Cooler heads will prevail – Tribunal finds that direct notice of termination of a home building contract is not required

/in

It is not uncommon in home building projects for disputes to occur at the end of the project in relation to the quality of the work carried out by the Builder and a claim for outstanding money by the Builder.  Inevitably, this can lead to the contract coming to end by way of abandonment, termination or repudiation.

If the matter proceeds to a Court or Tribunal, the first issue to be determined is:

  • whether the contract is still on foot;
  • whether the contract has been terminated; and
  • if the contract has been terminated, whether that termination was valid.

The answers to these questions will dictate the parties’ entitlement to claim damages (and the types of damages) and ultimately, the outcome of any legal proceedings.

In an ideal world, the terminating party would issue a notice of breach or default under the contract, which would result in a termination of the contract if the breaches are not remedied.

Building cases are never this clear cut and more often than not, the Courts and Tribunals have to delve into the conduct of the parties and what their intentions were in ascertaining whether the contract is still on foot, or whether it has been terminated validly or otherwise.

In the case of Rudas and Andrassy v Eid [2021] NSWCATAP 4 the Tribunal dealt with this very issue of termination of a home building contract by the Owners in the absence of any direct notice to the Builder and what circumstances or conduct would give rise to a finding that the contract was no longer on foot.

The first Tribunal determination

  1. The Owners entered into a home building contract with the Builder to carry out renovations at their property in Frenchs Forest (Site).
  2. In the first instance, the Tribunal found that the Builder abandoned the Site before completing the building works and thereby repudiated the building contract as the Builder ceased carrying out the building works at the Site and removed all of his tools and any materials that he felt he could use elsewhere.
  3. The Owners made a claim against the Builder under the Home Building Act 1989 (NSW) (HBA Act) for costs to complete the building works by another builder consequent upon their acceptance of the Builder’s repudiation of the building contract and its termination by them.
  4. The Tribunal held that even though the Builder had repudiated the contract, the contract still remained on-foot because the Tribunal was not satisfied that the Owners had terminated the contract by accepting the repudiation of the Builder. The Tribunal found that there was no evidence relied upon by the Owners that they accepted the Builder’s repudiation by their conduct of engaging another builder and further, there was no evidence that the Builder knew of this conduct.

The Appeal

5. The Owners appealed the determination principally on the basis that the Tribunal erred in failing to find that the contract had been terminated.

6. The appeal panel upheld the Owners’ appeal and determined that the Tribunal did determine this issue incorrectly for the following reasons:

(i)  there is no real issue as to the legal principles applicable to determine whether an innocent party to a contract has accepted the other party’s repudiation and thereby terminated the contract.  In other words, any communication or conduct which clearly conveys to the repudiating party that the aggrieved party is treating the contract as at an end is sufficient; and

(ii)  where the innocent party has by conduct elected to treat the contract as at an end, it is sufficient that the fact of election comes to the repudiating party’s attention.

Examples of conduct that would demonstrate that the contract has been terminated in the absence of any direct notice to the other party

In this case, the Tribunal said:

(i)   the commencement of the proceedings and/or the service of an appropriate pleading, claiming relief on the basis of termination for breach or otherwise clearly conveying in such pleading that the aggrieved party is treating the contract as at an end can be regarded as communication of the innocent party’s acceptance of repudiation and subsequent termination; and

(ii)    the commencement of the proceedings by the Owners claiming damages based upon the cost to complete the works will act as the communication of the prior election to treat the building contract as terminated, if this had not previously occurred. Indeed, the Owners in this case could have simply claimed damages on the basis of the contract coming to an end without more.

The Tribunal determination also contained a table of examples of cases where a termination has been held to have taken place, despite the absence of any direct notice to the relevant party, see below:

Case Paragraph
“The actual commencement of the hearing of lengthy and expensive litigation, directed to a final resolution of the parties’ rights, was conducted by both parties manifesting an intent ion wholly inconsistent with any continuing obligation of performance on either side Brewarrina Shire Council v Beckhaus Civil Pty Ltd (2005) NSWCA248 75
A maintenance provider was held to have accepted the  other party’s repudiation  by executing an agreement transferring  its  assets and employees to a third party although the transfer agreement did not purport to exercise any right to terminate Wallace–Smith v Thiess Infraco (Swanston) Pty Ltd

(2005) FCAFC 49

 103 and

152
Service of an appropriate pleading can be unequivocal election to terminate a contract. Janos v Chama Motors Pty Ltd (2011)NSWCA
na		 23
The commencement of an action claiming relief on the basis of termination for breach normally amounts to an election to terminate the contract if such an election has not already been made. Perri v Coolangatta Investments Pty Ltd (1982) 149 CLR 537
A seller of land who on expiry of a notice to complete proceeded to advertise and sell the land was held to have manifested an election to t rea t the contract as terminated. Holland v Wiltshire

(1954)

HCA 42 ; (1954)

 416 and

424
90 CLR409
The closing down of a business and vacating a premises
was held to be sufficient communication of the
termination of the lease.                                                         Karacominakis v Big 155                                                                                                       Country
Developments Pty Ltd
(2000) NSWCA 313.

Quantum of damages

The Tribunal then went onto assess the quantum of damages.

To be consistent with the guiding principle of ensuring the just, quick and cheap resolution of the real issues in the proceedings, the Tribunal determined the question of damages, rather than remit the matter for further hearing.

The Tribunal then assessed the damages owing by the Builder to the Owner in the amount of $187,280.24 plus costs on the ordinary basis.

What does this mean for residential builders?

  • contracts need to be terminated carefully as the Court and Tribunal will consider the conduct of the parties if there is any argument that the contract was repudiated.
  • if the contract is not validly terminated it can affect the builder’s entitlements to damages.
  • if the homeowner terminates the contract, the builder would need to prove that the termination was wrongful in order to claim any loss of profits, demobilisation costs and loss of wages etc.
  • obtain legal advice before you terminate.

Is a progress certificate issued by the Superintendent (or Architect) a payment schedule for the purposes of security of payment?

/in

It is trite that the “East Coast model” security of payment legislation provides that a respondent in receipt of a payment claim may provide a payment schedule in response[1].  If a respondent fails to provide a payment schedule within the relevant statutory timeframe, generally, the respondent becomes liable to pay the claimed amount[2].

What happens in a case where the contract is administered by a third party – e.g. a project manager, superintendent, architect or quantity surveyor – who provides a progress certificate to one or both parties?  E.g. the superintendent’s certificate under clause 37.2 of an AS4902-2000 or the architect’s certificate under clause N5.1 of the ABIC MW 2018?

Is this certification a payment schedule for the purposes of security of payment?

In our view, the answer will generally be yes.  Below is a summary of some case law in support of our view.

RHG Construction Fitout and Maintenance Pty Ltd v Kangaroo Point Developments MP Property Pty Ltd & Ors [2021] QCA 117 (RHG Constructions)

In RHG Construction, the Queensland Court of Appeal considered an amended AS4902-2000 contract and whether or not the provision of a payment certificate by the superintendent was a payment schedule under the Building Industry Fairness (Security of Payment) Act 2017 (BIFA).

Clause 37.2 of that contract was in generally standard form terms, requiring the superintendent to receive payment claims and issue to the principal and contractor:

“a certificate evidencing the Superintendent’s assessment of retention moneys and moneys due from the Contractor to the Principal pursuant to the Contract.”

Clause 37.2 of the contract contained the following paragraphs included by way of amendment to the AS4902-2000 standard drafting (Deeming Clause):

“In so far as necessary to ensure compliance with the Security of Payment Act, the Superintendent is deemed to issue any payment schedule under clause 37.2 or final payment schedule under clause 37.4 as the agent of the Principal and each such schedule shall constitute a payment schedule for the purposes of the Security of Payment Act.

For the purposes of and where permitted by the Security of Payment Act, each of the dates for delivery of a payment claim in subclause 37.1 constitutes a reference date.”

The contractor issued a payment claim and the superintendent issued an assessment within the relevant statutory timeframe[3].  The assessment stated (relevantly):

“This Payment Schedule has been produced pursuant to the Works Contract for the residential flat being constructed at 98 River Terrace, Kangaroo Point, between the Principal ‘Kangaroo Point Developments MP Property Pty Ltd’ and the Contractor ‘RHG Contractors Pty Ltd’. This Payment Schedule confirms that the Superintendent has assessed, calculated and certified the proper value of Work Under the Contract.”[4]

A week later, the principal’s solicitors issued correspondence enclosing a further purported “payment schedule” to the contractor denying the validity of the payment claim and stressing that if it was incorrect on that point, the document under the correspondence was to be taken to be the principal’s payment schedule for the purposes of the BIFA[5].

The contractor proceeded to adjudication citing the superintendent’s assessment as the principal’s payment schedule under the BIFA and the adjudicator agreed[6].  The principal applied to court for an order declaring the adjudicator’s determination void.

At first instance, Dalton J agreed with the principal that (notwithstanding the Deeming Clause) the superintendent’s assessment was not a payment schedule and ordered the adjudicator’s determination void.  Her Honour considered that the assessment did not comply with s 69(b) of the BIFA because it was a recommendation only as to payment and the document failed to state “the amount of the payment, if any, the respondent proposes to make”, as required by the BIFA[7].

The Queensland appellate court (Sofronoff P, wth McMurdo and Mullins JJA agreeing) overturned the trial judge’s order.  Sofronoff P said the following as to the standard form clause 37.2:

“For many years now, those engaged in construction have employed the standard form contracts drafted by a committee of Standards Australia, a not-for-profit company which, among other things, prepares draft general conditions of contract for various kinds of commercial transactions… Clause 37, which deals with progress claims, as been in its current form since 2004 when the Act of that year was passed.  It has been the subject of much academic analysis and has doubtless been relied upon by commercial parties thousands of times since then.  The effectiveness of clause 37.2 to engage the adjudication provisions of the 2004 Act, and now the current Act, has never been called into question.”[8] (emphasis added)

The effect of the issue of the certificate by the superintendent was the triggering of the principal’s obligation to pay.  Accordingly, the certificate does meet the requirement of s 69(b) of the BIFA[9].

The Deeming Clause was, therefore, “neither artificial nor contrived” [10].  The court considered it relevant that there was no other contractual mechanism whereby a payment schedule would be provided[11].  It would be commercially unworkable for the principal and the superintendent to each issue payment schedules (i.e. one for the purposes of statute and one for the purposes of the contract) because they may differ materially (e.g. provide a vastly differing scheduled amount) [12].

Bucklands Convalescent Hospital v Taylor Projects Group [2007] NSWSC 1514 (Bucklands)

We are not sure whether Sofronoff P’s comment that the effectiveness of clause 37.2 of the Australian Standard contract had never been called into question considered authorities from other east coast jurisdictions.

For example, in Bucklands, Hammerschlag J considered the effectiveness under the NSW statute of clause 37.2 of the AS4000-1997, which provides for the same mechanism of superintendent assessment as the AS4902-2000.

While His Honour considered that the question of jurisdiction should be determined by the adjudicator at first instance[13], His Honour[14], noted that a principal may clothe an agent with authority to provide a payment schedule on their behalf for the purposes of the Building and Construction Industry Security of Payment Act 1999 (NSW) (NSW Act).  The requirement for the superintendent to act honestly and impartially in performing certain functions under the contract, including assessing payment claims, is not the issue at hand[15].  The question:

“…is whether in the circumstances Simmat was exercising function under the contract. Whether it was or was not is a matter of fact. As a matter of law it does not seem to me that a person who is a Superintendent under a contract and who has certifying functions under it is incapable of being appointed as agent to respond to a payment claim under the Act.”[16]

The question was not answered in Bucklands as this was the job of the adjudicator.

However, His Honour’s comments suggest that the use of the standard-form contractual mechanism by the superintendent when progress certificates is likely to give rise to an implication that the superintendent had authority to issue a statutory payment schedule and that the payment certificate was indeed to be interpreted as such.  We consider it likely that the courts would continue to take positions on these issues which is facilitates the objects of the legislation, rather than unduly technical interpretations which themselves would prejudice a party.

Take away tips

As:

  1. the agent (e.g. superintendent, architect, quantity surveyor, etc) will usually act as agent of the respondent under the contract for the purposes of issuing progress certificates (even if they must assess payment claims honestly, reasonably, fairly or the like); and
  2. judicial interpretation of the interplay between widely-used standard form contractual mechanisms tends to favour and facilitate commercial workability,

we are of the view that additional drafting of the kind of the “Deeming Clause” in the RHG Constructions case may not necessarily be required to ensure compliance with the legislation and ensure that the respondent’s interests will not be prejudiced[17].  However, if it is omitted, ensuring that the agent’s payment certificate:

  1. states that it is a payment schedule under the relevant legislation; or
  2. annexes a further document provided by the respondent confirming that the superintendent’s assessment of the amount payable should be taken to be the scheduled amount under the legislation,

are prudent steps to take.  It would also be beneficial for the contract or terms of engagement between the agent and the respondent to expressly state that part of the agent’s engagement is to issue payment schedules under the legislation on behalf of the respondent, having regard to Bucklands and the classic agency case Baulderstone Hornibrook Pty Ltd v Queensland Investment Corporation [2007] NSWCA 9.

What to do if you are the respondent party (e.g. the principal or owner) and you disagree with your agent’s assessment of the payment claim?  That will be the subject of one of our next articles!

[1] E.g. see s 14(1) of the NSW Act.

[2] E.g. see s 14(4) of the NSW Act (subject to s 17(2)).

[3] Kangaroo Point Developments MP Property Pty Ltd v RHG Construction Fitout and Maintenance Pty Ltd & Ors [2021] QSC 30 at [5].

[4] Ibid at [13].

[5] Ibid at [6].

[6] Ibid at [19].

[7] Ibid at [14].

[8] RHG Construction Fitout and Maintenance Pty Ltd v Kangaroo Point Developments MP Property Pty Ltd & Ors [2021] QCA 117 at [23].

[9] Ibid at [27].

[10] Ibid.

[11] Ibid at [28].

[12] Ibid.

[13] Bucklands Convalescent Hospital v Taylor Projects Group [2007] NSWSC 1514 at [26].

[14] At [33] referring to Baulderstone Hornibrook Pty Ltd v Queensland Investment Corporation [2007] NSWCA 9.

[15] Ibid at [34].

[16] Ibid at [35].

[17] Assuming the respondent agrees with the superintendent’s assessment.