Mrocki v Mountview Prestige Homes Pty Ltd
[2011] VSCA 73
•18 March 2011
SUPREME COURT OF VICTORIA
COURT OF APPEAL
S APCI 2011 0014
| LEON MROCKI & ANOR | Applicants |
| v | |
| MOUNTVIEW PRESTIGE HOMES PTY LTD (ACN 092 818 669) | Respondent |
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| JUDGES | HARPER JA and KYROU AJA |
| WHERE HELD | MELBOURNE |
| DATE OF HEARING | 9 March 2011 |
| DATE OF JUDGMENT | 18 March 2011 |
| MEDIUM NEUTRAL CITATION | [2011] VSCA 73 |
| JUDGMENT APPEALED FROM | Mrocki v Mountview Prestige Homes Pty Ltd [2010] VSC 624 (Dixon J) |
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APPLICATION FOR LEAVE TO APPEAL – Application made pursuant to s 17A(3A)(a) of the Supreme Court Act 1986 – Judge in the Trial Division allowed an appeal from a decision of the VCAT, but refused to remit the proceeding because the claim was bound to fail – Construction of contract in the form of an amended Housing Industry Association ‘cost plus’ contract – Contract related to construction of apartment building – Defects in completed building – Judge held that the ‘Building Works’ for which the builder was responsible under the contract were confined to the provision of contract management services and that the contractual warranties applied only to those services – Application granted.
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| APPEARANCES: | Counsel | Solicitors |
| For the Applicants | Mr I D Martindale SC with Mr R N Cameron | Fetter Gdanski |
| For the Respondent | Mr N McPhee | Neil McPhee & Associates |
HARPER JA
KYROU AJA:
Introduction and summary
This is an application pursuant to s 17A(3A)(a) of the Supreme Court Act 1986 for leave to appeal from a decision of a judge in the trial division of this Court (Dixon J).[1] His Honour allowed an appeal from a decision of the Victorian Civil and Administrative Tribunal (‘VCAT’) which dismissed a claim made by Leon Mrocki and Harry Mrocki (‘Owners’) against Mountview Prestige Homes Pty Ltd (‘Builder’) in respect of defects in two luxury apartments that were built in a two-storey building at Lot 27, St Ninians Road, Brighton. However, his Honour refused to remit the proceeding to the VCAT on the basis that the Owners’ claim was bound to fail.
[1]Mrocki v Mountview Prestige Homes Pty Ltd [2010] VSC 624 (22 December 2010) (‘Reasons’).
The dispute between the Owners and the Builder arose out of a written agreement that they executed on 30 November 2006 in respect of the construction of the apartments (‘Agreement’). The apartment building incorporated a shared basement and two swimming pools.
Pursuant to the Agreement, the Owners agreed to pay to the Builder a fixed fee of $247,500 and to pay directly all tradespeople and suppliers of materials (collectively, ‘contractors’). The apartments were built at a cost of over $5 million. There were many defects, including water leaking from the swimming pools into the apartments. The causes of some of the defects were unclear. The Owners’ claim against the Builder was under the warranties in cl 11 of the Agreement.
The VCAT found that the Agreement was void for uncertainty. It also decided that the Builder’s obligation to the Owners was to supervise the building project with reasonable care and skill, rather than to undertake responsibility for the construction of the apartments; that the Builder had not breached its obligation; and that, accordingly, the Builder was not liable to rectify the defects.
On appeal from the VCAT’s decision, Dixon J found that the VCAT had erred in law in concluding that the Agreement was void for uncertainty. His Honour construed the Agreement as requiring the Builder to manage the project. As the VCAT had found that the Builder’s supervision of the project did not cause any of the defects, his Honour concluded that the Builder had not breached the warranties in cl 11 of the Agreement and, therefore, that the Owners’ claim was bound to fail. Accordingly, as stated above, while his Honour allowed the appeal, he refused to remit the proceeding to the VCAT.
In order for the Owners to succeed in their application for leave to appeal, they must show that the decision below is wrong or attended with sufficient doubt and that substantial injustice would result if the decision were to stand.[2] For the reasons that follow, we are satisfied that the decision below is attended with sufficient doubt, that substantial injustice would result to the Owners if the decision were to stand, and that leave to appeal should be granted.
[2]Niemann v Electronic Industries Ltd [1978] VR 431, 433, 441.
Facts
The Owners are real estate developers. They wished to construct the apartments with the intention of living in them.
Events preceding the execution of the Agreement
In November 2006, the Owners obtained a town planning permit for the apartment building on the basis of six sheets of town planning and preliminary drawings (‘Six Preliminary Drawings’). Those drawings were then used to obtain estimates of the cost of construction from a number of builders. The estimates ranged from a little under $4 million to over $6 million.
The Builder is a company controlled by Martin Vella, who was known to Harry Mrocki. The Owners met Martin Vella on 27 November 2006 for the purpose of obtaining a cost estimate from him. After Martin Vella was shown the Six Preliminary Drawings, he told the Owners that he would prefer to undertake the job on the basis of ‘cost plus 10 percent’. Leon Mrocki suggested that Martin Vella act as construction manager for a fee and that the Owners would pay the contractors. Martin Vella said that he would provide a quote to the Owners.
On 28 November 2006, Martin Vella informed the Owners that he estimated the cost of construction, excluding landscaping, external paving and the swimming pools, at between $4.4 million and $4.5 million. The Owners insisted that the cost would be closer to $3.5 million and that Martin Vella should base his fee upon that figure. Martin Vella then quoted a fee of 7 per cent of $3.5 million, namely, $245,000, plus GST. After negotiation, the fee was agreed at $247,500, inclusive of GST.
Martin Vella then sought a form of construction management contract from the Housing Industry Association (‘HIA’). He was informed by the HIA that his licence did not permit him to enter into such a contract and that he should use the ‘cost plus’ contract form.[3] The Agreement was executed in that form with a number of handwritten amendments.
[3]This is what the VCAT found. For reasons which are not clear, Dixon J stated that the HIA informed Martin Vella that ‘he could not, under the insurance he held, enter into a construction management agreement’: Reasons, [13].
Key features of the Agreement
For present purposes, the key features of the Agreement are as follows:
(a)Section A, which is headed ‘Interpretation’, contains the following relevant definitions:
•‘Building Works’ means the works to be carried out and completed by the Builder as shown in the Contract Documents and as varied in accordance with this Contract.
•‘Contract Documents’ means this signed Contract and the Conditions, signed Specifications, signed Plans and an Engineer’s Design.
•‘Plans’ means the drawings showing the layout and design details of the Building Works with dimensions and elevations, including Engineer’s Design.
•‘Price of the Building Works’ means the total of the Cost of Building Works and the Builder’s Fee.
•‘Specifications’ means the Contract document that shows the full details of the Building Works and includes the details of the materials to be supplied.
•‘Sub-Contractor’ means a person, partnership or company who contracts with the Builder to carry out part of the Building Works.
(b)Under the heading, ‘Particulars of Contract’, the ‘Building Works’ are described as:
2 apartments with basement (Brief description) as set out in the Specifications and Plans. The SPECIFICATIONS include [blank] pages that were prepared and supplied by CBG Architects. There are 6 sheets of PLANS and they were prepared and supplied by CBG Architects. There are [blank] sheets in the ENGINEER’S DESIGN/S, and it/they, was/were, prepared by [blank] for the OWNER.[4]
[4]The italicised text was handwritten.
(c)Various sections of the schedules to the Agreement have been ruled out and the words ‘By Owner’ or ‘N-A’ have been inserted in handwriting to indicate that they are not applicable. The schedules are relevantly summarised below:
(i)in item 1 of schedule 1, the building period is stated to be 390 days;
(ii)in item 2 of schedule 1, in the box opposite the marginal heading, ‘Estimated Price (Clause 12)’ all words in the box itself have been crossed out and ‘N-A’ has been inserted. Nevertheless, cl 12 has not been crossed out from section B, which is headed, ‘Main Obligations of the Parties’. That clause defines the obligation of the Owner to pay the price of the Building Works;
(iii)in item 1 of schedule 1 in a further box where the parties would identify the items that are not included in the Estimated Price of the Building Works and the amounts payable to third parties which are excluded from the Estimated Price all words have been crossed out and the words ‘By Owner’ have been inserted;
(iv)in item 3 of schedule 1, in the box for ‘Deposit (Clause 9)’, the deposit is stated to be ‘$15,000 + GST’;
(v)in items 4 and 5 of schedule 1, which refer to cl 19 and allow for identification of the person responsible for obtaining and paying for planning approval and the building permit, all words have been crossed out and the words ‘By Owner’ have been inserted. Clause 19 has not been crossed out from section C, which comprises cll 14 to 20 and is headed ‘Before Work Begins’;
(vi)in item 6 of schedule 1, in the box for the ‘Builder’s Margin (for variations and where the contract is ended)’, all words have been crossed out and ‘N-A’ has been inserted;
(vii)item 7 of schedule 1 nominates ‘seven’ as the number of days within which progress payments must be made, and after which interest becomes due, under cl 30;
(viii)item 9 of schedule 1, which specifies for cl 39 the agreed weekly rate of damages for late completion of the Building Works, is marked ‘N-A’;
(ix)schedule 2, which is entitled, ‘Prime Cost Items and Provisional Sum Items and Allowances’, has been crossed out and ‘N-A’ has been inserted;
(x)schedule 3 deals with progress payments. The progress payments fixed by s 40 of the Domestic Building Contracts Act 1995 (‘DBC Act’) are displaced by the handwritten obligation of the Owners to pay the Contract Price by ‘Progress claims to be submitted by the Builder at the end of each month’;
(xi)schedule 4 defines, for the purposes of the definition of ‘Cost of the Building Works’ in cl 1, what is included in that expression. The section specifying rates per hour for the cost of labour and services supplied wholly in connection with the Building Works has been crossed out and the words ‘By Owner’ have been inserted;
(xii)schedule 5 defines the Builder’s Fee for the purposes of the definition of that term in cl 1. The GST inclusive amount of $247,500 has been specified. Other provisions of that schedule, which could provide for the Builder’s Fee to be a percentage of the Cost of the Building Works paid progressively, have been crossed out;
(xiii) schedule 6 sets out the following handwritten special condition:
All accounts for project to be paid by the Owner. Mountview Prestige Homes to approve invoices for payment.
(xiv)schedule 7 is headed, ‘Excluded Items’ and contains the following printed and handwritten text:
The Owner acknowledges that the Contract Building Works do not include those items of building work and materials listed below and accepts full responsibility for this work and building materials.
All external paving and landscaping. This work will be done by Owners.[5]
[5]The italicised words were handwritten.
(d) Clause 3 in section A states:
This Contract is complete in itself and overrides any earlier agreement, whether made verbally or in writing.
(e)Section B, which is headed, ‘Main Obligations of the Parties’, contains the following relevant terms:
(i)Clause 11 is headed ‘Statutory Warranties’ and sets out the Builder’s warranties which reflect the warranties in s 8 of the DBC Act. Clause 11 provides:
To the extent required by the Domestic Building Contracts Act the Builder warrants that:
•the Building Works will be carried out in a proper and workmanlike manner and in accordance with the Plans and the Specifications set out in this Contract;
•all materials to be supplied by the Builder for use in the Building Works will be good and suitable for the purpose for which they are used and that, unless otherwise stated in this Contract, those materials will be new;
•the Building Works will be carried out in accordance with, and will comply with, all laws and legal requirements including, without limiting the generality of this warranty, the Building Act 1993 and the regulations made under that Act;
•the Building Works will be carried out with reasonable care and skill and will be completed by the end of the Building Period;
•if the Building Works consists of the erection or construction of a home, or is work intended to renovate, alter, extend, improve or repair a home to a stage suitable for occupation, the home will be suitable for occupation at the time the Building Works are completed; and
•if this Contract states the particular purpose for which the Building Works are required, or the result which the Owner wishes the Building Works to achieve, so as to show that the Owner relies on the Builder’s skill and judgement, the Builder warrants that the Building Works and any material used in carrying out the Building Works will be reasonably fit for that purpose or will be of such a nature and quality that they might reasonably be expected to achieve that result.
(ii)Clause 12 provides that the Owner must pay the Builder the Price of the Building Works in accordance with cl 28 or as otherwise stated in the Agreement.
(iii)Clause 28 entitles the Builder to claim progress payments as set out in schedule 3, the terms of which are outlined above.
Events subsequent to the execution of the Agreement
At the time that the Agreement was executed on 30 November 2006, the only drawings that were in existence were the Six Preliminary Drawings. Those drawings were attached to the Agreement. According to the expert evidence before the VCAT, it would have been impossible to construct the apartment building from those drawings.
The Builder obtained domestic building insurance for $880,000 for one of the apartments and for $900,000 for the other apartment.
Revised plans were submitted to the local council in December 2006 and engineering drawings were prepared during that month. It is not clear when the specifications were prepared. A stage 1 building permit was issued by a building surveyor on 21 January 2007 which authorised construction of the basement and ground floor only. On 9 February 2007, structural engineering drawings for the swimming pools were prepared.
On 3 May 2007, the building surveyor issued a stage 2 building permit which did not include the swimming pools. On 9 October 2007, the building surveyor purported to issue a ‘Variation Building Permit’ which included the swimming pools.
During the project, the Builder purported to engage contractors as agent for the Owners.
Martin Vella’s brother, Adam Vella, acted as on-site supervisor and was paid by the Owners directly. Adam Vella and all other contractors worked under the overall supervision of Martin Vella.
The swimming pools were designed and built by a swimming pool company, Red Tag Pty Ltd. The VCAT decided that the swimming pools were not within the scope of works for which the Builder had undertaken supervisory responsibility.
When the project was about half completed, Martin Vella complained to the Owners that the true value of the project was considerably more than the $3.5 million upon which he had based his fee. On 25 February 2008, he sent a letter requesting a further $30,000. The Owners paid this additional amount.
The Owners did not retain any part of the progress claims that were submitted by the Builder in respect of the fee of $247,500. They did, however, retain five per cent of the amounts claimed by contractors.
The project was completed and the Builder was paid the fee of $247,500 in full.
The decision below
As stated at [5] above, Dixon J held that the VCAT had erred in law in finding that the Agreement was void for uncertainty. The Owners do not challenge that aspect of Dixon J’s decision.
Having found that the Agreement was valid and enforceable according to its terms, Dixon J considered the critical issue of the meaning of cl 11, which set out the Builder’s warranties. In doing so, he relied on the following principles:
(a)the meaning of the terms of a contract is to be ascertained objectively by reference to what a reasonable person would have understood them to mean;[6] and
(b)the Court may have regard to the surrounding circumstances which were known to the parties at the time that they entered into the contract, and to the purpose and object of the transaction.[7]
[6]Pacific Carriers Ltd v BNP Paribas (2004) 218 CLR 451, 461-2 [22] (‘BNP’); Toll (FGCT) Pty Ltd v Alphafarm Pty Ltd (2004) 219 CLR 165, 179 [40] (‘Toll’).
[7]BNP (2004) 218 CLR 451, 461-2 [22]; Toll (2004) 219 CLR 165, 179 [40].
His Honour then considered whether the terms of a contract must be ambiguous before the surrounding circumstances, and the purpose and object of the transaction, can be considered in interpreting them. After referring to the ‘traditional view’ expressed in Codelfa Construction Pty Ltd v State Rail Authority (NSW)[8] and Royal Botanic Gardens and Domain Trust v South Sydney City Council[9] that ambiguity was a precondition, his Honour relied on Pacific Carriers Ltd v BNP Paribas,[10] Toll (FGCT) Pty Ltd v Alphafarm Pty Ltd[11] and International Air Transport Association v Ansett Australia Holdings Ltd[12] for the proposition that ‘[i]t is now settled that … the High Court has removed the condition of ambiguity … so the context and purpose of the transaction may be taken into account in construing commercial contracts.’[13]
[8](1982) 149 CLR 337, 352.
[9](2002) 240 CLR 45, 52 [9].
[10]BNP (2004) 218 CLR 451.
[11](2004) 219 CLR 165.
[12](2008) 234 CLR 151, 160 [8].
[13]Reasons, [91], [92].
Dixon J stated that the most significant question about the proper scope of cl 11 of the Agreement was the nature of the ‘Building Works’ which were the subject of the warranties. The definition of ‘Building Works’ referred to ‘the works to be carried out and completed by the Builder as shown in the Contract Documents and as varied in accordance with this Contract’. His Honour stated that this definition raised two issues, namely, what were the ‘works’ and what was to be carried out and completed by the Builder.[14]
[14]Reasons, [95].
In relation to the first issue, Dixon J noted that the word ‘works’ was not specifically defined in the Agreement and that, at the time the Agreement was executed, the Six Preliminary Drawings did not provide sufficient details to enable the construction of the apartments. Those details were provided subsequently. His Honour concluded that, as the project was completed, the extent of the ‘works’ did not form part of the dispute between the parties; rather, their dispute related to ‘the extent of the Building Works warranted.’[15]
[15]Reasons, [97].
In relation to the second issue, Dixon J decided that the scope of the ‘Building Works’ to be carried out and completed by the Builder was contract management. His Honour employed two paths of reasoning to reach this conclusion.
Dixon J’s first path of reasoning was as follows:
Mountview agreed to give the clause 11 warranties when the Contract was formed. At the time of contracting, there was no detailed description of the construction works. The evidence given by the architect, Mr Genovesi, to VCAT was that it was not possible to build the project from the six sheets of concept drawings. Thus, it could be contended, and was before VCAT, that there was considerable uncertainty at that time as to what could be constructed under the Contract. Two observations are pertinent. The extent of the Works to be constructed does not form part of the dispute, as the project has been completed. Rather, the issue is the extent of the Building Works warranted. The construction work was not to be undertaken by Mountview. The question which arises in this context is whether the fact that the Contract documents were limited to the signed Contract, the conditions and the six sheets of concept plans, is sufficient to give certainty to the obligations being assumed by Mountview by clause 11. What had Mountview undertaken to carry out and complete under the Contract?
Where construction work, paid for by the Owners, is being carried out by others, not Mountview, using materials supplied by others to the Owner’s specifications, the lack of certainty in what was to be actually constructed, in terms of detailed dimensions, materials specifications and the like, may not render uncertain the scope of Mountview’s warranty obligations. Further, the Owners engaged and paid a site supervisor. What remains for Mountview, ‘the Builder’ to carry out and complete under the Contract, its scope of ‘building works’, is administration, supervision and like tasks, which can be described as the role of a contract manager. That this is the scope of the Building Works for Mountview under the Contract is not in my view uncertain or ambiguous. It might be thought that the role of contract manager is not the subject of detailed specification but I do not think this renders the role uncertain in its scope. The role of contract manager excluded onsite supervision of trades, as Mr Adam Vella was employed directly by the Owners to supervise on-site and his role was a known circumstance between the parties at the time of contracting.
…
Further, I consider that this construction of the scope of Building Works under the Contract is unaffected when regard is had to the surrounding factual matrix. [Counsel for the Owners] described the scope of the Building Works as being to build two apartments and basement for a fixed fee with the Owner paying all the bills. I do not accept this contention.
Although ambiguity is not a pre-condition to open the surrounding factual matrix to assist in construing the contract, for Mountview, Mr Carr submitted that ambiguity is to be found in the scope of Mountview’s work as defined by the Contract. He submitted if there is no cost of Building Works, how can there be a contract to build? If the Contract is not for Mountview to build, what defines the precise scope of the builder’s works? I consider this question is answered, with sufficient certainty, by the terms of the Contract, but either way, the conclusion as to the scope of Building Works of Mountview is not altered when the surrounding factual matrix is examined. Once it is seen that the scope of the Building Works is contract management, there is no difficulty or uncertainty arising from the generic description of the project provided by the concept drawings. Such drawings cannot, with certainty, define the constructed project but can define a management role.[16]
[16]Reasons, [97], [98], [100], [101].
His Honour’s second path of reasoning was as follows:
There is a second path to this conclusion through the terms of the Contract. By clause 12, the Owners must pay Mountview the Price of the Building Works in accordance with clause 28. Clause 28 entitled Mountview to claim progress payments as set out in schedule 3 which, in turn, provided for progress claims to be submitted at the end of each month. The Price of the Building Works to be paid by the Owners is defined; it means the total of the Cost of the Building Works and the Builder’s fee. Each of those items is also defined; Cost of the Building Works means the amount determined in accordance with schedule 4 and Builder’s fee means the amount determined in accordance with schedule 5.
The Cost of Building Works, for Mountview, is nil. Schedule 4 has been partially amended in handwriting … These costs are allocated to the Owners by the terms of the Contract. Schedule 4 includes a list of items which form part of Cost of the Building Works. Further, the special condition in schedule 6 … provided that all accounts for the project were paid by the Owners after being approved for payment by Mountview. Unsurprisingly, in executing the project, the practical effect of this term was that all the trades and materials were paid for by the Owners, not Mountview. Schedule 5 set the Builder’s fee at $247,500, thus the Price of the Building Works was nil plus $247,500. … [T]he value to the Owners of the project was in excess of $5M.
That the responsibility for financing the project was agreed in this way is significant in determining the contractual allocation of risk intended by the parties. The handwritten special condition carries greater significance in identifying the intention of the parties than the printed terms. The special condition, when read with the terms which define the payments which Mountview was to receive, does not leave uncertainty as to the works to be undertaken and completed by the Builder under this Contract. Not included on the Builder’s account is responsibility for the work of the contractors and materials supplied.
The difference between the Cost of the Building Works, as incurred by the Owners in the project, and the Price of the Building Works payable to Mountview, as defined by the Contract, renders clear that the scope of the Building Works, in the context of the special condition and other handwritten additions and amendments, is contract management. This interpretation is arrived at by construing the terms of the Contract and is, in my view, clear of vitiating uncertainty. It is in the clarity of what is to be paid by whom, rather than what can be built from the concept drawings, that the scope of the Building Works under the Contract is identified with certainty.
The terms of the written Contract do not require Mountview to carry out and complete the construction works involved in the project or to supply the materials used. Such works, being the Works which are usually specified in detailed dimensioned drawings, an engineering design and specifications, did not need to be detailed in the Contract Documents when the Contract was entered into. The evident intention of the parties was that such works would be performed by contractors engaged and paid by the Owners on construction drawings supplied to them or the on-site supervisor.
The commercial purpose of the agreement is identified. Objectively construed, control of construction work was retained by the Owners. The allocation of the risk associated with inadequate performance was, objectively, distributed in a like way. The Owners and/or their trade contractors and material suppliers were responsible for warranty defects in construction and materials, and Mountview was responsible for such failings in management of the Contract. The cost structure of the Contract is different from a true cost plus contract or a fixed price contract where the owner pays the builder and does not directly pay the trades and suppliers, thereby allocating control, and thus responsibility for, the construction work.
There was nothing in the surrounding circumstances known to the parties, and the purpose and object of the transaction to affect the conclusion reached by analysing the text of the Contract. The surrounding circumstances known to the parties, and the purpose and object of the transaction, emerge from the findings of the [VCAT]. Mountview agreed it would obtain quotations from contractors and suppliers. There is nothing inconsistent with a contract management or administration role in agreeing to that task. Consistently with that role, the Contract provided that the Cost of the Building Works paid by Mountview was to be nil. In performance of the Contract, quotations from contractors and suppliers were submitted to the Owners, who directed Mountview as to whom to engage. Primary liability to pay contractors and suppliers was undertaken by the Owners.
Much earlier in this judgment, I noted some of the surrounding factual matrix. One matter I noted is that the Owners were not interested in Mountview’s offer to undertake the construction for cost, plus a 10% margin. Other additional matters that are consistent with this construction of the term ‘Building Works’ include the evidence of Mr Leon Mrocki that at the time of contracting:
•There was no building permit;
•The Owners intended to pay for all trades, there was to be no mark-up for Mountview;
•The Owners were to pay all costs and insurances apart from the builder’s fee; and
•The Owners would employ Mr Adam Vella directly as an on-site building supervisor.
In support of a submission that the [VCAT] erred in finding the Contract void for uncertainty, this construction of the Contract, identifying the obligation of the Owners to pay merely the Builder’s fee and not the cost of carrying out the work plus the Builder’s margin, was put by counsel for the Owners as the proper construction. The consequences of this submission, however, extends further than the uncertainty finding. It flows through into the interpretation of clause 11. The content of Building Works in clause 11 is the content of ‘Works to be carried out and completed by’ in the definition. The consistent interpretation of what it was that was to be carried out and completed by Mountview identifies the allocation of risk in the commercial purpose which, on objective analysis, the Contract expresses.[17]
[17]Reasons, [102]-[110].
Dixon J concluded that, on the proper construction of the Agreement, the Builder’s warranties in cl 11 were limited to ‘Building Works’ constituted by the services provided by the Builder under the Agreement and that such services were limited to contract management. The Builder did not warrant the workmanship of the contractors who built the apartments or the quality and suitability of the materials that were supplied for the project. That work was performed and those materials were supplied by or under contracts to which the Owners, rather than the Builder, were parties. The Owners paid for the work and the materials, and they supervised the performance of that work and the provision of those materials through their on-site supervisor, Adam Vella.[18]
[18]Reasons, [116].
His Honour stated that, in view of his findings, it was not necessary for him to decide whether the swimming pools formed part of the ‘Building Works’ under the Agreement or whether the Agreement was varied to include paving and landscaping.[19]
[19]Reasons, [69], [119].
As the VCAT had erred in finding that the Agreement was void, his Honour allowed the appeal. His Honour decided not to remit the proceeding to the VCAT because it was inevitable that the VCAT would dismiss the Owners’ claim against the Builder. This was because, in the light of the VCAT’s finding that the Builder had not failed to supervise the work with reasonable care and skill, there could not be any breach of cl 11 of the Agreement in relation to the contract management services that the Builder provided.[20]
[20]Reasons, [117]-[120].
The Owners’ proposed notice of appeal and submissions
Although the Owners’ proposed notice of appeal sets out eight grounds of appeal, the underlying complaint is that Dixon J erred in finding that, upon the proper construction of the Agreement, the ‘Building Works’ were confined to the provision of contract management services and that the warranties in cl 11 of the Agreement applied only to those services.
Mr Martindale SC, who appeared with Mr Cameron for the Owners, submitted that, on the proper construction of the Agreement, the ‘Building Works’ were the construction of two apartments with two swimming pools and a basement, as initially depicted on the Six Preliminary Drawings and in accordance with the detailed specifications and drawings subsequently supplied to the Builder for that purpose, and that the Builder’s warranties in cl 11 of the Agreement applied to the carrying out of those ‘Building Works’.
Mr Martindale candidly conceded that, if Dixon J was correct to construe the expression ‘Building Works’ as being confined to contract management, the application for leave to appeal must fail. He submitted that his Honour’s conclusion that it was clear from the terms of the Agreement, without reference to the surrounding circumstances, that the Builder’s obligation was to manage the project and not to build the apartments, could not be sustained. He contended that his Honour’s construction of the Agreement radically altered its legal effect; that the construction was reached prior to, rather than following, a detailed consideration of the terms of the Agreement; and that there was no proper legal basis for the construction. He sought to make good this contention by undertaking a detailed examination of the Agreement and his Honour’s reasons.
Mr Martindale submitted that the form of the Agreement was a ‘cost plus’ building contract which implicitly required the Builder to build the apartment building depicted in the Six Preliminary Drawings. He noted that, although amendments had been made to the Agreement, the Builder did not insert any special condition to the effect that its obligation was to manage the project, rather than to build the apartments. He contended that, although the amendments meant that the Builder’s remuneration was not on a ‘cost plus’ basis, they did not change the underlying purpose or intent of the written contract.
According to Mr Martindale, the special condition in schedule 6 dealt only with responsibility for the payment of contractors and did not alter the provisions of the Agreement which contemplated that the Builder would build the apartments and, for that purpose, engage sub‑contractors. He contended that schedule 7 made it clear that, apart from the paving and landscaping work, the Builder was responsible for all other building work that was depicted on the Six Preliminary Drawings.
Having dealt with the provisions of the Agreement, Mr Martindale then identified passages in his Honour’s reasons which were said to contain errors. The alleged errors may be summarised as follows:
(a)Dixon J erred in concluding that ambiguity is no longer a precondition to the use of surrounding circumstances as an aid to interpreting the meaning of a contract. However, as his Honour stated that his construction of the Agreement was based on its text without reference to the surrounding circumstances,[21] this error may not be material.
[21]Reasons, [100], [101], [108].
(b)Dixon J’s statement that ‘[t]he construction work was not to be undertaken by Mountview’,[22] which was made before his Honour had analysed the terms of the Agreement, indicated that he did not base the construction of the Agreement on its terms and that he may have impermissibly sought to give effect to the parties’ pre-contractual negotiations.
[22]Reasons, [97].
(c)The criticisms of Dixon J’s statement in (b) above also applied to his Honour’s statement that ‘construction work, paid for by the Owners, is being carried out by others, not Mountview’.[23]
[23]Reasons, [98].
(d)Dixon J’s statement that Leon Mrocki gave evidence that, ‘at the time of contracting … [t]he Owners would employ Mr Adam Vella directly as an on‑site building supervisor’[24] had no foundation in fact. The VCAT had not found that, at the time that the Agreement was signed, the parties had agreed that Adam Vella would be employed as an on-site supervisor. It was impermissible for his Honour to rely on the engagement of Adam Vella, after the Agreement was executed, to interpret the Agreement as limiting the scope of the ‘Building Works’ to the performance of ‘administration, supervision and like tasks, which can be described as the role of a contract manager.’[25]
[24]Reasons, [109].
[25]Reasons, [98].
(e)Dixon J erred in concluding that the fact that the financial arrangements in the Agreement – particularly the direct payment of contractors by the Owners pursuant to schedule 6 – meant that the Builder did not have ‘responsibility for the work of the contractors and materials supplied.’[26]
[26]Reasons, [104].
(f)Dixon J erred in concluding that the difference between the cost of the project to the Owners and the fee paid to the Builder ‘renders clear that the scope of the Building Works, in the context of the special condition [in schedule 6] and other handwritten additions and amendments, is contract management.’[27] This interpretation did not follow either textually or by reference to the commercial features of the Agreement because the special condition dealt only with responsibility for the payment of contractors and, by allocating that responsibility to the Owners, provided significant cash-flow advantages for the Builder. The parties were experienced business people and the commercial features of the Agreement were not absurd.
[27]Reasons, [105].
(g)Dixon J erred in stating that, in determining the contractual allocation of responsibility under cl 11 of the Agreement:
it is important to distinguish between the project, which was to be constructed for the Owners, and the work which was to be carried out and completed by Mountview, a distinction evident … in the difference between the value of the project to the Owner[s] and the consideration paid to Mountview under the [Agreement].[28]
It was not permissible for his Honour to undertake an economic analysis of the Agreement.
(h)Dixon J drew a false distinction between what were ‘the works’ and what was to be carried out and completed by the Builder.[29]
(i)Dixon J’s statements about the ‘evident intention of the parties’ and the legal effect of the Agreement at [105] to [107] of the Reasons were conclusionary and, contrary to his Honour’s assertion, were not ‘reached by analysing the text of the [Agreement]’.[30]
[28]Reasons, [93].
[29]Reasons, [95].
[30]Reasons, [108].
At the hearing of the application for leave to appeal, the Builder was represented by its solicitor, Mr McPhee, as a result of the counsel who had represented the Builder at the VCAT and at the hearing below, Mr Carr, becoming unavailable through illness. Initially, Mr McPhee informed us that he had prepared for the hearing and was ready to proceed. He later changed his position and applied for an adjournment. Mr Martindale opposed the application. In the light of the facts that no prior notice of the application had been given and that detailed written submissions prepared by Mr Carr had been filed on behalf of the Builder, we refused the application.
Mr McPhee submitted that Dixon J’s decision was correct for reasons that were entirely different from his Honour’s reasons. Mr McPhee contended that, in the absence of the special condition in schedule 6, the Agreement could properly be construed as a ‘classic contract’ for the building of the apartments. The special condition, according to Mr McPhee, cast doubt on such a construction and necessitated a consideration of the surrounding circumstances to ascertain the true character of the Agreement.
The main ‘surrounding circumstance’ upon which Mr McPhee relied was the form of contract that was used by the Builder to engage contractors on behalf of the Owners. Mr McPhee contended that the Agreement was not a contract for the building of the apartments, but a contract management agreement. In support of that contention, he relied on the following facts: that the contractors were engaged on behalf of the Owners; that the contractors were paid by the Owners; and that the Owners retained five per cent of the amount invoiced by the contractors.
In response to a question from the Bench about whether he was relying on any particular authority for the proposition that the Agreement could be construed by reference to the parties’ conduct subsequent to the execution of the Agreement, Mr McPhee stated that he was not able to refer us to any such authority. In fact, the authorities make it clear that post-contractual conduct is inadmissible in the interpretation of a written contract.[31]
[31]See FAI Traders Insurance Co Ltd v Savoy Plaza Pty Ltd [1993] 2 VR 343, 347-51; Magill v National Australia Bank Ltd [2001] NSWCA 221 (13 August 2001) [51]; Gangemi v Osborne [2009] VSCA 297 (15 December 2009) [24].
Is the decision below wrong or attended with sufficient doubt?
We are satisfied that the alleged errors identified by Mr Martindale are arguable and that the decision below is attended with sufficient doubt. The fact that Mr McPhee sought to support the decision by reference to inadmissible post‑contractual conduct, rather than on the basis of the text of the Agreement, fortifies us in our view. As we have concluded below that leave to appeal should be granted, it would be inappropriate for us to say anything more about the correctness of Dixon J’s decision.
Would substantial injustice result if the decision below were to stand?
As set out at [6] above, in order for the Owners’ application for leave to appeal to succeed, we must be satisfied not only that the decision below is attended with sufficient doubt, but also that substantial injustice would result if the decision were to stand.
It was common ground before us that a practical effect of Dixon J’s construction of the Agreement was that, in order to rectify the defects, the Owners would need to investigate the causes of the defects, to identify the contractors who were responsible for causing the defects and to enforce their contractual rights against those contractors in relation to rectification works. Mr McPhee conceded that, if the Owners were able to rectify the defects only by seeking to exercise their contractual rights against individual contractors, the process would be more time consuming and expensive, and less certain, than if they were able to do so by seeking to exercise their contractual rights against the Builder. Mr McPhee also acknowledged the possibility that some contractors may dispute liability in respect of particular defects and may not be insured.
It was also common ground that one of the legal consequences of Dixon J’s construction of the Agreement was that the Owners were ‘owner builders’. Pursuant to s 137B of the Building Act 1993, if the Owners wish to sell the apartments within six years of the issue of certificates of occupancy, they must:
(a)procure and pay for a report from a registered builder setting out any existing defects;
(b) procure and pay for home warranty insurance;
(c)provide a copy of the report of defects and a certificate of insurance to the intended purchaser; and
(d) include in the contract of sale certain statutory warranties.
Further, it was common ground that any home warranty insurance that was purchased by the Owners would not include the defects in the report of defects.[32] There was a dispute, however, about whether the Owners would be able to purchase home warranty insurance.
[32]Building Act 1993 s 137D(1)(b).
In our opinion, the practical consequences set out at [46] above are sufficient to satisfy the requirement of substantial injustice. For completeness, we add that, in our opinion, , even if home warranty insurance were readily available to the Owners at a reasonable premium, the fact that such insurance would not cover existing defects would also satisfy the requirement.
Conclusion
For the above reasons, we will grant the application for leave to appeal.
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