The issue of estoppel in the context of a rejected variation claim was recently considered by the NSW Court of Appeal in Valmont Interiors Pty Ltd v Giorgio Armani Australia Pty Ltd (No 2) [2021] NSWCA 93.

In this case, Valmont Interiors Pty Ltd (Valmont) was led to assume that it would be paid for additional joinery works that were directed by Giorgio Armani Australia Pty Ltd (Armani) as a purported variation.  However, as the procedure for claiming and approving variations under the contract was not adhered to, Armani sought to rely on the time bar in the variation provision to reject the claim.

Facts

In early 2016, Valmont entered into a contract with Armani to provide fit-out works for the new Emporio Armani store at Sydney Airport. The scope of works originally excluded certain joinery items, which were to be sourced by Armani from a third party supplier. However, shortly after the works commenced, the third party supplier was not able to meet the tight schedule for delivery and Armani directed Valmont to supply the joinery items.

Valmont supplied the joinery items but Armani refused to pay for them on the basis that Valmont did not follow the procedure set out in clause 15 of the contract for claiming a variation and waived its claim.  Relevantly, this clause provided that if Valmont considered that a direction of Armani constituted a variation it was required to give notice of the purported variation within five business days.  This clause also provided that failure to provide notice within the specified time period resulted in Valmont releasing and waiving any entitlement to a claim.

Valmont’s position was that Armani should be estopped from relying on the time bar in clause 15 to reject the claim because Armani did also not follow the procedure in clause 15 for instructing the supply of the additional joinery items (as well as for previous other variations).  As a result of this, Valmont argued that Armani led it to assume that strict compliance with the procedure in clause 15 was not required in order to claim payment for the additional joinery work.

The First Decision

The primary judge held that, although Valmont did not strictly comply with the procedure set out in clause 15 of the contract for claiming a variation, Armani was estopped from relying on the time bar in that clause and that the costs of certain variation were recoverable by Valmont.

However, the primary judge also found that at a certain point in time (being 11 April 2016), email correspondence between the parties corrected Valmont’s assumption that it could claim payment for variations without complying with the procedure set out in clause 15 of the contract and that Armani would rely on strict compliance with that procedure for future variations.  Accordingly, it was held that the estoppel ceased on that date and the costs of purposed variations after that date (including the additional joinery works) were not recoverable.

The Appeal

On appeal the Court disagreed with the primary judge and found that the estoppel continued to operate after the 11 April 2016 email because:

1. the email did not displace Valmont’s assumption that was induced by Armani that it would be paid for supplying the additional joinery works. This was partly because Armani’s email was not sufficiently clear to correct Valmont’s assumption (ie. that strict compliance with clause 15 of the contract was not required in order to be paid for additional joinery works);
2. the email conveyed that the supply of the joinery was not a variation but additional works outside of the contract;
3. Valmont was entitled to expect to be paid for the additional joinery works that were directed by Armani. The fact that it continued to incur liabilities after receiving the email from Armani demonstrated that the email did not correct Valmont’s understanding of the situation.  Further, Valmont relied on that understanding to its detriment, and as it was no longer possible for Valmont to comply with clause 15 of the contract it could not overcome the detriment already suffered; and
4. in the circumstances, it was unconscionable for Armani to refuse to pay Valmont for the additional joinery works.

Take home tips

We understand that in administering contracts parties do not always strictly comply with the procedures and timing set out in the contract for claims, especially if the parties consider they have a good relationship or believe that strict compliance is too formal.  This case highlights the potential serious consequences of taking that approach.

Parties to a contract should be aware of the risks of acting inconsistently with their rights under the contract (ie. in Armani’s case, not requiring compliance with the terms of the contract for claiming variations and also not formally directing variations), as this could lead to those rights being lost and there not being a basis to reject claims.

If a principal or head contractor (or other party in a similar position) is concerned that a particular state of affairs exists between them and the downstream party that is inconsistent with the contract, it is crucial that the principal or head contractor:

1. corrects that understanding by stating in clear and precise terms that the current understanding must be departed from and that strict compliance with the contract is required;
2. provides sufficient notice of this so that the downstream party has time to comply with the procedure in the contract for claims and can attempt to overcome any detriment; and
3. then strictly requires and enforces the procedure in the contract for claims so as to avoid any doubt that another state of affairs exists between the parties.