M Van Der Wal Builders & Contractors Limited v Hanham
[2013] NZHC 2284
•3 September 2013
IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY
CIV-2013-404-2158 [2013] NZHC 2284
BETWEEN M VAN DER WAL BUILDERS & CONTRACTORS LIMITED Appellant
ANDGEOFFREY HANHAM AND ELIZABETH HANHAM Respondents
Hearing: 29 August 2013
Appearances: S E McCabe for Appellant
C F Foote for Respondents
Judgment: 3 September 2013
JUDGMENT OF COOPER J
This judgment was delivered by Justice Cooper on
3 September 2013 at 3.00 p.m., pursuant to r 11.5 of the High Court Rules
Registrar/Deputy Registrar
Date:
Solicitors:
Martelli McKegg Wells & Cormack, Auckland
Kendall Sturm & Foote, Auckland
VAN DER WAL BUILDERS & CONTRACTORS LIMITED v HANHAM [2013] NZHC 2284 [3 September
2013]
Introduction
[1] The appellant, M Van Der Wal Builders & Contractors Ltd, appeals against a decision of Judge Gittos, given in the North Shore District Court on 28 March 2013.
[2] In the judgment the Judge held that the respondents, Mr and Mrs Hanham, who were the defendants in the District Court, were not liable to the appellant on a claim for damages in the sum of $188,297 for alleged breach of contract.
[3] The appellant is a builder and contracted with the respondents to carry out building work on their house at Kingfisher Grove, Greenhithe. The works consisted of renovations and improvements.
[4] Once the works were commenced, the Council required various works to be carried out on the basis that they were necessary to bring the existing house structure into compliance with the Building Code as altered following enactment of the Building Act 2004. The parties had not been aware that those requirements would be made, or the extent of them, when entering into the building contract. The result of the Council’s requirements was a very significant increase in the amount of work needing to be done, and its cost. Eventually, the respondents decided that they could not afford to continue with the works and purported to give the appellant notice terminating the contract on expiry of a two week period after the notice was given.
[5] The appellant’s claim in the District Court asserted that the purported cancellation was in breach of contract. Damages were sought on the basis of a calculation of the profit that would have been derived from completing the balance of the works outstanding as at the date of the wrongful cancellation.
[6] By agreement there were to be separate trials of liability and quantum. In the event, Judge Gittos held that the purported cancellation was valid. That meant that a trial on quantum would be unnecessary. The decision that the respondents were entitled to terminate the contract was based on a finding that the contract had an implied term entitling the respondents to terminate the contract in the circumstances that had arisen. The appellant says that that finding is incorrect.
[7] Before addressing the principal issues, it is appropriate to set out the relevant provisions of the contract and to summarise the reasons that the Judge gave for the decision he reached.
The contract
[8] The contract was in writing and in a standard form published by the Registered Master Builders Federation of New Zealand Inc, and used by its members.
[9] For present purposes it is relevant to note that under the terms of the contract the appellant, as the builder, undertook to construct and carry out works which were shown and described in drawings and specifications attached to the agreement. It was provided that the works would be carried out in a proper and workmanlike manner, and in conformity with the drawings and specifications.
[10] Clause 3 of the standard form contract was set out on a basis which envisaged a dollar figure being given for the contract price. However, in this case, the parties had agreed that the work would be done on a “charge up” basis. This was consistent with a note under clause 3 in the standard form which provided:
If the payment method selected is charge-up payments, insert the words: “the
total of all charge-up invoiced claims”.
[11] Consistent with that note, the clause that the parties agreed to read:
The Owner will pay the Registered Master Builder the sum of
(words) The total of all charge-up invoiced claims
$ GST Inclusive;
being the Contract Price for the Works subject to adjustments provided for in the Building Contract.
[12] Clause 4 provided for a margin of eight percent to be added to provisional sums, prime cost sums, additional works and variations.
[13] There was a special condition, expressed as follows:
The contract price will be an amount equal to the labour cost charged by the builder which the parties acknowledge as at the date of this agreement is as follows: Project management $55.00 per hour, Foreman/Leading Hand
$55.00, Carpenters $45.00, Labourers and Apprentices $35.00 per hour. In
addition the owner will pay for all materials and subcontractors in terms of the contract, together with a margin of 8% on all materials and subcontractors. The builder, when submitting the accounts to the owner, will attach copies of all invoices with respect to the materials and subcontractors.
[14] There were a number of “general conditions” of the contract. For present purposes it is relevant to note what was said about Variations. The relevant provisions were clauses 30 to 31 of the general conditions, which read as follows:
30The Registered Master Builder shall carry out all reasonable variations ordered by the Owner provided that the Owner orders all variations in writing and the change to the Contract Price is agreed in writing. Variations apply irrespective of the payment method agreed by the parties.
31Unless the cost of processing the variation is otherwise included in the Contract Price or is included in the agreed cost of the variation, the Registered Master Builder shall be entitled to recover for the cost of processing each variation a sum equivalent to 5% of the total amount derived by adding together the money value of all additions, reductions or substitutions making up the variation. However, in the event that, in the case of any particular variation, this produces an unreasonable sum, the Registered Master Builder shall be entitled instead to recover a reasonable sum for the cost of processing the variation. For the purposes of this clause, cost fluctuations (clause
52) shall not constitute variations.
32Payment for each variation shall be due seven (7) Working Days after the date of the invoice. Where a payment claim is served under the Construction Contracts Act 2002, the payment schedule and the payment are due within seven (7) Working Days of the date of the payment claim.
[15] There was also a provision headed Additional Work, clause 33. It provided:
33In the event that any work additional to that specified in the plans and specifications or any altered work is required by the territorial authority as a condition of the granting or retention of a building consent or otherwise, or for any part of the Works to comply with the Building Code, then:
a.the Registered Master Builder and the Owner shall consult concerning the requirement for additional work. The Owner shall advise the Registered Master Builder whether it wishes the additional or altered work to be carried out, or whether it wishes some alternative, if any, which will avoid the need for the additional or altered work required by the territorial authority;
b.if the requirement by the territorial authority for additional or altered work is due to any discrepancy, error or defect in the plans or specifications supplied by the Owner, or is
otherwise due to non-compliance with territorial authority, or legislative requirements (such as the Building Act 2004 or the Resource Management Act 1991), then the costs of such additional or altered work shall be borne by the Owner.
[16] Clause 41 obliged the builder to commence the works within a reasonable time after the execution of the contract, and to “proceed to carry out the Works with all reasonable diligence”.
[17] Ms McCabe, for the appellant, also drew attention to clauses 62 to 64, and 65 and 66. Clauses 62 to 64 made provision for defaults by the owner, clauses 65 and
66 for defaults by the builder. In the former category were failing to comply with the contract, bankruptcy, liquidation or going into receivership or statutory management. The remedy given was cancellation, suspension of the works pending remedy of the default or the taking of legal action in a court. In the case of similar defaults by the builder, clause 65 gave a more detailed prescription of relevant acts of default. These allowed the owner to cancel in the case of failure to proceed with the works with reasonable diligence, and referred also to “persistently, flagrantly or wilfully neglecting to carry out its obligations under the contract,” and failure to remedy the default within ten working days of receiving written notice of it.
[18] In addition to that agreement, there was a subcontract agreement and subcontract conditions. One of its provisions was referred to in argument by Mr Foote for the respondents. That was clause 4(f), which was in the following terms:
(f) The Contractor shall have the right to terminate this Subcontract in the event that the work within this Subcontract, or a substantial part thereof, is deleted by the Architect in terms of his powers under the Head contract and such termination shall be treated as a variation. The amount of such variation shall be deducted from the Subcontract Sum. The Subcontractor shall not be entitled to any other compensation whatsoever for the termination of the Subcontract under this clause.
[19] I note, however, that while the building contract empowered the builder to sublet any portion of the works (less than the whole of the works), the subcontract agreement and subcontract conditions were not part of the building contract and appear to relate only to the relationship between the builder and any subcontractor employed.
The District Court judgment
[20] In his judgment of 28 March 2013, Judge Gittos found that the parties had agreed that the work would be carried out in three stages, and the respondents and their family would continue in occupation of the house throughout.1 He found also that Mr Hanham had obtained a cost estimate for the work from a firm of quantity surveyors in the sum of $1,075,000. That estimate had not been put to the appellant. Both parties agreed that prior to entry into the building contract, Mr Hanham had asked Mr van der Wal if he would do the work on a fixed price. Mr van der Wal was unwilling to do so:2
…on the basis that a reliable figure could not be established given the possibility that latent defects which required repair might become apparent once the building had been opened up.
[21] In fact, there was some indication that the building had suffered water ingress in places, which had been identified to Mr Hanham by Mr van der Wal prior to the contract being entered into.3 A building permit for the work was issued and work commenced in September 2008. However, as payment claims were made and paid the defendants became concerned at the cost of the works which appeared to be “greatly exceeding their expectations”.4 The Judge found that this was “in no small measure” because of the insistence by Council inspectors that parts of the existing structure, not themselves the subject of the work identified in the plans and specifications attached to the building contract, needed to be replaced or modified to meet the requirements of the current building code.5
[22] Importantly, by the end of February 2009:6
… Mr Hanham was concerned that while work had been advanced on Stage
1 only of the project, the sum of the amounts charged by the plaintiff to that point was approaching in total the amount he had expected to be the cost for completion of all three stages. Mr Hanham said his bank was not prepared to fund the project further, the bank manager having expressed concern, that the property had become, or would become, overcapitalised. Mr Hanham said he considered it necessary to stop the work. He terminated the contract
1 At [3].
2 At [4].
3 At [5].
and Mr van der Wal and his men were asked to leave the site; a period of
two weeks’ notice was given.
[23] There was a conflict in the evidence as to the termination of the contract. Mr Hanham said it was by agreement. Mr van der Wal gave evidence to the contrary. It was his evidence that he had not agreed to the termination of the contract because he had committed resources to the work, and his employees had no other work to go to. However, since Mr Hanham was the occupier, Mr van der Wal felt he
had no choice but to leave.7 In a later part of the judgment, however, the Judge
recorded that:8
…although there was some discussion between [Mr Hanham] and Mr van der Wal … during the two week period that the work was wound up Mr van der Wal did not at any stage challenge [Mr Hanham’s] right to terminate the contract or suggest he would be making some further claim.
[24] The Judge found that both Mr Hanham and Mr van der Wal were honest and reliable witnesses. It was not a case where conflicts of evidence needed to be resolved by a finding of credibility adverse to one or other of them. To the extent that there was a conflict, the Judge thought that reflected the different objective impressions the parties had formed from their oral dealings with one another.9
[25] However, the Judge rejected a defence pleaded by the respondents that there had been an oral agreement between Mr van der Wal and Mr Hanham after difficulties had been encountered with the work, that parts of the work would not be proceeded with. He also rejected a counterclaim in which the defendants asserted that they had been induced to enter into the contract in reliance upon a misrepresentation made by Mr van der Wal that it was not possible for a fixed price to be quoted for the work. Mr van der Wal had denied both the agreement and the misrepresentation. He had simply been unprepared to give a fixed price for the work because of the uncertainty about the possibility of hidden defects. The Judge held, at [17]:
There is quite simply no evidence to support the defendant’s pleadings on these matters. Mr Hanham’s own evidence does not extend to establishing
either of these propositions. Rather it tends to support what Mr van der Wal has to say.
[26] At [21], the Judge said:
Various provisions of the written contract were drawn to the Court’s attention by counsel in the course of argument, particularly those dealing with variations to the contract, but none is apt to cover the situation which has here arisen.
[27] However, the Judge held that there was an implied term which entitled the respondents to cancel the contract. His reasoning was set out in the following passage:10
[22] Although the matter was not expressly argued in this way it is apparent to me upon the evidence that this is a situation where it is necessary for the Court to imply a term in the contract allowing for termination of the work upon reasonable notice. The law in respect to the necessary implication of terms deriving from the so-called Moorcock doctrine is set out in Burrows Finn and Todd Law of Contract in New Zealand (4th ed.) at 6.3.3 and in particular at page 220 where the five point test for the implication of terms laid down by the Privy Council in BP Refinery (Western Port) Pty Limited v Shire of Hastings (1977) 16 ALR 363 is set out thus:11
“In their Lordship’s view for a term to be implied the following
conditions which may overlap must be satisfied:
1. It must be reasonable and equitable.
2.It must be necessary to give business efficacy to the contract, so that no term will be implied if the contract is effective without it.
3. It must be so obvious that it “goes without saying”.
4. It must be capable of clear expression.
5. It must not contradict any express term of the contract.”
[23] As the learned authors point out this quite stringent formulation is the one most favoured in contemporary New Zealand Judicial decisions on the topic. In my view on the facts of this case those requirements are met.
[24] The defendant’s position is certainly that he believed himself to be entitled in the circumstances to terminate the contract on reasonable notice, although he could point to no express contractual provision to that effect. He says at paragraph 30 of his prepared brief:
10 At [22]-[29].
11 While the words are quoted accurately, the District Court judgment altered the layout of the passage quoted by setting out the considerations in the form of a list.
“As this was a charge up contract at Mike van der Wal’s insistence and not a fixed price contract for fixed work, I believed we had every right after out budget had been exceeded to cease continuing with work we couldn’t pay for after giving fair notice.”
[25] That the plaintiff appeared to be accepting of this emerges from Mr Hanham’s evidence to the effect that although there was some discussion between himself and Mr van der Wal about matters during the two week period that the work was wound up, Mr van der Wal did not at any stage challenge his right to terminate the contract or suggest that he would be making some further claim.
[26] To his credit Mr van der Wal in his own evidence was quite candid about his attitude to the matter at the time, which was to the effect that he was really resigned to having to make the best of a bad job as it were, but changed his view when it appeared to him that the defendant had negotiated directly with one of his subcontractors to complete the work. As it emerges he was mistaken about that. The defendant did have some work completed by a subcontractor but only to the extent of dealing in some matters of urgency.
[27] It is plain that the parties never turned their minds to the possibility that the scope of the renovations required by Council might make the completion of the project uneconomic. Had they done so it seems that they would have accepted that the plaintiff could not be expected to continue if to do so would involve having to seriously over-capitalise the site and present difficulty in obtaining money to pay for the work, as in fact eventuated.
[28] In his replies to questions from the Court directed to this issue Mr van der Wal was commendably candid in his acknowledgement that had this been raised as a prospect he would have accepted that the owner should not be bound to proceed in such circumstances.
[29] I am satisfied therefore that it is necessary in equity and to give business efficacy to the contract that the Court should imply a term whereby the owner could in such circumstances terminate the works on reasonable notice. Unquestionably, by the time he did apply the closure Mr Hanham had reached the point where completion of the project, at least at that stage, was no longer financially viable. He gave a period of two weeks’ notice. The adequacy and reasonableness of this was not challenged at the time, and has not been challenged as part of the evidence before me to date.
[28] The consequence was that the appellant’s claim failed, and no hearing on
quantum would be required.
[29] The judgment did not set out the terms of the letter dated 11 March 2009 by which Mr Hanham purported to cancel the contract. It read as follows:
I confirm my earlier advice to you that my wife and I have to terminate your charge up contract for work on our house at the above address.
This decision is due to budget over-runs and unforeseen additional building costs. We have also experienced the advent of a global financial crisis which has in turn tightened up bank lending criteria. Our bank will not provide us any further funding and therefore we cannot continue (sic) afford to continue.
I propose that the termination takes effect on Friday 13th of March 2009 which will be on the expiry of the two week notice period I have given you.
[30] As can be seen, the Judge observed at the outset of [22] that “the matter” (i.e. the fact that there was an implied term) had not been expressly argued at the hearing. In fact, not only was it not argued, it was not pleaded either. The statement of defence alleged that it had been agreed that Stage 3 of the works would not be carried out. Further alternative defences were argued in case the Court held that there had not been an agreement to that effect. These were that the respondents were entitled to direct the plaintiff to omit work (in argument in this Court it was explained that that was in reliance on clause 30 of the building contract, providing for variations) or that the respondents were “in any event entitled to terminate the [appellant’s] employment … such termination not giving rise to any rights of
compensation, or entitlement to damages … .”12 It is unclear from the pleading what
would have founded the right asserted. In any event, there was certainly no pleading which purported to rely on an implied term, still less any attempt to define what it was.
[31] Nor did the Judge actually define the term that he held should be implied. This was a matter that I raised with Mr Foote in argument. In the end, he accepted and argued in support of an implied term based on the combination of paragraphs [29] and [27] of the judgment. That would mean an implied term that the owner (i.e. the respondents) could terminate the works on reasonable notice in circumstances “where continuing would involve having to seriously over-capitalise the site and
present difficulty in obtaining money to pay for the work.”
12 Statement of defence, paragraph 17.
Submissions
The appellant
[32] Ms McCabe argued that the facts did not justify the Judge’s conclusion that a term should be implied. Relying on the well known statement of the circumstances in which a term will be implied in BP Refinery (Westernport) Pty Ltd v President, Councillors and Ratepayers of the Shire of Hastings,13 she submitted that none of the conditions which the Privy Council said needed to be satisfied for a term to be implied were satisfied here.
[33] She argued in particular that:
(a) The implication of a term which would allow the respondents to terminate the contract was not reasonable and equitable. While that might be the case if judged solely from the point of view of the respondents, it was not reasonable and equitable having regard to the appellant’s interests. The appellant had relied on the contract continuing through to the completion of the work and had not looked for other work accordingly.
(b)The implied term was not necessary to give business efficacy to the contract. In fact, it detracted from its efficacy and was uncertain in its terms.
(c) Rather than being obviously required, the reverse was the case. A construction contract without a termination clause of the kind held to be implied would simply need to be honoured by both parties who had signed the agreement.
(d)The implied term was contrary to express terms of the contract. In this respect, Ms McCabe noted that the contract dealt with termination
and when it could occur at clauses 62-66. Those clauses 62-64
13 BP Refinery (Westernport) Pty Ltd v President, Councillors and Ratepayers of the Shire of Hastings (1977) 16 ALR 363 at 376. This was the passage quoted by Judge Gittos at [22] as set out above.
provided what was to happen in the case of default by the owner (the respondents) in performance of their obligations under the agreement whilst clauses 65 and 66 did the same in respect of defaults by the registered builder (the appellant). None of the events which gave rise to the purported termination in the present case were covered by those existing clauses in the agreement. This was another reason why the implied term should not be implied in accordance with the Privy Council’s decision in BP Refinery.
The respondents
[34] Mr Foote submitted that the Judge was correct to find that there was an implied term allowing the respondents to terminate the contract in the circumstances that had arisen.
[35] He emphasised a number of factual considerations:
(a) Mr Hanham had been concerned about the costs of the work, both before the contract was signed and as the work progressed. Initially he had sought that there be a fixed price contract but Mr van der Wal would not agree to undertake the work on that basis. However, it was against the background of that concern, that there was an oral agreement that the work be carried out in stages. Mr van der Wal had provided a Gantt chart that related only to the first stage of the works.
(b)Although Mr van der Wal had referred to the house as a leaky home, that was not supported by the evidence overall. The real reason for the cost of the work escalating was the fact that the Council had required a weather tightness expert to be appointed as consultant to
the project, something not anticipated by either of the parties.14 The
appointment was said to arise not from any existing issues with the house but as the house was being renovated, it was necessary to
14 It appears that this occurred after the building consent was issued and the work was underway. I was not advised of any power the Council had to make this requirement after issuing a building consent, but that is immaterial for present purposes
ensure that it complied with requirements of the Building Code that had come into force since the house was originally built.
(c) The person so appointed took a very thorough approach, erring on the side of caution. This led to an extensive and unexpected increase in the scope of the work needing to be performed and, as Mr Foote put it, “a lot more replacement than what was originally anticipated , or even those on site felt was necessary.” There was extensive replacement of framework and cladding, and sometimes whole walls were required to be removed and replaced. Mr Foote referred to evidence given by both Mr van der Wal and Mr Hanham that suggested neither party had any real control over this process.
(d)The consequence for the cost of the project was very significant and by November 2008 the respondents decided they could not afford to carry out the third stage of the works. According to Mr Hanham, deletion of those works was then discussed and agreed,15 although the Judge did not make a finding to that effect.
(e) By the end of February 2009 after 6 months progress only the stage one works had been completed, but at a cost that approached the total amount that Mr Hanham had expected to pay for the whole project. Completion would, according to Mr Hanham, have cost somewhere between $2 million and $3 million. The project had become uneconomic and the bank would not lend further money for its completion.
(f) It was in these circumstances that Mr Hanham told Mr van der Wal that he could not continue with the project and that he would be terminating his services, giving him two weeks’ written notice to close
down the works.
15 The Judge did not make a finding to that effect. In fact, as has been seen, he rejected the
respondents’ pleading that there was an agreement that the stage three work not be carried out.
[36] It was in this factual setting that the question of an implied term needed to be considered. The Judge’s decision was correct because a situation had arisen which the parties had not contemplated at the time of entering the Agreement. The traditional response in such situations is to imply a term, which is what the Judge did and was entitled to do. Each of the criteria set out in BP Refinery were met in this case. The term was:
(a) Reasonable and equitable: the agreement was no longer financially viable, and the respondents had already paid to the appellant the amount which had been budgeted for completion of the entire project.
(b)Necessary for business efficacy and went without saying: the respondents should not be bound to proceed in the circumstances, as had been acknowledged by Mr van der Wal himself. Further, “business efficacy” does not mean “whatever is necessary to maintain an ongoing business relationship”.
(c) capable of clear expression.
(d)did not contradict any express term of the agreement, as the agreement was silent on what should happen in the circumstances that had arisen. Rather, the implied term is a “natural corollary of the charge-up basis of contracting” where neither party could gauge the extent and financial impact of unknown factors.
[37] Mr Foote also referred to Attorney-General of Belize v Belize Telecom Ltd16 in which Lord Hoffman (for the Board) said that terms are implied in order to spell out what the instrument actually means17 and the list of considerations set out in BP Refinery18 was:
...best regarded, not as a series of independent tests which must each be surmounted, but rather as a collection of different ways in which judges have tried to express the central idea that the proposed term must spell out what
16 Attorney-General of Belize v Belize Telecom Ltd [2009] UKPC 10, [2009] 1 WLR 1988.
17 At [18].
18 At [27].
the contract actually means, or in which they have explained why they did not think that it did so.
[38] Mr Foote argued that Belize Telecom supported his proposition that the implied term found by the Judge was the natural corollary of the charge-up basis of contracting. The latter protected the appellant from being exposed to a potentially uneconomic contract, while the implied term protected the respondents from being exposed to a potentially uneconomic contract. These were two sides to the same coin and driven by the same logic. Consequently the implied term fitted naturally into the contract the parties had actually expressed.
[39] Consequently there were good and proper grounds to uphold the implied term found by the Judge.
[40] Alternatively, Mr Foote submitted that the agreement recognised that the respondents had overall control of the works. Clause 30 of the agreement obliged the appellant to give effect to all reasonable variations ordered by the respondents, and was wide enough to encompass the respondents’ right to omit work by way of variation. This right to omit work was reflected by clause 4(f) of the Master Builders’ subcontract,19 which Mr van der Wal gave to the respondents at the negotiation stage. Clause 4(f) of that subcontract gives the head contractor the right to terminate a subcontract where the subcontracted work or a substantial portion
thereof is deleted under the main contract. Mr Foote submitted that there would be no purpose to this clause if the owners could not direct the builder to delete work.
Discussion
Implied term
[41] Mr Foote’s proposition that, where a situation arises which was not contemplated at the time of entering an agreement, the traditional response is to imply a term is too broad. In Belize Telecom, Lord Hoffman observed:20
The question of implication arises when the instrument does not expressly provide for what is to happen when some event occurs. The most usual
19 Discussed at [18] above
20 Belize Telecom, above n 16, at [17].
inference in such a case is that nothing is to happen. If the parties had intended something to happen, the instrument would have said so. Otherwise, the express provisions of the instrument are to continue to operate undisturbed. If the event has caused loss to one or other of the parties, the loss lies where it falls.
[42] In the present case, the agreement provided for the carrying out of works which were set out in plans and specifications attached to and forming part of the contract. The effect of the cancellation of the contract, which by implication of the term the Judge has effectively endorsed, was that the works which the parties had agreed would be carried out by the appellant were not to be completed. Without the implied term, the purported cancellation would have been ineffective. In law it would have been a repudiation which, accepted by the appellant, would have entitled it to claim damages.
[43] It would also have obliged the appellant to mitigate its loss by finding alternative work. In this respect, Ms McCabe suggested that the termination meant that the appellant was deprived of an anticipated six months or more further work. The claim in the District Court appears to have been pleaded on the basis that the measure of damages could properly be assessed on the basis of full entitlement to the profit that would have been derived if the contract had been allowed to run its course. However, that would be to overlook the obligation to mitigate. Unless evidence could be given that, despite diligent attempts, the appellant had been unable to find alternative work within the relevant period, damages would be limited to the period for which the appellant had been unsuccessful.
[44] That fact needs to be borne in mind in assessing the appropriateness of the implied term. It is highly relevant to the first of the considerations summarised in BP Refinery.21 It may be the case that binding the appellants to complete an agreement which had become much more onerous as a consequence of the requirements imposed by the Council appointed consultant could be considered not reasonable or equitable judged from the standpoint of the respondents. However, as Ms McCabe pointed out, the position of both parties has to be considered. The appellant had made the appropriate arrangements to carry out the contract works and,
in practical terms, would be adversely affected by any decision that significantly
21 BP Refinery, above n 13.
reduced the time needed to complete them, unless the decision were made near the end of the project.
[45] To hold that a term should be implied, of the kind found in this case, meant that the risk of not being able to find replacement work had to be assumed by the appellant. Without the implied term, the financial risks flowing from cancellation would have to be born by the respondent subject to the appellant’s obligation to mitigate, just discussed. It is unclear to me why, in circumstances for which it appears neither party was to blame, it is fair and reasonable to allocate the relevant risks in the respondent’s favour, rather than letting the matter be dealt with in accordance with the contract that the parties actually expressed.
[46] For similar reasons, I do not consider that it can be said that implication of the term is necessary to give business efficacy the contract; in my view, the contract can operate effectively without imposition of the term. In this respect, Mr Foote complained at one stage that the appellant had not acted responsibly in its role as project manager to manage the project costs. However, in assessing whether the contract has business efficacy without the implied term, regard needs to be had to the actual terms that the parties expressed.
[47] Here, the contract specifically dealt with work required by the Council which was additional to what had been specified in the plans and specifications. In accordance with clause 33 the parties were required to consult about the additional work, and the owner was required to advise the builder whether it wished that work to be carried out or whether it preferred some alternative avoiding the need for it. It may be that there may not have been an alternative to the Council’s requirements. Nevertheless, clause 33 is relevant as to whether or not implication of the term was necessary to give the contract business efficacy. On the face of it, the parties had turned their mind to the issue of extra work required by the Council, dealing with it to the extent thought appropriate, at the time the contract was signed, by means of clause 33. If the appellant breached its obligations under clause 33, then there would be a remedy under the contract. But no such breach was pleaded.
[48] As to whether the implied term was one “capable of clear expression”, the respondents faced the difficulty that the implied term was not pleaded by them. Further, the Judge did not spell out in precise terms the term that he thought should be implied. As a result of exchanges during argument, Mr Foote accepted that, piecing together [29] and [27] of the District Court judgment, the best that could be done was to imply a term allowing termination of the works on reasonable notice in circumstances where continuing would involve having to “seriously over-capitalise the site and present difficulty in obtaining money to pay for the work”. I do not consider that these words constitute a term which is clearly expressed. What is “serious over-capitalisation”, and what degree of difficulty is appropriate insofar as the capacity to borrow?
[49] I accept that the implied term does not contradict any express term of the contract. It does deal with subject matters that are dealt with by some of the express terms but it does so in a supplemental way rather than a contradictory one. Clause
33 is one example of that. The default provisions of the contract on which Ms McCabe relied are another. Thus, it cannot be said on the present facts that the appellant is guilty of any of the acts of default set out in clause 65. Consequently, the circumstances in which the respondents would be entitled to cancel the contract under its express terms do not arise. However, absent an express term stating that the contract could only be cancelled by the respondents in the circumstances set out in clause 65, an implied term dealing with another circumstance that might result in cancellation would not be contrary to the express terms of the contract.
[50] Overall, however, application of the considerations set out in BP Refinery22
does not suggest that it is appropriate to imply a term in this case.
[51] There is ongoing discussion about whether, or the extent to which, the Privy Council’s decision in Belize Telecom23 altered the law on the implication of terms into contracts. In Dysart Timbers Ltd v Nielsen24 Tipping and Wilson JJ described
Belize Telecom as containing an “illuminating recent discussion of the general
22 See for example John McCaughran “Implied Terms: The Journey of the Man on the Clapham
Omnibus” [2011] C.L.J. 607; Matthew Barber “Implied Terms” [2013] 6 NZLJ 238.
23 Above n 16.
24 Dysart Timbers Ltd v Nielsen [2009] NZSC 43, [2009] 3 NZLR 160.
subject of implication of terms into contracts”.25 The Privy Council’s discussion was described as indicating that “an implied term is not a term which the Court adds to the contract; it is already in the contract as a matter of construction”.
[52] In Hickman v Turn and Wave Ltd26 the Court of Appeal referred to both Belize Telecom and Dysart Timbers Ltd, quoting passages from the former in apparent agreement with Lord Hoffman’s approach. One of the passages emphasised27 was from [22] of Belize Telecom in which the Privy Council discussed the concept that an implied term must be “necessary to give business efficacy to the contract”. It was said that the word “necessary” underlined the important point that:
It is not enough for a Court to consider that the implied term expresses what it would have been reasonable for the parties to agree to. It must be satisfied that it is what the contract actually means.
[53] As has been seen, Mr Foote purported to derive support from Belize Telecom on the basis that the implied term “fits squarely” into the parties’ contract as the natural corollary of the charge-up basis of contracting. Whether or not that is the case, however, is not determinative. The parties expressly agreed that the price would be ascertained on a charge-up basis. The question raised by Belize Telecom is whether the contract must be construed as also providing along the lines of the implied term. I have already held, in application of the BP Refinery approach, that an implied term as found by the District Court Judge would not be contrary to express terms of the contract. However, as I read Belize Telecom it would require something more, that is a conclusion that the parties actually contracted for the outcome encapsulated by the proposed term. I do not consider that they did, for reasons already addressed.
[54] For the reasons I have addressed, I do not consider that there was an implied term as found by the District Court Judge.
25 At [25], fn 12.
26 Hickman v Turn and Wave Ltd [2011] NZCA 100, [2011] 3 NZLR 318.
27 At [249]. The case went to the Supreme Court (Hickman v Turn and Wave Ltd [2012] NZSC 72, [2013] 1 NZLR 741) but there was no discussion in the judgments of implied terms.
Variation
[55] Mr Foote’s alternative argument was that the respondents were entitled to exercise their right under clause 30 of the contract to order variations of the contract by deleting works. That, of course, was not what the respondents purported to do. However, notionally at least, the provisions of clause 30 would justify the respondents deleting some of the works as a variation.
[56] This possibility was one of the pleaded defences in the District Court but did not find favour with the Judge. It was covered by his broadly expressed conclusion at [21], which I have quoted at [26] above. He said simply that he did not think that the variation power was apt to cover the situation that has arisen here.
[57] I agree with that conclusion. Obviously, the power to order a variation in the works cannot be regarded as co-extensive with the work which is the subject of the contract. The agreement would not be an agreement if that were the case and it would enable one party, the respondents, to escape from their obligations under the agreement. Clearly, it must be a matter of fact and degree as to whether or not what is claimed to be a variation by the deletion of work is in fact a variation, or more properly to be regarded as a unilateral attempt to alter the scope of the works contracted for. Here, what is purportedly claimed to be able to be authorised pursuant to clause 30 is a very substantial portion of the works. In my view, the works deleted were too significant to fall within the clause.
[58] Consequently, I also reject the respondents’ variation argument.
Result
[59] For the reasons I have given, the appeal is allowed and the matter is remitted to the District Court for further proceedings in accordance with this judgment.
[60] Ms McCabe sought indemnity costs on the basis of clause 61 of the agreement. That clause entitles the registered master builder to recover amongst other things all costs and expenses incurred in relation to any court proceedings. However, such costs and expenses are costs in connection with the recovery of any
amount due and payable by the owner under the building contract. It is not clear that this extends to damages claimed for wrongful repudiation of the contract and I consider the better view is that it should be limited to claims for work done and not paid for in accordance with the contractual terms. That is not this case.
[61] Consequently, I direct that the appellant is to have its costs on a category 2B basis in the normal way. I note that costs in the District Court were effectively reserved, the Judge stipulating that if counsel were not able to agree then further memoranda could be filed and served. I was not advised of the outcome of that process. I direct that any order made in the Court below for costs in favour of the respondents in this Court should be reversed.
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