Adrija Pty Ltd v Mohamed, Ahmed and Registrar General ACT Land Titles Office [2013] ACTSC 120

2. The plaintiff (referred to in the originating application as the applicant), Adrija Pty Ltd, is a company engaged in residential building. I will refer to it as "the Builder".

3. The first and second defendants (referred to in the originating application as the first and second respondents) are the registered proprietors of land known as Block 6, Section 56, Bonner in the Australian Capital Territory which is also known as 10 Elphick Place, Bonner. I will refer to the first and second defendants collectively as "the Owners".

4. The third defendant (referred to in the originating application as the third respondent) is the Registrar General of the Australian Capital Territory who did not take any part in the proceedings.

5. In April 2010 a standard form contract was entered into between the Owners and the Builder. That contract was in a form prepared by the Housing Industry Association and the version of that standard form contract is dated January 2008. For reasons which were not explained in the evidence, notwithstanding that it was executed in April 2010, the contract was dated 23 September 2009.

6. On 2 December 2010 the applicant issued an invoice in the sum of $9,987.44 for certain additional works. I will refer to this as the Additional Works Invoice. The works covered by the Additional Works Invoice were additional excavation, the addition of an extra window and a credit for removing two cavity sliding units. $9,699.44 was attributable to the additional excavation component.

7. On 11 February 2011 the Builder issued the Owners with an invoice for a progress payment in the sum of $54,750.00. This progress payment was said to be due because the stage of the works that had been reached was that described as "fixings complete" in the contract at which time 15% or $54,750.00 was said to become due. Neither of these amounts was paid. Relations between the Owners and the Builder broke down.

8. On 19 April 2011 a caveat was lodged by the Builder on the title of the property. It is notable that at this stage the contract was still on foot.

9. On 21 April 2011 the legal representatives of the Builder sent a letter to the Owners including a notice under cl 25.1 of the contract requiring them to satisfy their obligations under the contract and pay the Additional Works Invoice and the Progress Payment Invoice.

10. On 4 August 2011 a further letter was sent to the Owners' solicitor warning that if an expert's report which was being prepared was not served by 5.00 pm the next day then the Builder would terminate the contract. On 8 August 2011 the solicitors for the Builder sent a facsimile to the solicitors for the Owners referring to the letter of 4 August 2011 and stating:

We note that your client failed remedy [sic] the breach contained in that facsimile by 5pm, Friday, 5 August 2011. We consider the contract terminated and are currently in the process of drafting a statement of claim to recover the debt owing to our client.

11. Whilst the wording of the letter is not ideal I accept that the intention was to end the contract. There is an issue as to service of this notice which I will mention below.

12. After the Builder's termination letter there were continuing negotiations between the parties but no resolution of the underlying building dispute. The Owners subsequently contracted with another builder to complete the building work.

13. On 27 February 2012 the Builder's solicitors received a lapsing notice from the Office of Regulatory Services. On 2 March 2012 the Builder filed its originating application in these proceedings. On 9 March 2012 the Court ordered that the third respondent be prevented from removing the caveat lodged by the Builder until the Court ordered otherwise.

14. The proceedings were then adjourned on many occasions at the request of the parties. It appears that during the period of those adjournments the parties were attempting to resolve the underlying building dispute. Those efforts were evidently unsuccessful and on 22 March 2013 the proceedings were listed for hearing before me on 30 May 2013.

15. Notwithstanding that the letter of 8 August 2011 from the Builder's solicitors implied that the commencement of recovery proceedings was imminent, it was only shortly before the hearing of the matter in this Court that the Builder commenced proceedings in the Magistrates Court claiming damages totalling $128,841.18. The damages included components for loss of profit arising from termination of the contract, the cost of variations under the contract, the cost of materials ordered but not used and adjustments for prime cost items under the contract. It also includes an unparticularised claim based on quantum meruit.

16. Two affidavits were read in the proceedings. The first was that of Magdalena Juric who was a director of the Builder and executed the contract on the Builder's behalf. Her affidavit described the chronology of events largely in the terms that I have outlined above. She was cross examined by the first defendant.

17. The other affidavit was that of the first defendant. Only limited parts of that affidavit were admitted into evidence. The annexures to the affidavit included correspondence between the parties and an expert's report prepared by a quantity surveyor relating to the cost of completing works on the subject building. During the course of the first defendant's final submissions he applied for leave to reopen his case to give oral evidence about whether or not he had received the letter dated 8 August 2011 from the Builder terminating the contract. He gave oral evidence to the effect that he had not and that he had not been provided with a copy of that letter by his then solicitor. He was cross-examined on that evidence.

18. The Builder's submissions were that notwithstanding the termination of the contract, the Owners remained liable to pay the amounts recorded in the Additional Works Invoice and the Progress Payment Invoice. Because those amounts remained unpaid, the Builder submitted that there was, pursuant to cl 30 of the building contract, a charge over the Owners' land which would support the lodgement of a caveat. In those circumstances, where the invoices remain unpaid, the caveat was supportable. As a consequence, the Builder's position was that the caveat should be maintained. The Builder accepted that if some substitute security was offered then the balance of convenience might favour discharge of the caveat on the condition that such security be given. However in circumstances where there was no submission from the Owners that they were in a position to give alternate security, the caveat should simply be maintained.

19. The Owners were unrepresented. The first defendant made submissions on behalf of both first and second defendants in the proceedings. The position adopted by the Owners was that the caveat should be discharged. The first defendant submitted that no money was owing under the contract. It appears that the contention of the Owners was that there was no valid termination of the contract and that there was no money owing under the contract.

20. Section 107 of the Land Titles Act allows a registered proprietor of an interest in land subject to a caveat to apply to the Registrar-General to have a caveat removed. The Registrar-General then gives notice to the caveator and, not less than fourteen days later, must remove the caveat from the register unless the Court otherwise orders.

21. In order to justify an order preventing the removal of the caveat, the caveator's claim to an interest in the land must raise a serious question to be tried and the balance of convenience must favour of the extension of the caveat as opposed to other options: GR8 Constructions Pty Ltd v O'Donnell [2011] ACTSC 92 at [24]- [27]; John Lampard Pfeiffer v Colin James Cummins (unreported, ACT Supreme Court, Gallop J, 2 July 1986). The onus of establishing that there is a serious question rests with the caveator.

22. There is no doubt that charging clauses in building contracts can give rise to interests which justify the maintenance of a caveat. The clause commonly used in New South Wales was to the effect:

The owner hereby charges the parcel of land on which, or on part of which, the works are to be erected, with the due payment to the builder of all monies that may become payable to the builder by virtue of this contract, or otherwise arising from the carrying out of the works.

23. A clause in this form was held in Griffith v Hodge (1979) 2 BPR 9474 to give rise to an equitable charge which could be protected by the lodgement of a caveat. The decision in Griffiths v Hodge as to clauses in the same or similar terms has been followed in a number of cases including Sindoro Pty Ltd v Koen (unreported, New South Wales Supreme Court, Holland J, 1 June 1982); Re Cross; Ex Parte Official Trustee in Bankruptcy (unreported, Federal Court of Australia, Fitzgerald J, 11 March 1983); Venios v Machon (1986) 3 BCL 171; Gibson v Coordinated Building Services Pty Ltd (1989) 4 BPR 9630; Pelenoy Pty Ltd v Donovan Oates Hannaford Mortgage Corp [2004] NSWSC 4 at [28].

24. The use of such clauses was drastically limited in New South Wales following amendments to the Home Building Act 1989 (NSW). Those amendments had the effect of invalidating such clauses in residential building contracts unless, inter alia, the charge was limited to a charge that arose after a judgment had first been obtained by the unpaid builder. When the section was amended in 1998 to put it substantially in its current form the Minister explained the policy underlying the change in the law: see Kell and Rigby Pty Ltd v Flurrie Pty Ltd [2006] NSWSC 906; (2006) 67 NSWLR 113 at 118.

25. In the Australian Capital Territory a straightforward charging clause was considered in Matken Constructions Pty Ltd v James [2009] ACTSC 100 and GR8 Constructions Pty Ltd v O'Donnell [2011] ACTSC 92; Danthanarayana v GR8 Constructions Pty Ltd (2012) 201 FCR 347. The clause considered in those cases was:

The owner charges the Site with the payment to the Builder of all monies payable to the Builder under this Contract or otherwise from the carrying out of the Works.

26. In each case the clause was found to be sufficient to create a charge securing payment of unpaid monies in the circumstances of those cases.

27. The Builder relies upon cl 30 of the building contract in order to establish its claim to a charge over the land. Clause 30 of the contract provides:

The owner grants to the builder a charge over the site to secure the due performance of the contract. The builder may lodge a caveat over the site. The cost of lodging and removing the caveat must be paid by the builder. This charge continues until the contract price is paid.

The bolded terms in this clause are defined in cl 2 of the contract.

28. The scope of the charging clause is a question of construction of the written document. Neither party suggested that there were any factual issues that needed resolution in order to determine the proper construction of the document. As a consequence, I consider it open to the court to determine those construction issues on this application rather than merely determining the arguability of the Builder's contentions as to the scope of the charge that could arise pursuant to the terms of the contract. This appears to be consistent with the approach to questions of construction of contracts in the New South Wales cases dealing with the more standard charging clause. In those cases the court formed a view on the proper construction of the written terms of the contract rather than merely the arguability of one interpretation or another: Griffith v Hodge (1979) 2 BPR 9474 at 9475, Gibson v Coordinated Building Services Pty Ltd (1989) 4 BPR 9630 at 9631. In Venios v Machon (1986) 3 BCL 171 at 175 Young J said that that in an application equivalent to an application for an interlocutory injunction "ordinarily the court will determine any questions of law arising between the parties provided that the factual-matrix for the determination is present and there has been sufficient time for the parties to make proper submissions on it". It is also, in my view, appropriate to do so in this case since, notwithstanding that these proceedings have been on foot since March 2012, there are no separate proceedings brought by the Builder or foreshadowed by the Builder that would determine the scope of the charging clause. The proceedings recently commenced in the Magistrates Court only involve a claim for money under the contract and do not seek any determination of whether or not, as a result of the charging clause, the Builders have an interest in the Owners' land.

29. Clause 30 is not a straightforward charging clause. It does not pick up one of the "tried and tested" formulae for the creation of charges in building contracts that have been considered in the cases such as those referred to above at [23] and [25]. Neither counsel for the Builder nor the Owners were able to point me to any authority relating to the interpretation of this clause of the standard form contract or any clause relevantly similar.

30. In determining the scope of the charging clause it is necessary to consider the terms of the clause as a whole. Whilst the charge is said, in its first sentence, to secure "due performance of the contract" precisely what it secures is not explicitly dealt with. It is not explicitly limited to payment of monies as are the clauses considered in the cases referred to at [23] and [25] above. Reading the clause as a whole, the scope of the first sentence must take some of its content from the last sentence which indicates that the charge continues until "the contract price" is paid.

31. The phrase "the contract price" referred to in the last sentence of cl 30 is defined in cl 2 of the contract as "the amount to be paid by the owner to the builder, set out in Item 6 of Attachment A or as adjusted in accordance with the contract."

32. Item 6 of Attachment A identifies the sum of $365,000. The scope of the term "as adjusted in accordance with the contract" directs attention to how the contract price of $365,000 may be adjusted under the contract. There are various provisions which deal with adjustments to the contract price. That is made clear by cl 9 which provides:

1. The owner must pay the builder the contract price in a manner stated elsewhere in the contract (see Clauses 12 and 23).
2. The contract Price may vary (see Clauses 12.3, 13, 17, 18, 19, 21 and 22).

(a) cl 12.3 adds to the contract price an amount for interest if a progress payment is not paid;

(b) cl 13 deems, in certain circumstances, the cost of engaging a surveyor to be a variation to the contract;

(c) cl 17 relates to prime cost items and adjustments to take into account the actual price of those items;

(d) cl 18 deals with provisional sums and adjustment of the contract price;

(e) cl 19 deals with the suitability of goods and services provided by the owner and if they are not suitable or not supplied in time the builder may supply them and that is deemed to be a variation to the contract;

(f) cl 21 of the contract deals with variations to the contract;

(g) cl 22 of the contract deals with increases in the contract price due to extensions of time.

33. Thus the reference to the contract price and the payment of the contract price in cl 30 is a reference to the originally identified contract price as well as the variations to that price contemplated by cl 9 and the other clauses to which that clause refers. Clause 30 must be read as securing those entitlements. Although the Builder submitted that the last sentence in cl 30 might be interpreted as more in the nature of an advisory note, leaving the first sentence to operate to its full and imprecise extent, I do not accept that submission. Although there is a tension between the vague breadth of the first sentence and the precision of the last sentence, content must be given to each component of the composite clause.

34. The issue in the present case becomes acute because, on the Builder's case the contract in question has been terminated and the termination clause alters the entitlements of the Builder to payment in a way that means that the Builder is no longer entitled to recover "the contract price" as defined. Clause 25 of the contract deals with the ending of the contract by the builder because of the owner's breach, by the owner because of the builder's breach and also in various other circumstances.

35. Clauses 25.1-25.3 deal with the ending of the contract by the builder as a consequence of the owner's breach. It permits the suspension of building works prior to the termination of the contract and sets out the procedure by which that termination must be achieved. It is the procedure by which the Builder sought to terminate the contract in the present case (although there is an issue as to whether the procedure was complied with).

36. Clauses 25.4-25.6 provide for termination of the contract by the owner as a consequence of the builder's breach. Once again the clauses provide the process that must be followed.

37. Clause 25.7 permits either the owner or the builder to end the contract by a written agreement or by notice if the other becomes bankrupt or goes into liquidation, if an automatic variation raises the contract price by more than 10% or if planning or building approvals cannot be obtained within the time required by the contract.

8. If the contract is ended, then the owner must pay the builder:

(b) the cost of any materials on the site or already ordered from suppliers;

(d) the builder's margin, applied to the total of (a) plus (b) plus (c).

39. The "builder's margin" is defined in cl 2 and identified in the schedule to the contract as being 20%.

40. The Builder submitted that this is an unusual clause because, if read as generally applicable to all terminations under cl 25, even if the builder is the one in breach of the contract and it is terminated by the owner under cl 25.5, the obligation on the owner is still to pay all of the builders costs as well as the cost of ordered materials, the costs of leaving the site and a profit component on top of all of those categories of expense. This, the Builder submitted, would be an unusual result if the Builder was the party in breach of the contract because it is very favourable to the Builder, who recovers everything spent plus a profit component. As a consequence, the Builder submitted that the operation of cl 25.8 should be confined to the situations where the contract is ended under cl 25.7. I do not accept this submission. Whilst there may be sound reasons of fairness for such a limitation on the scope of cl 25.8 there is no justification for such an interpretation in the text of cl 25 or arising in any other way from the contract as a whole. Subclause 8 is in general terms, coming at the end of the clause dealing with termination and there is nothing in its text to suggest it is to operate in a manner limited to only one of the categories of termination provided for in the preceding clauses. In my view, cl 25.8 applies to each of the methods of termination under cl 25.

41. Therefore cl 25.8 applied in circumstances where the Builder terminated the contract as it alleges it did on 5 August 2011. At that point the entitlement of the Builder to progress payments ceased. Instead, the entitlement of the builder was to payment in accordance with cl 25.8. That might produce a result for the Builder that is more or less favourable than the entitlement to progress payments depending upon the stage of the works, the schedule of payments under the contract and the actual costs incurred in constructing the building. The important point is that the Builder was no longer entitled to "the contract price" as defined in the contract and used in cl 30.

42. With a charging clause in a more usual form it is clear that the charge would survive the termination of the contract so as to secure an entitlement to progress payments accruing prior to termination. That is because termination of a contract does not discharge rights and obligations accrued before the date of termination: McCosker v Lovett (1995) 7 BPR 14,507; Danthanarayana v GR8 Constructions Pty Ltd (2012) 201 FCR 347 at 357-358. However in the present case the charging clause is said to only continue as until "the contract price" is paid. That is inconsistent with it continuing in circumstances where the contract price is no longer payable but instead the different obligation, namely that under cl 25.8, comes into force. I do not think it is possible to interpret the defined term "the contract price" to include the payment obligation under cl 25.8 which arises on termination when that is not an "adjustment" to the contract price contemplated by the definition or referred to in cl 9 as one of the ways in which "the contract price" may vary.

43. As a result, in my view the charging clause had no operation after the termination of the contract and cannot support the maintenance of the caveat that was lodged.

44. In case I am wrong in my interpretation of the scope of the charging clause I would also have discharged the caveat because there was no evidence that money was owing under cl 25.8 of the contract. Even if the charging clause was capable of operating after the termination of the contract in circumstances where the obligation on the Owners to pay money was that under cl 25.8, in order to maintain the caveat the Builder needed to demonstrate that there was an arguable case that money was owing pursuant to that clause. The Builder put its case and led its evidence directed not to the obligation under cl 25.8 but instead on the basis the obligation to pay was an obligation to pay accrued progress payments plus the contractually determined cost of variations. The Builder alleges in the Magistrates Court proceedings that the Owners have paid $243,900. In submissions the Owners said that they had paid $237,000. There was no clear evidence on this issue. More importantly, there was no evidence that the amount owing under cl 25.8 exceeded the amount already paid. The Builder submitted that I should find that it was at least arguable that it was because the amount of the progress claims would be equivalent to the "cost" to the Builder referred to in cl 25.8. I am not satisfied that this is the case. Such a finding, even at this interlocutory stage, would depend upon assumptions about the costs incurred by builders in constructing residential dwellings, their profit margins and the timing of those costs when compared with the schedule of progress payments required by the contract. These are matters in relation to which there was no evidence and which go beyond the scope of judicial notice permitted under s 144 of the Evidence Act 2012. As a result, even if the charging clause had continued operation beyond the termination of the contract and covered the liability to pay under cl 25.8, I would not have been satisfied, on the evidence that was led, that there was an arguable case that an equitable charge existed and hence would not have continued the caveat.

45. Because of my findings above, it is not necessary to address the other submissions made by the Owners. Those submissions involved particular components of the claim such as the claim of variations to the contract, whether or not the notice of termination of the contract was properly served, whether or not the work was carried out in a proper manner. Had the charging clause been in a more standard form, the evidence in relation to these matters was such that it was clear that there were serious questions to be determined as to the liability of the Owners to pay the amounts claimed by the Builder prior to its termination of the contract. I would have considered that the Builder had an arguable case that a charge existed and would have continued the caveat. However in the light of the terms of the charging clause those issues are not relevant and there is no need to address them in any detail.

46. I will therefore make an order that the caveat be removed. In relation to costs, in my view the appropriate order is that costs follow the event. As a consequence, I will order that the Builder pay the Owners costs of the proceedings.

(a) The plaintiff is to withdraw caveat 1739306 forthwith.

(b) The plaintiff is to pay the first and second defendants costs of the proceedings.

I certify that the preceding forty-seven (47) numbered paragraphs are a true copy of the Reasons for Judgment herein of his Honour, Master Mossop.

Solicitor for the plaintiff: Adams and Partners Lawyers