R Developments Pty Ltd v Forth - [2016] ACTSC 8

SUPREME COURT OF THE AUSTRALIAN CAPITAL TERRITORY

Case Title:	R Developments Pty Ltd v Forth & Anor
Citation:	[2016] ACTSC 8
Hearing Dates:	10, 11, 12 August 2015
DecisionDate:	4 February 2016
Before:	Mossop AsJ
Decision:	See [183]
Catchwords:	CONTRACT – Standard form building contract – contract wrongfully terminated by builder on basis of alleged failure by owner to comply with contractual requirement to provide evidence of capacity to pay amounts due under contract – not open to builder to rely on contractual requirement once building works commenced – no entitlement to rely on alternative power to end contract – counterclaim based on acceptance of wrongful termination as repudiation of contract – entitlement to damages on repudiation – quantum of damages not established
Legislation Cited:	Court Procedures Rules 2006 (ACT)
Cases Cited:	AMEV-UDC Finance Ltd v Austin (1986) 162 CLR 170 Gumland Property Holdings Pty Ltd v Duffy Bros Fruit Market (Campbelltown) Pty Ltd (2008) 234 CLR 237 Phillips v Ellinson Brothers Pty Ltd (1941) 65 CLR 221 Sargent v ASL Developments Ltd (1974) 131 CLR 634 Shepherd v Felt and Textiles of Australia Ltd (1931) 45 CLR 359 Shevill v Builders Licensing Board (1982) 149 CLR 620 Sunbird Plaza Pty Ltd v Maloney (1988) 166 CLR 245 Tan Hung Nguyen v Luxury Design Homes Pty Ltd [2004] NSWCA 178 United Petroleum Pty Ltd v 7-Eleven Stores Pty Ltd [2012] QCA 172
Texts Cited:	Cheshire and Fifoot, Law of Contract, 10^th Australian edition
Parties:	R Developments Pty Ltd (Plaintiff) Andrew Stephen Forth (First Defendant) Ksenija Maria Nemet (Second Defendant)
Representation:	Counsel AJ Greinke and JPD Trost (Plaintiff) BF Katekar (First and Second Defendants)
Solicitors Meyer Vandenberg Lawyers (Plaintiff) Kamy Saeedi Law (First and Second Defendants)
File Number:	SC 201 of 2014

Introduction

This case relates to a building contract. The contract was for the construction of a residence at 12 Bailey Place, Yarralumla. The plaintiff was the builder and the defendants are the owners. I will generally refer to the parties as the Builder and the Owners. The contract was a written one entered into on 27 February 2013. The Builder terminated the building contract on 13 August 2013. The ground upon which the contract was terminated was an alleged failure to comply with a requirement under the contract to supply evidence of the Owners’ capacity to pay the amount required to be paid under the contract. The resolution of the case depends, in substance, on whether or not the termination by the Builder was a valid one. If it was valid then the Builder asserts an entitlement to damages. If it was not valid then the purported termination has been accepted as a repudiation of the contract and the Owners assert an entitlement to damages. The positions of the parties are somewhat more refined than this and I will identify their positions in some more detail by reference to their pleadings.

My conclusion is that the Builder’s claim fails because it was not entitled to insist, under cl 4 of the contract, that the Owners provide evidence of capacity to pay the amount required to be paid under the contract after it had commenced building works under the contract. Further, it was not entitled to rely upon an alternative provision in the contract (cl 27(a)(v)) to support the validity of its termination of the contract. In relation to the Owners’ claim for damages arising from the repudiation by the Builder of the contract I find that the Owners have failed to prove that they are entitled to any more than nominal damages.

The pleaded cases

It is uncontroversial that on 27 February 2013 the Builder and the Owners entered a written agreement in the form of a Master Builders Association of the ACT, ACT Home Building Contract. The contract price was $972,000. The contract identified that a deposit of $72,900 was required to be paid before construction commenced. The Builder was paid on 13 March 2013. The Builder alleges that between 27 February 2013 and 13 August 2013 the Builder carried out building work on the property.

The Builder alleges that the first defendant, Mr Forth, acting on behalf of both owners, required the Builder to carry out “varied and additional works” to those specified in the contract. These can be summarised as:

(a)an extension to the basement;
(b)an increase in the size of the pool;
(c)changes to the finished floor levels;
(d)other modifications to the pool;
(e)the addition of an “in-floor cleaning system” for the pool;
(f)a change to the previously identified supplier of the windows from Trend Windows to Taylors Windows.

The Owners are alleged not to have provided any “Variation Notices” under cl 15(c) of the contract. It is alleged at [11E] of the amended statement of claim (ASOC) that:

The defendants knew and intended that the plaintiff carried out the variations, which they had directed, without any Variation Notices, and on the basis that strict compliance with clause 15 of the Contract was not required by the defendants.

On 27 July 2013 the Builder is alleged to have given the Owners a document titled “Cost Variation Notice” in the sum of $27,078 for:

(a)the installation of an in-floor cleaning system in the pool; and
(b)changes to the windows.

This is referred to as the First Cost Variation Notice (ASOC [12]).

On 3 August 2013 the Builder is alleged to have given to the Owners a further document titled “Cost Variation Notice” in the sum of $67,794.63 for the following additional work:

(a)variations to the location and dimensions of the pool (costing a total of $37,956.72);
(b)structural changes to the basement, footings and finished floor levels of the proposed building due to changes in the location and dimensions of the pool (costing a total of $29,835.91).

This is referred to as the Second Cost Variation Notice (ASOC [13]).

It is alleged that the work the subject of these two notices was “carried out … in reliance on the assumption that [the Builder] did not need to comply with clause 15 and that the defendants had agreed to the quotation from Taylors Windows”.

It is alleged that on 12 August 2013 the Owners paid the First Cost Variation Notice in the sum of $27,078. They are thereby said, by their conduct, to have “entered into an agreement to the variations contained in the First Cost Variation Notice”. It is also alleged that the Builder would suffer detriment if the Owners were entitled to rely on their strict legal rights under cl 15 of the contract which relates to the prerequisites for there to be a variation of the contract. As a result the Owners are said to be estopped from contending that the changes were not variations under the contract.

As a consequence, it is said that the price of the above variations was the cost plus a 20% builder’s margin by operation of cl 15(f) of the contract or, alternatively, in relation only to the First Cost Variation Notice, the agreed price of $27,078.

Alternatively, if the variations did not form part of the contract, the cost of the variations is claimed on a quantum meruit basis (ASOC [15A]).

The Owners deny that any estoppel arose or that there is any entitlement to payment upon a quantum meruit. They rely upon the terms of cl 15 and contest that, for various reasons, neither of the Cost Variation Notices were valid notices.

The Builder next contends (ASOC [16]) that the Owners had breached cl 4(a) of the contract in that they did not supply to the Builder evidence of their capacity to pay the contract sum. It further alleges that at no time did the Owners provide to the Builder evidence that they had obtained finance for the purposes of a separate obligation in cl 27(a)(v) (ASOC [16A]).

The Builder alleges that on 3 August 2013 it gave a notice dated 2 August 2013 specifying that the Owners were in default of their obligations under the contract and requiring them to remedy that within five days, specifying that if the default was not remedied within five days the Builder intended to terminate the contract (ASOC [17]).

The Builder alleges that the Owners did not provide evidence of their capacity to pay or that they had obtained finance within five days of the service of the notice and that on 13 August 2013 the Builder served a notice on the Owners terminating the contract: (ASOC [18]-[19]).

In their amended defence and counterclaim (Defence) the Owners say that the Builder was in fact provided with evidence from Westpac Banking Corporation Ltd (Westpac) that funding for construction of the residence was approved and that prior to 2 August 2013 the Builder did not require the Owners to provide any other proof of their capacity to pay the contract price or require the Owners to produce any written consent by Westpac to any variation to the works (Defence [15]). The Owners admit that they did not respond to the Builder’s letter of 2 August 2013 and contend that the Builder’s purported termination was ineffective to end the contract (Defence [17]-[18]). The Owners contend that pursuant to cll 4(a), 21(b) and Appendix B of the contract, before the commencement of the works by the Builder, the Owners were required to show the Builder reasonably satisfactory evidence of their capacity to pay the contract sum to the Builder at the times and in the manner specified in the contract. They point to the fact that under cl 4(b) of the contract, if the Owners failed to produce such evidence within ten days of the contract the Builder could end the contract under cl 27 and that under cl 7(a) the Builder was not required to commence works until 30 days after the Owners had produced evidence of capacity to pay. Because of the existence of these provisions the Owners contend that if the Builder elected to commence the works without having been provided with evidence of the Owners’ capacity to pay in accordance with cl 4 then the Builder was not entitled to require the Owners to produce such evidence subsequently and could not end the contract under cl 27 for default in compliance with cl 4. As a result, the Owners contend that the letter dated 2 August 2013 was not a valid notice for the purposes of cl 27 and that the Builder’s letter of 13 August 2013 was not effective to end the contract.

The Owners then allege that the Builder has refused to complete the contract and has abandoned the contract for the purposes of cl 26 of the contract and that the Owners have terminated the contract under cl 26 and at common law by accepting the Builder’s repudiation of the contract (Defence [25]-[27]).

The Builder claims damages which fall into the following categories:

(a)the cost of the works carried out on the property being $381,580.20;
(b)a deposit paid for the windows that had been ordered by the Builder of $27,994.00;
(c)the profit that would have arisen to the Builder had the contract not been terminated based on a 20% builder’s margin on the contract sum namely $162,000.00 plus 20% profit on the works the subject of the First Cost Variation Notice and the Second Cost Variation Notice being $18,974.53;
(d)in the alternative, the Builder claims restitution in respect of the works the subject of the First Cost Variation Notice and the Second Cost Variation Notice on a quantum meruit basis.

The Owners, on the other hand, allege in a counterclaim that if the termination was ineffective then they are entitled to damages arising from any excess in the cost to complete the works over that which they would be required to pay under the contract as well as the costs incurred in renting alternative accommodation in the period from December 2013 when it was anticipated that the construction would be completed (Defence [28]-[33]).

By the time of final submissions not all of the pleaded claims were pressed and some of the amounts claimed had been amended in the light of the evidence.

The terms of the contract

The contract is a standard form “ACT Home Building Contract” of the Master Builders Association of the ACT. It is identified as Version 8, January 2008. The clauses from the standard form of the contract that are relevant are as follows.

PART 1 – OVERVIEW
GENERAL NOTES FOR THE OWNER
THIS CONTRACT
This Contract is divided into four Parts. This first Part, The Overview, provides a broad perspective on the obligations of each party to the Contract. The second Part contains some key Definitions. Some of the words in this Contract have special meaning. Part 3 contains the General Conditions of Contract to which you and the Builder are bound. Finally, the Appendices (A) to (F) are the details of who is entering the Contract, what you are contracting for, and notices for variations and delays to the Contract.

…
K. OWNER’S RESPONSIBILITY BEFORE COMMENCEMENT OF WORK
a) Evidence of building and planning approvals if it is the Owner’s responsibility;
b)Evidence that the Owners own the property, eg Certificate of Title or Rates Notices;

c) Evidence from the lending authority that monies are approved;
d)Evidence or some other proof that the Owners have the capacity to pay the Builder in the manner specified in the Appendix B Item B1;
e)Any other proof that that Builder may require the Owner to show the capacity to pay the Contract price.

…
PART 2 – DEFINITIONS
…
·     “Actual Cost” means the receipted cost from a Supplier or Subcontractor.
·     “Approved Plan” – drawings and/or attached conditions approved and certified by the relevant authorities.
·     …
·     “Specifications” means the specification or list of inclusions and/or finishes annexed.

PART 3 – GENERAL CONDITIONS OF CONTRACT
1. RESPONSIBILITY OF BUILDER AND STANDARDS OF CONSTRUCTION
a)The Builder will carry out the Works shown on the Approved Plans and described in the Specifications and on the terms of this Contract in a proper and skilful manner.
b)The standards of construction required by the Building Act 2004 (ACT) relating to buildings of the type covered in this Contract form part of this Contract and if inconsistent with this Contract the higher standard prevails.
...

2.     DISCREPANCIES AND AMBIGUITIES
a)Any discrepancy or ambiguity in the contract documents will be resolved by interpreting them in this order of priority:
i)        These Clauses including special conditions;
ii)        The Specifications;
iii)       Approved Plans annexed to this Contract;
iv)       Other Drawings annexed to this Contract.

…

…
4. OWNER’S RESPONSIBILITIES BEFORE COMMENCEMENT OF WORK
a)Before the commencement of the Works, the Owner will show the Builder reasonably satisfactory:
i) evidence of the Owner’s title; and
ii)evidence of the Owner’s capacity to pay the Contract Sum to the Builder at the times and in the manner specified.

b)If the Owner does not produce that evidence within ten (10) days of this Contract, the Builder may end this Contract under Clause 27.

5. BUILDING APPROVAL
a)The party identified in Item A8 of Appendix A will obtain and pay for all planning and Building Approvals.
b)If Building Approval is not issued within sixty (60) days of this Contract, either party may by written notice to the other, end it without liability to the other except that the Builder is entitled to be paid the Actual Cost incurred plus the percentage in Item A18 of Appendix A up to the date this Contract is ended.

6. LENDING AUTHORITY PROCEDURES
For that part of the Contract Sum to be provided by a Lending Authority:
a)The Owner irrevocably directs the Lending Authority to pay to the Builder all money which becomes due to the Builder.

…
e)The Builder may require the Owner to produce written consent of the Lending Authority to, any, variation before the variation is done.

…

7.     COMMENCEMENT DATE
a)       The Builder will commence the Works:
i)        on the date in Item A9 of Appendix A [Item A9 was blank] or;
ii)within thirty (30) days of the Owner complying with Clause 4 (Owner’s responsibility); or
iii)within fifteen (15) days of receipt of the Building Approval; whichever is the latest.

8. COMPLETION DATE AND LIQUIDATED DAMAGES
a)The Builder will reach Practical Completion within the time in Item A10 of Appendix A, unless that time is extended under Clause 13.
b)If the Builder defaults under Clause 8(a) the pre-estimated liquidated damages for that default is a sum calculated using the rate in Item A17 of Appendix A for the period from the Date for Practical Completion until Practical Completion is achieved under Clause 23.
c)Those damages may be deducted from any money which becomes payable to the Builder by the Owner and any shortfall may be recovered by the Owner.

…
13.   DELAYS AND EXTENSIONS OF TIME
a)       If the Works are delayed by:
i)        variations;
ii)        suspension under Clause 22;
iii)       inclement weather;
iv)proceedings taken or threatened by, or disputes with or objections made by neighbouring Owners or residents;
v)civil commotion or industrial dispute affecting any of the trades employed on the Works or the manufacture or supply of material for the Works;

vi) any act, default or omission on the part of the Owner;
vii) delay by any authority in granting any necessary consent or approval;
viii)anything else beyond the control of the Builder, such as, but not limited to trade contractor shortages or material shortages which affect the builders ability to do the work,

then the Builder is entitled to a reasonable extension of time.
b)The Builder will submit a Time Variation Notice and notify the Owner in writing of a delay within five (5) days of it occurring. The notice will identify the extended Construction Period.
c)if the Owner has not responded in writing to the notification within five (5) days of service of it, the Construction Period is extended by the time proposed.
d)The Builder is entitled to an increase in the contract sum if the delay results in an increase in costs. Such costs must be submitted to the Owners as a Cost Variation Notice and must be included in the next progress claim.

…
15.   VARIATIONS
a)       This Contract may be varied by:
i)        extras or omissions;
ii)        additional work;
iii)       changes in the character or quality of any material or work;
iv)changes in the levels, lines, positions or dimensions of any part of the Works.
v)Extras or omissions associated with compliance to altered Statutory Provisions.

b) This Contract can be varied only with the Builder’s consent.
c)i) If the Owner or the Builder requires variation to any part of the
Contract, then a Variation Notice must be submitted before the variation is undertaken.
ii)Upon receipt or delivery of the Variation Notice the Builder will within ten (10) days provide a Cost Variation Notice for the Owner’s approval.
iii)If within five (5) days the Owner does not respond to the Cost Variation Notice, then by default the cost of the variation is deemed to be accepted by the Owner.
iv)The Builder may require the Owner to produce evidence satisfactory to the Builder of the Owner’s capacity to pay the proper cost of the variation before doing the work.

d)The Actual Cost of all reductions or omissions will be deducted from the Contract Sum.
e)The cost of all extra work will be added to the Contract Sum. Where a price for any variation has been agreed, it will be added to the next progress payment.
f)Where a price has not been previously agreed, and the Builder must carry out the variation, the price will be cost plus the percentage specified in Item A18 Appendix A.

g) In calculating the cost of extra work:

i)the rates for labour are those applied by the Builder to this site at the time the variation is accepted by the Builder; and

ii) the price for materials will be the cost to the Builder
iii)where the work is done by a subcontractor, the amount properly charged by it is the extra cost.

h) If the variation is more than 5% of the Contract Sum;
i)if no lending authority is involved either party may within ten (10) days of service of the notice of variation by written notice served on the other, end this Contract.

ii) if a lending authority is involved then;
(aa)either party may end this Contract within seven (7) days of service of the notice of variation by written notice to the other,
(bb)if neither ends it then the Owner will at once apply to the Lending Authority for consent to proceed with this Contract and when such consent is given the Builder will and is authorised to proceed with this Contract. If the consent of the Lending Authority is not received within seven (7) days of the expiration of the seven-day period previously mentioned then either party may end this Contract by notice to the other.

If this Contract is ended under Clause 15(h) the Builder is entitled to be paid the Actual Cost of work, plus the percentage in Item A18 of Appendix A, up to the date of the notice of variation.

…
17. PRIME COST ITEMS AND/OR PROVISIONAL SUMS
a)If Prime Cost items are included in this Contract and listed in Item B2 Appendix B:
[The contract contained a clause about prime cost items and provisional sums except none were specified in the relevant appendix to the contract.]

...

...
20. DEPOSIT
a)If indicated in Item A7.2 of Appendix A, the Owner will pay a deposit to the Builder before the commencement of Works.
b)The deposit must be brought into account when the balance due under this Contract is calculated on Practical Completion.

21. PROGRESS PAYMENT
a)The Contract Sum must be paid to the Builder as set out in Item A7 of Appendix A.

b) The Builder must give the Owner a written claim for each progress claim.
c)The Owner will pay the progress payment claim to the Builder within the period stated in Item A11 of Appendix A, or, if not stated, within seven (7) days of the date the claim is submitted to the Owner.
d)Progress Payment claim will be paid in the preparation [sic] and values stated in Item B1 of Appendix B, except for minor omissions which does not prevent the works from progressing.
e)A progress payment to the Builder is not proof or admission that any particular work has been executed in accordance with the Plans and Specification but only as payment on account.
f)If the Builder does not receive a progress payment by the due date, in addition to any other rights it may have, the Builder is entitled to interest on the overdue amount at the rate in Item A15 of Appendix A.

…
26. THE OWNER ENDING THIS CONTRACT
a) If the Builder:
i)being a natural person becomes insolvent or, being a corporation, suffers an Insolvency Event; or
ii)fails to carry out the Works with due diligence or in a competent manner; or
iii)without reasonable cause wholly suspends the carrying out of the Works before Practical Completion; or

iv) refuses or persistently neglects:
(aa) to comply with the requirements of Clause 14; or
(bb)to remove or remedy defective work or improper materials, so that by the refusal or persistent neglect the Works are materially affected; or

v)intimates inability or unwillingness to complete the Works or abandons this Contract;
(aa)the Owner may, without affecting the Owner’s other rights, by notice in writing end this Contract.
(bb)if the default in sub-Clause (a) is capable of remedy, the Owner may not end this Contract unless the default continues for five (5) days after notice in writing has been given to the Builder specifying the default and stating the Owner’s intention of ending this Contract.
(cc)if the Owner so ends this Contract, the Owner may engage another Builder to carry out the Works and:
i)if the reasonable cost of the Works exceeds that which would have been otherwise payable under this Contract, then the amount of that excess is a debt due and payable by the Builder to the Owner.
ii)if the reasonable cost of the Works is less than that which would have been otherwise payable under this Contract, then the difference is a debt due and payable by the Owner to the Builder.

b) The Owner may not end this Contract if the Owner is in breach of it.

27. THE BUILDER ENDING THIS CONTRACT
a) If the Owner:
i)refuses the Builder access to the Site at any time after commencement of the Works;

ii) fails to comply with Clause 4;
iii)fails to pay the Builder any progress payment within seven (7) days of a written request or within the period in Item A11 of Appendix A, whichever is longer;

iv) fails to pay the deposit required by Clause 20;
v)fails to provide the Builder with evidence that the Owner has obtained finance from the Lending Authority or has the finance withdrawn; or
vi)being a natural person becomes insolvent or being a corporation suffers an Insolvency Event;
the Builder may, without affecting the Builder’s other rights, by notice in writing end this Contract.

b)If the default in sub-Clause (a) is capable of remedy, the Builder may not end this Contract unless the default continues for five (5) days after notice in writing has been given to the Owner specifying the default and stating the Builder’s intention to end this Contract.

…
31. CHARGE ON LAND
The Owner charges the Site with the payment to the Builder of all money payable to the Builder under this Contract or otherwise from the carrying out of the Works.

Appendix A of the contract contained the items into which details were inserted so as to give effect to the printed conditions of the contract. In relation to the items in Appendix A it is necessary to note the following. Item A6 provided:

A6    SOURCES OF FUNDS
Owner’s funds         $72,000
Lending Authority    $900,000
Other  $ –
Total funds             $972,000

Item A18 which provided the builder’s margin referred to in cl 15 provided that the rate was 20%.

Appendix B provided, in item B1, a payment schedule. It is necessary to note that the first item in that payment schedule required a deposit of 7.5% referring to cl 20 and amounting to a sum of $72,900. The next payment was for a stage described as “Base Stage: Slab complete, sub-floor framing completed” and was for an amount of 10% of the contract price namely $97,200.

Item B2 in Appendix B was a list of prime cost allowances as referred to in cl 17. The schedule was blank. Similarly, item B3 which was a list of provisional sum allowances referred to in cl 17 was also blank.

Appendix C was the execution page which was signed by both the Builder and the Owners. The copy that was in evidence was undated but the evidence, although confusing in some respects, was that the date of the contract was in fact 27 February 2013.

Appendix F included some forms including Form 1 a “Time Variation Notice”, Form 3 a “Cost Variation Notice” and Form 5 a “Variation Notice by Owner/Builder”.

As is made clear by the definitions of “Approved Plan” and “Specifications”, documents comprising plans and specifications should have been annexed to the contract.

Having regard to the conclusions that I have reached it is unnecessary to fully describe the deficiencies in the contract. However four significant deficiencies should be noted:

(a)the approved plans were not annexed to the contract;
(b)no document containing specifications was annexed to the contract;
(c)the schedule relating to prime cost items in the contract was left blank;
(d)the schedule relating to provisional sums in the contract was left blank.

The parties intended that the contract be based upon the approved plans including both the architectural and engineering plans. However there was evidence consistent with an intention that there be departures from the approved plans. In particular there was evidence that an area labelled as “void” on the approved plans was intended, in fact, to have a floor built within it so as to form part of the second storey of the building. Having regard to my conclusions it is not necessary to make a finding about the extent to which the contract entered into involved departures from the plans which were approved.

While some specifications were provided to Mr Forth prior to entry into the contract, this document was at a high level of generality and incomplete. The evidence is not sufficient to indicate that the parties intended this document to form part of the contract.

The absence of any agreed specifications was an issue the subject of correspondence and discussion up until shortly before the contract was terminated.

Relevant facts

At the core of the dispute between the parties is the operation of cl 4. There was a series of factual controversies relevant to the operation of cl 4. They were as to what evidence or information was given by the Owners to the Builder prior to entry into the contract, during the course of the contract and following the service of the letter dated 2 August 2013. The relevant oral evidence was given by Mr Forth and David Rosa, the sole director of the Builder. Both parties made attacks on the credibility of the other side’s witness. While the evidence extended significantly beyond the facts relevant to the operation of cl 4, I have set out below my findings of fact focusing on those facts which are relevant to the operation of that clause.

Events prior to loan approval

Mr Forth and Mr Rosa first met in May or June 2012. In July 2012 the architect originally engaged by Mr Forth ceased to act and Mr Rosa had plans prepared by a different architect. Detailed plans were ultimately provided by the new architect in early December 2012. On 20 December 2012 Mr Rosa provided a quote of $972,000 to complete the construction. While the quote was based upon a document prepared by Mr Forth entitled “Residential Development Outline” and the approved plans, much of the actual content of the quote was obscured by the fact that the specifications, allowances and prime cost items were not identified. Instead the quote stated:

The above pricing is for the whole project including the knockdown and rebuild of custom residence, construction of concrete swimming pool and landscaping as per the supplied plans. If this price is acceptable I am happy to sit down with you and your family to go through the inclusions and specifications.

Mr Forth and his wife made an application for a loan from Westpac which was signed by them on 24 December 2012. It was sent by a finance broker to Westpac on 1 January 2013. The application sought a total of $1,572,000.

Between 2 January 2013 and 18 January 2013 there was correspondence from the bank to the broker requesting further information relevant to the assessment of the loan application. Those requests included requests for the full progress payment schedule and the provision of the building specifications. On 7 January 2013 Mr Forth emailed Mr Rosa requesting, for submission to the bank, an inclusions list and building specifications. On 8 January 2013 Mr Rosa replied saying “I have included the inclusions list and specs it needs refinement but should be good enough for the bank”. One of the attachments to the email was titled “pez forth final spec for bnk.doc”. “Pez” was Mr Forth’s nickname and was commonly used in correspondence and discussion between him and Mr Rosa.

A valuation was prepared for Westpac as part of its assessment of the loan on 10 January 2013.

The plans for the building were approved by a certifier on 22 February 2013. Temporary fencing was erected on the site in late January 2013.

On 23 January 2013 Westpac communicated to the finance broker that his customers’ “loan approval is now unconditional” and required him to check the customers’ details and make any corrections before the loan documents were printed.

On 5 February 2013 the bank provided a letter to the Owners indicating that a loan of $1.5 million had been approved. The offer was accepted by the Owners on 5 February 2013 who both signed the letter on that day. On that date they also executed documents giving authority to the bank to establish the loan, make direct debits and establish an offset transaction account relating to the loan. I am satisfied that the signed documents were provided by the Owners to their finance broker on or shortly after 5 February 2013 and that they were in turn provided to the Bank.

Commencement of work

There were some differences in the evidence as to when work on the site actually commenced.

The text message communications between Mr Rosa and Mr Forth indicate that there was some activity on the site, most likely involving the erection of temporary fencing, on 21 or 22 January 2013. Having regard to the fact that no contract had been entered into at that stage that was work in anticipation of, rather than pursuant to, the contract.

Mr Rosa’s evidence was that the Builder started work on the property on 27 February 2013, the date on which the contract was entered into. On that day he sent a text message to Mr Forth stating that the machine that was to do the demolition was to be transported to site that day. In evidence were photographs showing that the demolition in fact had occurred on the afternoon of 27 February 2013.

In August 2013 the Owners asserted in correspondence that work had commenced on the site on 22 February 2013. It is not clear what that work was asserted to be.

Having regard to the objective record in the text message and the photographs which show demolition occurring on the afternoon of 27 February 2013, I accept Mr Rosa’s evidence that work under the contract commenced on 27 February 2013, the day on which the contract was signed.

Entry into the contract and subsequent events

The Builder pleads, and the Owners admit, that the contract was entered into “on or about” 27 February 2013. The evidence of Mr Rosa and Mr Forth was consistent with the building contract being signed on 27 February 2013. Mr Rosa’s affidavit evidence was that it was signed “[i]n or around late February or early March 2013”. In his subsequent affidavit he stated that he, Mr Forth and his wife, the second defendant, Ms Nemet met on 27 February 2013 and signed copies of the contract although they neglected to date them and both parties missed signing one page. Mr Forth’s affidavit evidence was that one copy of the contract was signed on 27 February 2013 and a further copy of the contract was signed on 12 March 2013. This evidence was somewhat confusing and appeared to be inconsistent with the contemporaneous communications to which I refer below. The cross-examination of Mr Forth on this issue did not clarify his evidence.

Only the Builder’s copy of the contract was in evidence. That copy is undated. The place where the date should have been inserted has been left blank. The document in evidence indicates that there should be two copies of the contract, a builder’s copy and an owner’s copy. The Owners’ copy of the contract was not in evidence.

However the documentary evidence from Westpac indicates that the document which had been provided to Westpac on or prior to 6 March 2013 did not include signatures on the execution page of the contract (page 31). On 6 March 2013 Westpac sent a facsimile to the Owners’ finance broker headed “Outstanding Settlement Requirements Notification”. That identified in the comments section: “Require Building Contract As Owner & Builder Signatures Are Missing”. A similar document was sent the next day which was slightly more specific and included the comment: “Require Building Contract As Signatures Are Missing On Page Number 31 In The Document 78065254”. On 7 March 2013 Mr Forth emailed Mr Rosa saying: “Apparently we both missed to sign the contract on page 31! Can we please bring in both copies of the contract and get these signed tomorrow?” On 12 March 2013 Mr Forth sent a text message to Mr Rosa saying: “Can we meet at 5pm to catchup. Pls bring your copy of contract as we need to sign.” It is not clear whether both copies of the contract needed to be signed but the bank appears to have been provided with an executed contract by about 27 March 2013.

However the bank was not satisfied with what it was provided with because the signature of Mr Forth on the document did not match the signature on the loan acceptance document. On 28 March 2013 another similar outstanding settlement requirements notification document was sent with the comment: “Amended Building Contract Primary Applicant “Forth Andrew Stephen” Signature Not Matching With Loan Offer & Loan Authority”. The issue is not further raised in the documentary material and, although the copy of the contract that was in evidence does not appear to have been re-signed, the issue is not further referred to after 4 April 2013 and it is likely that it was resolved to the satisfaction of the bank.

Consistently with the contract having been signed on 27 February 2013, on 4 March 2013 Mr Rosa emailed Mr Forth and enquired: “How are you going with the bank is it all ok, when can i get the cheque for the deposit?”

While the evidence about the execution of the contract was not entirely satisfactory my ultimate findings are as follows:

(a)I find that two copies of the contract were intended to be executed on 27 February 2013. I also find that one of those copies was not properly executed. This was the copy that was provided by the Owners to the bank. The error was remedied on 12 March 2013 following the request from the bank on 7 March 2013.
(b)I further find that Mr Forth re-executed the copy of the contract held by the bank so as to satisfy their requirements in relation to the form of his signature and that that occurred prior to 8 April 2013. Mr Forth did not tell Mr Rosa about this issue and Mr Rosa was not otherwise aware of it.

The deposit required to be paid under the contract of $72,900 was paid by Mr Forth on 13 March 2013.

Excavation and ground works commenced on the site on 13 March 2013.

Events relevant to finance after entry into the contract

On 10 April 2013 a further communication from the bank was sent requesting receipts showing the Owners’ contribution of $67,866.05 has been paid or that there were sufficient funds paid into an account. On this document the bank identified the status of the loan as “[n]ot ready to book”.

The internal records of the bank stated that on 10 April 2013 a “Conditional Builders Pack” was sent and that on 17 June 2013 an “Unconditional Builder’s pack” was sent. There is no evidence of these being received by either the Owners or the Builder. A facsimile from the finance broker dated 26 July 2013 requested that a “Builders Pack” be sent to his clients at their address in Kambah “as they have not received it as yet when loan for refinance of land was completed back in April 2013”. There is evidence that the bank had an incorrect address for the Owners and this is one reason why the documents were not received by them although there may be other reasons. It is not necessary to make a specific finding as to why they did not receive the documents.

Evidence of finance

The evidence of Mr Forth in his affidavit, as modified by his oral evidence, was that in early February 2013 he met with Mr Rosa and had with him a copy of the loan offer from Westpac. His evidence was that he said he had a copy of the loan offer and asked Mr Rosa whether he needed a copy. He was told that Mr Rosa did not. He then requested from Mr Rosa a contract with progress payments and a list of allowances in order to finalise the finance. He said that he told Mr Rosa that he and his wife had sufficient funds available to personally pay the deposit amount that Mr Rosa would require under the contract. He was then told that Mr Rosa would have the contract to him shortly. His evidence was that he showed the loan offer to Mr Rosa but Mr Rosa did not inspect that document or question finance any further. In his cross-examination he asserted, somewhat inconsistently, that:

(a)“The loan offer agreement was available at numerous occasions and David Rosa never requested to inspect it or requested a copy, nor did I offer due to the reason that I was unaware that he needed to view it or receive a copy.”
(b)“… the documents were available and referred to and no initiative from either side was required on copies of those.”
(c)“... Mr Rosa saw the loan approvals on numerous occasions.”

In cross-examination it was suggested to him that he never showed Mr Rosa at any time a copy of the loan agreement with Westpac. Mr Forth’s evidence was:

I believe I showed him whatever I had from Westpac that basically said that we had finance and loan approved. And I recall at, you know, one of the early meetings in February that we actually both had a little rejoice that that was out of the way and finance was free to flow.

Mr Rosa gave evidence that he was aware that a bank was involved. He understood that the deposit of $72,900 was from the Owners’ personal funds.

The evidence of Mr Rosa was that prior to the receipt of Mr Forth’s affidavit he had never seen the letter from Westpac or any loan offer. His evidence was that Mr Forth never showed him any loan offer and never offered to give him a copy. He said: “If he had, I would have taken him up on that because I needed it for my paperwork for the project. I was concerned, as any builder would be, about my clients’ ability to pay for what was a high-end and ambitious project.” He also gave evidence that in March 2013 while undertaking the excavation of the pool and basement areas he saw Mr Forth on site on a number of occasions and “[o]n numerous occasions” he asked him for a copy of his financial approval and was told that Mr Forth was still awaiting documentation from the bank. He also gave evidence that he had never been told by Mr Forth that finance was approved and he had never received anything from the bank.

The only documentary material indicating a request in relation to bank finance is the email of 4 March 2013 referred to above.

The factual issue in relation to what, if anything, was shown to the Builder in relation to the Owners’ capacity to pay the amounts due under the contract is a significant one which is largely dependent upon the conflicting evidence of Mr Forth and Mr Rosa. Having observed both witnesses give evidence I am not satisfied that the evidence of either was entirely reliable. Both witnesses appeared to be reconstructing their evidence and tending to give evidence that would support their interest in the outcome of the case. Mr Rosa had a somewhat abrupt manner and appeared to take a somewhat dogmatic approach to issues. Both his evidence and the manner in which he gave it suggested to me that he did not take a careful and methodical approach to the contractual detail that might be expected of a builder entering into a contract for just under $1 million. I do not accept his oral evidence about his extent of concern about the Owners’ ability to finance the project or the extent of his requests for documents. It is not reflected in the documentary records that are available or his other conduct of which there was evidence. It appeared to me that his evidence as to his extent of concern was overstated in the light of the events that ultimately occurred and the significance of the financing issue in this case.

In relation to Mr Forth, it was clear both from his evidence and the manner in which he gave it that at the time of the relevant events he and his wife were relatively naive about the nature of the construction process as well as the mechanical and legal issues that would arise during the course of that process. There were points in Mr Forth’s evidence when he appeared to overstate the extent to which he disclosed evidence of the Westpac loan approval. As with Mr Rosa, that tendency was likely to arise from reconstructing events in the light of the significance of that issue in this case.

Notwithstanding the submissions made by each side concerning credit, I did not consider either lay witness to have been dishonest nor did I consider the evidence of either to be generally unreliable. However in making the findings that I do I have treated aspects of each of their evidence in relation to the issue of the disclosure of financial capacity with caution.

The Owners signed the loan approval on 5 February 2013. Having regard to the signatures on that document, the significance of the loan approval for the project and the meetings and discussions that were taking place at that time, it is more likely than not that either on 5 February 2013 or within a day or two of that date Mr Forth told Mr Rosa that the bank had approved the loan and that the Owners had accepted the offer. I accept Mr Forth’s evidence that when this was disclosed they “had a little rejoice”. Having regard to the email of 4 March 2013 which indicates that Mr Rosa was aware that there were further issues that needed to be resolved with the bank, it is also more likely than not that Mr Forth told Mr Rosa that there were further steps that needed to be taken in relation to the bank to give effect to the bank’s offer which had been accepted by the Owners before the first drawdown could occur. As at 5 February 2013 that included obtaining a copy of the contract.

I am not, however, satisfied that Mr Forth either showed Mr Rosa a copy of the loan approval or offered to provide him with a copy. I did not consider Mr Forth’s evidence to be so reliable on matters of detail as to accept his evidence that he did provide or offer to provide a copy of the relevant document. While it is likely that Mr Forth appreciated the general significance of the obtaining of bank finance for the progress of the project, it is unlikely that Mr Forth appreciated the necessity for any formal disclosure of documentation relating to the existence of the loan, not only because of his lack of experience in such matters but also because of the fact that, as at 5 February 2013, he had not been provided with a copy of the contract. His uncontested evidence was that he was first provided with a contract on 14 February 2013. Further, his evidence that he showed Mr Rosa a copy or offered him a copy is inconsistent with the correspondence after the termination of the contract which indicates that the issue was simply overlooked by both parties. I consider that it is likely that had there been an express offer to provide a copy of the loan approval which was declined by Mr Rosa then that is an issue which would have been referred to in the post-termination correspondence.

I do accept Mr Forth’s evidence that the matter was one which was not agitated by either party in the sense that the Owners did not take the initiative to provide documentation in order to satisfy any contractual obligation and Mr Rosa never indicated that documentation needed to be provided, even though he was aware of the loan approval and the necessity for further steps to be taken by both parties in order to bring that approval to a point where it was finalised and loan funds were actually available. To the extent that Mr Rosa in his oral evidence suggested that he did make a specific request for documentation I do not accept that evidence.

Building works undertaken

In March 2013 the excavation for the basement was undertaken. In April 2013 the basement slab was poured and formwork constructed for the pool. In May and June 2013 the pool and the basement walls were constructed and the formwork for the driveway walls erected. In June 2013 the Builder ordered windows and paid a deposit for them. Although an invoiced amount of the deposit was $27,530.50, the actual amount paid was $27,944. The amount paid incorporated an amount for payment by credit card of 1.5%. By July 2013 the basement walls had been constructed and driveway walls and brickwork up to slab height were in place.

Specifications, prime cost items and allowances

While substantial building works were being undertaken on the site and a reasonable working relationship appeared to exist between Mr Forth and Mr Rosa, the fundamental issue of what had been contracted for remained unresolved. The communications between the parties in relation to specifications, prime cost items and allowances were as follows.

The terms of the quote given by the Builder “on or about” 20 December 2012 are set out above.

On 7 January 2013 Mr Forth requested from Mr Rosa an inclusions list and building specifications for the construction for submission to his bank. On 8 January 2013 Mr Rosa sent an email with two attached documents which said: “I have included the inclusions list and specs it needs refinement but should be good enough for the bank”. One of the documents was a table with a series of general specifications. It included a number of blank items where allowances either for particular amounts or applicable rates were required to be included but were not included. It was clearly not completed.

The other document, which had a “Draft” watermark across it, was a document headed “Specifications for the Forth Residence Block 13 Section 10 Yarralumla ACT Prepared by RDevelopments Pty Ltd”. It provided some specifications at a reasonably high level of generality and with a number of items since identified as “Tba”. Prime cost allowances were identified for “Windows”, “Digi glass”, “Panelling above fireplace”, “Home Automation” and “Swimming Pool” totalling $190,000.

On 28 April 2013 Mr Forth sent an email to Mr Rosa after an earlier meeting between them which, in relation to “allowances and allocations”, said:

· Allowances and allocations
oDifficult for us to work out where we can save and balance increase costs elsewhere
oDifficult for us to select finishes et cetera as we do not know whether we are in budget or over or under
oDavid to provide the breakdown by Monday 8th of May 2013

On 6 May 2013 Mr Rosa emailed Mr Forth saying:

I need the rest of the week to get the allowances finished as I have a huge tender I am working on that they brought the deadline forward sorry but there is nothing I can speed up sorry.

The specifications and inclusions document was not provided as indicated in that email. On 14 June 2013 Mr Rosa emailed Mr Forth saying:

I will have to type up allowances tonight and get them to you tomorrow morning as I have a full day today.”

It was only on 5 July 2013 that Mr Rosa gave to Mr Forth a document headed “Allowances 12 Bailey Place Yarralumla”. This included the items previously provided as well as additional items said to be the subject of allowances. Those additional items included 16 items which were stated to be allowances of particular amounts and six items which were allowances in the form of applicable rates. The significance of the additional allowances can be seen by the fact that those items which involved specification of a particular figure amounted to $390,000, a substantial proportion of the overall quote. When combined with those allowances already provided the specified sum allowances amounted to $519,000.

There was no evidence that prior to the end of July 2013 agreement had been reached that the document provided by Mr Rosa on 5 July 2013 was to form part of the contract.

Events at the end of July 2013

On 27 July 2013 Mr Rosa met Mr Forth and provided him with tax invoice number 792 dated 24 July 2013 for a total of $27,078. That amount was identified on the tax invoice as being made up as follows:

(a)“infloor cleaning” $16,190;
(b)“difference in window pricing” $10,888.

There was a meeting between Mr Rosa and Mr Forth on 3 August 2013. On 2 August 2013 Mr Rosa sent Mr Forth a text message: “Hey buddy got any spare time this arvo I have samples for concrete finishes drive way etc? Cheers Dave.” Further text messages were exchanged and ultimately a meeting arranged at a cafe in Manuka on the afternoon of 3 August 2013. At the conclusion of the meeting the two men returned to Mr Rosa’s car and Mr Rosa said to Mr Forth that he was giving him “some paperwork relevant to the build”. He offered to go through it with Mr Forth but Mr Forth indicated that he would look at it and discuss it with him later.

The various documents provided were:

(a)three time variation notices each dated 2 August 2013 for the periods 4 to 11 March 2013, 19 March to 16 April 2013, 15 to 29 July 2013;
(b)a variation notice dated 24 July 2013;
(c)a cost variation notice dated 2 August 2013 for a variation of $67,794.63;
(d)a letter dated 2 August 2013.

There was nothing in the interactions between the two men to give Mr Forth any indication of the gravity of the content of the correspondence provided to Mr Forth, namely, the letter dated 2 August 2013.

The letter of 2 August 2013

The letter of 2 August 2013 was as follows:

Dear Andrew & Ksenija,
12 Bailey Place, Block 13 Section 10 Yarralumla
Construction of your new house is progressing well. The pool shell and basement are virtually completed, and we anticipate moving onto the construction of the slab very shortly. At Rdevelopments we appreciate how important it is that the contract is administered smoothly with documentation kept up to date for the entire life of the project. As such, we wish to draw your attention to the following housekeeping matters.
Evidence of funding
As construction of your residence is being funded by a bank, we need to ensure that there are sufficient funds available to cover the full cost of construction. As set out in clause 4 of the Contract you were to provide RDevelopments with evidence of the sufficiency of funds prior to the commencement of construction, however you have not yet done so.
If this evidence is not supplied we are entitled to protect ourselves be [sic] ending the contract in accordance with clause 27, and we intend to do so if you do not provide evidence within 5 days.
Variation notices
On the 24 July 2013 I supplied you with a variation notice regarding certain changes to the pool and basement, as well as a Cost Variation Notice setting out the additional cost of the in floor pool cleaning and windows in the sum of $27,078.00. Copies are enclosed for your convenience. I now also enclose the Cost Variation notice for the remainder of the variations in the sum of $67,794.63.
Could you please also supply evidence of sufficient funds available to cover the cost of the variations.
Extensions of time
As you are aware we have had some periods of wet weather which have affected our ability to progress the construction in accordance with our planned program. I enclose Time Variation notices setting out the new Construction Period and anticipated Practical completion date.
Yours faithfully,
RDevelopments Pty Ltd
…

Consistently with the manner in which the document was provided to Mr Forth, the tone of this letter does not reflect the gravity of the stated intention to terminate the contract if evidence of funding was not provided within five days.

The other documents of significance were the variation notice of 24 July 2013 and the cost variation notice dated 2 August 2013.

The variation notice dated 24 July 2013 identified, for the purposes of cl 15 of the contract, that the Builder requested the following variations to be made:

- change location of pool and dimensions and structurals
- change FFL (ie number of steps)
- add infloor cleaning
- change FFL alfresco
- relocate pool equipment to basement
- change structural design due to pool change

The cost variation notice which accompanied it was given on the contractual form and submitted a claim for cost variations for “[a]ll items Listed on Variation notice No 1” of $67,794.63. The form stated that if the owner did not respond within five days of service of the notice “the contract sum will be amended by this Cost Variation Claim”.

There was a meeting on 7 August 2013 between Mr Forth and Mr Rosa at which the issues of the finance and variations were discussed. It was a lengthy meeting and, at least at the commencement of the meeting, Mr Rosa was agitated and perceived by Mr Forth to be behaving in an aggressive manner. The evidence of the witnesses as to precisely what was discussed during the course of the meeting was not comprehensive. I am satisfied that Mr Forth made specific reference to the earlier loan approval. Consistently with my earlier findings I am not satisfied that he specifically referred to having shown it to Mr Rosa before. Mr Rosa pressed for payment arising out of variations to the scope of the contract. Mr Forth indicated that he was not familiar with the construction industry but he thought things had been progressing reasonably well. He indicated that in the interests of keeping the peace he would pay the $27,000 claim by the end of the week from his personal savings and would have to consider the second price variation that had been provided. There was a discussion about the revised list of allowances. There is a conflict in the evidence as to whether or not Mr Rosa agreed that there would be a reduction in the contract price if items for which an allowance had been made cost less than the allocated amount.

On the evidence available to me about this meeting, I am not satisfied that there was any significant discussion of the issue raised by the 2 August 2013 letter of the need to provide additional evidence of the availability of finance from Westpac for the payments that would become due under the contract. Rather the issue appears to have been “buried” beneath the other apparently more pressing issues relating to variations to accommodate changes to the works and the manner in which allowances would be dealt with.

It is clear that the Owners did not fully appreciate the significance of the stated intention on the part of the Builder to terminate the contract if evidence of financial capacity was not provided. On 9 August 2013 Westpac provided to Mr Forth a letter dated 9 August 2013 indicating that the loan from the bank was proceeding and indicating that approved plans needed to be provided as well as a copy of the builder’s risk insurance. The letter was consistent with there being no difficulty with the provision of funds for the building work. Notwithstanding the availability of this document which was received by Mr Forth on 9 August 2013, Mr Forth did not provide this letter or a similar letter addressed to Mr Rosa to the Builder.

Following the meeting on 7 August 2013 Mr Forth made the payment of $27,078 by way of three electronic funds transfers initiated on 9, 10 and 11 August 2013. This, of course, was consistent with an understanding that the contract was to remain on foot.

The termination

The Builder’s solicitors wrote to the Owners on 13 August 2013. The body of the letter provided:

We act for RDevelopments Pty Ltd in relation to the above contract.
On Saturday 3 August 2013 our client hand delivered to Mr Forth a notice dated 2 August 2013 pursuant to clause 27(b) (copy enclosed for convenience) of the contract specifying that you are in default of your obligations under clause 4 of the contract and requiring you to remedy that default within 5 days. The notice stated that RDevelopments Pty Ltd intended to end the contract if you did not do so.
Five days have now elapsed since the notice was served on you. You have not complied with your obligations under clause 4 of the contract, namely to supply to our client evidence of your capacity to pay the Contract Sum at the times and in the manner specified in the contract.
As such, RDevelopments Pty Ltd now terminates the contract in accordance with clause 27(a).

The letter was served on Ms Nemet by a process server either on that day or sometime shortly after.

On 19 August 2013 the Owners wrote to the solicitors for the Builder. The letter indicates a misunderstanding of the operation of cl 27 in that it appears to proceed on the basis that there was a five day period from “your contract termination notice” to provide the evidence of capacity to pay the contract sum. The letter said that it attached evidence of capacity to pay the contract sum. The letter then continued:

We note that the builder commenced work on site on 22 February 2013.
On 10 April 2013 and 17 June 2013 and again on 9 August 2013 our financier, Westpac have advised us that they wrote to David Rosa RDevelopments Pty Ltd (builder) advising that we had finance. (refer to attachment dated 9 August 2013 – most recent copy). Given that there was no complaint by David Rosa about the status of the evidence of our finance prior to the builder commencing work, nor any issue raised after receipt of the letters from Westpac, it is now inappropriate for David Rosa RDevelopments Pty Ltd to purport to use these contract provisions to seek to terminate.
On numerous occasions including prior to contract signing on 27 February 2013, RDevelopments Pty Ltd was advised verbally by Mr Forth who referred to bank documentation that funding had been approved from the finance provider. Unfortunately a copy of this paperwork was neither provided by Mr Forth or Ms Nemet nor requested by RDevelopments Pty Ltd, and it is now understood by both parties that this was an oversight and an assumption that the notification from the bank directly (as mentioned above) was sufficient. Both Mr Forth and Ms Nemet apologise for this situation and did not intentionally desire to cause any concern or misconception to RDevelopments Pty Ltd. Please refer to attachments advising confirmation from Finance Broker and Westpac.

The reference to the attachment dated 9 August 2013 is to the letter from Westpac to the Owners dated 9 August 2013 (referred to above at [88]).

The letter from the Owners then:

(a)noted that the building had not reached the stage where the first progress payment was payable;
(b)did not accept the purported termination of the contract;
(c)stated that the letter was a dispute notice under cl 28 of the contract; and
(d)indicated the desire of the Owners to meet and resolve this dispute so as to have R Developments Pty Ltd complete the building project.

Notwithstanding the terms of this letter and the information which it provided, the Builder did not alter its position and continued to treat the contract as having been brought to an end.

The present proceedings were commenced by the Builder on 26 May 2014.

How does cl 4 operate?

The issue between the parties as to the interpretation of cl 4 is whether the builder has a single opportunity to obtain information about title and capacity to pay prior to commencement of works which is then lost if the builder makes the choice, notwithstanding the absence of that information, to start the works or, instead, the builder is able, if the information is not provided in the time required by cl 4, to compel production at any later time during the course of the contract and terminate the contract if it is not provided.

The issue only arises because of two unusual features of this case:

(a)the Builder chose to commence the works without requesting documentary evidence of title or finance prior to the commencement of work under the contract and only sought to insist upon provision of that information some six months after the contract was signed, at a time when the works were well advanced;
(b)the Owners, not realising the gravity of the situation or the intent of the Builder, failed to provide that evidence within the five day period permitted by the contract or the ten day period actually given before the notice of the termination of the contract was served, even though they could have done so.

Submissions of the parties

The Builder submitted that there were two alternative obligations in cl 4. The first was that in cl 4(a) and the second in cl 4(b) and these were separate obligations which might apply in different circumstances.

The Builder submitted that cl 7 provides for the latest time by which the builder must commence works but does not prevent the builder from commencing works at any earlier time. It submitted that commencement of works could not detract from the builder’s right to require compliance with cl 4(b) that evidence of funding be produced within ten days of the contract.

It submitted that no case of election could be made out because the rights in cl 4 and cl 7 were not mutually inconsistent. That is because cl 7 does not prevent the builder from commencing prior to the date determined under that clause and hence there was no inconsistency between commencement and insisting on the rights in cl 4.

It submitted that it would be an uncommercial and unrealistic interpretation of the contract if the effect was that by turning a sod of soil, putting up a part of a fence or installing a portable toilet on the site the builder had thereby irrevocably waived the builder’s right to ask for evidence of title or capacity to pay.

It submitted that “reasonably satisfactory evidence” is an objective standard. This was refined in submissions to being an objective test that required the Court to ascertain “by reference to the parties and their context ... how someone would understand the evidence in the position of [the builder]”. The Builder submitted that not only did the evidence need to be reasonably satisfactory to the actual builder but it was also required to be objectively satisfactory to a reasonable builder as well. It made the submission that only what was objectively reasonable could satisfy the clause so that there would still be a breach of the clause if objectively inadequate evidence was provided which led to the builder being subjectively satisfied.

It submitted that the words “show”, “evidence” and “produce” necessarily required the provision of documentary evidence of capacity to pay.

It submitted that cl 4 is relevantly similar to cl 20 which relates to the payment of a deposit and that it could not reasonably be contended that the builder could not rely upon cl 20 after the commencement of the works if the deposit had not been paid at that point. Therefore it submitted that the same position should apply in relation to cl 4.

The Builder submitted that the clause is given a reasonable operation if the capacity to terminate exists after work has been commenced because the owner must be given, under cl 27(b), the opportunity to remedy any breach.

It submitted that the structure of cl 27, which picks up a failure to comply with cl 4 and then, being a matter capable of remedy, requires a five day period in which to do so, is consistent with its interpretation. It was said to indicate that the contract contemplates that there may be a state of affairs where there has been a past failure to comply with cl 4 which could be remedied as a result of the process under cl 27. It suggested that the Owners’ interpretation would mean that cl 4 was not capable of remedy because once the works had commenced then the failure to comply with cl 4 was not capable of remedy because, inevitably, the evidence would have been provided after commencement, contrary to the terms of the clause. It suggested that the Builder’s interpretation was in fact more favourable to an owner because the owner got the opportunity to remedy a default.

The Owners submitted that the Builder had a choice whether or not to accept the evidence that had been given to it by Mr Forth. They submitted that the obligations under cl 4 applied “before the commencement of the works”. They submitted that that was made clear both by the terms of cl 4(a) as well as by the terms of the heading to the clause. Under the contract there is no limitation on the use of headings and hence they form part of the contract. They therefore submitted that it was only open to the Builder to exercise its rights prior to commencement of works.

They also pointed to paragraph K in part 1 of the contract which also, in its heading, refers to the period “Before Commencement of Work” and submitted that this heading also reinforced their interpretation.

Consideration

My consideration of the operation of cl 4 is as follows.

The contention of the Builder has the attraction of being a straightforward one. It treats the obligation to provide satisfactory evidence as one which may be insisted upon at any time during the course of the contract so long as ten days have passed since the date of the contract and so long as notice is given under cl 27(b). I accept that this gives the clause a reasonable operation. However, in my view, although it does have the attraction of simplicity, it fails to give effect to the actual words used in the contract and the context in which they appear. I address in some more detail below the relevant features of the contract.

Scheme of the contract: The printed terms of the contract are ones which are designed to ensure that the builder’s interest in payment is protected. They do that by requiring, prior to the commencement of works, evidence of the owner’s title and capacity to pay. The builder’s interest in receiving payment for work done is, after that point, protected by a number of defined features of the contract:

(a)the requirement to pay a deposit prior to the commencement of work and an entitlement to terminate if that is not paid (cll 20, 27(a)(iv));
(b)the entitlement to staged payments (cl 21);
(c)the capacity to terminate the contract if those payments are not made promptly (cl 27(a)(iii));
(d)the entitlement of the builder to satisfactory evidence of the owner’s capacity to pay the cost of any variation prior to doing the work (cl 15(c)(iv));
(e)the capacity to end the contract if a variation is more than 5% of the contract sum (cll 15(h), 16(e)) and recover the actual cost of work done if the contract is so ended;
(f)the entitlement to terminate the contract if finance from a lending authority is withdrawn (cl 27(a)(v)).

All of these measures represent a relatively coherent scheme for limiting the exposure of a builder to loss arising from non-payment of amounts due under the contract or a change in circumstances leading to the termination of works. It is important to recognise, however, that the regime does not provide perfect protection for the builder in relation to capacity to finance or in relation to title in that on any reading of cl 4 it only provides the builder with one opportunity to obtain evidence from the owner and does not provide an entitlement to continual reassurance in relation to those issues.

Scheme of cl 4: Clause 4 is located early in the contract. Its heading emphasises that it relates to matters “Before Commencement of Work”. It appears before cl 7 which imposes the obligation to commence work. Clause 4 permits the builder to terminate within ten days of the contract if the evidence required by cl 4(a) is not provided. It means that the builder is not required to wait around quarantining resources for a project which may or may not be able to proceed. Rather, once the contract is signed there is a relatively short period during which the owner needs to sort out title and finance or the builder is entitled to terminate the contract and use its resources elsewhere. It is notable that a similar provision applies in relation to a failure to obtain building approval: cl 5. However, in relation to obtaining building approval, the period permitted after the date of the contract is 60 days in cl 5(b) rather than the ten days specified in cl 4(b). Clause 7, which addresses the obligation to commence work, picks up these three issues, title, financial capacity and building approval, as the issues which need to be sorted out before there is any obligation on the builder to start work. In interpreting cl 4 in relation to financial capacity it is important to note:

(a)the nature of the other issues dealt with in a similar manner, namely, title and building approval which are potentially fundamental ones on which a builder may wish to obtain evidence before committing significant resources to the project;
(b)the position in the contract of cll 4 and 5; and
(c)the fact that satisfaction of the obligations is the trigger for any obligation to commence work.

Clause 4 imposes a single obligation rather than separate obligations: Contrary to the submissions of the Builder which suggested that cll 4(a) and 4(b) contained separate obligations, cl 4 is a single obligation. The obligation is to provide the evidence referred to in cl 4(a) and the clause gives the entitlement to terminate in cl 4(b). Clause 4(b) cannot be interpreted as a separate obligation, freed of the consequences of the reference in cl 4(a) to “Before the commencement of the Works”. That cl 4(b) is designed to operate upon non-compliance with cl 4(a) and is not a separate entitlement unconstrained by the words “Before the commencement of the Works” is made clear by:

(a)the reference in cl 4(b) to “that evidence” being a reference back to the obligation to provide the evidence referred to in cl 4(a)(i) and (ii);
(b)the single reference to cl 27 in cl 4(b) which is consistent with termination under the whole clause being dealt with in paragraph (b).

Absence of actual cost provision in cl 4: In determining whether or not cl 4 permits termination after the commencement of building it is important to note the difference in drafting between cl 4 and other clauses in the contract. A number of other provisions in the contract which provide for termination in particular circumstances specifically provide for the recovery of the actual costs incurred by the builder up to the point the contract is ended. An example of such an “actual cost plus builder’s margin” provision is cl 5(b) which is set out above. The clauses in the contract which incorporate such a provision are:

(a)clause 5: termination if building approval is not provided within 60 days of the contract;
(b)clause 15: termination if the variation is greater than 5% of the contract sum;
(c)clause 16: termination as a result of certain site investigations or increases in the cost of footings.

The absence of any equivalent provision in cl 4 is a factor suggesting that the clause is intended to operate in the period immediately after the contract is executed and before construction commences. The fact that no “actual cost plus builder’s margin” provision is included is consistent with an interpretation that requires the power to terminate for failure to comply with cl 4 to be exercised prior to the commencement of works.

In my view the weight to be given to this distinction in the drafting of the different provisions for the interpretation of cl 4 is significant as it is not at all obvious that there would be any damages arising from a breach of cl 4 itself as opposed to, for example, actual non-payment of amounts under the contract due to incapacity. Further, cl 27, when invoked on the basis of a breach of cl 4, does not expressly give rise to any entitlement to payment for work done to the point of termination. Instead it throws the builder back upon any “other rights” that it has. If it was intended that compliance with cl 4 involved an entitlement which could be insisted upon at any stage of the contract then it is likely that in order to protect the position of the builder an “actual cost plus builder’s margin” provision (or some other express provision) would have been included. Its absence, having regard to the position that a builder would be in if it terminated the contract on the basis of non-compliance after the commencement of work, is a matter which indicates that it was not intended to so operate.

The significance of “Before the commencement of the Works”: If cl 4(a) did not include the words “Before the commencement of the Works”, cl 4(b) would simply permit the builder to end the contract under cl 27 if the owner failed to provide the relevant evidence within ten days of the contract. In other words, even in the absence of “Before the commencement of the Works” the clause would define the time at which the builder was entitled to terminate the contract under cl 27 and hence when the obligation to provide the information arose. The inclusion of the words “Before the commencement of the Works” only adds to the clause if it does something different to providing the time by which a breach can be determined. That is because that function is performed by paragraph (b). The words are given effect if, consistently with the subject matter with which the clause deals and its position in the contract, the words qualify the obligation as one which only operates prior to the commencement of works.

The significance of the time period in cl 4(b): The power to terminate under cl 27 is tied by cl 4(b) to the entry into the contract. That is an indication that the clause is one that must be satisfied close to the point of contracting. By being tied back to the date of the contract it is consistent with a scheme which permits the builder to know at the beginning of the contract whether or not it can be paid before committing time and resources to the project, rather than one which gives rise to a breach of the contract after ten days, even where the builder chooses to commence the works.

The relationship of cl 4 with cl 7: Under cl 7 there is no obligation on the builder to commence works until 30 days after the period by which the owner is required to provide information under cl 4. As a consequence, the scheme of the contract allows the builder to terminate the contract before commencement of works by reason of the combined operation of cl 4 and cl 7 if the owner does not produce the evidence referred to in cl 4(a).

Paragraph K: The Owners placed some reliance upon paragraph K of Part 1 of the contract, in particular the reference in the heading to “Owner’s Responsibility before commencement of Work”. The contract itself contains no provision which provides expressly that the “General Notes for the Owner” do not form part of the contract. However:

(a)the fact that they are described as notes for the owner;
(b)the text in the opening provision of Part 1 which refers to them as “a broad perspective on the obligations of each party” in contrast to the provisions in part 3 which are stated to be binding; and
(c)the fact that they do not correspond to the actual obligations set out in the “General Conditions of Contract”;

mean that it is not possible to place weight on the heading for the purposes of interpreting cl 4 of the contract.

Conclusion: My conclusion as to the operation of cl 4 is as follows. The function of the words “Before the commencement of the Works” is to fix the point at which the obligation arises. If that point is passed then the obligation no longer exists. If by reason of satisfaction or otherwise the builder chooses to commence the works then it has extinguished any obligation upon the owner to provide the evidence that it might have insisted upon.

Such an outcome could be described as the builder making an election to proceed with the works and to not require compliance with cl 4. In Sargent v ASL Developments Ltd (1974) 131 CLR 634 at 641 Stephen J said of the doctrine of election:

The doctrine only applies if the rights are inconsistent the one with the other and it is this concurrent existence of inconsistent sets of rights which explains the doctrine; because they are inconsistent neither one may be enjoyed without the extinction of the other and that extinction confers upon the elector the benefit of enjoying the other, a benefit denied to him so long as both remained in existence.

The Builder countered this argument by saying that cl 7 does not make the entitlement to commence the works contingent upon compliance with cl 4. Hence it argued that it is not a case of there being inconsistent rights. However this submission does not, in my view, give proper effect to the opening words of cl 4(a) as a limit upon the time when the obligations arise. If the effect of the opening words of cl 4(a) is to confine the operation of the clause to the period prior to commencement of works then inconsistent sets of rights can be seen to exist. First, there is the right to insist upon provision of evidence under cl 4 and then proceed to commence the works or terminate the contract under cl 27. Alternatively, there is the right to commence the works without that evidence which necessarily extinguishes the rights under cl 4. These can be seen as inconsistent rights because by adopting the latter course the entitlement to insist upon the additional obligations in cl 4 has been destroyed.

The Builder has made an election in the sense that it has made a decision to take action which under the contract ends the period during which the obligation upon the owner exists. By doing so it necessarily disentitled itself from insisting upon compliance with cl 4(a) or taking the steps under cl 4(b) consequent upon a failure by the owner to comply with that obligation. Whether this is in fact described as an election or simply an interpretation of the contract which confines the operation of cl 4 to the period before the commencement of works does not really matter. The ultimate point is that the clause ceases to have effect at the point where building works under the contract have been commenced and it is no longer open to the builder to assert any non-compliance with that obligation.

There are two further arguments against such an interpretation which must be considered. The Builder argued that giving this effect to the opening words of cl 4 would be inconsistent with the drafting of cl 20 which relates to the payment of a deposit. That clause also uses the words “before the commencement of Works”. The Builder argued that it would never be contended that if the builder commenced works that the deposit would no longer be payable and hence that cl 4 should not be interpreted as ceasing operation at the point where the builder commenced works. While there is some force in this argument I do not accept it. First, the conceptual precision in the drafting of the contract as a whole is not such as to allow great weight to be given to the use of the same expression elsewhere in the contract. Second, the submission fails to take into account the various features of both the drafting of cl 4 and its context which have been referred to above and which, in my view, indicate that it should be given the interpretation which I have indicated.

The second argument against the interpretation which I have given is that arising out of the capacity under cl 7(a)(i) for a date for commencement of works to be specified. Notwithstanding that this is not the provision which applies to the present case, I consider it relevant to take into account the availability of this option in a standard form contract insofar as it reflects on the operation of the contract as filled out by the parties in this case. The capacity to require work to be commenced by a specified date potentially tells against any interpretation that would limit the operation of cl 4 to the period before the commencement of works because a builder could, if item A9 of Appendix A said so, be compelled to commence works within ten days of the contract or prior to the time in which any termination under cl 27 by reason of a failure to comply with cl 4 could be affected. Notwithstanding there is potential for cl 4 to be rendered inoperative by an obligation in cl 7(a)(i) to commence work on a specified date that is not a strong factor telling against the interpretation which I have adopted. That is because the date can be set in the light of the operation of cl 4 and, in any event, there is no reason why the builder could not require satisfaction as to capacity to occur prior to entry into a contract which incorporated a fixed start date.

Summary: My conclusion is, therefore, that cl 4 should be interpreted as an obligation which may only be insisted upon so long as the builder has not commenced the works under the contract. If the builder chooses to commence works then that extinguishes the entitlement to insist upon compliance with cl 4, including the capacity to terminate for non-compliance under cl 27. As indicated by my reasons above, that is because of:

(a)the position of the clause in the contract;
(b)the foundational nature of the matters dealt with in cll 4 and 5;
(c)the relationship between the clause and the obligation to commence the works under cl 7;
(d)the fact that the words “Before the commencement of the Works” need to be given some effect other than defining the time when cl 27 may be invoked; and
(e)the absence of an “actual costs” provision if the contract is terminated.

These aspects of the drafting of the clause and its context lead me to prefer this interpretation over the otherwise attractively simple interpretation contended for by the Builder.

In the light of my finding above (at [45]) that the Builder commenced works under the contract on the day the contract was signed, it was not open to the Builder in August 2013 to rely on the failure by the Owners to provide “reasonably satisfactory ... evidence” of their capacity to pay the contract sum to the Builder in order to give a notice to remedy under cl 27(b). As a consequence, insofar as the Builder relied upon a breach of cl 4 to terminate the contract, the termination was not effective.

As a result of this conclusion and my finding that documentary evidence was not in fact “shown” by Mr Forth to Mr Rosa, it is not necessary to determine precisely what is meant by the phrase “reasonably satisfactory evidence”. On the interpretation that I have adopted that issue would only arise in circumstances where evidence had been shown to a builder but the builder refused to commence work or sought to terminate the contract under cl 27. It would not arise in circumstances where the builder then chose to commence work because by doing so the builder would have elected not to require compliance with cl 4 or, expressed differently, extinguished any obligation under the clause to provide that evidence.

Is the Builder entitled to rely upon cl 27(a)(v) to support the validity of the termination?

Clause 27(a)(v) refers both to a failure to provide evidence of finance from the “Lending Authority” as well as the withdrawal of finance. The term “Lending Authority” is not defined in Part 2 of the contract but it is clear from items A4 and A6 in Appendix A that the Lending Authority is the entity identified in item A4 of Appendix A, in this case, Westpac.

Builder’s submission

The Builder submitted that cl 27(a)(v) provided a freestanding obligation on the owner to provide the builder with evidence of having obtained finance. It contended both that there had been a breach of the obligation in cl 27(a)(v) and that it was entitled to rely upon that breach in order to support the validity of its termination of the contract.

It contended that in contrast to other provisions such as cl 27(a)(iii) which specifically refer to a written request, that language is missing from subparagraph (v) indicating that such a request was not necessary. Further it submitted that it made more commercial sense for there to be a contractually defined period in which evidence of finance from the Lending Authority should be produced, namely, the period in cl 27(b), rather than some undefined period in which the evidence needed to be provided which would inevitably lead to uncertainty as to whether or not, if an owner failed to supply the evidence, a builder was entitled to terminate.

It contended that by including failure to provide evidence of finance from a Lending Authority as a ground for termination the contract had elevated this obligation to an essential term entitling the Builder to damages for loss of bargain upon its breach. In support of this proposition it relied upon the decision in Gumland Property Holdings Pty Ltd v Duffy Bros Fruit Market (Campbelltown) Pty Ltd (2008) 234 CLR 237 at [58] (‘Gumland’).

It submitted that although the letter of 2 August 2013 referred to cl 4 of the contract, the notice given by that letter was not limited to that default and that fact was made apparent by the additional request for evidence of the sufficiency of funding for subsequent variations. It also pointed to the fact that the letter expressly referred to cl 27 without limitation as to its subparagraphs as the basis for the intended termination of the contract. Finally, it submitted that it was entitled to justify the termination by reference to any ground valid at the time of termination even though it was not expressly relied upon at the time: Shepherd v Felt and Textiles of Australia Ltd (1931) 45 CLR 359 at 377-378 (‘Shepherd’); Sunbird Plaza Pty Ltd v Maloney (1988) 166 CLR 245 at 262.

Owners’ submission

The Owners submitted that the Builder could not recover damages by relying upon cl 27(a)(v) for a number of reasons:

(a)There was no stand-alone obligation in the contract to provide the Builder with evidence that finance had been obtained.
(b)To rely on this ground, there would first need to be a “failure” in order to enliven the subparagraph. They submitted that if cl 27(a)(v) imposed a freestanding obligation to provide evidence that the Owners had obtained finance then there would only be a failure to comply with that obligation if there had been a demand for that evidence to be provided. If it was not provided then a default under cl 27(a)(v) could arise. Any such default would be curable. A further notice would then be needed under cl 27(b). Such a “two-step” process was not undertaken.
(c)Neither step was in fact taken because the letter of 2 August 2013 did not refer to cl 27(a)(v) nor make any demand under it. It asked for the obligation under cl 4 to be cured.
(d)No damages could be awarded consequent upon the termination in any event.

Conclusion

Nature of clause: The premise upon which the submissions of the Builder were based was that a failure to provide evidence of obtaining finance from the Lending Authority or having the finance withdrawn as referred to in cl 27(a)(v) involved, on the part of the Owners, a breach of the contract. That is because what the clause provides is an entitlement to terminate the contract. An entitlement to terminate the contract is not necessarily dependent upon the existence of a breach of contract. It is for that reason that cl 27 makes it clear that the ending of the contract occurs “without affecting the Builder’s other rights”. Thus the Builder must look to its other rights in order to obtain damages following its decision to terminate under cl 27. It must look to any rights it has to damages for the relevant breach or to any rights which it has accrued under the contract up until the point at which the contract is ended.

In the present case, having regard to the stage which the works had reached, it is not alleged that the Builder was entitled to recover any accrued entitlements under the contract such as an entitlement to a progress payment. As a consequence it was necessary to establish a breach of the contract.

Some of the grounds for ending the contract under cl 27 do not involve any breach of contract on the part of an owner. For example, becoming insolvent or suffering an “Insolvency Event” involves no breach of the terms of the contract. On the other hand, each of subparagraphs (i)-(iv) involves a breach of a provision of the contract. The provisions corresponding to the grounds for termination in these subparagraphs are as follows:

(a)subparagraph (i): cl 9(a);
(b)subparagraph (ii): cl 4;
(c)subparagraph (iii): cl 21(c);
(d)subparagraph (iv): cl 20.

There is no provision corresponding to the ground for ending the contract under subparagraph (v). A failure to comply with cl 4 is dealt with separately. It is possible to comply with cl 4 yet not have provided evidence of having obtained finance or alternatively suffer a withdrawal of finance. Thus the existence of the circumstances referred to in subparagraph (v) does not necessarily indicate a breach of cl 4.

It was suggested by the Builder that there should be implied, by reason of the terms of subparagraph (v), that to have failed to provide evidence of having obtained finance from the Lending Authority or to have the finance withdrawn is a breach of the contract. That contention might be supported by the reference in cl 27(b) to there having been a “default”. However I do not consider that to be the correct approach. Having regard to the clause as a whole, involving some subparagraphs which identify breaches of obligations found elsewhere in the contract and another which clearly involves no breach of such obligations, the implication of a breach of contract as a result of the terms of subparagraph (v) is not warranted.

Rather, each of the subparagraphs in cl 27(a) merely provides a circumstance which might lead to the ending of the contract and any question of breach of that contract is dealt with by the statement at the end of cl 27(a) that the ending of the contract does not affect a builder’s “other rights”. Such an interpretation means that subparagraphs (v) and (vi) are, in contrast to the earlier subparagraphs, triggers for the ending of the contract which do not involve a breach of the contract.

No entitlement to damages arising from termination: The position is, therefore, in relation to the ending of the contract under subparagraph (v) that there is no necessary breach of the contract. In Shevill v Builders Licensing Board (1982) 149 CLR 620 (‘Shevill’) the fact that a lease had been terminated pursuant to a contractual entitlement to do so for breach of a non-essential term meant that damages for loss of bargain were not recoverable. Similarly, as Mason and Wilson JJ said in AMEV-UDC Finance Ltd v Austin (1986) 162 CLR 170 at 186, where a “lessor terminates pursuant to the contractual right given to him for breach by the lessee, the loss which he can recover for non-fundamental breach is limited to the loss which flows from the lessee’s breach. The lessor cannot recover the loss which he sustains as a result of his termination because that loss is attributable to his act, not to the conduct of the lessee.”

However in the present case not only has there been no breach of a non-essential term of the contract or any repudiation of the contract, there has been no breach of the contract at all because the existence of facts that fall within the scope of either of the limbs in subparagraph (v) do not constitute a breach of the agreement. In contrast to the cases discussed in Gumland at [52]-[53], the present case involves, in relation to cl 27(a)(v), the exercise of an entitlement to end the contract for reasons that do not involve a breach of the contract by the Owners.

Necessarily involved in the above conclusion is a rejection of the Builder’s submission based on Gumland at [58] that cl 27 makes each of the circumstances in the subparagraphs of cl 27(a) an essential term of the contract. In Gumland the Court said (at [58]):

Save for any applicable statutory requirements or rules of law, there is no reason in law why general contractual principles do not apply to leases in this respect. Under general contractual principles, an innocent promisee can terminate the contract, and recover loss of bargain damages, where there is repudiation, or a fundamental breach, or a breach of condition – ie a breach of an essential term. And under these principles it is possible by express provision in the contract to make a term a condition, even if it would not be so in the absence of such a provision – not only in order to support a power to terminate the contract, which the Lessee concedes, but also to support a power to recover loss of bargain damages. No convincing reason was given to explain why the former outcome was sound in law but the latter was not.
(Footnotes omitted)

In that case there were “very clear words” (Gumland at [53]) which were described as an “anti-Shevill [clause]” (Gumland at [42]) that made payment of rent an essential term and permitted the recovery of loss of bargain damages: Gumland at [3]. In the present case the terms of cl 27 are not such that, at least in relation to subparagraphs (v) and (vi), they convert what would otherwise be a circumstance not involving a breach of the contract into a breach. Similarly in relation to the other subparagraphs in cl 27(a) there are no words in the clause which alter the status of the corresponding contractual provisions (referred to above) which give rise to breaches which trigger the operation of those subparagraphs so as to mandate that they be essential rather than non-essential terms of the contract. Had it been desired to avoid the operation of Shevill then it would have been, consistent with the contractual freedom emphasised in Gumland, possible and simple to include words to achieve that outcome. Gumland certainly does not go so far as to support the proposition that would be necessary for the Builder’s contention to succeed, namely, that the mere specification of a circumstance as a basis upon which a contract may be terminated is sufficient to make the presence or absence of that circumstance an essential term of the contract so as to:

(a)necessitate that the presence or absence of that circumstance would amount to a breach of contract by the Owners; or
(b)permit the recovery of damages for loss of bargain on the basis of the breach of that essential term.

Such a conclusion would be contrary to the approach identified in Shevill in which Gibbs CJ said (149 CLR at 628) that “very clear words” would be needed to permit the recovery of loss of bargain damages following the exercise of a right to terminate for what may have been a minor breach (see also Wilson J at 637).

The position is, therefore, that even if the notice requirements under cl 27 had been complied with, ending of the contract under cl 27(a)(v) would not have given the Builder an entitlement to damages. That is because the contract would have been ended in circumstances which did not involve a breach of the contract on the part of the Owners. Any losses incurred by the Builder as a result of the termination would be losses caused by the decision to terminate although the “other rights” of the Builder would not be affected.

Reinforcing that interpretation of cl 27 are those provisions (cll 5, 15 and 16) which expressly deal with the recovery of actual costs incurred by the builder where the contract is terminated for specified reasons. The existence of those provisions contrasts with the position under cl 27 which does not make specific provision for recovery of any particular category of costs and expressly leaves the builder to the builder’s “other rights”.

Alternative conclusion

However, even if I am wrong in my interpretation of cl 27(a)(v) and a failure on the part of the Owners to provide to the Builder, at some unspecified time, evidence that the Owners had obtained finance amounts to a breach of the terms of the contract, it would not now be open to the Builder to rely upon that failure in order to support the validity of the termination of the contract.

The general proposition relied upon by the Builder is that articulated in Shepherd that termination based on an invalid ground is not necessarily ineffective if termination is, in fact, justified on another ground. (There is some uncertainty as to whether or not the principle permits reliance upon an alternative grounds of which the terminating party was aware at the time of the termination: Cheshire and Fifoot, Law of Contract, 10^th Australian edition at [21.24] but that is not an issue raised by the Owners in this case.) This principle may readily be applied where the termination is pursuant to general contractual principles for breach of an essential term.

However the position is different where the termination is pursuant to a contractual power to do so and the alternative contractual power sought to be relied upon is subject to preconditions. The common law doctrine articulated in Shepherd must be adapted to conform to the contractual requirements for a valid termination of the contract: United Petroleum Pty Ltd v 7-Eleven Stores Pty Ltd [2012] QCA 172 at [20]. That means that the doctrine in Shepherd cannot avoid the requirements in this contract that notice be given of the proposed ground of termination prior to the power being exercised. Thus the doctrine in Shepherd does not permit reliance upon an undisclosed ground for termination if there is a contractual precondition such as a requirement for notice so as to give an opportunity to remedy the default that applied to that ground and that requirement was not complied with.

In the present case notice was not given by the Builder of any intention to terminate the contract on the ground identified in cl 27(a)(v). That is apparent from the terms of the letter dated 2 August 2013. As the Builder pointed out, the letter does refer to funding by a bank, consistent with a possible reference to a “Lending Authority” in cl 27(a)(v). Further, when identifying the intention to terminate it does refer to cl 27 in general terms rather than cl 27(a)(ii) specifically. However the following features demonstrate that a fair reading of the letter indicates that it was a notice relating to a failure to comply with cl 27(a)(ii):

(a)the express reference to the obligation under cl 4;
(b)the reference to provision of that evidence “prior to the commencement of construction” consistent with reliance upon cl 4;
(c)the reference to “sufficiency of funds” (cf cl 4: “evidence of ... capacity”) rather than “[obtaining] finance from the Lending Authority”.

Although it may not be determinative or even relevant, it is clear, having regard to the terms of the termination letter of 13 August 2013 that the subjective intention of the Builder was to rely upon failure to comply with cl 4 rather than any independent obligation in cl 27(a)(v).

While, clearly, the subject matter of the obligations in cll 4 and 27(a)(v) overlapped, a recipient of such a contractual notice is entitled to be made aware with some precision of what the default is alleged to be, including being directed to the source of the obligation which has not been complied with. Insofar as cl 27(a)(v) is relied upon, the notice does not do so. Because a notice under cl 27(b) is a precondition to the exercise of the power to end the contract under cl 27(a), even if it was otherwise open to the Builder to do so, it would not be entitled to now rely upon any default under cl 27(a)(v) because it did not give that notice.

Entire contract

As a consequence of the conclusions reached above the Builder’s claim must fail. Had I been of the opinion that the termination was effective under cl 27(a)(ii) because of a breach of cl 4 or, alternatively, could be supported by reason of a breach of the obligation in cl 27(a)(v), I would not have refused to award damages on the basis that the contract was an entire contract. Whether or not this contract should be considered an entire contract in the light of the entitlement to progress payments and the provision in clauses such as cll 5, 15 and 16 that permit recovery of costs in some circumstances is a matter which may involve some difficulty as is illustrated by the differing approaches in Tan Hung Nguyen v Luxury Design Homes Pty Ltd [2004] NSWCA 178 at [5] per Hodgson JA, [40] per McColl JA and [76] per Einstein J. Having regard to the terms of cl 21(e) and notwithstanding the entitlement to progress payments, it would appear to be an entire contract. However this is a matter which I do not need to finally resolve.

Assuming for present purposes that the contract was an entire one, that would not prevent the recovery by the Builder of damages for a breach of that contract prior to termination. The entire contract defence prevents, subject to certain ameliorative exceptions, recovery of amounts when claimed by a contractor who has failed to complete the entire contract. It does not prevent recovery of damages arising from a breach of that contract in circumstances where the contractor has validly terminated it for breach, that is, where it is the “other party’s fault that the work was incomplete”: Phillips v Ellinson Brothers Pty Ltd (1941) 65 CLR 221 at 233-234. It would not therefore prevent recovery of damages for breach of the contractual provisions which I have identified, if such damages otherwise arose.

Contingent assessment of damages

Had I not reached the conclusions that I have expressed above and, instead, found that the Builder was entitled to damages arising from the termination of the contract by reason of the breach of that contract by the Owners it would have been necessary to address the Builder’s entitlement to damages and assess those damages.

The manner in which the evidence relating to assessment of damages was given proceeded on the basis that the Builder was entitled to damages flowing from the termination of the contract as a whole rather than being limited to those damages identified as arising from the breach and excluding the damages caused by the decision of the Builder to end the contract. As will be apparent, assessment of damages on that basis is inconsistent with my findings above. However it is the basis upon which the lay and expert evidence in relation to damages was given.

The Builder claimed damages for the cost to the Builder of the works carried out on the property including the forfeited deposit for the windows ordered by the Builder less the amounts already paid by the Owners under the contract. There was also a claim for a loss of profit to the Builder which is particularised as a 20% builder’s margin on the contract sum as well as upon the amounts in the First Cost Variation Notice and the Second Cost Variation Notice.

The cost of the works to the date of termination is established by Mr Rosa’s schedule of the costs incurred on the site which is based upon a bundle of business records of the Builder. The total cost for subcontractors and suppliers is $331,539.05. This includes the amount for the windows deposit of $27,944.00. There is also a further amount of $54,850.00 which represents the cost for the use of the Builder’s own excavation machinery and the labour of Mr Rosa himself. This gives a total of $386,389.05 (inclusive of GST).

The claim for damages based upon expenditure by the Builder is supported by the reports of the quantity surveyors called to give expert evidence. The quantity surveyor called by the Builder, Mr Alex Feng, estimated the reasonable cost of works on the site to the point of termination including the windows deposit as $382,079 ($322,317 + GST + windows deposit of $27,530.50). The quantity surveyor called by the Owners, Mr Aaron Still, estimated the equivalent amount to be $336,850 ($281,200 + GST + windows deposit of $27,530.50).

Had an entitlement to damages flowing from the termination of the contract been established I would have accepted, subject to two issues that I address below, that the amount paid out to subcontractors and suppliers as well as the deposit paid in relation to the windows should be awarded as damages. In relation to the notional amounts claimed for the time of Mr Rosa and the machinery involved in the excavation, the evidence in relation to that entry given by Mr Rosa in cross-examination was that “[i]t was the hire of my machine” and further:

Who spent that time?---I did.
You did?---Yes.
At $100 an hour?---Yes.
Did you company pay you $100 an hour?---No.
You just allocated $100 an hour for your own time?---For my time and machinery hire, yes.
The money hasn’t come out of the R Developments bank account, has it?---No.

Based on Mr Rosa’s evidence it is not possible to say:

(a)whether the $100 per hour was for Mr Rosa’s time, Mr Rosa’s time when using a machine or a combination of these;
(b)who owned the machine, that is, whether it was owned by Mr Rosa personally or R Developments Pty Ltd.

In the light of this evidence I could not be satisfied that the amount included in the schedule was a loss to the Builder, R Developments Pty Ltd. No liability has been demonstrated to exist in the Builder to pay for Mr Rosa’s time. Similarly no liability has been demonstrated to exist in the Builder to pay for machinery hire. Mr Rosa is the director of R Developments Pty Ltd. That of itself does not create any liability in R Developments Pty Ltd to pay for his time or to pay for his time using a piece of machinery that he owns. Further, if the machinery was, in fact, owned by R Developments Pty Ltd itself then the basis for a damages claim arising from the use of that machinery (such as that it would have been deployed elsewhere had it not been involved in this job) has not been laid. Rather, the evidence is consistent with Mr Rosa deploying his own time and machinery to the job as a director of the company in the anticipation of ultimately achieving a profit on the job rather than on the basis of any entitlement to payment of hourly rates.

Thus the starting point for an award of damages would have been $331,539.05 (see [163] above) being the amounts paid out or liable to be paid out by the Builder to third parties.

In relation to the claim for loss of profit I do not accept that there is a proper factual basis for this claim. The profit is claimed at a rate of 20%. The written submissions by the Builder on this point are as follows:

As to the loss of profit claim, the plaintiff advances two alternative bases:
1. a markup of 20% on the cost of the works completed; or
2. alternatively, an estimated profit margin applied to the contract.
The Contract is a “plain English” document prepared by the Master Builders Association. It represents what the parties agreed as reasonable. Where the Contract is terminated under clause 5, 15(h) and 16(f), the builder is entitled to its actual costs plus a 20% margin. This is also consistent with clause 10 and 15(f) in respect of additional costs.
While no corresponding sub-clause appears in 27, the plaintiff submits that on the proper construction of the agreement, the Owners should on termination pay at least the actual costs incurred plus that margin of 20%. This is consistent with the approach of the Contract for termination otherwise than for fault. The Builder should be in no worse position because it has terminated for breach.
Alternatively, the plaintiff relies on the builder’s margin for overheads and profit as calculated by the Quantity Surveyors’ reports as above. The QS figures include an allowance for builder’s margin and profits, which are 21% for both experts.
(paragraph numbers omitted)

I do not accept that either basis is a proper one upon which to award loss of profit. The fact that the contract provides in other circumstances that a builder is entitled to be paid its actual expenses plus a profit margin does not indicate that such a profit margin is payable in circumstances where the relevant clause includes no such provision. In the absence of such a contractual entitlement, in order to recover a loss of profit component, the likelihood of such a loss of profit must be proven. There is no logical connection between the figure used in contractual provisions relating to termination or the carrying out of variations and the factual question of whether or not the Builder did in fact suffer any loss of profit. Similarly, in relation to the profit margin adopted by the expert quantity surveyors as one which a builder might expect to make on a job, what must be demonstrated is that this builder would have made that level of profit on this job. No evidence has been given sufficient to support a conclusion that this job would have been profitable for the Builder. Indeed, having regard to the inadequacies in the documentation of the contract there was a real risk that no profit or a loss would be made on the job. However it is not necessary to go so far. It is enough that the Builder has failed to discharge the onus of proving that on the balance of probabilities it would have made a profit on this job of any particular amount.

Therefore had it been necessary to do so the starting point would have been to allow damages in favour of the Builder of $331,539.05 but to then allow credit to the Owners for the amounts already paid, namely $99,978.00. That would have led to an award of damages of $239,561.05. I would have allowed interest at rates prescribed by the Court Procedures Rules 2006 (ACT) from the date of termination of the contract.

However there are two additional issues upon which I would have needed to hear further submissions which may have affected the amount that any award of damages would be:

(a)whether any deduction should be made from the damages award for the amounts claimed as part of the first or second variation notices because there would, in any event, have been no entitlement on the part of the Builder to recover those amounts having regard to the terms of the contract or otherwise by reason of a quantum meruit claim;
(b)whether or not any adjustment should be made to these damages calculations to take account of the availability of input tax credits arising from payments made by the Builder to other parties.

The former of these two issues may involve some complexity and, having regard to the conclusions that I have reached, I do not consider it appropriate to attempt to resolve those issues for the purposes of a contingent assessment of damages.

Counterclaim

The Owners’ counterclaim arises from a characterisation of the invalid termination and refusal to continue with the building project as a repudiation of the contract or abandonment of the contract entitling the Owners to put an end to the contract under cl 26.

In submissions the Builder accepted that if it failed on its claim then its conduct amounted to a repudiation of the contract.

The Owners sought damages so as to put themselves in the position that they would be had the contract been performed. The claim to be entitled to damages in the sum of $40,900 was arrived at as follows:

A. Cost of house under contract with Builder   $972,000
B. Less amount paid to Builder   $72,900
C. Amount remaining to be paid to Builder to complete the building      $899,100
D. Amount to be paid to new contractor to complete the building          $940,000
E. Difference between C and D   $40,900.

This analysis takes no account of the amount of the variation for which payment of $27,078 was made. In effect it assumes that the claim was validly made but because it was paid the amount does not affect the above calculations. Further, it takes no account of the claim for variations of $67,794.63 which was made but not paid prior to termination. If that claim was validly made under the contract then it would increase the cost of completion by the Builder above the amount to be paid to the new contractor and consequently reduce any damages to zero.

On this aspect of the case I generally accept the submissions of the Builder that the Owners have failed to prove their damages with the result that they are entitled only to nominal damages.

The basis for the calculation of damages is the alternative contract entered into with the new contractor, Temperate Living Pty Ltd. That contract was based upon the same certified architectural and engineering plans that formed the basis for the contract with the Builder. Also provided to the new contractor for the purposes of its quote were other documents generated either before or during the contract with the Builder including the allowances and specifications documents referred to at [70] and [75] above and proposed design amendments that had been provided by Mr Forth to Mr Rosa on 8 January 2013 and 5 July 2013. The alternative contract obviously proceeded on the basis that there were existing works in place. The difficulty arises in assessing whether or not what in fact is to be built under the contract with Temperate Living Pty Ltd is the same as that which was to be built under the previous contract. That is made very difficult by the manifest inadequacy of the original contract to properly specify what had been contracted for. The original contract was very poorly documented insofar as it did not incorporate any proper specifications and did not identify prime cost or provisional sum items. As pointed out at [68]-[76] above, at the time of the purported termination of the contract these issues had not been resolved but it was not necessary for the purposes of this case to resolve the issues that would have inevitably arisen about the scope of the contract. Secondly, insofar as the nature of the building to be constructed under the contract was not determined by the certified plans or any specifications, the scope of the works quoted on was likely to have been influenced by what was discussed at meetings between Mr Forth and the representatives of Temperate Living Pty Ltd on site, the nature of which was not disclosed by the evidence. Thirdly, clearly in some respects the building being constructed was different from that on the approved plans. That was clear in relation to the eaves and also in relation to the construction of the pool.

Because of these deficiencies in the evidence and the fact that the Owners have the benefit of the works completed by the Builder for which they have outlaid only $99,978 I am not satisfied that they have proved the damages claimed or indeed any damages.

In those circumstances they are only entitled to nominal damages: Cheshire and Fifoot, Law of Contract, 10^th Australian edition at [23.1] and I will award damages in the sum of five dollars.

Orders

In the light of my conclusions above the Builder’s claim must be dismissed and judgment given in favour of the Owners on their counterclaim in the sum of five dollars. In relation to costs I will order that costs follow the event but give the parties an opportunity to be further heard if necessary.

The orders of the Court are:

1. Judgment be entered for the defendants on the plaintiff’s claim.

2. Judgment be entered for the defendants on the counterclaim in the sum of five dollars.

3. The plaintiff is to pay the defendants’ costs of the proceedings.

4. Order 3 does not take effect for 14 days after the date of this decision and if within that time any party notifies my associate by email (copied to the other parties) that the party wishes to be further heard in relation to costs, does not take effect until further order of the Court.

I certify that the preceding one hundred and eighty-three [183] numbered paragraphs are a true copy of the Reasons for Judgment of his Honour Associate Justice Mossop.

Associate:

Date: 4 February 2016