Eminent Forms Pty Ltd v Formosa
[2004] SASC 192
•1 July 2004
SUPREME COURT OF SOUTH AUSTRALIA
(Civil: Miscellaneous Appeal)
EMINENT FORMS PTY LTD v FORMOSA & ANOR
Judgment of The Honourable Justice Besanko
1 July 2004
CONTRACTS - BUILDING, ENGINEERING AND RELATED CONTRACTS - REMUNERATION - RECOVERY
ARBITRATION - THE AWARD - APPEAL OR JUDICIAL REVIEW - GROUNDS FOR REMITTING OR SETTING ASIDE - ERROR OF LAW
Appeal by leave against an interim award made by an arbitrator – the appellant entered into a contract with the respondents to make alterations and additions to the respondents’ home –appellant was to be paid the contract price by progress payments at the completion of various stages of the work – the appellant sought payment of the first progress payment but the respondents denied an obligation to make the first progress payment because the Stage 1 works were not completed – the respondents asked the appellant to put the works on hold until problems with work performed in Stage 1 of the contract were addressed – the appellant served a notice of termination on the respondents on the ground that the respondents were in breach of contract by their refusal to make the first progress payment because the Stage 1 work had been completed and by a number of other breaches – the respondents asserted that the purported termination by the appellant constituted an unlawful repudiation of the contract and the respondents accepted the repudiation – the arbitrator found that the appellant had wrongfully repudiated and that the respondents had accepted the repudiation – the arbitrator made an award of $22,164.00 in favour of the respondents and made no allowance for the work done by the appellant – whether the arbitrator erred in finding that certain work not completed by the appellant was a part of the Stage 1 work – whether the arbitrator erred in finding that the respondents were not in breach of their obligations under the contract not to take possession of the building area and not to disrupt the work – whether the appellant had substantially performed the Stage 1 work such that it was entitled to recover the first progress payment – discussion of the doctrine of substantial performance – whether, if the appellant is not entitled to relief on the contract, the appellant is entitled to restitutionary relief by way of a claim on a quantum meruit – discussion of the principles of quantum meruit in relation to work performed on land – whether the appellant should be given leave to challenge the award in respect of compensation awarded to the respondents for the front verandah – appeal allowed.
Commercial Arbitration Act 1986 s 38, referred to.
Hoenig v Isaacs [1952] 2 All ER 176, applied.
H Dakin & Co Ltd v Lee [1916] 1 KB 566; Bolton v Mahadeva [1972] 2 All ER 1322; Sumpter v Hedges [1898] 1 QB 673; Pavey & Matthews Pty Ltd v Paul (1987) 162 CLR 221; Steele v Tardiani (1946) 72 CLR 386, discussed.
Leighton Contractors Pty Ltd v South Australian Superannuation Fund Investment Trust (1994) 63 SASR 444; Tuta Products Pty Ltd v Hutcherson Bros Pty Ltd (1972) 127 CLR 253; Angela Kinnane v Zee Homes Pty Ltd (2003) 227 LSJS 496, considered.
EMINENT FORMS PTY LTD v FORMOSA & ANOR
[2004] SASC 192Miscellaneous Appeal
BESANKO J: This is an appeal by leave pursuant to s 38 of the Commercial Arbitration Act 1986 (“CAA”) against an interim award made by an arbitrator under an arbitration agreement in a building contract. The interim award was made on 17th November 2003 and the appellant was ordered to pay the respondents the sum of $22,164.00 within 21 days of the interim award. The appeal is against that order and in its notice of appeal the appellant asks that it be set aside and that there be an order that the respondents pay the appellant the sum of $28,910.35.
On 9th September 2002, Eminent Forms Pty Ltd, as contractor, and Kim Formosa and Anthony Formosa, as owners, entered into a building contract for the making of alterations and additions to the owners’ residence at 18 Araluen Street, Ridgehaven, in the State of South Australia (“the property”). The contractual documents consisted not only of this document, which I will call the Contract, but also a Building Schedule and Building Specification which it seems were not signed until 23rd October 2002. The contractual documents also included all documents showing what the contractor was to do for the owners (clause 1.7 of the Contract).
Eminent Forms Pty Ltd is the appellant before me and Kim Formosa and Anthony Formosa are the respondents.
Under the Contract, the appellant was to be paid a price of $125,694.00, and there was provision for the making of progress payments at the completion of various stages of the work. The provision is in the following terms:
Clause 3 – Payment of the price by instalments:
Stage of the work
Percentage of price payable Payment amount
$Demolition/Footings poured 25% 31,423.50 Wall frame /Roof frame complete 20% 25,138.80 Roof covered/Brickwork complete 25% 31,423.50 Int linings/2nd fix/Cupboards 20% 25,138.80 Final – Pre Handover 10% 12,569.40 125,694.00
All the information appearing under the bold headings is written by hand.
By a tax invoice dated 6th January 2003 the appellant sought payment by the respondents of the first progress payment of $31,423.50. It asserted that it had completed the Stage 1 work of “Demolition/Footings poured”. The respondents denied an obligation to make the first progress payment. In response to this denial, the appellant served a notice of termination on the respondents dated 24th January 2003 whereby it purported to terminate the Contract. It did so on the ground that the respondents’ refusal to make the first progress payment was in breach of contract because it had completed the Stage 1 work and was entitled to the first progress payment and, independently of this ground, it asserted a number of other breaches of the Contract by the respondents which it said entitled it to terminate the Contract. For their part, the respondents asserted that the purported termination by the appellant constituted an unlawful repudiation of the Contract and they accepted the repudiation by notice to the appellant dated 12th February 2003. They also referred the disputes between the parties to arbitration.
It is clear that the appellant had done substantial work under the Contract before it was terminated. As I have said the contract price was $125,694.00. During the course of the arbitration the parties agreed that the cost to complete the works under the Contract was $81,265.00. To this should be added the cost of work done on the front verandah by the respondents after the Contract had been terminated. This was part of the work under the Contract and the arbitrator fixed the cost at $3,139.00. The arbitrator found that part of the work done by the appellant was defective in various respects and he found that the cost of rectifying the defective work was $8,631.00. The figure for the cost of the defective work was not challenged on the appeal.
The arbitrator found that the appellant had wrongfully repudiated the Contract and that the repudiation had been accepted by the respondents. He found that the respondents had suffered a loss as a result of the wrongful repudiation of $9,500.00 for inconvenience and stress, and he allowed $894.00 for various sundry items.
In the absence of any obligation on the respondents to pay the appellant for the work it had carried out, and bearing in mind the agreed cost to complete the works, the respondents could not show any loss resulting from the fact that they had to engage another builder to complete the work under the Contract. The arbitrator made no allowance for the work carried out by the appellant and his award of $22,164.00 in favour of the respondents is comprised of inconvenience and stress ($9,500.00), remedial work ($8,631.00), front verandah compensation ($3,139.00) and the various sundry items ($894.00).
The appellant submits that it was entitled to serve the notice of termination because it had completed the Stage 1 work and was entitled to the first progress payment which the respondents refused to pay. It submits that there were other grounds for termination and, in particular, the respondents were in breach of the Contract in taking possession of the building area and/or they disrupted the work under the Contract. The appellant submits that it was not in breach of contract and was entitled to terminate. If this argument is right, the appellant would be entitled to a contractual remedy including damages in relation to the work it had carried out under the Contract and, presumably, any loss of profit it might have made under the Contract. In the alternative, the appellant submits that even if it did not quite complete the Stage 1 work it did substantially complete or perform the work, and in those circumstances it was entitled to the first progress payment specified in the Contract minus an allowance for the defect in completion or performance. In the further alternative, the appellant submits that even if the foregoing arguments are unsuccessful, it should succeed on a quantum meruit for the work it had carried out minus appropriate deductions. As I have said, there is no doubt that there is value in the work carried out by the appellant. This can be seen from the following table which appears in the arbitrator’s reasons:
FINANCIAL SUMMARY
$ Cost to Complete Contract Work
81,265-00
Front Verandah Compensation
3,139-00
Remedial work
8,631-00
Temporary Stormwater
270-00
Toilet Hire
141-00
Reinstate Side Gates
308-00
Roof Deck Compensation
175-00
Inconvenience and Stress
9,500-00
103,429-00
Less Original Contract sum
(125,694-00)
Amount Due to the Contractor
22,265-00
The arbitrator did not allow the amount he identified in this table as the amount due to the contractor for the reasons I will explain when considering the appellant’s claim for restitutionary relief.
There are probably a number of ways in which one might calculate the value of the work carried out by the appellant. Using the above summary it might be said the cost to complete the work under the Contract is the total of the first three items, namely the sum of $93,035.00. Using this analysis, the value of the work carried out by the appellant is $32,659.00. I do not think that it was disputed by the appellant that the various sundry items and the compensation for inconvenience and stress should be deducted from this figure leaving the sum of $22,265.00. During the course of argument on the appeal, the appellant’s counsel acknowledged that this was the appropriate figure should its claim in restitution be successful.
The Grounds of Appeal
As I have said, this is an appeal by leave. The appellant sought leave in relation to 17 grounds of appeal. On 5th December 2003, Martin J granted leave to appeal in relation to grounds 1, 3 – 15 and 16 of the proposed notice of appeal. He referred the question of leave in relation to ground 17 to the Judge hearing the appeal. Grounds 1 and 2 recite certain findings of the arbitrator, and it is not clear to me that the Judge intended to exclude ground 2 from the leave which he granted. In any event, I do not think it matters much in view of the way in which the arguments were put on the appeal.
It is convenient to group the grounds of appeal in the following way:
Grounds 3 – 8 inclusive complain of the arbitrator’s finding that an aspect of the work under the Contract, namely, the application of two slurry coats of xypex to the walls of the cellar, was part of the Stage 1 work, and that, by reason of the fact that that had not been done, the appellant could not recover the first progress payment. Furthermore, even if it did form part of the Stage 1 work, there had nevertheless been substantial performance of the Stage 1 work such that the appellant was entitled to recover the first progress payment.
Grounds 9 – 15 inclusive complain of the arbitrator’s finding that the respondents had not acted in breach of the Contract by taking possession of the building area and/or disrupting the work thereby giving the appellant the right to terminate the Contract.
Ground 16 complains of the arbitrator’s failure to recognise that the appellant had a right based on restitution to recover from the respondents the value of the work it had carried out before the Contract was terminated. The appellant said that it should have been awarded the sum of $22,265.00.
Ground 17 complains of the arbitrator’s finding that an item of damage which the respondents were entitled to recover from the appellant was the cost of work done on the front verandah. It was said that the work done on the front verandah was not work done in order to rectify defective work done by the appellant. Rather, it was work within the scope of the work under the Contract, but which had not been done at the time the Contract was terminated.
Martin J granted leave under s 38 of the CAA. The relevant provisions of that section are as follows:
“38. (1) Without prejudice to the right of appeal conferred by subsection (2), the Court shall not have jurisdiction to set aside or remit an award on the ground of error of fact or law on the face of the award.
(2) Subject to subsection (4), an appeal shall lie to the Supreme Court on any question of law arising out of an award.
(3) On the determination of an appeal under subsection (2) the Supreme Court may, by order--
(a) confirm, vary or set aside the award;
or
(b) remit the award, together with the Supreme Court's opinion on the question of law which was the subject of the appeal, to the arbitrator or umpire for reconsideration or, where a new arbitrator or umpire has been appointed, to that arbitrator or umpire for consideration,
and where the award is remitted under paragraph (b) the arbitrator or umpire shall, unless the order otherwise directs, make the award within three months after the date of the order.
(4) An appeal under subsection (2) may be brought by any of the parties to an arbitration agreement--
(a) with the consent of all the other parties to the arbitration agreement;
or
(b) subject to section 40, with the leave of the Supreme Court.
(5) The Supreme Court shall not grant leave under subsection (4) (b) unless it considers that--
(a) having regard to all the circumstances, the determination of the question of law concerned could substantially affect the rights of one or more parties to the arbitration agreement;
and
(b) there is--
(i) a manifest error of law on the face of the award;
or
(ii) strong evidence that the arbitrator or umpire made an error of law and that the determination of the question may add, or may be likely to add, substantially to the certainty of commercial law.”
It is clear that the circumstances in which a party may challenge an award are quite narrow. I do not think it is necessary to discuss the relevant principles. They are set out in the reasons for judgment of Debelle J in Leighton Contractors Pty Ltd v South Australian Superannuation Fund Investment Trust (1994) 63 SASR 444. I refer also to the discussion of what constitutes the “award” for the purposes of an equivalent section in Tuta Products Pty Ltd v Hutcherson Bros Pty Ltd (1972) 127 CLR 253 per Barwick CJ at 258, and to the discussion by Debelle J (with whom Duggan and Lander JJ agreed) of when rights are substantially affected for the purposes of s 38(5)(a) in Angela Kinnane v Zee Homes Pty Ltd [2003] SASC 187; (2003) 227 LSJS 496.
Issues on the Appeal
The issues on the appeal are as follows:
1.Was the application of two slurry coats of xypex to the cellar walls part of the Stage 1 work? If no, the appellant says it was entitled to terminate the contract on the ground that the respondents had refused to pay the first progress payment. If yes, the appellant was not entitled to terminate the Contract on this ground.
2.As at the 24th January 2003 were the respondents in breach of the obligations under the Contract not to take possession of the building area and/or not to disrupt the work such that the appellant was entitled to terminate the Contract?
3.Even if the first two questions are answered against the appellant, did it substantially perform the Stage 1 work such that it is entitled to recover the first progress payment minus appropriate deductions?
4.Even if the appellant is not entitled to relief on the Contract, is it entitled to restitutionary relief by way of a claim on a quantum meruit? This question does not arise if the appellant is entitled to relief on the Contract.
5.Should the appellant be given leave to challenge the award for the front verandah compensation, and if so, did the arbitrator err in making this award?
It is convenient to deal with the issues in the above order.
Was the application of xypex part of the Stage 1 work?
The work under the Contract included the construction of a cellar and of a slab over the cellar. The walls of the cellar were to be constructed by a process called “shotcreting”. The engineers engaged by the respondents (Koukourou Engineers) prepared calculations and drawings for the cellar and suspended slab over the cellar. One such drawing is number “SK4”. It contains a requirement to apply two slurry coats of xypex to the walls of the cellar. The function of xypex is described in a publication put before the arbitrator in the following terms:
“Xypex is a unique chemical treatment for the waterproofing, protection and repair of concrete. XYPEX CONCENTRATE is the most chemically active product within the Xypex Crystalline Waterproofing System. When mixed with water, this light grey powder is applied as a cementitious slurry coat to above ground or below ground concrete, either as a single coat or as the first of a two-coat application. It is also mixed in Dry-Pac form for scaling strips at construction joints, or for the repairing of cracks, faulty construction joints and honeycombs. Xypex prevents the penetration of water and other liquids from any direction by causing a catalytic reaction that produces a non-soluble crystalline formation within the pores and capillary tracts of concrete and cement-based materials”
It seems that the appellant decided to add xypex to the cement mixture. However, it was not disputed by the appellant by 15th January 2003 that under the Contract the appellant was required to apply two slurry coats of xypex to the cellar walls. Nor was it disputed that this had not been done at the time the contract was terminated. The issue between the parties was whether it was part of the Stage 1 work. The respondent asserted that it was, whereas the appellant asserted it could be done at a later stage of the work under the Contract.
The Contract consists of four pages containing printed words and provision for handwritten additions, and 18 or so pages of standard printed contractual terms and a Form 1 consisting of four pages. The Form 1 is not relevant for present purposes.
I have already set out the part of the Contract dealing with the stages of the work and the progress payments. It appears in the four page section of the Contract as previously described.
Clause 1 of the Contract appears in the part I have described as 18 or so pages of standard printed contractual terms and has the heading, “Special Meanings”. Relevantly, it provides:
“The words below have particular meanings. When a word is used with this meaning it is printed in italics. If it is not printed in italics, the word is being used in its ordinary sense.
…
1.8The work: the work to be done and completed under this contract as shown in the contract documents.
…
1.13Footings: footings and foundations. All the work from ground floor level down.”
Clauses 3 and 5 appear in the same section, and they provide:
“3. Payment of the price
3.1 You must pay us the price
3.2 You must pay it in the instalments listed, and at the stages listed on page 2.
3.3 If none are listed on page 2 then, at times (but not more often than weekly), we will give you a progress claims payment of part of the price. You must pay them as required by clause 5.
3.4 However, we cannot claim payment for work before we have done it.
…
5. Payment claims, interest
5.1Any claim for payment must be in writing.
5.2You have 5 days to pay us from when the claim is given to you.
5.3 We will charge you interest at 15% per annum on what is unpaid after then.”
The word “we” refers to the appellant, and the word “you” refers to the respondents.”
In the Building Schedule, there is a clause dealing with footings. It relevantly provides:
“6. Footings
…
Other details or types of footings: Spray Concrete Cellar and Slab over to Engineers Details.”
The Engineers Details include the drawing, “SK4”.
The arbitrator found that the application of two slurry coats of xypex was part of the Stage 1 work and he appears to have done so for the following reasons:
1.The definition of “Footings” in clause 1.13 of the Contract refers to all work from ground floor level down and that would include the application of two slurry coats of xypex to the cellar walls.
2.That part of the definition of “Footings” in clause 1.13 which refers to “All the work from ground floor level down” and the definition of “The work” in clause 1.8 to mean all “the work to be done and completed under this contract as shown in the contract documents” makes it clear that all work in the cellar was included in the Stage 1 work.
3.The fact that in the Building Schedule the reference to “Other details or types of footings” is said to mean or include “Spray Concrete Cellar and Slab over to Engineers Details” supports the conclusion that all work in the cellar is part of the “Footings” stage.
I should mention at this point that expert evidence was put before the arbitrator as to the appropriate stage for the application of the two slurry coats of xypex. One expert expressed the view that it should be delayed as long as possible in the work under the Contract, whereas another said that it should be applied at the earliest possible stage. The arbitrator said that if he had to express a preference, he would prefer the latter view, but he did not have to do so because it was the express terms of the Contract which governed the issue. I did not understand either party to challenge that conclusion. The arbitrator also said that the relevant words were not ambiguous and therefore the appellant could not rely on the contra proferentum rule.
I think the arbitrator reached the correct conclusion on this issue, but I do not agree with all of his reasons. I do not think the definition in clause 1.13 of the Contract applies to the description of Stage 1 work in the four pages containing printed words and provision for handwritten additions. The description of the Stage 1 work is handwritten. It is not printed in italics. I think the definition in clause 1.13 applies to those cases where the word “Footings” appears printed in italics in the 18 or so pages of standard printed contractual terms. It does not according to its terms apply to handwritten insertions in the four pages containing printed terms and provision for handwritten additions. The respondents sought to support the arbitrator’s decision by reference to a definition of “italic” which referred to handwriting modelled on the style used by professional scribes in 16th Century Italy, but I reject that argument as being quite artificial.
The appellant submits that by reference to clause 1 of the Contract the words, “Demolition/Footings Poured” must be given their ordinary meaning. It is said that the application of two slurry coats of xypex does not fall within the ordinary meaning of the word, “Footings”. To a point the appellant’s submission is correct, but I do not think it goes so far as to exclude from consideration the context in which the word “Footings” appears. The meaning of the word must be determined having regard to the context in which it appears.
Although I do not think the arbitrator was right to rely on the definition of “Footings” in clause 1.13, or on that part of the definition which picks up the definition of “The work”, his conclusion is correct for two reasons. First, the five stages specified by the parties involve, in a general sense, work from the bottom up and, in any event, the description of each stage is very general. It is not without significance that the appellant performed all the work other than applying the xypex required in the cellar (including adding xypex to the mixture) before claiming the first progress payment. Furthermore, it is not suggested that the construction of the cellar is not part of the Stage 1 work even though it is not specifically referred to in the description “Demolition/Footings Poured”. Secondly, I think regard can be had to the Building Schedule. The reference to the cellar in that part of the Schedule which deals with footings and the reference to the Engineer Details (although not specifically a reference to the application of xypex) in that section is suggestive of the fact that all work in the cellar is part of the Footings.
In my opinion, having regard to the context in which the words “Demolition Footings/Poured” appear, the application of two slurry coats of xypex was part of the Stage 1 work.
It follows from this conclusion that the appellant did not have the right to claim the first progress payment, and it did not have the right to serve the notice of termination based on the alleged failure to make the first progress payment.
Were there other breaches of the Contract by the Respondents which entitled the Appellant to terminate?
The notice of termination served by the appellant on the respondents identified a number of other alleged breaches of the Contract by the respondents which it was said gave the appellant the right to terminate the Contract. The arbitrator considered each of these grounds and he rejected the appellant’s arguments with respect to each ground. The appellant appeals against the arbitrator’s decision in relation to one of the grounds. The appellant submits that the respondents interfered with, or took possession of, the building area and/or disrupted the work under the Contract and that this conduct constituted a breach of contract which entitled the appellant to terminate the Contract.
Clause 10 of the Contract provides:
“10. Possession of the building area
10.1 You must give us possession of the building area by the start date.
10.2The building area must be vacant (unless you and we have a different agreement.
10.3Our possession of the building area continues until it is returned to you under Clause 25.
[This means we take over the building area as if we own it and can stop anybody coming on.]
10.4 You, and any other person you wish, can visit the building area.
10.5 However, you, and they, must not disrupt the work.
10.6 We must display a builder’s sign on the site.”
In this case the respondents continued to reside in the house during the work under the Contract and this fact needs to be borne in mind.
Clause 34 of the Contract provides:
“34 Termination of Contract
[It would be very unwise to terminate (that is, bring to an end) this contract before getting legal advice.]
34.1 We may terminate this contract by written notice if
34.1.1 you fail to make any payment due
34.1.2 you take possession of the work without our consent
34.1.3 you disobey Clauses 7.4 or 10.5 or 19.1 or
34.1.4 there is any other substantial breach of this contract by you.
[A ‘substantial breach’ is a serious disobedience of this contract showing that the disobeyer does not want to respect it any longer.]”
On appeal, the appellant did not submit that the respondents physically took possession of the building area or physically disrupted the work under the Contract. Rather, the appellant submits that the respondents communicated to it what it called a “stop work order”. The appellant identified a letter dated 6th January 2003 from the respondents to the appellant stating, among other things:
“[We] would like to inform you that before any work continues on the project we want written evidence that the water problem in the cellar will be rectified, and I want the rectification process to be documented by the engineers.”
The appellant also referred to its letter to the respondents dated 15th January 2003 wherein it said, among other things, “It is unfortunate that you have seen fit to stop work on your project”, and the fact that that assertion by the appellant was not denied in the response from the respondents’ solicitors dated 16th January 2003.
Having regard to the way in which this argument was developed on appeal, I doubt whether the point warrants a grant of leave under s 38 of the CAA. It seems to me that the issue is one of fact rather than of law. At all events, I reject the argument and it is unnecessary to consider whether leave should be revoked.
The arbitrator found that there was no occasion either before, on, or after 6th January 2003 when the respondents removed the site from the ownership of the appellant in breach of clause 10.3 of the Contract. I presume the arbitrator meant to say possession, rather than ownership. In my opinion, there is no reason to interfere with the arbitrator’s finding. As I have said, there was no evidence that the appellant was prevented physically from entering and remaining on the site, or that the respondents physically took possession of the site. The arbitrator found, correctly in my view, that the respondents’ letter dated 6th January 2003 did no more than ask the appellant to put the works on hold until the cellar problem was addressed. By way of example, the arbitrator referred to a “substantial” breach, but that example was not critical to his reasoning.
The arbitrator considered whether there had been a disruption of the work by the respondents as at 6th January 2003. He approached the question by considering whether any breach was “substantial”, and he said that to be a substantial breach the disruption itself needed to be substantial. In doing so the arbitrator may have misread clause 34.1. Under that clause, what gives rise to a right to terminate is not a substantial breach of clause 10.5, but conduct by the respondents which can be characterised as the respondents disobeying clause 10.5 of the Contract. Nevertheless, I think the arbitrator’s conclusion is correct.
As at 6th January 2003 the respondents were concerned about flooding in the cellar. The water in the cellar was a problem. By their letter dated 6th January 2003 the respondents were seeking an assurance that it would be addressed and rectified. By their letter dated 8th January 2003, the respondents indicated that they would make the first progress payment once the issue involving the application of xypex was resolved. By letter dated 8th January 2003 the appellant advised the respondents that there was a problem with the steel rods from the cellar walls onto the cellar roof. It said that this would be rectified. The appellant did not raise any issue about a disruption of the work by the respondents. By letter dated 10th January 2003 the respondents advised the appellant that they wanted clarification of the appellant’s intention in relation to the drawing, SK4, and that they were anxious to continue the project. Again they said they were willing to make the first progress payment subject to the clarification of the issue involving the application of xypex.
In my opinion, there is nothing in the letter dated 15th January 2003 from the appellant to the respondents, or the letter dated 16th January 2003 from the respondents’ solicitors to the appellant, which constitutes or indicates a disruption of the work by the respondents.
I think the issue should be judged in a practical way and having regard to the context in which the statement in the letter dated 6th January 2003 appears, I do not think the statement itself amounted to a disruption of the work. Something more was required. The appellant could have asserted a right to continue the work under the Contract and then awaited the respondents’ response, but it did not do that. Whilst it is not necessary to show that the disruption was substantial, there must be clear evidence of a disruption of the work. That evidence is not present in this case.
It is convenient to state my conclusions to this point. It was a term of the Contract that the respondents pay the appellant the sum of $31,423.50 on completion of the Stage 1 work. The application of two slurry coats of xypex to the cellar walls was part of the Stage 1 work and that was not done by the appellant. The appellant was not entitled to the first progress payment. As at 24th January 2003 the respondents were not in breach of clause 10 of the Contract. I did not understand the appellant to dispute that if I reached these conclusions, there was no proper basis for its notice of termination which constituted a repudiation of the Contract which was accepted by the respondents.
Was the Stage 1 Work substantially performed?
A party in breach of a contract may nevertheless recover on the contract if he has substantially performed the agreed works. In circumstances where the doctrine of substantial performance applies, the party not in breach may claim the damages resulting from the breach by way of a set off or counterclaim. Counsel for the appellant referred me to a number of cases in which the doctrine of substantial performance has been discussed. It is accurate to say as J W Carter and D J Harland state in Contract Law in Australia, 4th ed (2002), that the nature and scope of the substantial performance doctrine is uncertain.
In H Dakin & Co Ltd v Lee [1916] 1 KB 566 a builder under a lump sum contract for the supply of work and labour for the repair of a house sued for the contract price. The builder had failed to perform all the obligations under the contract. For present purposes, it is enough to refer to one failure to illustrate the nature of the failures in the case. There was an obligation to place concrete four feet in depth under an area to be underpinned. In fact, the builder had placed concrete no more than two feet in depth under the area to be underpinned. The owner argued that the builder was not entitled to recover the contract price. The Court of Appeal rejected the owner’s submission. The Court emphasised the fact that the builder had not abandoned the contract or refused to perform. Lord Cozens-Hardy MR said (at 579):
“But to say that a builder cannot recover from a building owner merely because some item of the work has been done negligently or inefficiently or improperly is a proposition which I should not listen to unless compelled by a decision of the House of Lords. Take a contract for a lump sum to decorate a house; the contract provides that there shall be three coats of oil paint, but in one of the rooms only two coats of paint are put on. Can anybody seriously say that under these circumstances the building owner could go and occupy the house and take the benefit of all the decorations which had been done in the other rooms without paying a penny for all the work done by the builder, just because only two coats of paint had been put on in one room where there ought to have been three?
I regard the present case as one of negligence and bad workmanship, and not as a case where there has been an omission of any one of the items in the specification. The builders thought apparently, or so they have sworn, that they had done all that was intended to be done in reference to the contract; and I suppose the defects are due to carelessness on the part of some of the workmen or of the foreman: but the existence of these defects does not amount to a refusal by them to perform part of the contract; it simply shows negligence in the way in which they have done the work.”
The Court held that the builder could recover the contract price subject to a right in the owner to recover in relation to defective items. An important aspect of the Court’s decision was the conclusion that the builder had not refused to do the work, but what it had done it had done insufficiently and badly.
In Hoenig v Isaacs [1952] 2 All ER 176 the plaintiff, an interior decorator and designer of furniture, was engaged to decorate and furnish the defendant’s flat for the sum of £750, the terms of payment being “net cash, as the work proceeds, and balance on completion”. The defendant paid the plaintiff the sum of £400, occupied the flat and used the furniture. He refused to pay the balance on the ground that certain work done and articles of furniture supplied were defective. The official referee found that although there were certain defects there had been substantial compliance with the contract. The Court of Appeal held that the plaintiff was entitled to the balance of £350 subject to a deduction to make good the defects or omissions proved. Somervell LJ said that a builder could not recover for work done if he stops before the work is completed in the ordinary sense, in other words, if he abandons the contract. His Lordship drew a distinction between a contract where the work was not “finished” or “done” on the one hand, and a contract where the work was finished or done but was in some respects not in accordance with the contract. In other words, in the latter case the work was finished in the ordinary sense though in part defective. He also referred to a breach which was collateral to the main purpose of the contract and one in respect of which there was no right of rescission. The analysis of the issue by Denning LJ is, with respect, instructive. He said that the first question is whether the promise to complete specified work is a condition precedent to payment, or simply a term of the contract. The courts lean against a construction that a promise is a condition precedent to payment and will construe the promise as a term not a condition. It will only be a breach of the term that goes to the root of the contract, such as abandonment or the carrying out of quite different work, which will relieve the innocent party of the obligation to pay. Denning LJ said (at 181):
“A familiar instance is when the contract provides for progress payments to be made as the work proceeds, but for retention money to be held until completion. Then entire performance is usually a condition precedent to payment of the retention money, but not, of course, to the progress payments. The contractor is entitled to payment pro rata as the work proceeds, less a deduction for retention money. But he is not entitled to the retention money until the work is entirely finished, without defects or omissions. In the present case the contract provided for ‘net cash, as the work proceeds; and balance on completion.’ If the balance could be regarded as retention money, then it might well be that the contractor ought to have done all the work correctly, without defects or omissions, in order to be entitled to the balance. But I do not think the balance should be regarded as retention money. Retention money is usually only ten per cent, or fifteen per cent, whereas this balance was more than fifty per cent. I think this contract should be regarded as an ordinary lump sum contract. It was substantially performed. The contractor is entitled, therefore, to the contract price, less a deduction for the defects.”
Denning LJ went on to say that even if entire performance was a condition precedent, the result in the case would be the same because he would find that the condition had been waived. The defendant waived the condition by entering into possession and utilising the flat, and in the circumstances he could not treat the entire performance clause as a condition precedent, but only as a term giving rise to a right to damages.
Romer LJ approached the issue by saying that one should look at whether the defendant has renounced the contract, or has performed the contract in a totally different way. Romer LJ said (at 182 – 183):
“But when a man fully performs his contract in the sense that he supplies all that he agreed to supply but what he supplies is subject to defects of so minor a character that he can be said to have substantially performed his promise, it is, in my judgment, far more equitable to apply the H Dakin & Co., Ltd v Lee principle than to deprive him wholly of his contractual rights and relegate him to such remedy (if any) as he may have on a quantum meruit, nor, in my judgment, are we compelled to a contrary view (having regard to the nature and terms of the agreement and the official referee’s finding) by any of the cases in the books.”
In Bolton v Mahadeva [1972] 2 All ER 1322 the plaintiff agreed to install central heating and to perform certain other work in the defendant’s house. The contract price for the installation and work was a lump sum of £560. The central heating was installed but there were defects and the cost of remedying the defects was £174. The Court of Appeal held that the plaintiff was not entitled to recover any sum. Cairns LJ (with whom Buckley LJ agreed) said the main question was whether the defects in workmanship were of such a character and amount that the plaintiff could not be said to have substantially performed his contract. In other words, the governing considerations were the nature of the defects and the proportion between the cost of rectifying them and the contract price. Cairns LJ said (at 1326):
“Now, certainly it appears to me that the nature and amount of the defects in this case were far different from those which the court had to consider in H Dakin & Co Ltd v Lee and Hoenig v Isaacs. For my part, I find it impossible to say that the judge was right in reaching the conclusion that in those circumstances the contract had been substantially performed. The contract was a contract to install a central heating system. If a central heating system when installed is such that it does not heat the house adequately and is such, further, that fumes are given out, so as to make living rooms uncomfortable, and if the putting right of those defects is not something which can be done by some slight amendment of the system, then I think that the contract is not substantially performed.
The actual amounts of expenditure which the judge assessed as being necessary to cure those particular defects were £40 in each case. Taking those matters into account and the other matters making up the total of £174, I have reached the conclusion that the judge was wrong in saying that this contract had been substantially completed; and, on my view of the law, it follows that the plaintiff was not entitled to recover under that contract.”
Sachs LJ took a similar approach.
It seems to me that as a matter of law there are two possible approaches to the question of substantial performance. They are not necessarily inconsistent and may involve no more than a different emphasis on the relevant factors.
The first approach is the one which I prefer. The first question is whether the relevant term should be construed as a condition precedent to the obligation to pay. The Court leans against a construction that a term is a condition precedent. Assuming a term is not a condition precedent, the plaintiff builder may not recover if his breach goes to the root of the contract because it involves abandonment or the performance of work of a substantially different kind. It would seem that even if the term is construed as a condition precedent it is possible to waive it, although it is unnecessary for me to decide this point in view of my conclusion that the term here is not a condition precedent.
The second approach requires a consideration of the nature of the defects and the proportion between the cost of rectifying them and the contract price.
In my opinion, on either approach the conclusion is that the doctrine of substantial performance applies in this case.
The Contract specifies that the price is $125,694 inclusive of GST. The Contract provides that the main obligation on the appellant is to carry out the work at the site (clause 2). The respondents are to pay the price and to do so in the instalments, and at the stages listed in the Contract (clause 3). If no stages are listed, the appellant may make progress claims, but not more frequently than weekly. The Contract does not contain a procedure for the issuing of a certificate of completion in relation to the various stages. Furthermore, although not directly applicable, I note that under the Contract final payment is to be made on practical completion and that term is defined as meaning, “when the work is substantially complete and reasonably fit for use.
The Court leans against a construction that a term is a condition precedent. In Hoenig v Isaacs (supra) Denning LJ suggested that entire performance is not ordinarily a condition precedent to the payment of the progress payments. Having regard to these matters and the features of the Contract to which I have referred, I would not construe the obligation to complete the Stage 1 work as a condition precedent to the payment of the first progress payment.
Nor can it be said that the failure to apply the xypex went to the root of the Contract. The amount of the first progress payment was $31,423.50 and the arbitrator found that the cost to apply the two slurry coats of xypex was $2,340.00. The appellant was not refusing to carry out the work, but rather was saying that it was not required to do it at that stage. It is true that the appellant’s mistaken assertion that he was not required to apply two slurry coats of xypex to the cellar walls as part of the Stage 1 work led it to claim the first progress payment and that the respondents correctly denied that they were liable to make the first progress payment. That denial by the respondents and other alleged breaches of the Contract by the respondents which were without substance formed the basis of the appellant’s notice of termination which was a repudiation of the Contract. However, in my opinion it is not appropriate in the circumstances of this case to look at the ultimate repudiation of the Contract by the appellant in considering the doctrine of substantial performance. In considering whether the appellant’s breach went to the root of the Contract, the act to be considered is the appellant’s failure to complete the Stage 1 work in that it did not apply two slurry coats of xypex to the cellar walls. That conduct did not go to the root of the Contract.
The same conclusion follows from the application of the second approach. The nature of the defects and the proportion between the cost of rectifying them ($2,340.00) and the first progress payment ($31,423.50) leads to the conclusion that the Stage 1 works were substantially performed.
In my opinion, the appellant was entitled to recover the first progress payment minus an allowance for the application of xypex. At the same time, the respondents were entitled to damages for the subsequent wrongful repudiation of the Contract by the appellant.
A Claim in Quantum Meruit
I have found that the appellant has a remedy on the Contract. In those circumstances, it is unnecessary for me to consider if the appellant is entitled to restitutionary relief. However, in case I am wrong on the issue of substantial performance and the doctrine does not apply, I will consider whether the appellant is entitled to relief by way of a claim on a quantum meruit.
In the well known case of Sumpter v Hedges [1898] 1 QB 673 a builder contracted with an owner to construct certain buildings on the owner’s land for a lump sum. The builder did part of the work and then abandoned the contract. The owner completed the work. The builder sued the owner on a quantum meruit for the value of the work he had carried out. The Court of Appeal in England held that the builder could not claim on a quantum meruit unless a fresh contract could be inferred. A L Smith LJ said (at 674):
“The law is that, where there is a contract to do work for a lump sum, until the work is completed the price of it cannot be recovered. Therefore the plaintiff could not recover on the original contract. It is suggested however that the plaintiff was entitled to recover for the work he did on a quantum meruit. But, in order that that may be so, there must be evidence of a fresh contract to pay for the work already done. With regard to that, the case of Munro v Butt appears to be exactly in point. That case decides that, unless the building owner does something from which a new contract can be inferred to pay for the work already done, the plaintiff in such a case as this cannot recover on a quantum meruit.”
More recently, the High Court of Australia has held that the right to recover on a quantum meruit does not depend on an implied contract, but rather on a claim to restitution or one based on unjust enrichment (Pavey & Matthews Pty Ltd v Paul (1987) 162 CLR 221). Mason and Wilson JJ in joint reasons (at 227) and Deane J in separate reasons (at 256 and 259) emphasised the point that the action lay where the defendant accepted the works performed by the party claiming a quantum meruit.
It may be that if the decision in Sumpter v Hedges (supra) is followed today it will be followed on the basis that the owner had not accepted the builder’s works in the relevant sense, and not on the basis that there was no evidence of a fresh contract.
In Steele v Tardiani (1946) 72 CLR 386 the plaintiffs were employed by the defendant to cut firewood into certain sizes in terms of width or diameter. The plaintiffs cut the firewood but not into the required sizes. Dixon J (as he then was) said that each divisible application of the contract was entire and was only satisfied by performance which was not partial, but substantially complete. Dixon J said that to recover on a quantum meruit in the above circumstances the plaintiffs needed to show, “circumstances removing their right of remuneration from the exact conditions of the special contract” (at 402). It was not enough to show that the work carried out by the plaintiff has been beneficial to the defendant. It was necessary to show that the defendant had taken the benefit of the work, and that in turn involved the exercise of some choice open to the defendant. Dixon J referred to the difference between an innocent party who has a choice of accepting defective or incomplete performance of work in relation to a chattel, and taking the benefit of defective or incomplete work on land. The mere fact that the owner takes possession of his own land cannot be considered to be taking the benefit of the work carried out on the land. Dixon J referred (at 403) with approval to the following passage from the reasons for judgment of Collins LJ in Sumpter v Hedges (supra) (at 676):
“There are cases in which, though the plaintiff has abandoned the performance of a contract, it is possible for him to raise the inference of a new contract to pay for the work done on a quantum meruit from the defendant’s having taken the benefit of that work, but, in order that that may be done, the circumstances must be such as to give an option to the defendant to take or not to take the benefit of the work done. It is only where the circumstances are such as to give that option that there is any evidence on which to ground the inference of a new contract. Where, as in the case of work done on land, the circumstances are such as to give the defendant no option whether he will take the benefit of the work or not, then one must look to other facts than the mere taking the benefit of the work in order to ground the inference of a new contract.”
On the facts in Steele v Tardiani (supra), Dixon J held that the defendant had acquiesced and had taken the benefit of the work and so “as involving either a dispensation from precise performance or an implication at law of a new obligation to pay the value of the work done” (at 405).
Before the arbitrator, the appellant conceded that on the law as it stood it was not entitled to relief based on a restitutionary claim. Its position is summarised in the following remarks of the arbitrator:
“However, the Contractor in its Further Submissions said that if I found that the Contractor had acted unlawfully, and then rewarded the Contractor on the basis of quantum meruit or unjust enrichment, the award would contain an error in law on its face. In its Further Submissions, the Contractor wrote, ‘Thus, if the builder cannot establish entitlement to its first progress claim, and cannot establish that it lawfully terminated the Contract, then it will be entitled to nothing … The builder’s position is this, that … as the law currently stands an arbitrator would be bound to refuse the builder any relief in restitution. It goes without saying that … this outcome is both unfair and absurd, and that it is appropriate that the law in this regard be considered by an appellate court … obviously the builder would reserve its position generally in that respect.”
As I understand it, in seeking leave to appeal in relation to the claim in restitution, the appellant submitted that it would argue that the decision of Sumpter v Hedges (supra) was wrong. On the hearing of the appeal before me, the appellant took a different approach. It accepted the authority of Sumpter v Hedges (supra), but submitted that on the facts of this case the respondents had taken the benefit of the work carried out by the appellant. It was submitted that the respondent had done so by electing to pursue a claim for damages for the defects in the work performed by the appellant in carrying out the Stage 1 work.
The respondents said that the appellant was raising a new point on the appeal, and that it should not be permitted to do so.
The first question is whether the appellant would be able to raise this point even if it had an appeal to this Court as of right. I think the answer to this question is yes because the point the appellant wishes to raise is essentially a point of law, and, as will become apparent in my discussion of the merits of the point, there is no prejudice to the respondents if the appellant is allowed to raise the point at this stage.
The second question is whether the argument is within the scope of the leave granted by Martin J on 5th December 2003, and if not, whether I should grant leave in relation to the argument. Leave was granted by Martin J in relation to the following ground of appeal:
“16.Further and in the alternative, the Arbitrator erred in law in failing to recognise the builder’s claim in restitution for the value of the work which it had carried out up to the time the contract was terminated, and in failing to make an award in favour of the builder in the amount of $22,265.”
I think the argument the appellant now wishes to raise is within the terms of this ground. However, even if I am wrong about this, I think the point falls within the terms of s 38 of the CAA and that leave should be granted in relation to it.
I think the appellant’s submission is correct in that an owner does take the benefit of the work carried out by the builder if he claims and receives from the builder compensation for defective work performed by the builder. The owner is receiving compensation to make right the work performed by the builder. If the owner does this, the builder may claim on a quantum meruit the fair value of the work he has performed. In my opinion, the respondents had the right to select the course they wished to pursue ie., to exclude a claim for defective works and not be liable on a quantum meruit, or to include a claim for defective works and be liable on a quantum meruit, and in my opinion this right extended up to the time the arbitrator made his award. Had it been necessary for me to determine the appellant’s claim for restitutionary relief, and because the point was raised by the appellant for the first time on appeal, I would have allowed the respondents the opportunity before making orders on the appeal to consider which course they wished to pursue. I assume they would have taken the course which cost them the least amount of money and that would have involved abandoning the claim in relation to defective works which would have resulted in a reduction in the amount awarded by the arbitrator of $8,631.00. In other words, if the only basis upon which the appellant was entitled to succeed was on a claim on a quantum meruit, that would have resulted in a reduction of the amount awarded by the arbitrator in favour of the respondents of $8,631.00. I would also have disallowed the front verandah compensation but for different reasons which I set out below.
The Front Verandah Compensation
The respondents carried out work on the front verandah after the Contract had been terminated. The work was work within the scope of the Contract and it was not remedial work. I cannot see why it formed part of the arbitrator’s award in favour of the respondents. They were entitled to be compensated for any additional cost in another builder carrying out the work the appellant agreed to carry out, but even making the allowance in favour of the appellant for substantial performance which I propose to make, there is no additional cost.
There is a question as to whether leave to appeal should be granted in relation to this complaint, and I would have to say that the answer to that question is fairly described as borderline. However, having regard to the approach taken in Angela Kinnane v Zee Homes Pty Ltd (supra), I am prepared to grant leave.
Conclusions
The appeal must be allowed and the award made by the arbitrator must be set aside. The appellant is entitled to claim from the respondents the first progress payment ($31,423.50) minus the cost of applying two slurry coats of xypex ($2,340.00) giving a total of $29,083.50.
The respondents are entitled to recover from the appellant the cost to make good other defective works ($6,291.00), the various sundry items ($894.00) and the compensation for inconvenience and stress ($9,500.00) giving a total of $16,685.00. This leaves a balance in favour of the appellant of $12,398.50.
I will hear the parties as to the appropriate orders, interest and costs.
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