Appellants v Respondents

2 The dispute between the parties arises from the performance of a building contract between them for the builders to construct a brick veneer dwelling on the owners' land for the sum of $245,245.00. A building permit was issued by a private building surveyor, Mr Roger Kidd, and the builders commenced the works around 22 September 2006. The strip footings were poured, stumps were installed, base brick work was completed and the base stage progress payments were paid on 16 November 2006. On 4 December 2006 the builders requested payment of the frame stage progress payment pursuant to the contract. That claim of $36,786.75 was paid and, at around this time, the owners appeared to be happy with the work which had been completed although disagreement has since arisen about whether the frame stage progress payment claim could have been made. At some point there arose a significant dispute between the parties about the roof trusses which formed part of the work during the frame stage. That dispute was the trigger of subsequent disagreement between the owners and the builders but the state of the trusses is not directly relevant to the issues which I must decide which, rather, depend upon whether there was an error of law in the VCAT decision to enliven the Court's jurisdiction under s 148 of the Victorian Civil and Administrative Tribunal Act 1998 (Vic).

3 On 14 February 2007 the owners received a progress claim for the lock-up stage payment of $85,835.75 which they refused to pay. On 6 March 2007 the builders suspended works in reliance upon clause 35 of the contract and the non payment of the lock-up stage progress payment. On 26 April 2007 the owners' solicitors informed the solicitors for the builders that the claim for the lock-up stage payment could not have been made and, amongst other things, required the builders to return to the site to continue construction works. Further disputational correspondence was exchanged until the builders commenced the proceedings in VCAT on 3 July 2007 which is the subject of this appeal.

4 The owners' justification for non payment of the builders' claim for the lock-up stage progress payment was that that claim could not be made if (as the owners contended) the frame stage had not been reached. It is true that the frame stage progress payment had been claimed and paid but it had been paid by the owners on what the owners maintained was a mistaken belief that the frame stage had been completed. The owners contended in the VCAT proceeding that the frame stage had not been completed and that, accordingly, a progress payment claim for a subsequent stage could not be sought. The learned Deputy President took the view that each stage was separate and that a progress payment claim for one stage might become payable notwithstanding that an earlier stage had not been completed. On that view of the building contract the Deputy President decided that it was unnecessary for him to make a finding about whether the frame stage was completed.

5 The owners maintained that the VCAT decision was wrong in construing the building contract as providing that each stage has its own separate definitions "which might or might not necessarily entail that one stage may not be attained until the completion of the previous stage".[1] In support of their claim the owners point to, amongst other things, the reasoning in Pratley Constructions v Racine[2] in which Senior Member Young expressed the view that entitlements to claim under a similar building contract could only be made sequentially upon the earlier stage having first been completed.[3]

6 The contract between the parties is a standard contract for the building of residential premises and its terms are to be read in conjunction with the provisions of the Domestic Building Contracts Act 1995 (Vic) ("the Act"). Many of the terms of the building contract are reproduced from the Act without amendment. Some of the terms are prescribed by the Act. Schedule 3 of the building contract contains the table prescribed by s 40 of the Act setting out the construction stages applicable to the method for progress payments to which the parties had agreed. It contemplates the five stages of building a residential building from "base stage" through to "completion" and provides for the payment of different percentages of the contract price until the whole of the contract price was paid upon completion of the building.

7 Notwithstanding the apparently sequential regime provided for in the building contract and the Act, the Deputy President concluded that the entitlements to payment did not arise sequentially. The learned Deputy President said:

The first question I consider is whether it is correct to reason as does Mr Miller that failure to attain frame stage necessarily entails failure to attain lock-up stage. To take a practical example of the interaction of the various stages to completion referred to in Section 40 of the Domestic Building Contracts Act were a non-structural internal wall not framed up it is difficult to see how a structure could be regarded as having reached fixing stage because the 'internal cladding' in the form of the plaster boards to be attached to that wall would not have been fixed. They could not be fixed if the wall itself had not been framed up. Mr Miller's submission however went beyond this sort of analysis. He saw the interaction between the various stages by analogy for instance to birthdays. A failure to attain one's 20th birthday necessarily entailed the conclusion that one had not attained one's 21st birthday. I reject that analysis. The stages have their own separate definitions which might or might not necessarily entail that one stage may not be attained until the completion of the previous stage. The [sic.] is not a simple numerical progression. Whether this structure has reached lock-up stage requires us to consider the words used in the definition in Section 40 of the Act. Clearly the external wall cladding and roof covering of a house could be fixed, its flooring laid and its external doors and windows fixed without for instance the construction of an internal non-structural wall or the construction of external bearers or external decking.[4]

The scheme for progress payments under the building contract and the Act is intended to apply sequentially. It begins with an entitlement to make a claim for payment for the base stage and ends with the entitlement to make a claim for payment upon completion. Between those two stages the builder may make claims for progress payments upon completion of the frame stage, the lock-up stage and the fixing stage. Payments are contemplated to be progressive as each stage is completed, and each stage is identified in the sequential process from beginning to end of construction. That does not mean that the contractual entitlement to make a claim, and the corresponding contractual obligation to pay a claim, requires that an earlier stage in the sequence has first been completed, claimed for and paid. It may seem counter intuitive that a valid claim for lock-up can be made unless a valid claim has first been made for completion of the frame stage, but (as the learned Deputy President correctly observed) the contractual entitlements have their separate definitions and should not be construed with an implied condition precedent which is not expressly stated. Entitlement to make a claim for the lock-up stage progress payment depends upon whether the definition for payment of that stage has been satisfied and not whether some previous definition of a previous stage has been satisfied. As a matter of practical reality that will usually, if not always, mean that the frame stage will have been completed before a claim can validly be made for the lock-up stage, but an entitlement to make a claim for the lock-up stage will depend upon whether works have sufficiently progressed to satisfy the definition and not whether an earlier defined stage has been reached.

8 The owners also contended that the learned Deputy President erred in his construction of the definition of lock-up stage of the contract and applying that construction to the facts of the case. In that regard the owners contended that the entitlement to make a claim for the lock-up progress payment had not arisen because the construction had not reached the lock-up stage within the meaning of the definition of lock-up for the purposes of the building contract. The building contract, and s 40 of the Act, define "lock-up stage" to mean:

the stage when a 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).

In this case the owners contended that this definition had not been satisfied on the facts because, relevantly, the external wall cladding was not fixed. The owners' complaint was that the construction of the external wall had left unsecured an area between approximately head height of the wall and the roof. The building plans did not provide for that area to be sealed because that wall bordered the end of the house and the garage. Both the house and the garage would eventually have a ceiling and the garage would eventually have doors and roller doors. At the point when the lock-up progress payment claim was made, however, the garage did not have roller doors or other doors, and the external wall (being the wall described in the plans between the master suite and the garage) left exposed the area between its ceiling height and the roof line.

9 The owners contended that this opening meant that the home's external wall cladding and roof covering was not fixed within the meaning of the definition of "lock-up stage" of the building contract. The owners maintained that various options might have been adopted by the builders to ensure that the external wall cladding and roof covering was fixed but that none was adopted. One measure which might have been adopted was to install temporary doors to the garage or to have constructed the ceiling in the garage or, as a temporary measure, to seal the area between the wall between the master suite and the garage and the ceiling.

10 The learned Deputy President held that the proper construction of the definition of lock-up did not require such degree of fixing. In that regard he said:

There is nothing in the definition of lock-up in the Act which requires a structure at lock-up stage to be impregnable nor on the face of it does an owner have any particular interest in having an impregnable structure at lock-up stage. The structure may and sometimes is used to store materials and prime cost items; but those materials and items are at that stage at the builder's risk not the owners' risk. The definition of lock-up stage appearing in the Act does not mention the concept of locking-up at all, hence there seems some plausibility in the view expressed by Mr Setford that a structure could have reached lock-up stage if secured by door fixed not by a lock but merely by a bent nail. If I regard the definition of lock-up stage from its very name as necessarily importing some concept that the structure has been locked, this does not in my view carry us the distance of requiring the structure to be impregnable except via access through a locked door.

In ordinary speech an open air compound surrounded by say a 2.5m cyclone fence could quite properly be regarded as locked up if the gate to the compound was secured by a chain and padlock. It would not cease to be regarded as so locked because the compound might be capable of being accessed by someone climbing over the cyclone wire fence with the assistance of a ladder, by standing on a tall barrel or by scrambling up the face of the cyclone wire without any further assistance. In my view this house had reached lock-up stage when the builder made his lock-up claim.[5]

The learned Deputy President's use of the word "impregnable" in these reasons attracted some criticism from senior counsel appearing for the owners. The use of the word arose during the course of the hearing and its echo may be found in the owners' submissions before me that the definition required a house to be "secure". What the definition relevantly requires, however, is that the home's external wall cladding and roof covering be fixed. It does not require any greater security or completion. The fixing may perhaps be done by doors or windows which are only temporary but it does not require taking steps other than those required by the building plans. The relevant wall in this case constituting the external wall was that between the master suite and the garage. The plans did not contemplate any cladding above its ceiling height as found in the plans (and as constructed at the time the progress claim was made) to seal it off from what would ultimately be a continuous open cavity between home and garage. The fixing required by the definition was no more than required by the plans and in this case the plans were complied with at the time of the claim for the lock-up stage progress payment. I do not find error in this aspect of the learned Deputy President's reasoning or in his application of the construction of the definition of lock-up to the facts.

11 The progress claim certificate for the lock-up stage was dated 13 February 2007 and appears to have been received by the owners on the following day. It required payment to be made by 27 February 2007. On 23 February the property was inspected and thereafter further disagreements developed between the parties. The progress claim for the lock-up stage was not paid and on 6 March 2007 the builders gave notice of suspension of work for non payment of the progress payment claimed for the lock-up stage due on 27 February 2007. The parties remained in argumentative correspondence through their respective solicitors and on 20 June 2007 the owners' solicitors wrote to the solicitors for the builders formally purporting to accept what was said to be the builders' repudiation of the building contract by requesting payment for the frame stage prematurely, by seeking payment for the lock up stage prematurely, by suspending work and by refusing to return to the site to proceed with the work under the building contract. The trigger for the competing claims of entitlement was the competing views about whether the claim for progress payment of the lock-up stage was validly made under the building contract.

12 The learned Deputy President concluded that it was the owners who had repudiated the building contract and not the builders.[6] The learned Deputy President reasoned that the builders' failure to complete the building was caused by the impasse over whether they had or had not reached the lock-up stage. He had determined that the house had reached lock-up stage and that what had caused the contract to break down was "the owners' refusal to pay the claim for lock-up" stating that they "were unjustified in so doing" and had "persisted with an unjustified attitude in this regard over a period of months".[7]

13 The owners contended, in part, that the notice of suspension given by the builders was never effective because, on any view, the progress claim was not payable on 27 February 2007. It was accepted in the proceedings in VCAT, and in the proceedings before me, that an error was made in the calculation of the time by which the progress claim would become payable so that it would never have been payable on 27 February 2007 but may have been payable either on the next one or two days depending upon how the calculation was made.[8] The Tribunal accepted, therefore, as the parties accepted before me, that the builders had prematurely suspended work and had prematurely served the notice. Clause 35 in schedule 5 of the building contract entitled the builder to suspend the building works if the owner did "not make a progress payment that [was] due within 7 days after it [became] due" or was in breach of the building contract. The owners contended that this clause required strict compliance and that at no stage did the builders suspend work after the date permitted by clause 35. Indeed, the owners point to clause 43.1 which provides that the builders would be in substantial breach of the contract if they suspended the carrying out of the building works "otherwise than in accordance with clause 35".

14 The Tribunal reasoned that the premature suspension of the work by the builders was not material. In this regard the learned Deputy President said:

The scheme of the section is to give the builder an entitlement to suspend work if a progress payment is not made within seven days after it becomes due. The parties were agreed that subject to the issue as to whether lock-up stage had been attained or not the progress claim was payable on 28 February. Within seven days after it was due, unless payment was made by virtue of Clause 35.0 the builder was entitled to suspend work and was required forthwith to give notice by registered post to the owner. The effect seems to be that the builder suspended work one day prematurely or perhaps two days depending upon how one makes the calculation. Mr Edmunds conceded that Mr Brown had contrary to established principle, failed to omit the first day of the relevant period from calculation. See my decision of Industrial Services Pty Ltd v 52-64 Latrobe Street Pty Ltd [2007] VCAT 918 where the relevant authorities are considered. The result then is that the builder prematurely suspended work and prematurely served the notice. This would appear to constitute a breach of contract; but there is nothing in the language of Clause 35 that would have the consequence that if a builder wrongfully suspended work on day six he would be disabled from rightfully suspending work on day eight. Given that I have found that the builder was right in his view that lock-up stage had been attained and that he was entitled to payment of his lock-up stage claim and the owners were wrong in refusing to make that claim, it would be altogether artificial to say that since the builder was a day or two premature in his suspension the ultimate right which clearly accrued to him should be denied. At least in theory the owners might have a claim for damages for the premature suspension of work for say 24, 48 or 72 hours. There is no evidence which could assign any particular loss to that prematurity. In the circumstances I do not regard it as material.[9]

I do not consider this reasoning to be incorrect. Clause 35 permitted the builder to suspend works if a progress payment was not made within 7 days after it became due or was in breach of the contract. Building contracts, like other commercial agreements, should be construed by reference to the commercial objectives to be achieved and the reasonable understanding of the parties.[10] The condition upon which the builder was entitled to suspend building works may not have been satisfied on 27 February 2007 but, for the purposes of this argument, was satisfied no later than two days later. The builders' entitlement thereby crystallised and there is no reason to deny the builders the entitlement which had then accrued. Clause 35.1 obliged the builder to give immediate notice by registered post to the owner giving the owner 7 days in which to remedy the breach. The purpose of this obligation is to put the owner on notice of the builder's position and to give the owner an opportunity to remedy a breach. In this case a notice was given (albeit one or two days too soon) and the owners plainly intended not to make a payment. No point was being taken by the owners at that stage that the notice was technically defective in the sense that it could only lawfully be given on either 28 February or 1 March 2007. The owners' position was quite different, namely, that the notice could not be given at all because no entitlement to pay had ever arisen because the progress payment claim for the lock-up stage had been premature.

15 Clause 35.0 and 35.1 are not to be given narrow or pedantic construction provided that what each is intended to achieve is satisfied on the facts of any case. Clause 35.0 is directed to enlivening a builder's ability to suspend works if a lawful entitlement to be paid is not received within the 7 days after it becomes due. That entitlement, on this part of the argument, was satisfied by no later than 1 March 2007. Clause 35.1 is designed to give notice to the owner of the builder's position and to give the owner an opportunity to remedy any default. Its purpose was achieved in this case by the notice and the passage of time. Accordingly, I do not find error in this aspect of the conclusion reached by the learned Deputy President.

16 A separate contention was maintained by the owners that the builders had repudiated the contract by insistence upon an erroneous construction of the definition of lock-up stage in the building contract. The difficulty of inferring an intention not to perform a contract by a continued adherence to an incorrect interpretation of a contract was discussed in DTR Nominees Pty Ltd v Mona Homes Pty Ltd.[11] In that case it was said in the joint judgment of Stephen, Mason and Jacobs JJ:

It was urged that the appellant, because it was acting on an erroneous view, was not willing to perform the contract according to its terms. No doubt there are cases in which a party, by insisting on an incorrect interpretation of a contract, evinces an intention that he will not perform the contract according to its terms. But there are other cases in which a party, though asserting a wrong view of a contract because he believes it to be correct, is willing to perform the contract according to its tenor. He may be willing to recognize his heresy once the true doctrine is enunciated or he may be willing to accept an authoritative exposition of the correct interpretation. In either event an intention to repudiate the contract could not be attributed to him. As Pearson LJ observed in Sweet & Maxwell Ltd. v. Universal News Services Ltd.:

"In the last resort, if the parties cannot agree, the true construction will have to be determined by the court. A party should not too readily be found to have refused to perform the agreement by contentious observations in the course of discussions or arguments ..." (footnotes omitted)[12]

In that case, and in this case, a party purported to rescind a contract in reliance upon the disputed interpretation of the contract. In that regard their Honours said:

A party in order to be entitled to rescind for anticipatory breach must at the time of rescission himself be willing to perform the contract on its proper interpretation. Otherwise he is not an innocent party, the common description of a party entitled to rescind for anticipatory breach, and indeed could profit from his misinterpretation of the contract, as the appellant seeks to do in this case when it claims forfeiture of the deposit and damages. By insisting on its incorrect interpretation of the contract to the point of claiming to rescind because the respondents were relying on the different but correction interpretation, the appellant by that stage showed that "definitive resolve or decision against doing in the future what the contract" [required] which is referred to by Dixon C.J. in Rawson v. Hobbs. Whether or not the respondents could by then have rescinded certainly the appellant could not do so. (footnotes omitted)[13]

The parties in this case can each point to correspondence through their solicitors expressing a willingness to perform the contract if the other party abandoned its position. I have no reason to assume that the parties were not each genuinely willing to perform the building contract upon the basis of the interpretation which each maintained and, perhaps, were supported (if not encouraged) by their respective legal advisers to maintain. Accordingly, I consider the Deputy President correct in his conclusion that the builders did not repudiate the building contract but that, eventually, the owners did. They did so by their purported acceptance of what they asserted to be the builders' repudiation.

17 The parties have asked that I give them a short time to consider the orders that I should make in light of my reasons and the other findings made by the learned Deputy President. It appears to me that the appropriate orders are simply that the proceeding before me be dismissed subject to any question of costs. However, I shall give the parties a short period of time within which to consider whether different orders should be made and, in any event, what orders should be made in regards to costs.

[1] Brown v Cardona [2009] VCAT 910 (Unreported, Deputy President Macnamara, 26 May 2009) [77].

[2] [2004] VCAT 2035 (Unreported, Senior Member Young, 29 October 2004).

[4] Brown v Cardona [2009] VCAT 910 (Unreported, Deputy President Macnamara, 26 May 2009) [77].

[8] Ibid [85]; Industrial Services Pty Ltd v 52-64 Latrobe Street Pty Ltd [2007] VCAT 918 (Unreported, Deputy President Macnamara, 14 April 2005).

[9] Brown v Cardona [2009] VCAT 910 (Unreported, Deputy President Macnamara, 26 May 2009) [85].

[10] Koompahtoo Local Aboriginal Land Council v Sanpine Pty Ltd [2007] HCA 61; (2007) 233 CLR 115, [68] (Gleeson CJ, Gummow, Heydon and Crennan JJ); Pan Foods Co Importers & Distributors Pty Ltd v Australia and New Zealand Banking Group Limited [2000] HCA 20; (2000) 170 ALR 579, [24] (Kirby J); 3143 Victoria St Doncaster Pty Ltd v Retirement Services Australia (R.S.A.) Pty Ltd [2010] VSC 317 (Unreported, Pagone J, 20 July 2010) [7]-[8].

[11] [1978] HCA 12; (1978) 138 CLR 423.