Stojanovski v Australian Dream Homes
[2015] VSC 404
•17 AUGUST 2015
| IN THE SUPREME COURT OF VICTORIA | Not Restricted |
AT MELBOURNE
COMMON LAW DIVISION
S CI 2014 04489
| ILIJA STOJANOVSKI & ANOR | Plaintiffs |
| v | |
| AUSTRALIAN DREAM HOMES PTY LTD | Defendant |
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JUDGE: | JOHN DIXON J |
WHERE HELD: | MELBOURNE |
DATE OF HEARING: | 30 JULY 2015 |
DATE OF JUDGMENT: | 17 AUGUST 2015 |
CASE MAY BE CITED AS: | STOJANOVSKI v AUSTRALIAN DREAM HOMES |
MEDIUM NEUTRAL CITATION: | [2015] VSC 404 |
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ADMINISTRATIVE LAW - Appeal from the Victorian Civil and Administrative Tribunal - Domestic building dispute - Termination of contract by owner on failure of builder to rectify defects specified in a default notice – Clause 20 of Victorian Master Builders Association New Homes Contract (HC-6 addition 1-2007) - Tribunal found purported contractual termination was ineffective - Whether Tribunal correctly construed the term ‘substantial breach’ – Whether owner acted unreasonably when terminating the contract after specifying a 14 day rectification period by the default notice when remediation would take 6 weeks - Whether Tribunal failed to consider a relevant consideration – Builder wrongly insisting on payment of a progress claim as a condition of any further work - Meaning of term ‘substantial breach’ considered in context of a breach of the obligation to carry out the works in a proper and workmanlike manner under cl 10 of the contract - Appeal allowed – Proceeding remitted to VCAT.
CONTRACTS – Building, Engineering and related contracts - Victorian Master Builders Association New Homes Contract (HC-6 addition 1-2007) – Clauses 10 and 20 – Breach – Termination - Termination by owner on failure of builder to rectify defects specified in a default notice - Meaning of term ‘substantial breach’ considered - Whether owner acted unreasonably when terminating contract after specifying a 14 day rectification period by the default notice when remediation would take 6 weeks
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APPEARANCES: | Counsel | Solicitors |
| For the Plaintiffs | Mr R Andrew | Noble Lawyers |
| For the Defendant | Mr S Smith | Lovegrove Smith & Cotton |
HIS HONOUR:
Introduction
On 21 August 2011, the plaintiffs, as owner, entered into a standard form domestic building contract[1] with the defendant as builder for the construction of a single storey dwelling on their land in Reservoir. The contract price was $320,000. The parties fell into dispute and that dispute came to a head in April 2012 when the builder sought its ‘lockup stage’ progress claim. On 4 May 2012, the owner served on the builder a notice terminating the contract. The builder contended that the owner’s purported termination was ineffective and that they had repudiated the contract. That repudiation was accepted as bringing the contract to an end at common law.
[1]Victorian Master Builders Association New Homes Contract (HC-6 addition 1-2007).
The builder commenced proceedings in VCAT to recover the unpaid progress claim, alternatively, on a quantum meriut the value of the work performed up to the date of termination of the contract. The owner claimed that they had validly terminated the contract and were entitled to damages from the builder for the cost of repairing defective work and damages for costs overruns in having to complete the work themselves.
Before VCAT, the Senior Member held that:
(a)The works were not at lockup when the builder submitted its lockup stage progress payment invoice and there was no obligation on the owner to make payment of that claim at that time.
(b)There were significant defects in the builder’s works, particularly in the exterior brickwork, which required complete demolition and rebuilding.
(c)Merely because there were defects in work in progress, the builder was not in substantial breach of the contract notwithstanding that the defects were significant. Accordingly, the owner’s default notice was ineffective.
(d)Further, the default notice afforded the builder insufficient time to carry out the remedial works required to remedy the specified breaches and the purported contractual termination based upon that notice was unreasonable and ineffective.
(e)The conduct of the builder after service of the default notice did not constitute repudiation or disavowal of the builder’s obligations under the contract.
(f)The owner was not entitled to terminate the contract at common law.
(g)The owner repudiated the contract because the contractual right to terminate had been exercised unreasonably and the builder had been given no real opportunity to remedy the specified defects, which repudiation was accepted by the builder as terminating the contract.
(h)Although the owner’s obligation to pay the lockup stage progress claim never crystallised, the builder was entitled on a quantum meriut basis to the value of work performed. The value of the ‘as constructed’ works needed to take into account the cost of making good defects in the works.
(i)The unpaid reasonable value of the works completed was assessed at $89,381.32 and the reasonable cost to the owner of having that work rectified was $67,466.27. The net balance payable by the owner to the builder was $21,914.85.
On 9 December 2014, Rush J granted the owner leave to appeal pursuant to s 148 of the Victorian Civil and Administrative Tribunal Act 1998 (Vic). The owner’s notice of appeal raised five questions of law:
(a)In construing cl 20.1 of the building contract, should the tribunal have held that the significant defects in the building works amounted to a substantial breach of the building contract;
(b)Did the tribunal misconstrue cl 20.1 of the contract by finding that the clause prescribed the period of 14 days for remediation as a minimum period and that it was open to the parties to extend that period so as not to offend cl 20.3 of the contract;
(c)In determining whether the builder was in ‘substantial breach’ of the contract, did the tribunal fail to take into account a relevant consideration, namely, the fact that in its solicitor’s letters, the builder notified the owner that –
It would not complete the works unless the lockup stage payment was paid in circumstances where the works for lockup stage (the external brick walls) contained significant defects and required demolition and rebuilding; and it disputed the defects.
(d)Did the tribunal misdirect itself in determining whether the builder was repudiating the contract in that the tribunal found that because the builder still had time to complete the works, its conduct could not be regarded as repudiatory; and.
(e)Did the tribunal erred in law in finding that the builder was entitled to accept the owner’s repudiation and terminate the contract at common law in circumstances where the owner was in substantial breach of the contract.
The facts
The relevant terms of the building contract were that the owner agreed to make progress payments to the builder as specified in the building contract (cl 11.8). The builder agreed to bring the works to completion on the completion date (cl 8.4). The ‘lockup stage’ was defined (cl 1) of the contract to mean ‘when the home’s external wall cladding and roof covering is fixed, the flooring is laid and external doors and external windows are fixed (even if those doors or windows are only temporary)’.
By cl 10.1 of the contract, the builder gave to the owner the warranties contained in s 8 of the Domestic Building Contracts Act 1995 including that:
The Builder will carry out the Works in a proper and workmanlike manner and in accordance with the Plans and Specifications set out in the Contract.
The owner’s right to serve a notice of intention to terminate the contract was governed by cl 20.1 of the contract which was in these terms (only relevant parts of this clause have been reproduced):
If the builder:
·fails to proceed with the works with due diligence or in a confident manner; or
·refuses or persistently neglects to remove or remedy defective work or improper Materials, so that by their refusal or persistent neglect the Works are adversely affected; or
·refuses or persistently neglects to comply with this Contract (including the requirements of municipal or other authorities); or
·is in substantial breach of this Contract;
then the owner may give written notice by registered post to the Builder:
·describing the breach or breaches of the Contract by the Builder; and
·stating the owner’s intention to terminate the Contract unless the Builder remedies the breach or breaches of this Contract within a period of fourteen (14) days after the Builder’s receipt of the above notice.
Clause 20.2 of the contract provided that if the builder failed to remedy the breach the owner may terminate the contract by giving a further written notice to the builder. Clause 20.3 provided that the owner may not terminate the contract unreasonably or vexatiously or if the owner was in substantial breach of the contract.
The facts as found by the tribunal were not challenged. The tribunal found that in early November 2011, the concrete slab was poured and the owner paid the base stage progress claim. On 15 November 2011, the owner by letter raised with the builder a number of concerns regarding the construction of the works. On 24 November 2011, a building consultant engaged by the owner attended a site meeting with the builder. Those present discussed a number of issues about the standard of the work but those discussions are no longer relevant.
On 24 March 2012, the owner’s building consultant inspected the works and prepared a report dated 5 April 2012. On 13 April 2012, the builder served its lockup stage progress claim. On 17 April 2012, the owner served a ‘Notice of Intention to Terminate the Contract’ (‘the default notice’).
The default notice alleged that the builder was:
in substantial breach of the building contract in that:
1.You have failed to carry out the works in a proper and workmanlike manner in accordance with the plans and specifications set out in the building contract.
2.You have failed to carry out the works in accordance with all laws and legal requirements.
3. You have failed to carry out the works with reasonable care and skill.
In each case, the particulars of breach referred to defective works identified by the building consultant in the attached report. There were 21 items of defective work. The building consultant had concluded that, as a result of numerous defects in the brickwork completed by the builder, that brickwork should be demolished and rebuilt. The notice then stated that ‘the owner intend to terminate the building contract unless you remedy the breaches of contract within a period of 14 days after your receipt of this notice’.
On 17 April 2012, the builder’s solicitors responded informing the owner that the builder was referring the notice to its own building consultant and that a response would be provided within the 14 day period. The solicitors reminded the owner that payment of the lockup stage claim was expected within the next 14 days.
On 19 April 2012, the owner’s solicitors that lockup stage had not been reached, significant defects remained unrectified at the property, and the owner had no contractual obligation to pay the lockup stage progress claim. The same day, the builder’s solicitors asserted that the property was at lockup stage, and stated the builder’s position in these terms:
The defects outlined in your client’s building report are not admitted and we are currently arranging for our client’s expert to view the works and we shall provide you with our report shortly. If your client does not pay our client’s tax invoice within the agreed 14 day period then we place you on notice that our client will cease any further works at the property and we shall serve you with a notice of intention to terminate contract.
At this point, the builder changed its solicitors and on 27 April 2012 the builder’s new solicitors asserted that:
(a)The owner was in substantial breach of the contract by a failure to pay the lockup stage claim that was overdue.
(b)The builder remained ready, willing and able to complete the building works, subject to being paid moneys outstanding.
(c)Because the building consultant’s report on which the defects notice was based was not current, the defects notice was without merit and the allegations ‘therein are disputed’.
(d)The builder’s expert report is still to be obtained but the building works have not ceased at the site.
On 4 May 2012, the owner served on the builder a notice of termination. On 18 May 2012, the builder’s consultant inspected the works and later prepared a report. The evidence before the tribunal supported the conclusion that the builder had engaged its consultant in early May 2012, prior to its receipt of the notice of termination. Initially, the builder’s consultant considered that the brickwork could be repaired. Following further investigation and a site visit, he revised his opinion and agreed with the owner’s consultant that it was more economical to demolish and rebuild the whole of the brickwork, rather than to rectify it in a piecemeal fashion.
The tribunal’s reasons
First, the tribunal found that the works were not at lockup stage at the time when the builder submitted its lockup stage progress payment invoice and that there was no obligation on the owner to make payment of that invoice at that time. This finding was not challenged on appeal.
Second, the tribunal held that the builder was not in substantial breach of the contract. Noting that the term ‘substantial breach’ was not defined in the contract, the Senior Member referred to an analysis of that term in the context of cl 20 of the standard form domestic building contract by a Deputy President of the tribunal in Serong v Dependable Developments Pty Ltd.[2] The Deputy President had suggested that the word ‘substantial’ in that phrase referred only to ‘really important breaches’. The Senior Member accepted that the defective brickwork constituted ‘a significant defect in the works undertaken by the builder’, but he reasoned that because the builder had not completed the construction of the works and there remained significant time under the contract for it to do so, it could not be said that the builder was in substantial breach of the contract.
[2]Australian Dream Homes Pty Ltd v Stojanovski (Building and Property) (07 August 2014) [2014] VCAT 975 at [20], citing Serong v Dependable Developments Pty Ltd [2009] VCAT 760, [77].
Third, the tribunal reasoned that the evidence in the proceeding did not support a finding that the builder’s conduct amounted to anticipatory breach. That conclusion was drawn by the tribunal solely from its analysis of the correspondence that passed between the parties’ solicitors. The tribunal concluded that significant defects in work in progress did not amount to anticipatory breach of the contract because of the builder’s contractual right and obligation to rectify those defects during the contractual construction period. Thus, the assertion that the builder was in substantial breach was premature.
Fourth, the tribunal concluded that insufficient time had been afforded to the builder to carry out the required rectification work prior to the contractual termination. It was common ground that the required rectification work would take approximately 6 to 8 weeks. The tribunal construed cl 20.1 as intended to give a defaulting party an opportunity to remedy the identified breach of contract, a purpose that was defeated if notice under the clause was insufficient to permit the defaulting party to do so prior to termination. The tribunal construed the words ‘within a period of 14 days’ in cl 20.1 as providing a minimum period, one which might be extended by the parties so as not to offend cl 20.3 of the contract. Clause 20.3 provided that the owner may not terminate the contract unreasonably or vexatiously.
For these reasons, the tribunal concluded that the owner’s purported contractual termination was ineffective.
In the alternative, the owner had contended before the tribunal that the builder’s conduct in seeking payment of a contractually premature claim, together with its failure to undertake the works in accordance with its obligations under the contract, was evidence that the builder was disavowing its contractual obligation, a repudiation of the contract that was accepted by the owner when they gave written notice of termination. The tribunal rejected this submission because it was satisfied from the correspondence passing between the parties that there was no repudiation or disavowal by the builder of its obligations under the contract in the period from the default notice to the termination notice.
The tribunal accepted the builder’s contention that the owner repudiated the contract by a wrongfully exercising the power to terminate under cl 20 because it was premature for the owner to conclude that the as constructed works would be handed over as being complete. The characterisation of the owner’s conduct as repudiatory was unaffected by the builder having wrongfully sought payment of the lockup stage progress claim. The factual grounds that underpinned the owner’s termination did not exist and even if those grounds did exist, the owner’s right to terminate was always subject to it being exercised reasonably. The owner had acted unreasonably in giving the builder no real opportunity to remedy the defects and thereby evinced an intention not to be bound by the terms of the contract.
The submissions of the parties
Was there a substantial breach of the building contract?
Owner’s submissions
The owner submitted that the tribunal should have held that the significant defects in the works amounted to a substantial breach of the contract. By cl 10.1 of the contract, the builder had warranted that the work would be carried out in a proper and workmanlike manner and in accordance with all laws and legal requirements. The tribunal’s conclusion that the defective work was evidence of a significant breach of cl 10 of the contract at the time that the default notice was served was not challenged. Further, tribunal’s factual findings compelled the conclusion that such breach was a substantial breach of that clause of the contract for three reasons.
First, the defects in respect of the brickwork were so systemic that the only economical solution was to demolish the brick walls and rebuild them. Second, by demanding payment of the lockup stage progress payment, the builder was proffering the works as complete to that stage. Although defects requiring remediation might not constitute a substantial breach of cl 10 in many cases, here it was necessary to demolish and rebuild the external brick walls over a period of approximately 6 to 8 weeks. The works would not remain at the lockup stage given the magnitude of the rectification work required. Although the tribunal found that the works were not at lockup for other reasons, the fact that the works were so defective that during rectification the works would no longer be at lockup demonstrated that the breach of cl 10.1 was substantial. Third, the tribunal found that the value of the ‘as constructed works’ was $177,381 and the cost of rectification was assessed at $67,466. The defects represented 38% of the value of the ‘as constructed’ work and more than 50% of the sum claimed by the lockup stage progress payment ($112,000).
The owner contended that the proper question was not whether the defective state of the works might be remediated before the time for completion but whether there was a substantial breach of the contract at the time that the default notice was issued. Further, the tribunal had confused the notion of a substantial breach with the concept of an anticipatory breach.
Builder’s submissions
The builder submitted that whether it was in substantial breach of the contract was a question of fact that had been correctly decided by the tribunal since –
(a) the builder had not proffered the works up as being completed;
(b) the builder had not denied the existence of the defects alleged by the owner and had engaged another building consultant to inspect and report;
(c) there was still 3 months left in the building contract to complete the works;
(d) the owner gave the builder no real opportunity to remedy the defects set out in the default notice;
(e) between the date of the default notice and the date of the notice of termination the builder had continued with building works at the site.
The builder submitted that the tribunal correctly distinguished a significant defect in the works from a significant breach of the contract. Noting that the proper construction of cl 20.1 required that the builder be in substantial breach of the contract, that question required consideration by the tribunal of all of the facts and surrounding circumstances at the relevant time, which was the date of service of the termination notice. The tribunal was correct when it concluded that, based on the circumstances at the time of the notice of termination particularly the time remaining before completion was due, no substantial breach had crystallised from the existence of significant defects.
The builder submitted that the construction of the phrase ‘substantial breach of this contract’ was affected by its context within cl 20.1. It submitted that where conduct that might constitute a breach of cl 10.1 was to be the ground for the owner to serve a default notice, a different ground was specified in cl 20.1 that was not used by the owner to support the default notice. The clause permitted the owner to serve a default notice where the builder refused or persistently neglected to remove or remedy defective work or improper materials, so that by the refusal or persistent neglect the works were adversely affected. As I understood this submission, the builder contended that the tribunal correctly concluded that defects in work in progress would not constitute a substantial breach of the contract even though some of those defects were significant for two reasons. First, because the time for completion had not arrived, the substantial breach ground was not the applicable ground under cl 20. Secondly, there had not been a refusal or persistent failure by the builder to remove or remedy the defective work. In other words, by the language used in cl 20.1, the parties had envisaged that the owner’s entitlement to terminate the contract for breach of cl 10.1 prior to completion was limited to circumstances where the builder had refused or persistently neglected to rectify defects. The tribunal has correctly accepted this submission, and found that the builder’s conduct could not be so characterised.
The finding of a 14 day minimum period.
Owner’s submissions
The owner contended that the tribunal’s second error of law lay in its finding that cl 20.1 was not to be construed as prescribing a maximum period of 14 days for the defaulting party to remedy its position, and that the 14 day period was intended by the parties to be a minimum period, which could be extended by the parties so as not to offend cl 20.3 of the contract. The owner contended that the clause, when requiring that the builder remedy the breach within 14 days, required no more than that the builder commenced rectification works or otherwise indicated its intention to do so within the period. For example, all that was required in the present case was that the builder demolish the brick walls, so that the significant defects that had been identified would no longer exist and the builder would no longer be in breach of cl 10.1.
The owner contended that the builder did not, during the 14 day period, admit the existence of the defects, indicate any intention to rectify them or engage any expert to attend the site to advise in respect of the defects. At all times, the builder was insisting that it had satisfactorily completed the works to lockup stage and was entitled to payment for that stage.
The owner submitted that the tribunal erred in finding that the owner’s termination was invalid because it was unreasonable, contrary to cl 20.3. It ought to have held that during the 14 day period the builder did not take any step to acknowledge or commence to remedy its substantial breach of the contract and that there was nothing unreasonable in the owner’s response. The owner contended that the tribunal’s finding was infected by its erroneous construction of cl 20.2. The tribunal reasoned that the termination was unreasonable because 14 days was an insufficient time for the builder to rectify the defects. Had the tribunal correctly construed the builder’s obligation in response to the defects notice, then it would have not come to the conclusion that the termination was unreasonable, there being no other basis apparent for that finding.
Builder’s submissions
The builder disputed the owner’s contention that the obligation set by the phrase ‘unless the builder remedies the breach or breaches of this contract’ would be met if the builder merely acknowledged the defects and commenced rectification. The builder supported the tribunal’s conclusion that the reasonableness obligation under cl 20.3 could operate to extend the period of time specified by an owner in a default notice and that the owner had specified an unreasonable time.
Alternatively, if the owner’s contention was correct, in the circumstances the builder had taken a sufficient step towards investigation or remediation of the defects, as the tribunal’s findings based on the parties’ correspondence following service of the dispute notice made clear. Further, the builder submitted that the owner’s suggestion, raised during the hearing of the appeal, that the builder could have complied with the default notice by demolition of the brickwork within the 14 day period, and later completed reconstruction of the walls, was a recently developed hypothesis retrospectively applied.
Failure to take into account a relevant consideration
Owner’s submissions
The third error contended for by the owner was that the tribunal failed to take into account a relevant consideration when determining whether the builder was in substantial breach of the contract. That consideration was the builder’s statement that it would not complete the works unless the lockup stage payment was made when those works required demolition and rebuilding. Initially the builder neither admitted nor denied the defects, pending further investigation. Later in the 14 day period, after it had changed solicitors and without any independent consultant’s advice, the builder denied the validity of the notice. First, the builder challenged the currency of the owner’s report and thus the existence of the claimed defects. The builder maintained that denial by its pleadings before the tribunal. Secondly, the tribunal’s finding that the builder was not entitled to the lockup stage payment was not challenged on appeal. The builder’s statement of a conditional willingness to complete the works was relevant because the proper inquiry was whether the owner acted unreasonably when serving the termination notice.
Builder’s submissions
The builder submitted that the owner’s default notice had not specified an improper claim for the lockup stage progress payment as a substantial breach. Further, when the builder, by its solicitors, stated that it remained ready, willing and able to complete the building works, subject to being paid moneys outstanding, that statement of its intention referred to completion of the works and did not indicate any refusal to rectify any particular defect found genuinely to exist.
Repudiation at Common Law
Owner’s submissions
The fourth and fifth errors contended for by the owner arose in respect of termination at common law of the building contract. The owner contended that the tribunal misdirected itself in concluding that because the builder still had time to complete the works, its conduct could not be regarded as repudiatory. The owner contended that the builder’s substantial defects in the brickwork alone amounted to a repudiation of the contract in the context of the builder’s claim that the works had been completed to the lockup stage and the builder was entitled to payment for the finished brick walls. The builder had threatened to suspend the work and issue a notice of intention to terminate the contract if the invoice was not paid.
The owner submitted that the tribunal ought to have concluded that the builder clearly repudiated the contract and the only relevance of the remaining period for completion of the works was to assess whether the builder had withdrawn its repudiatory conduct, for example by conceding the defects and commencing rectification. However, at that time the builder continued to insist on payment of the lockup stage progress claim and disputed the existence of any defects. Thus, the owner contended that even if the contractual termination was invalid, the tribunal should have found that the contract was terminated by the owner at common law.
Finally, the owner contended that the tribunal erred in law in finding that the builder was entitled to accept the owner’s repudiation and terminate the contract at common law, when the builder was itself in substantial breach of the contract. The owner contended that the builder was in substantial breach of the contract as it had demanded payment of the lockup stage when that stage had not been completed, contained substantial defects, and was not due and payable. Further, its solicitors indicated that the builder would cease any further works unless the lockup stage was paid. Although the builder carried out the works so defectively that substantial portions had to be demolished and rebuilt, at the relevant time when it purported to accept the owner’s repudiation, the builder disputed the existence of any defect and was not ready, willing and able to proceed with the contract according to its terms.
Builder’s submissions
The builder submitted that the tribunal was correct in concluding that the conduct complained of by the owner did not go so far as a repudiation or disavowal of the builder’s obligations under the contract, as was evident from analysis of the correspondence passing between the parties. The tribunal’s finding was not simply based upon the time remaining for completion of the contract but constituted an assessment of the fact whether, by its conduct after the service of the default notice, the builder was repudiating or disavowing its obligations under the contract.
The builder submitted that the tribunal correctly found that it was not in substantial breach at the time the owner served the notices and that at that or any other time, the builder had not refused to complete the works or to rectify genuine defects. Further, the builder submitted that for the reasons advanced in respect of the first question (set out above) the tribunal did not err in this finding. It followed logically that the conclusion in respect of this question must match the conclusion reached in respect of the first question.
Resolution of the appeal
The resolution of this appeal lies in understanding the proper meaning and operation of cl 20 of the contract in the context of the default notice, the termination notice and the findings by the tribunal about the intervening circumstances between the two. For the reasons that follow, I find that the tribunal was in error on each of the first three questions of law identified in the notice of appeal. The tribunal ought to have concluded that the owner terminated the contract under cl 20 on 4 May 2012 by service of the termination notice. Once the determination was made that the contract was terminated pursuant to its terms, it becomes unnecessary to further consider whether there was common law termination.
Was the builder in substantial breach.
The question whether the builder was in substantial breach of the contract is to be evaluated at the time that the notice was sent. That the party in default might subsequently remedy a substantial breach is self-evident. The language of the contract contemplates the prospect of remediation because the parties have plainly agreed that the right to immediately terminate the contract is dependent upon the opportunity to remedy the breach not having been taken. The opportunity to remedy an existing breach merely by completing the works free of defects by the agreed completion date does not address whether there was a substantial breach at the time when the notice was given. Thus, the prospect that a breach might be remediated after service of a default notice cannot resolve the question of whether the builder was in substantial breach when the notice was served. In this respect, the tribunal’s reasoning was in error.
The tribunal ought to have determined on the evidence whether the builder was in breach of the contract on 17 April 2012 in the particular respects asserted by the notice and whether such breach was a substantial breach. The task involved identifying the terms of the contract that were breached. Assessing whether the alleged circumstances of breach were substantial involved the proper construction of the phrase ‘substantial breach’ as used in cl 20.1.
Although the tribunal did consider the analysis of the phrase ‘substantial breach’ in Serong,[3] the test identified in that case was not applied by the tribunal in determining whether the owner was entitled to serve the default notice. The tribunal made no finding that the defects particularised in the default notice constituted a substantial breach of the builder’s obligation under cl 10.1 at the time that the default notice was served.
[3]Serong v Dependable Developments Pty Ltd [2009] VCAT 760, [77].
The word ‘substantial’ is protean, which no doubt explains the propensity for the drafters of standard form terms and conditions for building contracts to identify what breaches are to be regarded as substantial. It is not uncommon for building contracts to contain an inclusive definition of ‘substantial breach’.[4] However, the term ‘substantial breach’ is not defined in this contract. Neither party addressed the court as to the proper meaning of ‘substantial breach’.
[4]For example, AS4300-1995, cl 44.2; AS2124-1992, cl 44.2. In those standard form contracts the failure to use the standard of materials or provide the standards of workmanship required by the contract is generally defined as a substantial breach of the contract.
Its meaning in a variety of contexts has been considered by courts.
In Wong v Silkfield Pty Ltd,[5] the High Court said that the term ‘substantial’ may have various shades of meaning. Having regard to the context,[6] it may mean ‘large or weighty’ or ‘real or of substance as distinct from ephemeral or nominal’. In that case, the meaning dictated by the statutory context was that ‘substantial’ did not indicate that which is ‘large’ or ‘of special significance’ or would ‘have a major impact on the ... litigation’ but, rather, was directed to issues which were ‘real or of substance’. The court’s reasoning permitted context to determine where on the continuum the intended meaning was to be found.
[5][1999] HCA 48, (1999) 199 CLR 255, 267, [27].
[6]See also Ice TV Pty Limited v Nine Network Australia Pty Limited [2009] HCA 14; (2009) 83 ALJR 585, 617, [154] (Gummow, Hayne and Heydon JJ).
The term ‘substantial’ appears in s 9A of the Workers Compensation Act 1987 (NSW), in the context ‘… a worker’s employment is not to be regarded as a substantial contributing factor to a worker’s injury merely because of either or both of the following …’. The word is employed to evaluate a notion of causation. In Dayton v Coles Supermarkets Pty Limited,[7] the trial judge found that the worker’s employment constituted a ‘rather minor’ factor in the aetiology of the worker’s injury. Meagher JA opined that:
many judges have spent a great deal of time and difficulty analysing and pondering the meaning of the word “substantial”. But this word is a plain English word which is understood by anyone who is not a judge. Nor have the endless judicial lucubrations on the word contributed to anyone’s understanding of it. And nobody in their senses would regard a cause which could be correctly categorised as very “minor” as “substantial”.
[7][2001] NSWCA 153, [16].
By 2009, there were conflicting judgments of the NSW Court of Appeal about the proper construction of s 9A, and in Badawi v Nexon Asia Pacific Pty Limited trading as Commander Australia Pty Limited[8] a five member bench of the Court of Appeal considered its proper construction. The majority stated:[9]
First, and perhaps most importantly, the word “substantial”, must be given effect. It is a word of ordinary English meaning. It is a word of evaluative concept. The word substantial has been said to be not only susceptible of ambiguity, but also to be a word calculated to conceal a lack of precision. Which of the various possible shades of meaning the word bears is determined by the context: Here, the concept and purpose of the introduction of s 9A was to remove the possibility of compensation for injury with only a “remote or tenuous connection with work”. This was the purpose the amendment: see the Second Reading Speech at [34] above. We would endorse the separate comments of Meagher JA and Davies AJA in Dayton v Coles Supermarket. As Meagher JA said, something which is minor is not substantial, or, as Davies AJA said, “substantial” as it appears in s 9A means “in a manner that is real and of substance” and does not apply where, as a matter of practical reality, the contribution of the employment to the injury was of, or had, “little substance”. We agree with his Honour that it is not useful to search for or use other terms, such as “large”, or “weighty”, or by way of further example, other concepts such as “predominant”. We consider that to do so may carry the vice of introducing concepts with different nuances from the words used by the legislature and which would take the meaning of the word beyond that needed to fulfil the purpose of the provision in its legislative context. In this respect, we prefer the views of Davies AJA in Dayton to the views in the extempore judgment in Bulga, which did not refer to Dayton and to the views of Mason P in Mercer. The words of the statute should be adhered to: “a substantial contributing factor”. The “proper link” in the legislative context was a causal connection expressed by the words “a substantial contributing factor”, meaning one that was real and of substance. Given the conflict in the existing authority (Mercer, Bulga and Dayton), we think it important to clarify this issue.
[8][2009] NSWCA 324.
[9]Ibid [82] (Mason P, Beazley and McColl JJA).
Had it followed the reasoning in Serong, the tribunal may not have fallen into error. The tribunal appears to have approved of that reasoning but distinguished its application. In Serong, the Deputy President said:[10]
His Honour’s analysis refers to a number of interpretations which have been applied to the word substantial over the years in different contexts. In broad terms the two strands of meaning are on the one hand “of substance as distinct from ephemeral or nominal”. If applied in the present context this would mean that any breach going beyond the de minimis would be a substantial breach. The view which I think was espoused by Mr Gurr, counsel for the Serongs and the view adopted by Viscount Simon in the case referred to by Deane J in the passage quoted above, namely “considerable, solid or big” in the context of a building contract would mean that only really important breaches would count. In my view, in the context of a building contract, the latter meaning is the one which should be given to the word “substantial” or the phrase “substantial breach”.
Experience sitting in the Domestic Building List and a reading of judgments in building disputes demonstrates that building is a complex process and this complexity and human frailty mean that defects in a structure are common and sometimes, at least on a temporary basis, unavoidable. The evidence before me in this case was for instance that the existence of defects in a building frame would not render it inappropriate for a builder to claim payment for the frame stage. Given that it is difficult to avoid some defects and that the process of rectification may take some time it seems inherently unlikely that a standard form building contract prepared by a builders’ association (The Master Builders’ Association of Victoria) would intend to leave a builder at risk of contract cancellation for failure to rectify within 14 days of a notice any defect which was more than ephemeral or de minimis.
[10][2009] VCAT 760 [78]-[79].
I do not entirely agree with this passage, at least as a statement of the proper approach to construing this clause of the contract. By analogy with the cases that have construed the word ‘substantial’ in a statutory context, the proper approach to construing the term in the contract requires identifying the contractual context to assess the intended evaluative meaning of ‘substantial’ in connection with breach of the contract.
Although I agree that a substantial breach is one that is more than ephemeral or de minimis in its character, the concept and purpose of evaluating, and limiting, the kind of breach that enlivens the owner’s right to serve a default notice is given context by reference to the terms of the contract as a whole. It is unhelpful to paraphrase the qualifying condition introduced by the word ‘substantial’ by using the phrase ‘only really important breaches’ because that is not the language.
In some applications of cl 20.1, but perhaps not where cl 10.1 is breached, that evaluative concept may be too narrow. Because the qualifier is applied to the phrase ‘breach of this contract’, the concept of ‘substantial’ could apply to a breach of any term of the contract, across the range of the differing obligations cast on the builder by the contract. In that context, its protean quality serves a purpose and the precise meaning intended by the use of the word will be revealed by the nature of the breach. Whether a breach of the contract is a substantial breach is a question of fact and the answer to the legal question what was intended by ‘substantial ’ is that the nature and the consequences of the breach must satisfy that description and, in the present context, be ample or considerable or important.
It is relevant to notice the object or purpose of cl 20, which is to define the circumstances in which the owner may terminate the contract and engage another builder to complete the works. That right is very important and of great consequence to the parties and the reasonable reader of the contract would not assume otherwise. I broadly agree with the observation in the last paragraph extracted from Serong. In effect, judicial notice is taken of the nature of the building process, the frequency of the incidence of work that does not meet the requisite standard and the frequency of disputes about standards of workmanship and thus read the text of the contract against the background of the purposes and objects of the transaction. It is of fundamental importance to an owner that the builder carry out the works in a proper and workmanlike manner.
What is difficult is to assess where the parties, on the continuum from ‘real or of substance as distinct from ephemeral or nominal’ to ‘considerable, solid, big, or really important,’ intended the word ‘substantial’ to operate in order to evaluate the seriousness of the breach for the purpose of enlivening the owner’s rights. Each of the grounds set out in cl 20.1[11] that enlivens the owner’s right to serve a default notice is a significant matter that a reasonable reader would understand to involve a real and significant risk that the owner will not get what he bargained for from the builder’s performance of the contract. There is not a ground that could be characterised as being of minor significance to the risk that the owner is not receiving what he bargained for. However, although I do not think that the contractual context limits the qualification of a breach which is substantial to only those breaches considered to be ‘considerable, solid, big, or really important’, because it is preferable to apply the language chosen by the parties rather than a synonym with different nuances. In any event it matters little in this case, as I will in due course explain, given the nature of the builder’s breach of cl 10.
[11]I have not set out all of the grounds above at [7] but I have considered them all in reaching this conclusion.
The proper approach in determining whether the builder was in substantial breach of the contract requires that the court should first identify the term or terms breached, and the breach must then be evaluated by considering its nature and the consequences of the breach. Here, the term in question was cl 10.1, in particular the requirement that the works be carried out in a proper and workmanlike manner. About that obligation, it should be noted that the builder has agreed by cl 10.1 to carry out, as opposed to complete, the works to a particular standard. It is irrelevant that the builder may later complete the works to the requisite standard because the obligation under consideration is to carry out the works in a proper and workmanlike manner. The contractual term reflects an important statutory warranty, incorporated by legislation intended to provide protection to owner. That the works are carried out in a proper and workmanlike manner will ordinarily be fundamental to the owner and failure to do so is what is contemplated as enlivening the power to serve a default notice.
That the works are ‘completed’ in distinction to ‘carried out’ in a proper and workmanlike manner will also be fundamental to the owner, but the performance of that obligation is regulated by the contract in other ways. The builder must serve a Notice of Completion stating that the works are complete and ready for final inspection (cl 17). The owner may, following inspection serve a written list specifying defective, incomplete and non-compliant work that the builder must complete within 21 days. The builder may become liable to pay liquidated damages (cl 18). Further, there is a defects liability period (see cl 19) during which the builder may be obliged to rectify defects.
The contractual purpose of the default notice is to inform the builder that something is amiss with the works that requires its immediate attention. The right to terminate the contract is exercised after service of a default notice by a notice served under the power reserved by cl 20.2. That power to terminate the contract is constrained by cl 20.3 and may not be exercised unreasonably or vexatiously or if the owner is in substantial breach of the contract. Different considerations arise when the court assesses whether the owner has served a valid termination notice from those that arise where the default notice is contested. For example, the language of the contract does not show that the parties intended that an owner in substantial breach cannot serve a default notice on a builder in substantial breach.
The evidence before the tribunal compelled the finding that the default notice specified a substantial breach of the contract. I do not think that the tribunal determined otherwise, but all it said was that the defective brickwork constituted a significant defect in the works. For the reasons I have stated, the tribunal fell into error when it continued to reason that the significant defects were not a substantial breach of the contract because the time for completion had not arrived. Before the tribunal, the building consultants agreed that demolition and reconstruction of the exterior brick walls of a brick veneer home was required. The exterior brick walls are a major feature of a brick veneer home. Even if the tribunal had held that the works had reached lockup stage, demolition of the brickworks would necessarily regress considerably the stage that the works had reached, a further indicia that the builder was in substantial breach of his obligation to carry out the works in a proper and workmanlike manner. The value of the rectification works was assessed by the tribunal at $67,466.47, which finding is not now challenged. Of that sum, more than two thirds was attributable specifically to the brickwork. The value of rectification was approximately 60% of the progress claim being sought by the builder and more than a third of the value of the as constructed works (assuming no defects).
Did the tribunal misconstrue cl 20 of the contract.
For the reasons stated, I am satisfied that the tribunal misconstrued cl 20 of the contract. There was a further submission from the builder that I should mention. Although the tribunal correctly observed that the default notice was not based upon the alternative ground of a refusal or persistent neglect to rectify defects, I do not accept the builder’s submission that a breach of cl 10 can never constitute a substantial breach of the contract, because the owner is obliged to proceed in respect of a failure to remedy defects under a different power to serve a default notice, namely where the builder has refused or persistently neglected to rectify defects.
From the opening part of cl 20.1, it is clear that by the language used in the contract the grounds that justify service of a default notice are not explicitly linked to specific contractual obligations, except in respect of the obligation to produce evidence of compliance with the insurance obligation, which is not relevant in this instance. Having regard to the terms of the contract as a whole and in particular to the language used in cl 20.1, that clause is not to be construed on the basis that each ground that enables the owner to serve a default notice is mutually exclusive of each other ground. A reasonable person in the position of the parties at the time the contract was made would not have interpreted cl 20.1 in that fashion. Use of the word ‘or’ after each dot point shows that the language of the contract conveys to a properly informed reader that each ground (each dot point) stands independently from each other ground. Accordingly, for present purposes, the clause can be stripped of irrelevant considerations and read as follows:
If the builder is in substantial breach of this contract, then the owner may give written notice …
This construction gives the natural and ordinary meaning of the text of the clause without giving rise to any inconsistency or absurdity. No occasion to consider whether there was refusal or persistent neglect to rectify defects arose.
Did the tribunal fail to take into account a relevant consideration
Before the tribunal, the debate was whether the owner acted unreasonably in specifying a period of 14 days for remediation of the defects when the evidence was that the rectification work would take at least 6 weeks. That debate focused on whether the owner was unreasonable in not specifying a longer period in the default notice. In other words, the focus was on the conduct of the owner in serving the default notice, not the termination notice. The tribunal held that the parties had agreed on a minimum period of 14 days by the contract but the parties were not precluded from extending that period so as not to offend cl 20.3, that is, so as to not act unreasonably. In so concluding the tribunal fell into error.
The obligation to not terminate unreasonably or vexatiously or when the owner is in substantial breach governs the owner’s conduct when serving a termination notice under cl 20.2, not the service of a default notice under cl 20.1. The specification of the period in the default notice during which the builder is required to remedy the substantial breach of the contract is different conduct antecedent to that which the parties have agreed must be exercised reasonably. The parties have not agreed that the obligation not to act unreasonably or vexatiously governs the act of serving a default notice and in particular in determining the time to be allowed for remediation before the power to terminate will be exercised. The exercise of the power to serve a default notice should be discharged in good faith but it is not in issue on this appeal.[12]
[12]See generally Sopov v Kane Constructions Pty Ltd [2007] VSCA 257, [105]-[111] and FPM Constructions Pty Ltd v Council of the City of Blue Mountains [2005] NSWCA 340.
For that reason, it is unnecessary to determine whether the owner could serve a notice specifying a longer period. That said, it is self-evident that the parties may, as the tribunal concluded, extend that period. It is also, I think, open to an owner to specify a longer period for rectification irrespective of the attitude of the builder. But that is not what happened.
The proper question was whether the owner acted unreasonably in serving the termination notice when they did.
To the extent that the tribunal addressed that question, it concluded that the owner acted unreasonably when terminating the contract because the rectification work could not be completed within 14 days of service of the notice. In so concluding the tribunal evaluated the conduct of the owner in serving the default notice rather that the conduct of the owner in terminating the contract. As a result, the tribunal determined the legal question of whether the notice of termination was effective by reference to the wrong considerations.
That is not to say that the time required for remediation of the alleged defects is not a relevant consideration, but is not the only consideration. Once the inquiry is whether the owner has acted reasonably, the court must examine not just the default notice and its context but also the response of both the builder and the owner after service of the default notice up to the time of service of the termination notice.
The question that the tribunal posed for itself was whether the right to terminate could be exercised reasonably if the builder was given a default notice that was impossible to comply with. The conduct of the parties subsequent to service of the default notice was assessed by the tribunal entirely from the correspondence between solicitors, which I have referred to above. I can examine that correspondence for myself.
The only conclusion that may reasonably be drawn from this correspondence is that initially the builder stated its intention to investigate the defects alleged within the limited timeframe provided by engaging a building consultant. The builder did not admit or deny the existence of the defective work. However, it must be borne in mind that the builder’s lockup stage progress claim was served on the owner 4 days prior to the owner’s default notice and the builder, consistently in its responses to the default notice, was demanding payment of the progress claim. The owner responded stating that they had no contractual obligation to pay that progress claim. The tribunal agreed and its finding is not now challenged. The tribunal failed to take into account the relevant consideration that, at the time it was stating it would investigate the alleged defects, the builder insisted that if the progress claim was not paid, it would cease any further work at the property and serve a notice of intention to terminate the contract.
Then, 10 days into the period set by the default notice, the builder again stated that the progress claim was overdue for payment and qualified its statement that it remained ready, willing and able to complete the building works as subject to payment of moneys outstanding. Further, at this stage, the builder stated that the default notice was without merit and the allegations in the attached building consultant’s report were disputed. Although the builder was in possession of the site, it sought from the owner an opportunity for its building consultant to inspect the works. The tribunal found that the builder always intended to have the allegation of defects independently investigated but accepting that to be so does not provide a basis for concluding that the owner acted unreasonably when serving the termination notice. The builder was stating that it would not remedy any defects unless the progress claim was paid and was imposing conditions on its performance of the contract that were inconsistent with its contractual rights.
The period specified by the default notice expired on 1 May 2012. On 2 May 2012, the builder informed the owner that a building consultant had been retained and would inspect the works on 11 May 2012. The owner served the termination notice on 4 May 2012.
On these uncontested facts, it was not open to the tribunal to hold that the conduct of the owner in serving the termination notice was unreasonable. During the 14 day period, all that the builder did was state its intention to investigate the alleged defect within the period specified, which it then failed to do. Although it initially neither admitted nor denied that the work was defective, from 27 April 2012 the builder’s stated position was that the default notice was without merit and that the defects in the works were denied. After the default period expired, the builder stated that an inspection would occur on 11 May 2012.[13]
[13]The inspection ultimately took place on 18 May 2012.
The owner acted reasonably in refusing to pay the progress claim and the question of whether the owner acted unreasonably because the necessary rectification works would take at least 6 weeks never arose, because the builder’s response was to dispute the defects rather than the time allowed for remediation. The builder was dilatory when a timely response was required.
The only finding that was open to the tribunal was that the builder was in substantial breach of cl 10.1 of the contract. The builder having failed to demonstrate to the satisfaction of the owner that there was no substantial breach of the contract or that the builder accepted that there was a substantial breach of the contract that would be rectified, albeit within a longer timeframe than had been specified by the default notice, there was no basis to conclude that the power to terminate the contract was exercised unreasonably by the owner.
Conclusion
The tribunal ought to have concluded that the contract was terminated by the owner pursuant to cl 20 on 4 May 2012. In view of this finding, it is unnecessary to consider the remaining questions that were raised concerning termination of the contract at common law.
It follows that the assessment of the sum due from the owner to the builder on the basis that the owner’s repudiation of the contract was accepted by the builder cannot stand. The orders of the tribunal must be set aside and the proceeding remitted to the tribunal for further hearing and determination in accordance with these reasons. I will hear counsel as to the precise form of the orders to be made and on the question of costs.
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