate of Lease Compliance').
(2) Except in respect of any unauthorised improvements disclosed in Schedule Item 11, the Seller shall also hand over on completion a certificate as to fitness for occupancy and use in respect of such of the improvements and alterations or additions made to the improvements as require that certificate in order to comply with the Building Ordinance."
The date for completion was expressed to be "Seven days after the date of approval of finance or date of Certificate of Compliance whichever is the later" (Schedule Item 14). It is common ground that, in the present case, the later of those dates was the date of the Certificate of Compliance. The reference to the Ordinance was a reference to the Building Ordinance 1972 (A.C.T.). There were no unauthorised improvements disclosed in Schedule Item 11.
The purchase price payable under the agreement was $145,215.00. A deposit of $14,521.00 was payable to the second appellant as stakeholder on the date the agreement was made. The balance of $130,694.00 was payable on completion.
Clauses 19 and 20 of the agreement should be set out in full. They provided:
"19(1) Where
(a) a date for completion is set out in or becomes ascertained under Schedule Item 14 and
(b) completion is not effected in accordance with sub-clause 2(3) either party may at any time after such date for completion give to the other party a notice in writing to complete this agreement ('notice to complete').
(2) A notice to complete shall
(a) appoint a time during business hours and a date being not less than 14 days after the service of the notice (excluding the date of service) within which and a place in the Territory at which to complete this agreement and
(b) state that it is given pursuant to this clause.
(3) Notwithstanding any rule of law or equity to the contrary a party is entitled to give a notice to complete if
(a) at the time the notice is given he is not in default under this agreement and
(b) at the time completion is due he is ready willing and able to complete or could do so but for some default or omission of the other party.
(4) Upon service of a notice to complete the period of time therein limited for completion shall be an essential term of this agreement.
(5) Where one party is in default in the observance or performance of any obligation on him under or by virtue of this agreement (other than failure to complete) the other party may at any time thereafter give to the party in default a notice in writing to rectify the default ('default notice').
(6) A default notice shall
(a) specify the default and call upon the party to rectify the default within a period being not less than 7 days after the service of the notice (excluding the date of service) and
(b) state that it is given pursuant to this clause.
(7) Notwithstanding any rule of law or equity to the contrary a party is entitled to give a default notice if at the time the notice is given he is not in default under this agreement.
(8) Upon service of a default notice the period of time therein limited to rectify the specified default shall be an essential term of this agreement.
(9) Where one party does not comply with the terms of an effective default notice or notice to complete served by the other under this clause then the provisions of clause 20 shall apply.
(10) The party serving a notice under this clause may at the request or with the consent of the other party extend the term of the notice for one or more specifically stated periods of time and thereupon the term of the notice shall be deemed to expire on the last day of such extended period or periods and the notice shall operate as though this clause stipulated such extended period of notice in lieu of that stated above and time shall be essential accordingly.
20. Buyer in default
(1) Subject to the provisions of clause 19, if the Buyer defaults in the observance or performance of any obligation imposed on him under or by virtue of this agreement the Seller may forfeit the deposit paid by the Buyer, except so much of it as exceeds 10% of the Total Purchase Price, the Seller may terminate this agreement and thereafter may either
(a) sue the Buyer for breach of contract, or
(b) resell the Crown Lease and Goods (if any) as owner.
(2) In the event that the Seller elects to resell pursuant to paragraph (1)(b) the deficiency (if any) arising on such resale and all expenses of and incidental to such resale or attempted resale and the Buyer's default shall be recoverable by the Seller from the Buyer as liquidated damages provided that proceedings for the recovery thereof be commenced within 12 months of the termination of this agreement.
(3) The Seller may retain any money paid by the Buyer on account of the sale, other than the deposit forfeited under this clause, as security for any damages liquidated or otherwise awarded to him for the Buyer's default provided that proceedings for recovery of such damages are commenced within 12 months of the termination of this agreement.
(4) If the Seller terminates the agreement under this clause the Seller or his solicitor may notify the Stakeholder in writing accordingly and the Stakeholder shall thereupon be authorised to pay the deposit forfeited under this clause to the Seller or his solicitor as stated in that notice.
Seller in default
(5) Subject to the provisions of clause 19, if the Seller defaults in the observance or performance of any obligation imposed on him under or by virtue of this agreement the Buyer may elect either
(a) to enforce against the Seller without any further or other notice under this agreement such rights and remedies as may be available to the Buyer or
(b) to terminate this agreement and without prejudice to any right of the Buyer to damages, to give notice in writing to the Seller and the Stakeholder forthwith to repay to the Buyer any deposit and any money paid on account of the Total Purchase Price but on compliance with that notice the Buyer shall no longer be entitled to any right to specific performance of this agreement and shall return forthwith all papers in his possession belonging to the Seller."
Special condition 1, which was somewhat inelegantly expressed, provided:
"1. The Seller shall pursuant to Clause 15 hereof erect a dwelling and
(a) shall include in the dwelling the basic features and inclusions set forth in Schedule B hereto and
(b) Apart from defects or faults due to natural shrinkage of timbers the seller will make good at its own expense any defects or faults in the construction of the said dwelling which appear within a period of ninety days from either the date of settlement or the date of possession, whichever is the sooner and which are due to defective or improper materials or bad workmanship and are notified to the seller by the buyer in writing within that period.
The seller will make good such defects, if any:
(a) If such defects are in or concerning
(i) electricity supplies or distribution
(ii) sewerage or drainage;
(iii) any portion of the building the fault or defect in which could or might lead to damage to any of the buyer's chattels in the said dwelling and/or could restrict or interfere with the proper use and enjoyment of the said dwelling as the home of the buyer. The seller will make good the same as is reasonably possible after receiving such notice aforesaid; and
(b) in the case of any other defects or faults the seller will make good the same within ninety days of such notice."
After the making of the agreement of 18 October 1985 work commenced on the construction of the dwelling-house. On 29 May 1986 and 2 June 1986 certificates of occupancy and of compliance were respectively issued. Prior to the issue of those certificates, complaints had been made by and on behalf of the respondents that the first appellant had failed to construct the dwelling-house in accordance with the proper standard and the plans and specifications.
On 2 July 1986 the solicitors for the first appellants served on the solicitors for the respondents pursuant to sub-clause 19(1) of the agreement notice to complete the purchase on or before 18 July 1986.
By a notice dated 17 July 1986 and served on that day, the respondents, pursuant to sub-clause 19(5) of the agreement, required the first appellant "to rectify the defaults specified in the annexure hereto within the period of not less than four (4) months after the service of this notice (excluding the date of service)". The annexure to the notice set out 24 items of alleged defects and faulty workmanship. It is unnecessary to set out the text of the annexure. It is sufficient for present purposes to note that the defaults specified included matters concerning the slope or fall of the concrete slab in the garage, the flashing to the western wall, defective roof tiles, non-matching grouting, gaps around the garage door, gaps around the brickwork abutting windows and a gap above the sliding door to the family room. On behalf of the respondents it was claimed that the notice to complete was not properly given on behalf of the first appellant as the first appellant was in breach of its obligations under the agreement (see sub-clause 19(3)(a)).
On 24 November 1986 the respondents' solicitors wrote to the solicitors for the first appellant purporting to terminate the agreement pursuant to sub-clause 20(5) on the ground that the first appellant had not complied with the default notice given under sub-clause 19(5) of the agreement.
On 27 November 1986 the solicitors for the first appellant served a second notice to complete, this notice requiring completion by 3 p.m. on 12 December 1986.
On 6 February 1987 the solicitors for the first appellant notified the respondents' solicitors that the first appellant terminated the agreement because of the failure of the respondents to complete the purchase. Soon thereafter the first appellant sold the unexpired residue of the lease and the house to a third party.
The learned primary judge regarded clauses 14 and 15 of the agreement, when read with special condition 1, as having the effect that prior to completion of the agreement the first appellant was to complete the construction of the building in a good and workmanlike manner substantially in accordance with the plans and specifications approved by the Building Controller, to do all such things as might be necessary to satisfy the Minister that the building and development covenant had been complied with and to hand over to the respondents on completion a final certificate issued under the Building Ordinance and a certificate of lease compliance issued by the Minister.
His Honour then considered what he referred to as a threshold issue whether the first appellant had complied with the obligation to build the house in a good and workmanlike manner and with good and proper materials, noting that the respondents had alleged that that obligation arose from an implied term in the agreement. His Honour added:
"That there was such an implied term was not admitted in the defence filed. However, no argument was put to deny that such an obligation existed and the implication of such a term in a building contract can hardly be doubted: see Perry v. Sharon Development Co. Ltd (1937) 4 All ER 390."
After stating his findings in respect of 20 of the 24 items set out in the annexure to the notice dated 17 July 1986, his Honour continued:
"To summarise the above, whilst there are several items which do not go to support the
(respondents') allegations of poor workmanship, there are several that do and these entitled the
(respondents) to give the default notice under clause 19. Failure by the (first appellant) to remedy the defaults entitled the (respondents) to terminate the contract under clause 20. Because the (first appellant) was in breach, the (first appellant) was not entitled to serve the notice to complete."
In the result, his Honour held that the respondents were entitled to give the notice under sub-clause 19(5) of the agreement, that the first appellant did not rectify a number of the defaults specified in that notice and that the respondents were entitled to terminate the agreement thereupon becoming entitled to repayment of the deposit. His Honour further held that the respondents were entitled to such damages flowing from the first appellant's breach as were within the reasonable contemplation of the parties, those damages being assessed at $5,000 with interest assessed at $500. The judgment concludes:
"I make a declaration as to the termination of the contract in terms of para.(1) of the statement of claim and an order for return of deposit and interest in terms of paragraph (2) of the statement of claim. I give liberty to the (respondents) to enter judgment for damages and interest in the sum of $5,500 and I order the (first appellant) to pay the (respondents') costs on the full Supreme Court scale. Liberty to apply with regard to the exact terminology of these orders, and generally."
By the paragraphs of the statement of claim to which his Honour was referring, the respondents claimed -
"(1) A declaration that the agreement for sale dated the 18th day of October, 1985 made between the Plaintiffs as buyers and the First Defendant as seller in relation to Block 2, Section 3, Division of McKellar in the Australian Capital Territory was validly terminated by the Plaintiffs on or about the 24th day of November, 1986.
(2) An order that the Plaintiffs recover the deposit of $14,521.00 paid by the Plaintiffs to the Second Defendant as stakeholder together with interest pursuant to Section 53A Australian Capital Territory Supreme Court Act 1933."
On the hearing of the appeal, counsel for the first appellant conceded that, as the agreement was for the sale of a dwelling-house in the course of construction, the first appellant was contractually bound to construct it "in a good and workmanlike manner". He contended, however, that the origin of that obligation was to be found in an express, rather than an implied, term of the agreement. But, the concession having been made, it is of no moment whether the obligation arises from an express or an implied term and we need not consider that aspect of the matter further.
The argument presented on behalf of the first appellant turned upon the meaning to be ascribed to the reference in sub-clause 19(5) of the agreement to a party thereto being "in default in the observance or performance of any obligation on him under or by virtue of this agreement". No challenge was made to any of the findings of fact of the primary judge but it was submitted that his Honour had erred in concluding, in terms of sub-clause 19(5), that the first appellant was, at the time the notice under that sub-clause was given, in default in the observance or performance of an obligation assumed by it under or by virtue of the agreement. The thrust of the submission, which was expressed in a variety of ways during the course of argument, was that it was not every default in the observance or performance by the first appellant of such an obligation that would entitle the respondents to give a notice under the sub-clause. To justify the giving of such a notice, the default, so it was submitted, had to be such that it would disentitle the first appellant to call upon the respondents to complete the purchase. It was also put that the default had to be such as would amount, under the general law, to a repudiation of the agreement by the first appellant, thus giving rise to a right in the respondents to rescind the agreement. It was necesary, so the argument ran, to read sub-clause 19(5) in the restricted manner suggested as, unless it were so restricted, it would not make "a great deal of commercial sense".
Counsel for the first appellant also sought to find support for the submission that sub-clause 19(5) should be given a restricted operation in the terms of special condition 1(b) in the agreement. Under that provision, commonly referred to as a "maintenance clause" or a "defects liability clause", the first appellant undertook to make good at its own expense defects or faults (with some exceptions) in the construction of the dwelling-house which might appear within 90 days from the date of settlement or the date of possession, whichever should be the sooner, and which were due to defective or improper materials or bad workmanship and were notified to the first appellant in writing within that period.
The argument that the presence of special condition 1(b) in the agreement required a restricted operation to be given to sub-clause 19(5) was put to the primary judge. His Honour, in rejecting the argument, said:
"The maintenance clause regulates the rights of the buyer and the seller in relation to certain defects in the seller's performance, that is those defects which appear in the ninety day period after settlement or going into possession. It says nothing about the rights of the parties in relation to defects which constitute a breach by the seller and which are apparent before settlement. It may give the seller the protection from the ordinary consequences of liability for breach of contract in respect of defects appearing after completion or possession, but it is not necessary to pass an opinion on that aspect because this case is concerned with defects which arose before settlement and upon which the buyer relies for giving the default notice under clause 19. In my view, the maintenance clause does not affect the rights of the parties in respect of pre-settlement breach by the seller in failing to construct the building in a sound and workmanlike manner, and in particular the right of the buyer to give notice under clause 19 is not reduced in any way.
If the argument presented on behalf of the seller is correct, the logical consequence is that (apart from cases of so-called fundamental breach) the buyer can never be entitled to refuse to complete the purchase because of the poor quality of the building work: all the buyer can do is complete the purchase, give notice in writing within ninety days and in the event of failure to remedy the defect then sue for damages. In my view, the so-called maintenance clause does not have the radical effect contended for."
We agree, with respect, with his Honour's conclusion that special condition 1(b) has not the effect which the argument on behalf of the first appellant sought to ascribe to it.
Turning to the more general argument, we can find no justification either in the language of sub-clause 19(5) or in the context in which it appears to warrant giving the sub-clause the restricted meaning for which the first appellant contended. The necessary, but sufficient, requirement to warrant the giving of a notice under the sub-clause is that the other party is "in default in the observance or performance of any obligation on him under or by virtue of this agreement". In the event of a dispute arising whether that requirement has been met in a case where the obligation said not to have been observed or performed is the obligation to carry out the construction work in a good and workmanlike manner, the question will arise whether, in the circumstances of the particular case, the departures from the required standard are sufficient to amount to a default within the meaning of the sub-clause.
In the present case, we read the judgment under appeal as concluding that, at the date the notice under sub-clause 19(5) was given, there had been a number of significant departures by the first appellant from the standard of workmanship required to be observed in the construction of the dwelling-house amounting to a default on its part within the meaning of that sub-clause and that there had been a substantial failure on the part of the first appellant to rectify the default within the time allowed by the notice. In our opinion, there was ample evidence to support that conclusion and we find no justification for interfering with it.
Counsel for the first appellant referred to a number of authorities to which, however, we find it unnecessary to refer. None of the cases cited concerned the proper meaning and effect to be given to a contractual provision of the kind embodied in sub-clause 19(5) of the subject agreement.
One of the grounds taken in the first appellant's notice of appeal was that the primary judge was in error in including in the damages awarded a sum of $600 by way of a bank commitment fee, it being said that the correct amount should have been $300. This ground was but faintly argued on the hearing of the appeal and, having regard to the material before the primary judge, we do not consider it to have any substance.
It also follows from what we have said that, the first appellant being in default under the agreement, it was not entitled to require the respondents to complete the purchase.
Before parting with the case we should, however, mention one other matter. The final paragraph of the judgment appealed from which refers to declarations and orders of the primary judge has already been set out. The operative part of the formal order purporting to give effect to his Honour's judgment, however, is in the following terms:
"IT IS ORDERED:
1. That judgment be entered for the plaintiffs in the sum of $5,500.
2. That the first defendant pay the plaintiff's costs on the full Supreme Court scale.
3. That the deposit and interest be returned in terms of paragraph (2) of the Statement of Claim.
4. That the contract be terminated in terms of paragraph (1) of the Statement of Claim.
5. That there be liberty to apply with regard to the exact terminology of these orders."
In our opinion, the formal order should be varied by inserting before the words "IT IS ORDERED" the words and figures "IT IS DECLARED that the agreement dated 18 October 1985 made between the plaintiffs and the first defendant in relation to Block 2, Section 3, Division of McKellar in the Australian Capital Territory was validly terminated by the plaintiffs on or about 24 November 1986 and" and by deleting the orders numbered 4 and 5.
We, therefore, order that the formal order to give effect to the judgment of the Supreme Court herein be varied in the manner indicated and that otherwise the appeal be dismissed. The first appellant must pay the respondents' costs of the appeal.
0
0
0