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[2014] VSC 58
General information, not legal advice.
Supreme Court of Victoria
2014-02-28
KYROU J
Original judgment source is linked above.
Patel v J G King Pty Ltd [2013] VCAT 1272 (Senior Member M Lothian)
ADMINISTRATIVE LAW - Application for leave to appeal from a decision of the Victorian Civil and Administrative Tribunal - Whether the Tribunal erred in law in finding that a builder was not entitled to charge for rocks excavated and removed from the building site for a new home in excess of the volume of rocks allowed under a major domestic building contract - Whether the clauses in the contract providing for the excess charge complied with provisions of the contract and the Domestic Building Contracts Act 1995 dealing with variations and escalations in the cost of footings - Whether the Tribunal denied the builder natural justice by relying on a statutory provision that was not pleaded by the owners - Whether the Tribunal erred in relation to the method of calculating the volume of rock - Leave to appeal granted - Appeal allowed.
1 This is an application for leave to appeal and, if leave is granted, for the hearing of an appeal from a decision of the Victorian Civil and Administrative Tribunal ('VCAT'). The proceeding before VCAT concerned a dispute between Mr and Mrs Patel as owners ('Owners') of the land at an address in Epping ('Land') and the builder they engaged to build their home on the Land, J G King Pty Ltd ('Builder') pursuant to a domestic building contract dated 16 March 2012 ('Contract').
2 The dispute relates to a claim of $42,960 by the Builder for rock that it claims it excavated and removed from the Land ('Builder's Claim'). The Owners initiated the VCAT proceeding seeking an order that they were not liable to pay the Builder's Claim based on alleged breaches by the Builder of the Contract, the Domestic Building Contracts Act 1995 ('Act') and the Fair Trading Act 1999. The Builder counterclaimed for the amount of the Builder's Claim ('Counterclaim').
3 The Builder's Claim is based on cll 4-1 and 6-2 of the 15-page specification that forms part of the Contract ('Specification'). Those clauses provide as follows:
amount
...
An allowance of 5 ... cubic meters has been made for rock excavation and removal from site. Should the actual amount exceed this allowance the balance will be charged by variation at $358 per cubic meter.
...
Excavation
...
6-2 An additional allowance of 5 cubic meters has been made for rock excavation and removal from site above the 5 cubic meters included in the fixed site costs (total 10 cubic meters). Should the actual amount exceed this allowance the balance will be charged by variation at $358 per cubic meter.
4 The Builder's Claim is based on the rate of $358 per cubic metre for the 120m3 of rock the Builder alleges it excavated and removed from the Land in excess of the 10m3 allowed by the Contract.
5 On 18 July 2013, VCAT decided that the Owners were not liable to make any further payment to the Builder in relation to the excavation and removal of rock and ordered that the Counterclaim be dismissed ('VCAT's decision').[1] VCAT rejected many of the breaches alleged by the Owners against the Builder.
6 The Builder has sought to impugn VCAT's decision on the basis of 17 errors of law that are set out in its amended proposed notice of appeal. In broad terms, the Builder alleges that VCAT erred by:
(a) characterising the Builder's Claim as a variation that was not recoverable because it did not comply with the provisions of cl 13 of the Contract and s 37 of the Act;
(b) denying the Builder procedural fairness in not giving it prior notice that VCAT proposed to make the finding in (a);
(c) deciding that the Builder's Claim did not satisfy the requirements of cl 14 of the Contract and s 30 of the Act regarding additional amounts payable for works relating to footings; and
(d) adopting an interpretation of the phrase 'at $358 per cubic meter' in cll 4-1 and 6-2 of the Specification that measured the volume of the rock after it was broken down and excavated ('bulk method') rather than its volume while still in the ground ('in situ method').
7 For the reasons set out below, I have concluded that VCAT made errors of law that require that leave to appeal be granted and that the appeal be allowed.
Execution of Contract and dispute over cost of excavating and removing rock
8 According to VCAT's reasons, Epping is 'a more than averagely rocky suburb.'[2] Prior to entering into the Contract with the Owners, the Builder had constructed 60 or 70 other houses in Epping and was aware of the possible presence of substantial quantities of boulders, basalt and other rock formations in the area.[3]
9 Mr Patel was an engineer. VCAT did not state whether he or his wife had previously built any homes in Epping. In relation to the Owners' awareness of the presence of rock on the Land, VCAT stated:
There is no suggestion that the Owners were told the site they already owned is in an area of quaternary basalt, but if the [MacGregor] Geotechnical report was competent, it provided both parties with information on the likelihood of hitting rock.[4]
10 The Contract comprised a 49 page standard form Master Builders Association of Victoria HC6 'New Homes Contract', the Specification and six pages of plans ('Plans'). Attached to the Contract was a site investigation report dated 13 December 2011 prepared by MacGregor Geotechnical Pty Ltd ('Geotechnical Report') and a report headed 'FirstRate Feature Report'. The Contract also contained a checklist which was signed by the parties. Two of the questions on the checklist, which the Owners answered 'Yes', were: 'Do you Owner understand how the price is calculated and may be varied?'; and 'Is the procedure for variations of Plans or Specifications understood?'
11 The Contract was for the construction of a new single storey home on the Land in accordance with the Plans and Specification. The Specification described the foundation as '[t]hermally efficient, engineer designed concrete waffle pod slab, (site specific) to Class "M" soil classification. Excludes excavation of rock & soil removal.'
12 The GST-inclusive price set out in cl 10 of the appendix to the Contract was $223,444 ('Contract Price'). Directly beneath cl 10 in a shaded box was the 'Price Change Warning' that is set out at [48] below.
13 The object of the Geotechnical Report was stated as 'determining the ground conditions so that recommendations could be made on suitable foundation types and design parameters for the proposed articulated brick veneer development.' The report made footing recommendations based on data obtained from three boreholes in positions now occupied by the garage, the alfresco and the bathroom. The 'Engineering Log' in the Geotechnical Report recorded '[r]efusal on moderately weathered basalt or boulder' at 400mm for boreholes 1 and 3 and at 500mm for borehole 2.
14 The Geotechnical Report stated that the Land was located in an area of 'Quaternary Basalt' and noted the following:
The presence of many boulders within proposed excavation depths should be anticipated and this may lead to some construction difficulties and additional expense eg overbreak in footing excavations, difficulties in excavating trenches for services etc.
15 The evidence before VCAT was that, if the three boreholes represented what would be found on the rest of the Land, using the in situ method, between 3.28m3 and 8.5m3 of rock would have to be removed. If the bulk method was used, the calculations would have ranged from 6.56m3 to 17m3.[5]
16 The original draft of the Specification contained cl 4-1 but not cl 6-2, which meant that the Contract Price made an allowance for the excavation and removal of 5m3 of rock. On the day the Contract was signed, 16 March 2012, cl 6-2 was added to the Specification which had the effect of doubling the allowance to 10m3.
17 The reasons for the doubling of the allowance from 5m3 to 10m3 are unclear. VCAT accepted Mr Patel's evidence that an employee of the Builder told him that the additional sum was 'due to engineering that we did on your site.' [6]
18 On 13 July 2012, after all the rock had been excavated and removed from the Land, the Builder provided to the Owners a document headed 'Authority for Variation to Contract, Building Variation'. The document was in the same form as previous variations that had been delivered by the Builder and was described as 'Variation No.: 5' ('Variation No 5 Document'). There was provision for the Owners to certify their agreement and authorisation of the variation by signing and dating the Variation No 5 Document. In the Variation No 5 Document, the Builder claimed the net amount of $26,532 after applying a 'Goodwill Management Discount' of $16,786. The gross amount of $43,318 is 19.38% of the Contract Price of $223,444.
19 The Variation No 5 Document described the 'Variation Items' and the GST-inclusive amounts as follows:
Additional cost incurred by builder in relation to 1m3 of rock excavation and removal from site during Underground Power installation.
Additional cost incurred by builder in relation to 70m3 of rock excavation and removal from site during Site Excavation.
Additional cost incurred by builder in relation to 60m3 of rock excavation and removal from site during Sewer and Stormwater ...
Delete allowance for rock excavation and removal from site under item 4-1 of Contract. (5m3)
Delete item 6-2 from contract relating to 5m3 additional allowance for rock excavation and removal from site.
20 The Owners did not sign the Variation No 5 Document and did not pay the amount of $26,532. They commenced the VCAT proceeding on 13 July 2012, the same day that they received the Variation No 5 Document.
21 On 30 August 2012, the Builder provided to the Owners a tax invoice which required payment of the amount of $43,318 ('Tax Invoice'). The amount was for the following item: 'Additional amount for excavation that could not have been reasonably ascertained (pursuant to clause 14.3 of our contract)'. The Owners have not paid the amount of $43,318.[7]
22 As stated at [2] above, although the issue before VCAT was whether the Builder was entitled to be paid the amount of the Builder's Claim, the VCAT proceeding was initiated by the Owners rather than by the Builder.
23 In their application for review, the Owners sought an order 'that no further monies are payable for rock removal.' They relied on alleged breaches by the Builder of certain provisions of the Fair Trading Act 1999, which are not presently relevant, cl 9.1 of the Contract and s 21(1)(b) of the Act. As cl 9.1 of the Contract and s 21(1)(b) of the Act deal with provisional sums, the Owners obviously anticipated that the Builder's Claim would be for a provisional sum. This is made clear in the Points of Claim document that was attached to the application for review.
24 On 8 November 2012, the Builder delivered Points of Defence and Counterclaim which relevantly stated as follows:
Rock excavation and removal up to specified amount
and that the total amount specified was 10m3 and went on to state that:
should the actual amount exceed this allowance the balance will be charged by variation at $358 per cubic metre
COUNTERCLAIM
25 Attached to the Points of Defence and Counterclaim was a five page document titled 'Calculation of quantity of rock which could reasonably be ascertained from foundations data' ('Builder's Calculation Document'). That document contained 15 attachments. Although the Builder's Calculation Document contains the phrase 'foundations data' which appears in cl 14 of the Contract and s 30 of the Act, it did not refer to those provisions or to the matters relevant to the recovery of an additional amount for foundations under s 30(7) of the Act.
26 The phrase 'quantity of rock which could reasonably be ascertained' does not appear in cl 14 of the Contract or s 30 of the Act; those provisions address the question of whether the additional amount of money claimed for work on the footings could reasonably have been ascertained. Moreover, the amount claimed by the Builder, $42,960, is not the amount of $43,318 set out in the Tax Invoice.
27 Thus, neither the Points of Defence and Counterclaim nor the Builder's Calculation Document unequivocally indicated that the Builder's Claim was made under cl 14 of the Contract.
28 The Owners did not deliver a defence to the Points of Defence and Counterclaim. They did, however, deliver Amended Points of Claim dated 4 December 2012. That document alleged breaches by the Builder of: ss 20, 21 and 22 of the Act, which deal with provisional sums; cl 9.2 of the Contract, which deals with provisional sums; cl 10.1 of the Contract, which deals with statutory warranties binding on builders; and s 9 of the Fair Trading Act 1999, which dealt with misleading or deceptive conduct.
29 It follows from the above discussion of the 'pleadings' before VCAT that the Owners focused on the issue of provisional sums and that the Builder's Counterclaim was based on cll 4-1 and 6-2 of the Specification without identifying the contractual or statutory basis for the amount claimed under those clauses.
30 It is also clear from the 'pleadings' that neither party relied on the provisions of the Contract or the Act that deal with variations. In particular, the Owners did not allege that the Builder was precluded by s 37 of the Act from recovering the Builder's Claim.
31 The VCAT proceeding was heard on 20 November 2012, 17 December 2012, 18 January 2013, 18 March 2013, 31 May 2013 and 3 June 2013. The Owners were not legally represented until after lunch on 18 January 2013. Prior to that time, Mr Patel represented himself and his wife. After that time, the Owners were represented by Mr Guthridge of counsel. The Builder was represented throughout the VCAT hearing by its solicitor, Mr Champion.
32 On 18 March 2013, after the Owners were represented by counsel, they applied to re-open their case to tender an addendum to an expert witness' report. In considering that application, the presiding senior member referred to VCAT's obligations to act fairly and informally and to the fact that the Owners were previously unrepresented. The senior member then referred to the 'pleadings' and stated:
[I]t occurs to me that the clauses in the contract that are of most use in this matter are clauses 13 and 14. Clause 13 concerns variations generally and clause 14 concerns extra amounts claimed for excavations or footings. I am assuming that Mr Patel did not have any or much legal assistance when those points of claim were put together. So in order to do substantial justice between the parties, I need to know about that. I noted that [the Builder has] not pleaded a variation in [its] counterclaim and I'm not going to have Mr and Mrs Patel lose on a technicality. Perish the thought that we might have to adjourn this again but we are going to get it right.[8]
33 The parties did not specifically respond to the senior member's references to cll 13 and 14 of the Contact and did not seek to amend their 'pleadings'. Later on the same day, in response to an objection to a question put to Mr Patel in examination in chief about his understanding of the word 'provisional', the senior member said:
Objection upheld. And provisional as I said before is of little use when we're talking about something which has been described as subject to variation.[9]
34 The parties filed written submissions at the conclusion of the VCAT proceeding. The Owners' written submission focused on the issue of provisional sums. It contained the following statements on cl 14 of the Contract and the issue of variations:
(b) However, should the Senior Member not agree with this position, the Applicant's position in the alternative is that it should only have to pay a maximum of either $1,361.32, $8,679.00 or $21,126.60 as the Respondent has either: (i) not made any calculation of the rock excavated and removed from the Site or (ii) in doing so has not calculated the amount of rock correctly and (iii) in addition has not applied the correct Builder's margin to the Provisional Sum as required by Clauses 9.6 and 14.3 of the Contract ...
...
35 The Builder's written submission contained the following statements on cl 14 of the Contract and the issue of variations:
3.3 In the course of examination of Mr Boothby, the learned Senior Member suggested that a signed variation for the additional rock might have been required. With respect, that proposition is incorrect:
(a) there was no change to the plans and specifications, and therefore no need for a variation within the meaning of clause 13.1;
(b) while it is true that clauses 4-1 and 6-2 of the contract schedule state:
Should the actual amount exceed this allowance the balance will be charged by variation at $358 per cubic metre.
It is clear that this wording contemplated the charge being made once the actual amount of rock encountered had been determined. The reference to 'the balance ... [being] charged by variation' was clearly directed to the mechanism by which the adjustment to the contract price would be processed. It would be physically impossible for the 'actual' excess to be determined and charged prior to the excavation being completed.
...
7.8 Whilst it is true that under cl 14 of the contract (which effectively mirrors s 30(7) of the Act) prohibits the recovery of an amount of money if the additional amount could reasonably have been ascertained had the builder obtained all the Foundations Data required under the Act the Builder did obtain all the Foundations Data required under the Act and the additional amount could not reasonably have been ascertained.
36 The Builder's submission then set out arguments in support of its contention concerning s 30(7) of the Act.
37 It can be seen from the above that the issues raised by the parties in their 'pleadings' and submissions included the applicability of the provisions of the Contract and the Act dealing with provisional sums and work performed on footings and excavations. However, they did not include any issues about the provisions of the Contract or the Act dealing with variations.
38 As stated at [5] above, VCAT decided that no further amount was payable by the Owners to the Builder in relation to the excavation and removal of rock and ordered that the Counterclaim be dismissed. VCAT made the following order dated 18 July 2013 ('VCAT's Order'):
39 Before considering whether VCAT's order is vitiated by any of the errors of law set out in the Builder's amended proposed notice of appeal, it is necessary to establish the relevant legal framework. This requires an examination of the overarching provisions of the Act and the principles governing the construction of contracts.
40 One of the main purposes of the Act is 'to regulate contracts for the carrying out of domestic building work'.[11] The Act contains many provisions which seek to protect owners from unfair practices by builders.[12] The measures adopted by the Act for this purpose include restrictions to the circumstances in which a builder can charge more than the price set out in a domestic building contract, requirements that owners be given prominent warnings about those circumstances, and options for owners to terminate such a contract in some cases where the contract price is to be increased. The Act cannot be excluded by contract.[13]
41 It was common ground that the Contract was a 'domestic building contract' as well as a 'major domestic building contract' for the purposes of the Act.
42 Section 16(1) of the Act makes it an offence for a builder who enters into a domestic building contract to 'demand, recover or retain from the building owner an amount of money under the contract in excess of the contract price unless authorised to do so by [the] Act.'
43 The circumstances in which the price specified in a major domestic building contract can be validly increased in accordance with the Act relevantly include the following:
(a) where the builder or the owner requests a variation to the plans or specifications (ss 37 to 39 of the Act);
(b) where a prime cost or provisional sum allowance is included in the contract (ss 20 to 23 of the Act); and
(c) where unforeseen additional work is required in relation to the footings (s 30 of the Act).[14]
44 Section 33 of the Act requires builders to include a warning about possible price increases in a major domestic building contract and provides that, if such a warning is not included, the builder cannot charge more than the contract price. The section states as follows:
(1) This section applies to a major domestic building contract that contains a provision -
(a) that allows for the contract price to change ...
...
(2) A builder must not enter into such a major domestic building contract unless there is a warning that the contract price is subject to change and that warning -
(a) is placed next to that price; and
(b) is in a form approved by the Director; and
(c) specifies the provisions of the contract that allow for the change.
Penalty: 50 penalty units.
(3) If a warning is not included in a contract as required by subsection (2), any provision in the contract that enables the contract price to change only has effect to the extent that it enables the contract price to decrease.
45 The effect of ss 16 and 33 of the Act is to prohibit builders from claiming amounts in excess of a contract price unless the particular amount is expressly permitted by another provision of the Act or is covered by a warning that complies with s 33. In other words, the sections prohibit price escalation clauses which seek to have contractual effect independently of the scheme established by the Act. Section 33 can be described as a 'no price increase surprises' provision.
46 Section 41 of the Act relevantly confers a right on an owner to terminate a major domestic building contract in the case of some cost blow-outs. The section provides as follows:
(1) A building owner may end a major domestic building contract if -
(a) either -
(i) the contract price rises by 15% or more after the contract was entered into; or
(ii) ... ; and
(b) the reason for the increased ... cost was something that could not have been reasonably foreseen by the builder on the date the contract was made.
(2) For the purposes of subsection (1), any increased ... cost that arises as a result of a prime cost item or a provisional sum or that is caused by a variation made under section 38[15] is to be ignored in calculating any price rise ...
(3) To end the contract, the building owner must give the builder a signed notice stating that the building owner is ending the contract under this section and giving details of why the contract is being ended.
...
(5) If a contract is ended under this section, the builder is entitled to a reasonable price for the work carried out under the contract to the date the contract is ended.
(6) However, a builder may not recover under subsection (5) more than the builder would have been entitled to recover under the contract ...
47 Section 41 of the Act enables an owner to avoid being bound by a contract where the price increases by 15% or more due to circumstances that do not result from choices made by the owner or from circumstances that could have been reasonably foreseen by the builder. Section 41 adds to the protection afforded to the owner by the 'no price increase surprises' provisions of s 33.
48 In the present case, the Contract contained the following prominent warning ('Price Change Warning'):
WARNING: Changes to the Price
The Price of this Contract is not fixed, but may be altered as a result of:
49 In accordance with s 33 of the Act, the amount of the Builder's Claim cannot be recovered unless it can be characterised as falling within one of the categories set out in the Price Change Warning and it complies with the provisions of the Contract that apply to the relevant category.[16] It was common ground before me that the only potentially applicable categories were those relating to 'Provisional Sums', 'variations' and 'additional amounts payable for excavations or footings'. VCAT held that the Builder's Claim did not constitute a provisional sum and that aspect of VCAT's decision is not challenged. Accordingly, the critical issues in this proceeding are whether VCAT erred in its conclusions about the applicability of the provisions of the Contract and the Act dealing with variations and recovery of additional amounts for excavations or footings.
50 The principles which govern the construction of a contract were conveniently summarised by the High Court in Toll (FGCT) Pty Ltd v Alphapharm Pty Ltd[17] as follows:
This Court, in Pacific Carriers Ltd v BNP Paribas, has recently reaffirmed the principle of objectivity by which the rights and liabilities of the parties to a contract are determined. It is not the subjective beliefs or understandings of the parties about their rights and liabilities that govern their contractual relations. What matters is what each party by words and conduct would have led a reasonable person in the position of the other party to believe. References to the common intention of the parties to a contract are to be understood as referring to what a reasonable person would understand by the language in which the parties have expressed their agreement. The meaning of the terms of a contractual document is to be determined by what a reasonable person would have understood them to mean. That, normally, requires consideration not only of the text, but also of the surrounding circumstances known to the parties, and the purpose and object of the transaction.[18]
51 The circumstances in which evidence of surrounding circumstances is admissible to assist in the construction of a contract were stated as follows by Mason J in Codelfa Construction Pty Ltd v State Rail Authority (NSW):[19]
The true rule is that evidence of surrounding circumstances is admissible to assist in the interpretation of the contract if the language is ambiguous or susceptible of more than one meaning. But it is not admissible to contradict the language of the contract when it has a plain meaning. Generally speaking facts existing when the contract was made will not be receivable as part of the surrounding circumstances as an aid to construction, unless they were known to both parties, although, as we have seen, if the facts are notorious knowledge of them will be presumed.
...
[W]hen the issue is which of two or more possible meanings is to be given to a contractual provision we look, not to the actual intentions, aspirations or expectations of the parties before or at the time of the contract, except in so far as they are expressed in the contract, but to the objective framework of facts within which the contract came into existence, and to the parties' presumed intention in this setting. We do not take into account the actual intentions of the parties and for the very good reason that an investigation of those matters would not only be time consuming but it would also be unrewarding as it would tend to give too much weight to these factors at the expense of the actual language of the written contract.[20]
52 The 17 grounds of appeal in the Builder's amended proposed notice of appeal deal with three broad issues.
53 The first issue, which I will refer to as the 'variation issue', comprises grounds of appeal 1 to 5. The issue concerns whether VCAT erred in law in characterising the Builder's Claim as a variation and in construing cl 13 of the Contract and s 37 of the Act. The issue also concerns whether VCAT breached the hearing rule of natural justice in making an adverse decision based on s 37 of the Act without giving any prior notice to the Builder of VCAT's intention to do so.
54 The second issue, which I will refer to as the 'cl 14 issue', comprises grounds of appeal 6 to 10. The issue concerns whether VCAT erred in law in finding that the Builder had not satisfied the requirements of cl 14 of the Contract and s 30 of the Act for recovery of the cost of work performed in relation to footings and excavations.
55 The third issue, which I will refer to as the 'measurement issue', comprises grounds of appeal 11 to 17. The issue concerns whether VCAT erred in law in construing the Contract as requiring the volume of rocks excavated and removed from the Land to be measured using the in situ method rather than the bulk method.
56 For the reasons discussed at [37] above and [100] to [111] below, VCAT's findings in relation to the variation issue cannot affect the outcome of this proceeding. Accordingly, I will first discuss the grounds of appeal relating to the cl 14 issue before discussing those that relate to the variation issue.
Did VCAT err in finding Builder's Claim was not payable under cl 14 of Contract?
Provisions of Act and Contract dealing with charges for excavations and footings
57 Section 30 of the Act relevantly provides as follows:
(1) This section applies if proposed domestic building work under a major domestic building contract will require the construction or alteration of the footings of a building ...
(2) Before entering into the contract, the builder must obtain foundations data in relation to the building site on which the work is to be carried out.
Penalty: 50 penalty units.
(3) In this section foundations data means -
(a) the information concerning the building site that a builder exercising reasonable care and skill would need to prepare -
(i) a proper footings design for the site; and
(ii) an adequate estimate of the cost of constructing those footings; and
...
(4) In deciding whether he, she or it has obtained all the information required by subsection (2), a builder must have regard to -
(a) the relevant standards published by Standards Australia; and
(b) the need for a drainage plan or engineer's drawings and computations; and
(c) the need for information on the fall of the land on the site.
(5) It is not necessary for a builder to commission the preparation of foundations data under this section to the extent that such data already exists and it is reasonable for the builder to rely on that data.
...
(7) After entering into a major domestic building contract, a builder cannot seek from the building owner an amount of money not already provided for in the contract if the additional amount could reasonably have been ascertained had the builder obtained all the foundations data required by this section.
(8) Nothing in this section prevents a builder from exercising any right given by this Act to the builder to claim an amount of money not already provided for in the contract if the need for the additional amount could not reasonably have been ascertained from the foundations data required by this section.
14. ADDITIONAL AMOUNTS FOR EXCAVATIONS OR FOOTINGS
14.1 Builder generally not entitled to extra amounts for excavations or footings
After entering into this Contract the Builder cannot seek from the Owner an amount of money not already provided for in the Original Contract Price if the additional amount could reasonably have been ascertained had the Builder obtained all the Foundations Data required under the Act.
14.2 Builders entitlement to extra amount for excavations and footings
The Builder will be entitled to claim an amount of money not already provided for in the Original Contract Price if the need for the additional amount could not reasonably have been ascertained from the Foundations Data.
14.3 Owner to pay additional cost if builder entitled to extra amount
If the Builder is entitled to any additional amounts which could not reasonably have been ascertained for excavations or footings under this Contract or the Act, the Owner will pay to the Builder, in the Builder's next Progress Claim, the agreed cost of the additional work or, if the cost is not agreed, the cost incurred by the Builder plus 15% for the Builder's margin.
VCAT's decision that the Builder's Claim was not payable under cl 14 of Contract
59 VCAT decided that the Builder's Claim was not recoverable under cl 14 of the Contract because the preconditions for payment under that clause and s 30 of the Act were not satisfied.
60 Before specifically discussing cl 14 of the Contract and s 30 of the Act, VCAT made the following observations:
[I]t is possible for a soil report to be honest and competent, but not an accurate forecast of what is eventually found on a site.
...
In the absence of evidence for the Owners from a geotechnical expert, I am not satisfied that the Owners' criticism of the bore holes is justified.
...
Mr Boothby's evidence was that the Builder constructed 60 or 70 homes in the Epping area up to 2012, that in about five cases there was more rock found than estimated and in about 12 cases credit for rock was given. Under cross-examination Mr Guthridge asked about two named addresses where the Builder had estimated 5 m3 and in one case 40 m3 had been removed; in the other 80 m3. He gave another address where 14 m3 had been estimated and 52 m3 removed and a fourth where 20 m3 had been estimated and 81 m3 removed. In each case Mr Guthridge asked Mr Boothby to agree that this was so and Mr Boothby responded that he couldn't answer.
...
As I said during the hearing, one or even two instances where the Builder has failed to accurately predict the amount of rock found does not prove a consistent failure to predict accurately. I am not satisfied on the evidence before me in this case that the Builder is consistently unable to determine the amount of rock in Epping, but neither am I in a position to say that this allegation is without any merit. Producing the documents sought, although potentially an onerous task, might have enabled me to say that the allegation is without merit.[21]
61 The parts of VCAT's reasons that dealt with cl 14 of the Contract and s 30 of the Act are as follows:
The report of [MacGregor] Geotechnical appears to be of the type upon which the requirements of clause 14 of the contract and s 30 of the ... Act may be based.
The evidence is contradictory about whether this Builder could, or could not, have reasonably ascertained the actual amount of rock that was located. Based on the [MacGregor] Geotechnical report the Builder's Calculation of Quantity of Rock[22] indicates that only 3.28m3 of rock would be found measured in-ground, or if multiplied by a bulking factor of 2.5, 8.2m3. Mr Skiba's evidence of holes dug tends to support that view, as does Mr Patel's statement that his neighbour's site had 'almost close to none'.[23]
And yet Mr Sciessere[24] calculated on the basis of the [MacGregor] Geotechnical report that 8.5m3 of rock would be discovered if measured in situ, from which it follows that 17m3 would be measured if 'bulked'. Further, Earthlift sent Mr Foster and his 20 tonne excavator to site. In answer to my question, Mr Foster said that he is only sent to sites where there is rock. I asked if he is sent to sites where there is less than 10m3 of rock, to which he answered 'maybe', the minimum he is usually sent to site for is between 15m3 and 20m3 and the average is around 40m3.
Mr Foster gave evidence that he would work in the Epping area an average of twice a week and is familiar with it. In re-examination Mr Champion asked:
I take it from your experience you know there's heaps of jobs in Epping where they can be excavated and there's not much rock?
To which Mr Foster replied:
There's a couple.
However Mr Foster also said that he would expect to see an indication on the daily worksheet given to him to complete before work commenced, of the level at which he could expect to strike rock 'and I was actually a little bit shocked to see that there was no reference to rock going in there.'
...
But did the Builder ascertain possible volumes of rock from the [MacGregor] Geotechnical report?
Returning to Mr Sciessere's calculation for rock that could have been expected in the trenches, if the Builder did calculate the rock it could expect to discover, it significantly underestimated given that it charged for rock 'bulked'.
I accept the evidence of Mr Boothby[25] that the first estimate of 5m3 was made based on general knowledge of the Epping area. However I find his evidence about the allowance of 10m3 surprising because he said the calculation was no longer in the Builder's file and the unnamed person who 'would have' performed the calculation no longer works for the Builder. The nearest approach to proof that there was such a calculation was an email from Ms Lattman to Mr Jijo dated 16 March 2012 saying:
Luke [the manager] Anthony [sales estimator] and James [Boothby] have worked on the site costs and are happy with them.
However neither Ms Lattman nor Mr Jijo proved the email.
I cannot be satisfied that any such calculation ever existed. ... [E]ven the volume of 10m3 seems to have been set based on a guess, albeit an intelligent guess, rather than in accordance with a calculation which ascertained the amount of rock to be found from the foundations data. The Builder has therefore failed to fulfil the preconditions for a successful claim under clause 14 of the contract and s 30 of the ... Act. [26]
62 Earlier in its reasons, VCAT disagreed with the opinion of Mr Sciessere that, based on the Geotechnical Report, a contractual allowance of 10m3 was reasonable. VCAT stated that such an allowance was not reasonable because Mr Sciessere's calculation of 8.5m3 of rock was arrived at using the in situ method when he knew that the Builder's charge was based on the bulk method. VCAT concluded that if the Builder proposed to charge for bulked rock, it was obliged to allow at least 17m3 for rock.[27]
63 VCAT stated that, in the light of its conclusion that the Owners did not owe the Builder any further amount for the excavation and removal of rock, it did not need to decide the precise volume of rock that was excavated and removed.[28] VCAT referred to the evidence and made the observations set out below.
(a) Based on photographs of excavated rock, Mr Skiba expressed the opinion that most of the rock was reef (solid volumes of rock) which is charged as rock but 10% could be floaters (discrete boulders that do not require breaking) which are not charged as rock. VCAT stated that, as it had concluded that no further amount is payable for rock, it was not necessary for it to consider whether the claimed rock volume should be reduced for floaters.[29]
(b) The Builder adduced evidence that it engaged the following contractors in relation to the excavation and removal of rock for the footings and for trenches to connect services such as sewerage: J & D Rockblasting and SL John Pty Ltd for blasting services; Earthlift and SMD Drainage Pty Ltd for excavation and stockpiling; and Lewins Earthmoving Pty Ltd for removal. The fees that these contractors charged the Builder may be summarised as follows:
(c) Mr Foster of Earthlift gave evidence that he estimated that, in respect of the footings, he excavated and stockpiled 70m3 of rock using the bulk method. He arrived at this estimate by looking at the mound and working out how many truckloads would be required to remove it. He conceded his estimate might not be accurate and that the volume could have been 65m3.
(d) Mr Lewin of Lewins Earthmoving gave evidence that his truck and trailer had a total capacity of 25m3 (approximately 12m3 for the truck and 14m3 for the trailer) and that, based on the loads of rock he had removed from the Land, he calculated that the volume relating to the footings based on the bulk method was 70m3.
(e) Mr Milani of SMD Drainage Pty Ltd gave evidence that his company estimated that it excavated and stockpiled 60m3 of rock by measuring the length, width and height of the pile.
64 VCAT made the following concluding comments about the volume of rock for which the Builder charged:
The Builder has not given evidence of the total cost to it of removing the rock but the invoices provided as part of its evidence of volume total $20,202 or assuming 130m3 in total, $155.40/m3 before any amount is allowed for its overheads and profit.
If the amount per cubic meter is calculated separately for the footprint and the trenches, the cost for the footprint is $100.53 and for the trenches is $219.42, both before overheads and profit.
...
Even if I had been satisfied that measuring rock 'bulked up' was appropriate, I cannot be confident of the volumes the Builder claims to have removed. [31]
Grounds of appeal relating to VCAT's decision on the cl 14 issue
65 In its amended proposed notice of appeal, the Builder relies on the following alleged errors of law:
66 The Builder submitted that VCAT erred in law by misconstruing and misapplying cl 14 of the Contract and s 30 of the Act. According to the Builder, s 30(7) of the Act did not apply because that provision was engaged only when 'an amount of money [has] not already [been] provided for in the contract', whereas in the present case the amount of the Builder's Claim was provided for in the Contract. Even if that were not so, it was said, the section did not apply because the amount of the Builder's Claim could not reasonably have been ascertained from the foundations data. The Builder emphasised that VCAT had not made a finding that the Builder had not obtained all the foundations data required by s 30.
67 The Builder submitted that, although s 30 of the Act covered work done for the construction of footings and did not refer to other excavation work, cl 14 of the Contract referred to all excavation and footings work for which the additional amount charged could not reasonably have been ascertained from the foundations data. The Price Change Warning extended to 'any additional amounts payable for excavations or footings' under cl 14 and was not confined to footings work.
68 The Builder contended that VCAT applied the wrong legal test in arriving at its conclusion that the preconditions for a successful claim under cl 14 of the Contract and s 30 of the Act had not been fulfilled. According to the Builder, VCAT focused on how the allowance of 10m3 in the Contract was arrived at and whether it was reasonable, rather than applying the statutory test, namely whether the amount of the Builder's Claim could reasonably have been ascertained from the foundations data. The Builder relied on the absence of any finding by VCAT that the amount of the Builder's Claim could reasonably have been ascertained from the foundations data and maintained that there was no evidence that would have supported such a finding.
69 The Owners submitted that VCAT's conclusion that the Builder had not satisfied the requirements of cl 14 of the Contract and s 30 of the Act was correct. First, the Builder had not demonstrated that it had obtained all the foundations data required by the Act. Secondly, the Builder had not demonstrated that it could not reasonably have ascertained the amount of the additional cost if it had obtained all the foundations data.
70 The Owners also submitted that s 30(7) of the Act applied because the Contract did not already provide for the amount of money claimed by the Builder; it only set out a rate per cubic metre in excess of the allowance of 10m3.
71 Finally, the Owners submitted that VCAT's conclusions were findings of fact, not law, and thus could not be the subject of appeal to this Court.
72 Section 30(7) of the Act would preclude the Builder from charging an additional amount in respect of work done on the footings if:
(a) the additional amount is not already provided for in the Contract; and
(b) the additional amount could reasonably have been ascertained had the Builder obtained all the foundations data required by s 30.
73 Section 30 of the Act refers to 'work' and 'the construction or alteration of the footings of a building' without defining the scope of that work. In my opinion, where a major domestic building contract provides for the excavation of land for the construction of footings, s 30 applies not only to the work performed to excavate the land, but also to the disposal of items that are extracted. In the present case, s 30 extended to the excavation and removal of rock for the construction of the footings on the Land.
74 Although s 30(7) of the Act is confined to work done on the footings, cl 14 of the Contract adopts the provisions of the section for all work involving excavation and removal of extracted items, irrespective of whether the work relates to the footings or trenches for services such as sewerage. Accordingly, if the amount of the Builder's Claim was not already provided for in the Contract and it could reasonably have been ascertained had the Builder obtained all the foundations data required by s 30, the Builder would not be entitled to payment of that amount.
75 Logically, in determining whether s 30(7) of the Act precluded recovery of the amount of the Builder's Claim, the first issue that had to be decided was whether the amount of the Builder's Claim was not already provided for in the Contract. VCAT did not expressly find that the amount of the Builder's Claim was not already provided for in the Contract. However, on the undisputed facts, it would not have been open to VCAT to find that the amount of the Builder's Claim was already provided for in the Contract. That is because cll 4-1 and 6-2 of the Specification did not set out a precise amount that was payable by the Owners, but a rate that could be used to calculate that amount. It follows that I reject the Builder's submission that those clauses 'already provided' for the amount of the Builder's Claim.
76 The next issue that had to be considered was whether the Builder obtained all the foundations data required by s 30 of the Act. If the Builder had not obtained all the required foundations data, the third issue would have been whether the amount of the Builder's Claim could reasonably have been ascertained from the foundations data that should have been obtained in conjunction with the foundations data that had been obtained. If the Builder had obtained all the required foundations data, the third issue would have been whether the amount of the Builder's Claim could reasonably have been ascertained from that foundations data.
77 VCAT's discussion of these issues is not entirely clear. However, VCAT's rejection of the Owners' criticism of the boreholes and its statement that the Geotechnical Report 'appears to be the type upon which the requirements of clause 14 of the contract and s 30 of the ... Act may be based'[32] indicates that it was satisfied that the Builder had obtained all the foundations data required by s 30. In any event, VCAT did not make an express finding that the Builder had not obtained all the required foundations data.
78 The final issue that VCAT was required to determine was whether the amount of the Builder's Claim could reasonably have been ascertained from the foundations data that the Builder had obtained. VCAT did not decide this issue because it focused on whether the Builder had performed any calculations of the volume of rock to be found from the foundations data in arriving at the allowance of 10m3 and whether that allowance was reasonable. This is evident from VCAT's finding that the allowed volume of 10m3 was based on 'an intelligent guess' rather than 'a calculation which ascertained the amount of rock to be found from the foundations data.' VCAT did not find that, if the Builder had performed such a calculation, the Builder could reasonably have ascertained the volume of rock that needed excavation and removal and thus the amount of the additional cost (by multiplying the volume by $358).
79 The Builder's Claim was based on cll 4-1 and 6-2 of the Specification. The amount claimed was calculated by multiplying the rate of $358 by the volume of rock excavated and removed from the Land that was in excess of the 10m3 that was allowed by the Contract. The amount payable was not specified in the Contract but depended on the volume of rock extracted and removed, as ascertained after the date of the Contract.
80 By focusing on how the allowed volume of 10m3 was arrived at and whether it was reasonable, VCAT failed to apply the statutory test of whether the amount of the Builder's Claim, namely $42,960, that was based on the excavation and removal of 120m3 of rock, could reasonably have been ascertained by the Builder from the foundations data at the time the Contract was executed.
81 In order to apply the statutory test, VCAT had to consider the foundations data that the Builder had obtained and decide in the light of all the evidence whether on the day the Contract was signed the Builder could have reasonably ascertained that a total of 130m3 of rock would need to be excavated and removed from the Land. If that question was answered in the affirmative, s 30(7) of the Act would have precluded the Builder from recovering the amount of the Builder's Claim because that amount could have been calculated by deducting the allowed volume of 10m3 from 130m3 and then multiplying 120m3 by $358. On the other hand, if that question was answered in the negative, s 30(7) would not have precluded the Builder from recovering the amount of the Builder's Claim because that amount could not have been reasonably ascertained from the foundations data.
82 As VCAT failed to apply the statutory test, its decision that s 30(7) of the Act precluded the Builder from recovering the amount of the Builder's Claim is vitiated by an error of law.
83 It follows that ground of appeal 10 is made out. Contrary to the Owners' submissions, this ground raises a question of law rather than fact.
Did VCAT err in finding that the Builder's Claim was a variation?
84 My conclusion at [83] above is not necessarily sufficient to dispose of the application for leave to appeal and the appeal itself. Whether it is sufficient depends on whether the Act or the Contract provides that a builder's claim which is properly characterised as a variation to plans or specifications can only be recovered from the owner if it satisfies the requirements of s 37 of the Act and the provisions of the contract which reflect that section.
85 Section 37 of the Act, which is set out at [87] below, expressly states that it does not apply to contractual terms dealing with prime cost items or provis[33]nal sums.33 Prime cost items and provisional sums are dealt with in ss 20 to 23 of the Act. Section 37 does not contain a similar exception in respect of payments authorised by s 30. It is therefore arguable that if a builder wishes to claim an additional amount for a variation to the plans or specifications under s 37, the builder must comply with that section even if the work relates to footings.
86 The present case does not depend on whether s 37 of the Act is an exclusive statutory code governing the circumstances in which a builder can recover an additional amount for variations to plans or specifications. Accordingly, I will assume, without deciding, that s 37 does constitute such an exclusive statutory code. On the basis of this assumption, if VCAT's findings on the variation issue are correct, an appeal by the Builder cannot succeed. As will be seen, however, I have concluded that VCAT's findings are wrong in law.
Provisions of Act and Contract dealing with variations to plans or specifications
87 Section 37 of the Act relevantly provides as follows:
37 Variation of plans or specifications - by builder
(1) A builder who wishes to vary the plans or specifications set out in a major domestic building contract must give the building owner a notice that -
(a) describes the variation the builder wishes to make; and
(b) states why the builder wishes to make the variation; and
(c) states what effect the variation will have on the work as a whole being carried out under the contract and whether a variation to any permit will be required; and
(d) if the variation will result in any delays, states the builder's reasonable estimate as to how long those delays will be; and
(e) states the cost of the variation and the effect it will have on the contract price.
(2) A builder must not give effect to any variation unless -
(a) the building owner gives the builder a signed consent to the variation attached to a copy of the notice required by subsection (1); or
...
(3) A builder is not entitled to recover any money in respect of a variation unless -
(a) the builder -
(i) has complied with this section; and
(ii) can establish that the variation is made necessary by circumstances that could not have been reasonably foreseen by the builder at the time the contract was entered into; or
(b) [VCAT] is satisfied -
(i) that there are exceptional circumstances or that the builder would suffer a significant or exceptional hardship by the operation of paragraph (a); and
(ii) that it would not be unfair to the building owner for the builder to recover the money.
(4) If subsection (3) applies, the builder is entitled to recover the cost of carrying out the variation plus a reasonable profit.
(5) This section does not apply to contractual terms dealing with prime cost items or provisional sums.
13. VARIATIONS BY THE BUILDER
13.1 Notice required when builder requests a variation
If the Builder wishes to vary the Plans or Specifications, then the Builder will give the Owner written notice that-
• describes the variation; AND
• states the cost of the variation; AND
• states the effect of that cost on the Contract Price.
13.2 Variations only to be performed in certain circumstances
The Builder will not give effect to any variation requested by the Builder unless either;
...
13.4 Variation provisions not applicable to prime cost items or provisional sums
The variation provisions of this Clause 13 do not apply to any Prime Cost Items or Provisional Sums included in this Contract.
89 VCAT decided that the Claim constituted a variation for the purposes of cl 13 of the Contract and s 37 of the Act essentially because cll 4-1 and 6-2 of the Specification contain the phrase 'will be charged by variation'. VCAT held that the Builder was not entitled to recover the amount of the Builder's Claim because the preconditions for recovery of a variation in cl 13 of the Contract and s 37 of the Act were not satisfied.
90 The relevant parts of VCAT's reasons are as follows:
Although a variation is usually a change to the physical structure of the building, the Builder has characterised any extra sum payable for rock as a variation. The Builder has not done what it was required to do to obtain payment of a variation - that is, to obtain the Owners' written permission, although it has taken at least some steps towards that end by producing the variation document.[34] Neither has the Builder pleaded in its counterclaim that under s 37(3)(b) of the ... Act the Builder should be entitled to a variation regardless of its failure to obtain a variation in writing.
I am not satisfied that the Builder is entitled to an additional sum for rock excavation as a variation, and because the Builder chose to describe the additional sum as a variation in its contract documents and its claim dated 13 July 2012, it is not entitled to any sum at all ...[35]
Grounds of appeal relating to VCAT's decision on the variation issue
91 In its amended proposed notice of appeal, the Builder relies on the following alleged errors of law:
92 The Builder submitted that VCAT erred in characterising the Builder's Claim as a variation that was governed by the requirements of s 37 of the Act because the Builder's Claim did not seek to 'vary the plans or specifications' within the meaning of that section. According to the Builder, VCAT wrongly interpreted the words 'will be charged by variation' in cll 4-1 and 6-2 of the Specification as meaning that any additional charge for excavation and removal of rock would only be payable if the Builder complied with the provisions of the Contract and the Act dealing with variations.
93 The Builder contended that it did not make sense to construe the word 'variation' in cll 4-1 and 6-2 of the Specification as meaning that the additional charges constituted a variation. As the Owners had already agreed to pay the additional charges at the rate of $358 per cubic metre, it was said that it would be illogical if those charges could not be recovered by the Builder unless the Owners consented to the charges. Further, according to the Builder, the normal processes for submission of a variation to the Owners for their consent prior to implementing the variation would be impracticable in relation to the excavation and removal of rock because the volume of rock could not be known prior to the excavation work being undertaken.
94 According to the Builder, the phrase 'charged by variation' in cll 4-1 and 6-2 of the Specification simply referred to the mechanism and timing by which the additional amount would be charged, that is, as a variation to the Contract Price.
95 The Builder submitted that VCAT breached the hearing rule of natural justice by finding that the Builder's Claim constituted a variation and that s 37(3) of the Act precluded the Builder from recovering the amount of the claim. This was because, so it was said, neither the Owners nor VCAT gave the Builder any prior notice that this was an issue upon which VCAT might make findings that were adverse to the Builder.[36] According to the Builder, if such notice had been given, the Builder could have called evidence and made submissions in relation to the relevance of s 37 and on the matters set out in s 37(3)(b) of the Act.
96 The Owners submitted that, on its proper construction, the phrase 'charged by variation' in cll 4-1 and 6-2 of the Specification meant a variation governed by cl 13 of the Contract and s 37 of the Act. According to the Owners, the Builder's Claim constituted a variation of the Specification because its effect was to increase the amount of rock excavated and removed above the allowed volume of 10m3 and to increase the Contract Price. The fact that the Builder gave the Owners the Variation No 5 Document was said to support this characterisation.
97 The Owners disputed the Builder's contention that an amount payable under cll 4-1 and 6-2 of the Specification can constitute a variation for some (procedural) purposes under cl 13 of the Contract but not for other purposes. They submitted that it must be a variation for all purposes, including engaging the requirements of cl 13 of the Contract and s 37 of the Act. Once those requirements are engaged, so it was said, the amount of the Builder's Claim cannot be recovered unless they are satisfied.
98 According to the Owners, by virtue of cll 4-1 and 6-2 of the Specification, they agreed to the provisional sum of $1,790 and the rate of $358 per cubic metre but they did not agree to automatically pay any additional charge resulting from whatever volume of rock the Builder extracted and removed. Any additional charge would only be payable, so it was said, in accordance with cl 13 of the Contract and s 37 of the Act. The Owners submitted that there was nothing impracticable about the Builder seeking their consent to the volume of rock to be extracted and removed prior to the excavation work being completed. Such consent was said to be required, consistently with the option to end a major domestic building contract under s 41 of the Act where costs blow out unexpectedly. The Owners emphasised that, in their case, excavation and removal costs increased to represent over 19% of the Contract Price.
99 The Owners argued that the references to a variation by the presiding senior member during the hearing[37] and by the parties in their final submissions[38] were sufficient to give notice to the Builder that the issue of variation was before VCAT. This meant, so it was said, that VCAT did not breach the hearing rule of natural justice. The Owners also submitted that, even if the Builder had been given prior notice that VCAT intended to apply s 37 of the Act, the Builder could not have demonstrated that it satisfied the requirements of that section.
100 As discussed at [37] above, neither the 'pleadings' nor the parties' final submissions relied upon the provisions of the Contract or the Act dealing with variations. When the presiding senior member raised the issue of variation during the hearing, the parties did not respond. In its final submission, the Builder expressly stated that the amount claimed by it was not a variation within the meaning of the Contract or the Act. In their final submission, the Owners did not assert that the provisions of the Contract or the Act that dealt with variations applied to the Builder's Claim. The Owners merely said that '[i]f ... the [Builder] submits that the sum is ... a variation to the Contract', then s 41 of the Act would be engaged. As the Builder at no time submitted that the amount claimed was a variation, the Owners' statement could not be understood as independently raising the issue of variation.
101 It follows from the above that VCAT exceeded its jurisdiction by making a finding on an issue that was not properly before it and by relying on that finding as a basis for rejecting the Builder's Counterclaim.
102 Had the issue of variation been properly before VCAT, it should have been resolved by construing the phrase 'charged by variation' in cll 4-1 and 6-2 of the Specification in accordance with the principles set out at [50] to [51] above. VCAT did not apply those principles. Instead, it simply concluded that the Builder's choice of the word 'variation' meant that s 37 of the Act applied.
103 In my opinion, if VCAT had applied the principles set out at [50] to [51] above, the only conclusion that would have been open to it is that the word 'variation' was merely a generic reference to a change in the Contract Price in accordance with the Price Change Warning rather than a specific reference to a variation within the meaning of cl 13 of the Contract and s 37 of the Act. My reasons are as follows:
(a) Clause 13 of the Contract and s 37 of the Act only apply to situations where a builder 'wishes to vary the plans or specifications set out in a major domestic building contract'. Those provisions state that the builder cannot make such a variation unilaterally but must obtain the consent of the owner. Section 37(4) provides that if the owner consents to a variation requested by the builder or VCAT is satisfied of the matters set out in s 37(3)(b), 'the builder is entitled to recover the cost of carrying out the variation plus a reasonable profit.' Section 37 does not authorise a contractual provision which contains a fee charging formula such as the one set out in cll 4-1 and 6-2 of the Specification. This indicates that those clauses were not intended to be given effect as variations under cl 13 of the Contract and s 37 of the Act.
(b) When read in the context of s 37 as a whole, the words 'vary the plans or specifications' are clearly confined to variations to the physical characteristics of the building that is the subject of a major domestic building contract. In the present case, the physical features of the home to be constructed by the Builder were described in the Plans and Specification that form part of the Contract. The making of the Builder's Claim pursuant to cll 4-1 and 6-2 of the Specification did not involve any alteration to the physical features of the home pursuant to the Plans or the Specification; it was simply a step taken to give effect according to its terms of an existing contractual provision set out in the Specification.
(c) Pursuant to the Contract, and in accordance with s 33 of the Act, the parties agreed that the Builder could not seek from the Owners an amount in addition to the Contract Price unless payment of that additional amount was authorised by the Act or fell within one of the categories in the Price Change Warning. The category 'variations, including those required by a building surveyor or any authorised person under the Building Act 1983 [Refer Clauses 12 and 13]' in the Price Change Warning is not appropriate. This is because the express reference to cll 12 and 13 means that the category is confined to variations to 'the plans or specifications' as set out in those clauses and s 37 of the Act upon which they are based. The category does not extend to any other type of variation.
(d) To give effect to cll 4-1 and 6-2 of the Specification as a variation under cl 13 of the Contract when the subject matter of cll 4-1 and 6-2 does not fall within the subject matter of cl 13 would involve giving priority to the Specification over the Contract, contrary to cl 3.2 of the Contract.
(e) The Price Change Warning contains another category which is appropriate for the price increase for which cll 4-1 and 6-2 of the Specification provide, namely 'additional amounts payable for excavations or footings [Refer Clause 14]'. Unlike cl 13 of the Contract, there is nothing in cl 14 which is incompatible with the wording of cll 4-1 and 6-2 of the Specification. On the contrary, those provisions deal with the same subject matter as cl 14, namely excavation work whose cost could not be reasonably ascertained at the time the Contract was executed.
104 The fact that the Builder gave to the Owners the Variation No 5 Document in July 2012 cannot affect what a reasonable person would have understood the Contract to mean when it was signed in March 2012.
105 It is not necessary for me to decide whether the parties to a major domestic building contract can agree that a particular obligation to pay is to be deemed to be a variation that is governed by cl 13 of the Contract and s 37 of the Act even though the amount payable does not relate to a variation to the plans or specifications that form part of that contract. That is because, in the present case, the parties did not make any such agreement.
106 A reasonable person who had regard to the wording of cll 4-1 and 6-2 of the Specification and cl 13 of the Contract and to the purpose and object of those provisions would not have understood the word 'variation' in cll 4-1 and 6-2 as having a special meaning, that is, a variation of the Plans or the Specification under cl 13. Rather, the reasonable person would interpret the word 'variation' as having its ordinary meaning, that is, a change or alteration to the Contract Price in accordance with the provisions of the Contract.
107 Even if it is accepted that the meaning of the word 'variation' in cll 4-1 and 6-2 of the Specification is ambiguous, VCAT's factual findings indicate that there is nothing in the surrounding circumstances known to the parties at the time that they entered into the Contract that would cause a reasonable person to interpret the word as meaning a variation within the meaning of cl 13 of the Contract and s 37 of the Act.
108 By virtue of the Geotechnical Report which both parties had prior to signing the Contract, they were aware that there were rocks beneath the surface of the Land and that there was uncertainty about their precise locations and dimensions. Both parties knew that in order for the home to be built in accordance with the Plans and Specification, any rocks that were encountered during excavation for the footings and for installation of services such as sewerage would have to be extracted and removed. The Contract provided for this work to be performed by the Builder and paid for by the Owners.
109 In accordance with cll 4-1 and 6-2 of the Specification, the parties agreed that the Contract Price included an allowance for the excavation and removal of 10m3 of rock and that, if the volume of rock exceeded that allowance, the Contract Price would increase by the amount arrived at by multiplying the volume of excess rock (measured in cubic metres) by $358. There is nothing to indicate that the parties intended that this agreement could have effect in a manner that was incompatible with the provisions of the Price Change Warning. It follows that, for the reasons discussed at [103] above, the parties could not reasonably have intended that cll 4-1 and 6-2 of the Specification would have effect as a variation under cl 13.
110 The above discussion means that VCAT erred in law by construing the phrase 'charged by variation' in cll 4-1 and 6-2 of the Specification as referring to a variation that is governed by cl 13 of the Contract and s 37 of the Act. As those provisions were not engaged, VCAT should not have made any adverse findings based on them. The findings that VCAT made were not based on issues raised by the parties in their 'pleadings' and submissions. Accordingly, insofar as the findings were adverse to the Builder's Claim, the Builder was not afforded procedural fairness because it had no prior notice that VCAT would make the findings.
111 Accordingly, grounds of appeal 1, 2 and 5 are made out. Contrary to the Owners' submissions, these grounds raise questions of law rather than fact. However, my conclusion on these grounds does not warrant granting any relief to the Builder. This is because, for the reasons discussed above, if VCAT had properly construed cll 4-1 and 6-2 of the Specification, cl 13 of the Contract and s 37 of the Act, as a matter of law, the Builder's Claim could never have been recovered as a variation pursuant to those provisions. This Court will not set aside a decision of VCAT and remit the proceeding for further hearing on the basis of an error of law or a breach of the hearing rule of natural justice which could not have lawfully affected the outcome of the proceeding.[39]
Did VCAT err in deciding how the volume of rock is to be measured?
112 As can be seen from [3] above, cll 4-1 and 6-2 of the Specification required the Owners to pay $358 per cubic metre for rock excavated and removed by the Builder in excess of the contractual allowance of 10m3, without specifying how the volume of rock is to be measured. In particular, the Contract does not specify whether volume must be measured using the in situ method or the bulk method.
113 This issue has practical relevance because the evidence before VCAT was to the effect that the bulk method produces a higher volume - up to twice as much - as the in situ method. This is because the bulk method includes the gaps that form between new pieces of rock that are created by the breaking up of rock during the process of excavation.
VCAT's decision that the excavated rock is to be measured in situ
114 VCAT decided that, if the Builder's Claim were payable, the Contract required that the charge for the additional rock that was excavated and removed be measured using the in situ method rather than the bulk method.
115 In its reasons, VCAT described the issue and its task as follows:
An important issue between the parties if any rock is allowed, is how rock should be measured. The possibilities considered in this proceeding are whether it is the volume the rock occupies in the ground, or its volume 'bulked up' when it has been removed from the ground. The problem is that there was no agreement, written or oral, about how the rock should be measured. There is no suggestion by either party that there was ever a discussion about this issue. I must therefore decide which method of measurement applies to the agreement between these Owners and this Builder. [40]
116 The evidence at the VCAT hearing on this issue may be summarised as follows:
(a) Mr Skiba, a civil engineer called by the Owners, stated that he used the in situ method in accordance with Australian Standard AS 1182. He conceded, however, that this standard is specifically for use for civil engineering works.
(b) Mr Mladichek, a building expert called by the Owners, referred to the Australian Standard Method of Measurement that was adopted by Master Builders Australia and the Institute of Quantity Surveyors. This standard allows material, including rock, to be measured using the in situ method for any type of building work.
(c) Mr Boothby, the Builder's contract administration manager, gave evidence that the Builder and other domestic building firms in Victoria used the bulk method to measure rock.
(d) The Builder's Calculation Document used the in situ method. The document also included a calculation using the bulk method.
(e) Mr Sciessere, an engineering expert called by the Builder, used the in situ method.
(f) All the contractors engaged by the Builder to excavate and remove rock charged in accordance with the bulk method.[41]
117 After discussing the above evidence, VCAT stated the following:
I note with concern that domestic builders, dealing with home owners who will rarely build more than a few homes during their lifetimes, choose a method of calculating rock volumes which is difficult to check and lacks exactness, while in civil engineering where both parties to a contract can be expected to be sophisticated in such matters, a more rigorous method of measurement is used. Had the method been arrived at by two parties of equal financial weight and knowledge in the building industry, I would find common practice among builders more convincing when considering which method should be implied into the agreement between the parties.
...
I am not satisfied that it is reasonable for the Builder to measure rock 'bulked'. The result is that if the Builder is entitled to charge for bulked rock, the Owners must simply trust the Builder and its subcontractors about the amount of rock extracted. If, on the other hand, the rock is measured according to the volume it occupied in the ground, it is possible to calculate the theoretical maximum volume it could have occupied, as each of the author[s] of Calculation of Quantity of Rock,[42] Mr Sciessere and Mr Skiba have done.
The Builder is the proferens of this contract. I interpret it 'contra proferentem' - against the interest of the Builder, to mean the volume [of] rock the Builder may charge for is the volume it occupied in the ground.[43]
118 VCAT then considered and accepted Mr Skiba's evidence that, where basalt is weighed on a weighbridge, its volume can be calculated by dividing the weight by 2.8. This is because 1m3 of basalt weighs 2.8 tonnes.
Grounds of appeal relating to VCAT's decision on the measurement issue
119 In its amended proposed notice of appeal, the Builder relies on the following alleged errors of law:
120 The Builder submitted that VCAT erred in law in construing the Contract as requiring that the volume of rock be measured using the in situ method. According to the Builder, VCAT should have taken into account the industry practice among builders in Victoria to use the bulk method as part of the surrounding circumstances because the Owners could have found out about the practice by making simple inquiries. The Builder relied on the following statement by the High Court in Maggbury Pty Ltd v Hafele Australia Pty Ltd:[44]
Interpretation of a written contract involves, as Lord Hoffmann has put it: 'the ascertainment of the meaning which the document would convey to a reasonable person having all the background knowledge which would reasonably have been available to the parties in the situation in which they were at the time of the contract.' That knowledge may include matters of law, as in this case where the obtaining of intellectual property protection was of central importance to the commercial development ...[45]
121 The Builder contended that VCAT took into account irrelevant considerations, such as the parties' financial resources, the Builder's Calculation Document and the expert evidence of Mr Sciessere. According to the Builder, what is relevant is the amount of rock excavated, not the amount estimated to be in the ground. Further, according to the Builder, the capacity of the in situ method to produce a calculation of the theoretical maximum volume was not relevant to determining the amount the Owners were required to pay. The Builder also submitted that there was no evidence to justify VCAT's conclusions about the practical difficulties associated with the bulk method.
122 Finally, the Builder submitted that VCAT erred by applying the contra proferentem rule, which is a principle of last resort, to the Contract because its meaning can be ascertained by applying the ordinary rules of construction.[46]
123 The Owners submitted that VCAT had correctly concluded on the evidence that the volume of rock extracted and removed was to be measured using the in situ method. That was said to be a finding of fact rather than law. According to the Owners, this and all other findings of fact were open to VCAT on the evidence and were correct.
124 The Owners also submitted that VCAT properly applied the contra proferentem rule to the Contract. This was said to be because the Contract was a standard form contract which was drafted by the Builder and whose wording the Owners were not able to change. In these circumstances, so it was contended, the ambiguity in the wording of the Contract was properly resolved in favour of the Owners.
125 The measurement issue raises a question of construction of the Contract which must be resolved by applying the principles set out at [50] to [51] above. In accordance with those principles, the Contract must be read as a whole having regard to its purpose and object, and assistance can be obtained from the surrounding circumstances known to both parties if the Contract is ambiguous or susceptible to more than one meaning.
126 In the present case, the Contract required the clearing of the Land, the excavation of areas for the footings and for trenches to accommodate services such as sewerage, and for any extracted rock to be removed from the Land. Clauses 4-1 and 6-2 of the Specification make it clear on their face that the parties have not been able to ascertain how much rock would need to be excavated and removed; that is why they agreed upon an allowance of 10m3 and for payment at the rate of $358 for each cubic metre above that allowance.
127 Clauses 4-1 and 6-2 of the Specification prescribed a composite charge for excavation and removal of rock and did not distinguish between these items of work. Likewise, the clauses contained no indication that different methods of measuring the volume of rock must be used depending on whether the charge is for excavation rather than removal. On their face, the clauses imposed a single rate and contemplated a single method of measurement.
128 The above matters arise from the terms of the Contract. While they point to the imposition of a single method of measurement, they do not indicate with sufficient certainty which method the parties intended. It is therefore appropriate to consider the surrounding circumstances known to the parties.
129 It was open to VCAT to find that, as it is a matter of logic, the parties would have known that large rocks may have to be broken up in the course of excavation and that a rock would have a smaller volume when it is in its original state in situ than it would have when it is broken up and stockpiled. This is because the resulting pieces, when piled, will not fit neatly into each other like a jigsaw puzzle but will have gaps between them. It follows that it was open to VCAT to find that the parties would have known that the volume of rock measured in bulk when removed will ordinarily exceed the volume of rock measured in situ.
130 Although the Contract did not specify the method of transport to be used in removing rock from the Land, it was open to VCAT to find that the parties would have known that trucks would be used. It was also open to VCAT to find that the parties would have known that the number of truckloads that would be required, and the transport costs associated with them, would depend not on the volume of rock in situ but on the volume of rock when loaded on the trucks. If these were the only relevant surrounding circumstances, VCAT could have concluded that a reasonable person in the parties' position at the time the Contract was executed would not have contemplated that the volume of rock removed from the Land, and the costs associated with that removal, would be measured using the in situ method.
131 However, the parties must be taken to know all the terms of the Contract. Relevantly, for present purposes, the parties knew that the Builder's ability to charge an additional amount for excavations or footings was governed by the provisions of cl 14 which in turn referred to 'all the Foundations Data required under the Act'.
132 There was evidence before VCAT about the types of foundations data that can be obtained and how that data measures volume of rock. If VCAT had properly found on the evidence that all types of foundations data measure volume of rock exclusively using the in situ method, then this could have been a surrounding circumstance that could have assisted in construing cl 14 of the Contract and cll 4-1 and 6-2 of the Specification as requiring use of the in situ method.
133 Such a conclusion may have been supported if the evidence had justified a factual finding that the Contractual rate of $358 per cubic metre was known to the parties to be significantly higher than rates applicable using the bulk method. This is because such a finding may have permitted an inference that the parties intended that the in situ method be used because the higher rate took into account the increase in volume resulting from the excavation, stockpiling and loading of rock.
134 Regrettably, VCAT did not refer to the principles set out at [50] to [51] above or purport to apply them. Instead, it focused on the expert and other evidence adduced by the parties about standards, industry practices and issues of practicality and fairness. It also deviated from its function of ascertaining the meaning of the words used by the parties by viewing its task as 'implying' a method into the Contract and considering 'theoretical&#[47] maximum volumes.47
135 Standards and industry practice may be relevant to interpreting a contract that is entered into by participants in a particular industry who would be well aware of standards and practices that apply to that industry. In the case of a provision in a domestic building contract which uses non-technical language, the meaning of the provision cannot be affected by a standard that is unknown to one of the parties unless the standard applies to the provision by operation of law, is incorporated into the contract by reference or is notorious.
136 The same applies to industry practices known to builders but not to owners. It is not to the point that an owner could have obtained information about a standard or an industry practice by asking the builder or making other inquiries prior to entering into a contract. As I have already noted at [40] to [47] above, the Act contains many consumer protection provisions, including obligations on builders to provide information and warnings to owners to enable them to make informed decisions prior to entering into domestic building contracts. An extension of the principle in Maggbury to which I have referred at [120] above to include industry practices which were not known to an owner but could have been known if the owner made inquiries of a builder would be inconsistent with the purposes and scheme of the Act.
137 Where the issue is the meaning of a contractual provision that uses non-technical language, experts should not be asked to express their views on that meaning. That is because the task is to ascertain the ordinary meaning of the words used, not some technical meaning.
138 It follows that much of the discussion in VCAT's reasons about the experts' evidence and various standards and industry practices was not to the point. Likewise, the fact that the Builder had used the in situ method in the Builder's Calculation Document was irrelevant, as that document was prepared for the purposes of the VCAT hearing and was not in existence at the time the Contract was executed.
139 Contrary to the Builder's contention that VCAT did not take into account the evidence of Mr Boothby about industry practices, VCAT did take into account that evidence. However, in the circumstances of the present case, that evidence was irrelevant.
140 Where a contract is ambiguous and is open to two competing interpretations, one of which is attended by obvious practical problems, evidence of the parties' knowledge of the practical problems would be relevant to determining what a reasonable person would understand the contract to mean.
142 As VCAT did not apply the correct legal principles in construing cll 4-1 and 6-2 of the Specification as requiring the volume of rock to be measured using the in situ method, it erred in law.
143 It follows that ground of appeal 16, which raises questions of law, is made out.
144 VCAT's failure to apply the correct legal principles caused it to fail to make the factual findings that those principles required. In the absence of relevant factual findings by VCAT, I am unable to form my own view on the proper construction of the Contract.
Conclusion: Grant leave to appeal and allow the appeal
147 Some of the difficulties that have arisen in the VCAT proceeding could have been avoided if the legal representatives had more clearly identified their respective clients' cases in their 'pleadings'. The Counterclaim should have set out the provisions of the Contract upon which the Builder's Claim was based and the Owners should have filed a defence to the Counterclaim which specified their defences to the Builder's Claim. The failure of the parties to follow these obvious and basic steps caused unnecessary confusion. For its part, VCAT should have insisted that these steps be taken and should then have confined itself to the issues raised by the parties in their 'pleadings'.
148 I will hear from the parties on the orders to be made consequent upon the appeal being allowed and on the question of costs.
[1] See Patel v J G King Pty Ltd [2013] VCAT 1272 (18 July 2013) ('VCAT's reasons'). The text of VCAT's order is set out at [38] below.
[7] The Tax Invoice did not include the 'Goodwill Management Discount' referred to in the Variation No 5 Document.
[8] Transcript of Proceedings, Patel v J G King Pty Ltd (Victorian Civil and Administrative Tribunal, Senior Member Lothian, 18 March 2013) 235-6.
[9] Transcript of Proceedings, Patel v J G King Pty Ltd (Victorian Civil and Administrative Tribunal, Senior Member Lothian, 18 March 2013) 285.
[12] One of the practices to which the Attorney-General referred in the second reading speech for the Domestic Building Contracts and Tribunal Bill was deliberate underquoting of additional costs by 'a minority of unscrupulous builders': Victoria, Parliamentary Debates, Legislative Assembly, 24 October 1995, 696.
[13] Section 132(1)(a) of the Act provides that any term in a domestic building contract that is contrary to the Act, or that purports to annul, vary or exclude any provision of the Act, is void.
[14] Section 15 of the Act deals with cost escalation clauses based on increased costs of labour or materials. That provision is not relevant to this proceeding.
[15] Section 38 of the Act deals with variations requested by the owner.
[16] The Contract also contained a special condition which permitted a carbon tax price adjustment. This is not presently relevant.
[18] Toll (2004) 219 CLR 165, 179 [40] (citations omitted). See also Pacific Carriers Ltd v BNP Paribas [2004] HCA 35; (2004) 218 CLR 451, 461-2 [22].
[19] [1982] HCA 24; (1982) 149 CLR 337 ('Codelfa').
[20] Codelfa [1982] HCA 24; (1982) 149 CLR 337, 352.
[21] VCAT's reasons, [24], [107], [111], [116].
[23] Mr Skiba was a civil engineer called by the Owners.
[24] Mr Sciessere was an engineering expert called by the Builder.
[25] Mr Boothby was the Builder's contract administration manager.
JG King Pty Ltd
Patel & Anor [2014] VSC 58
(2004) 219 CLR 165
(2004) 218 CLR 451
(1982) 149 CLR 337