High Court of Australia|1985-02-14|Before: Wilson J, Matheson J, Murphy J

Corporation of the City of Adelaide v Jennings Industries Ltd [1985] HCA 7; (1985) 156 CLR 274 (14 February 1985)

THE CORPORATION OF THE CITY OF ADELAIDE v. JENNINGS INDUSTRIES LIMITED

[1985] HCA 7; (1985) 156 CLR 274

Building Contract - Delay - Failure and insolvency of sub-contractor - Whether implied term to nominate new sub-contractor - Requirement of architect for builder to complete - Default by builder - Completion by proprietor - Whether cost to be borne by proprietor or builder.

MURPHY J. I agree with the judgment of Mr Justice Wilson. The appeal should be allowed; the judgment of the Full Court of the Supreme Court of South Australia should be set aside and the judgment of Mr Justice Matheson restored.

WILSON J. These proceedings are the result of a building dispute between the parties. In March 1971, the appellant as proprietor entered into a contract with the respondent as builder for the construction of the Adelaide Festival Centre. The contract provided, inter alia, for the supply and installation of various mechanical services to be undertaken by a sub-contractor to be nominated by the proprietor. The contract provided for a prime cost sum of $584,124.00 for this section of the contract works. Following the procedure prescribed by cl. 15 of the conditions attached to the Articles of Agreement ("the Conditions"), the proprietor nominated a firm of six companies trading under the name of W. Curl & Sons ("the Sub-Contractor") and the builder entered into a contract with that firm.

2. The facts surrounding the execution of the works are not in dispute. The work proceeded and on 10 July 1973 the architect who was supervising the contract on behalf of the proprietor issued a notice of practical completion which, save with respect to some sections of the works which are not material, was operative from 2 June 1973. The notice stipulated a defects liability period in respect of mechanical services of 52 weeks expiring on 1 June 1974. Unfortunately, the Sub-Contractor experienced financial difficulty in the latter part of 1973 and this interfered with its completion of certain remedial work. A special manager was appointed to conduct the Sub-Contractor's affairs but the remedial work remained unfinished. Accordingly the architect wrote to the builder on 1 February 1974 urging it to terminate the sub-contract and arrange with another sub-contractor to complete the work. The builder made a further effort to have the Sub-Contractor fulfil its obligations but without success. On 1 March 1974 it wrote to the special manager pointing out the failure of the Sub-Contractor to co-operate and adding:

"We therefore have no alternative other than to place all items

of maintenance and finalisation of the original contract in the

hands of others, and debit all costs against Curl's contract. ..."

3. In anticipation of the approaching end of the defects liability period consulting engineers carried out inspections in April and May 1974 and compiled a lengthy list of outstanding items relating to the mechanical services sub-contract. A copy of this list was supplied to the builder under covering letter from the engineers dated 30 May 1974 and was followed up with a letter of 31 May from the architect formally requesting completion. The builder wrote to the special manager on 4 June 1974 expressing concern at the length of the list and urging co-operation in order to minimise the cost of completion, all of which would be at the cost of the Sub-Contractor.

4. On 3 September 1974 the architect wrote to the builder in the following terms:

"We refer to the Architects Instructions dated 29th May 1974 (this

date should be 31 May) enumerating the outstanding items to be

completed or made good by W. Curl & Sons in their subcontract with

you for the Mechanical Services at the Adelaide Festival Theatre.

Some of the items have been completed, but we hereby give notice

in accordance with Clause 1(c) of the Conditions of Contract that

unless you, within 7 days, comply with our instructions to commence

the work of making good the remainder of the items and diligently

proceed with this work, the Proprietor will employ and pay others to

execute any work whatsoever which may be necessary to give effect to

our instructions and all costs properly incurred in connection

therewith shall be recoverable from you by the Proprietor."

Further correspondence ensued between the architect and the

builder culminating in a letter of 12 September 1974 from the

architect noting the builder's failure to comply with the

instruction of 3 September and adding:

"We will therefore arrange, on behalf of the Proprietor, to employ

and pay workmen of the Adelaide Festival Centre Trust and others to

execute any work whatsoever which may be necessary to give effect to

those instructions.

Accurate records of the work performed will be kept and all costs

properly incurred in connection therewith will be recoverable from

you by the Proprietor."

5. By letter of 18 September 1974 the builder advised the special manager that he would be kept fully informed on all costs incurred by the Adelaide Festival Centre Trust in completing W. Curl & Sons' contract and that W. Curl & Sons would be held responsible for all such costs.

6. On 18 April 1975 the six partner companies of the Sub-Contractor were each placed in liquidation. On 21 April 1975 the builder informed the architect of the liquidation and invoked pars (f) and (g) of cl. 15 of the Conditions in order, as it claimed, to protect it from any further costs involved in the completion of the mechanical services sub-contract that were incurred after 18 April. The proposition contained in that letter did not find favour with the proprietor and this is the short question which the present appeal will determine. It is common ground that the amount claimed by the proprietor - $80,381.25 - is the cost incurred by it after 18 April 1975 in completing the sub-contract. The proprietor succeeded at trial in the Supreme Court of South Australia (Matheson J.), but this decision was reversed on appeal by a unanimous decision of the Full Court (Mitchell A.C.J., White and Legoe JJ.).

7. The appellant's case is that the architect was entitled to give the written notice to the builder on 3 September 1974 requiring the builder to commence, within seven days, the work of making good the outstanding items requiring completion under the sub-contract, with the proviso that in default of such commencement the proprietor would execute the work and charge the costs to the builder. It is not denied that the builder failed to comply with that notice and that in consequence the proprietor completed the sub-contract works and in doing so incurred costs which include the sum which is now claimed. Unless there are other provisions of the contract which affect the issue, the appellant's entitlement will depend upon the validity of the notice. It was given in purported pursuance of cl. 1(c) of the Conditions. That clause reads as follows:

"If within 7 days after receipt of a written notice from the

Architect requiring compliance with any Architect's Instructions

previously given the Builder does not comply therewith, the

Proprietor may employ and pay others to execute any work whatsoever

which may be necessary to give effect to such Architect's

Instructions and all costs properly incurred in connection therewith

shall be recoverable from the Builder by the Proprietor as a debt.

..."

I am unable to see why the notice of 3 September 1974 was not authorized by this condition of the contract. In the Full Court, White J., with whose reasons the Acting Chief Justice agreed, castigated it as "an impossible demand" but with respect to his Honour that was because he misunderstood it to require the completion of $80,000 worth of work within seven days. That was not so. The notice did no more than require the work to commence within seven days. On any view, it was not an unreasonable demand. The works, including the mechanical services section, had reached the state of practical completion in June 1973. The evidence showed that in excess of $600,000 had already been paid by the proprietor in respect of the sub-contract. The defects liability period of twelve months had then followed during which time efforts had been made to encourage the Sub-Contractor to complete the work. Having allowed the maximum possible latitude to the builder and the Sub-Contractor, the architect notified the builder by letter of 31 May 1974 that the list of mechanical services work still requiring to be completed had been supplied to it on 30 May and requested that the work be completed as soon as possible. Clause 26 of the Conditions obliged the builder to make good those defects within a reasonable time and provided further that where the defects are due to materials and/or workmanship not being in accordance with the contract, "such making good by the Builder shall be at no cost to the Proprietor".

8. Thereafter the responsibility for making good the outstanding defects in the mechanical services section of the works fell to the proprietor, although at the expense of the builder. That this was the result of the steps taken by the architect would appear to have been accepted by the builder; certainly it was anxious to co-operate with the proprietor and to encourage the co-operation of the Sub-Contractor in an effort to minimise the cost of the work. And it accepted the charges that were levelled against it until the liquidation of the six companies comprising the Sub-Contractor in April 1975.

9. However, the respondent builder denies liability for the alleged debt. It argues for a construction of the contract that leads to the conclusion that only a nominated sub-contractor can perform the works the subject of this case. It says that the builder is not entitled to perform these works itself or to have them performed by others. It follows then, in the respondent's submission, that the architect's notice of 3 September was unauthorized and the builder was not bound to comply with it because the works to which it referred were works which the contract required to be performed by nominated sub-contractors. For the purposes of the argument, let it be assumed that the premise is correct, namely, that only a nominated sub-contractor is able to undertake the work. Clearly, subject to any qualification flowing from cl. 15 of the Conditions, that fact would not relieve the builder from responsibility for defects in the work performed by the nominated Sub-Contractor. Indeed, cl. 13(c) of the Conditions expressly says:

"The Builder shall not be relieved of responsibility under this

Contract for such parts of the Works as are sub-let to

sub-contractors or suppliers pursuant to this clause or to nominated

sub-contractors or nominated suppliers pursuant to clauses 15 and 16

of these Conditions."

In a case where a nominated sub-contractor fails, as it did here, to make good defects as required of the builder by the architect there is no reason why the builder cannot be served with a notice under cl. 1(c) the effect of which is to require the builder within 7 days to ensure that the sub-contractor commences to comply with the requisition. If he fails to effect compliance then the proprietor may make other arrangements, at the cost of the builder. Of course, the builder would be entitled to hold the sub-contractor responsible to it for those costs.

10. But, in any event, I am unable to accept the premise of the argument. I do not think it is right to say that the builder is not permitted either by himself or by another sub-contractor to perform work which is left undone by a nominated sub-contractor and in respect of which the architect has issued a notice under cl. 1(c). The contract leaves no doubt as to the responsibility of the builder for the execution and completion of the whole of the works. Clause 1 of the Articles of Agreement provides as follows:

"1. For the consideration hereinafter mentioned the Builder

will upon and subject to the Conditions attached hereto execute and

complete the whole of the works shown upon the Contract Drawings

and/or described by or referred to in the said Specifications, and

each of the provisions of this Contract shall be read and construed

as subject to this primary responsibility."

Clause 13(c), to which I have referred, affirms this responsibility with particular reference to those parts of the works as are sub-let to sub-contractors, including nominated sub-contractors. Clause 26 deals specifically with the builder's responsibility to make good defects notified to it during the defects liability period. Subject to cll. 15(f) and 15(g), if a nominated sub-contractor drops out and the architect does not nominate another, the builder has the choice either of engaging, with the consent of the architect, another sub-contractor or of completing the work itself. Clause 18(c) of the Conditions contemplates circumstances where it may be the builder who executes work for which a prime cost sum is included in the contract sum.

11. The respondent argues for the implication of a term in the contract to the effect that if the nominated sub-contractor fails to perform its obligations under the sub-contract, as was evident here throughout 1974, then the architect is under an obligation to nominate another sub-contractor to complete the work. Such a term was implied by the House of Lords in the contract under consideration in North West Metropolitan Regional Hospital Board v. T.A. Bickerton & Son Ltd. (1970) 1 W.L.R. 607. The point of the case was stated with admirable succinctness by Lord Reid at p. 613:

"Once it is accepted that the principal contractor has no right or

duty to do the work himself when the nominated sub-contractor drops

out any more than he had before the sub-contractor was nominated

then equally it must be the duty of the employer to make a new

nomination when a nominated sub-contractor does drop out. For

otherwise the contract work cannot be completed."

His Lordship added the further point that the contract required payment for prime cost work to be expended only in favour of nominated sub-contractors. The decision in Bickerton has recently been cited with approval by the House of Lords in Percy Bilton Ltd. v. Greater London Council (1982) 1 W.L.R. 794. However, these decisions cannot assist the respondent because the British form of contract differs in significant respects from the Australian form involved here. In particular, neither cl. 13(c) nor cl. 18(c) has any counterpart in the British form. As I have explained it cannot be said that in the present case the builder lacked either the authority or the responsibility to arrange for the defects in the sub-contract work to be made good either by itself or by others in pursuance of the requisition of 3 September 1974. There was therefore no gap such as was discerned in the contract in Bickerton requiring the implication of a term. The conditions necessary to give rise to such a step are not present here: cf. B.P. Refinery Pty. Ltd. v. Hastings Shire Council [1977] HCA 40; (1977) 52 A.L.J.R. 20, at p. 26; [1977] HCA 40; 16 A.L.R. 363, at p. 376; Codelfa Construction Pty. Ltd. v. State Rail Authority of New South Wales [1982] HCA 24; (1982) 149 C.L.R. 337.

12. A further difficulty in the way of implying a term such as that for which the respondent contends lies in the fact that the contract here, unlike its British counterpart, deals expressly with the rights of the parties in a case where the nominated sub-contractor is in default. Clauses 15(f) and 15(g) provide as follows:

"15(f) If a nominated sub-contractor shall default in his

sub-contract with the Builder in such manner as would, if such

default were a default of the Builder enable the Proprietor to

determine the employment of the Builder under this Contract pursuant

to clause 22 of these Conditions, the Builder shall advise the

Architect in writing and the Architect shall thereupon issue

instructions to the Builder. All costs and expenses necessarily

incurred by the Builder in complying with such instructions shall be

deemed to have been incurred or expended under or by virtue of the

sub-contract concerned and the Contract Sum shall be adjusted in

accordance with the provisions of clause 18 of these Conditions as

if all such costs and expenses consisted wholly of sums expended by

the Builder in favour of another party pursuant to a provision of

this Contract. Should the Proprietor so desire he may proceed

against the defaulting nominated sub-contractor in such manner as he

may choose in the name of the Builder for recovery of his damages

arising out of the default aforesaid provided he shall have first

adequately indemnified the Builder against all costs or expenses of

the Builder arising out of or incidental to such proceedings and the

Proprietor shall be entitled to retain for his own benefit the

amount of damages that may be awarded or recovered in any such

proceedings.

15(g) In the case of any nominated sub-contract:

(i) in respect of which the Architect has before calling for

tenders for the nominated sub-contract submitted for the approval of

the Builder both the list of proposed tenderers and the terms and

conditions under which it is proposed that tenders be called, and

has also before nominating a sub-contractor submitted to the Builder

copies of all tenders received and agreed in consultation with the

Builder the selection of the nominated sub-contractor; or

(ii) in respect of which the Architect at the time of issue to the

Builder of tender documents for this Contract notified the Builder

in writing of the name and address of the proposed nominated

sub-contractor the specified terms and conditions of the

sub-contract and the amounts of all tenders received in respect of

the sub-contract and supplied to the Builder copies of all relevant

documents submitted by the proposed nominated sub-contractor with

his tender, the provisions of sub-clause (f) of this clause (except

in the case of the bankruptcy or liquidation of the nominated

sub-contractor) shall not apply, and the provision of paragraph

(xii) of sub-clause (g) of clause 24 shall apply only where delay is

due to any of the causes referred to in paragraphs (i) to (xi) and

(xiii) and (xiv) of the said sub-clause."

It is common ground that the conditions specified in par. (ii) of cl. 15(g) were satisfied with the result that the provisions of cl. 15(f) had no application "except in the case of the bankruptcy or liquidation of the nominated sub-contractor". Since the liquidation did not occur until April 1975 the contract in these clauses expressly denies to the builder any right during 1974 to call upon the architect to issue instructions within the meaning of cl. 15(f) the result of which would be to make the costs and expenses involved in compliance with those instructions the responsibility of the proprietor.

13. Nevertheless, the respondent in its final submission invokes and relies upon cl. 15(f). It says that upon the liquidation of the Sub-Contractor and the giving of notice under cl. 15(f) the provisions of that clause came into effect and obliged the architect to issue instructions to the builder. It follows, in its submission, that the action of the architect in having the outstanding work performed by others was outside the scope of the contract and the cost thereby incurred is not recoverable from the builder. I am unable to accept that argument. In my opinion, the critical fact in the whole case was the action of the architect on 3 September 1974 in pursuance of cl. 1(c) of the Conditions. The requisition of that date not having been complied with by the builder, the contract authorized the proprietor to employ and pay others to execute the outstanding work and to recover the costs incurred thereby from the builder. This occurred some fifteen months after the agreement that the works had reached the stage of practical completion and reflects the patience with which the contract was handled by the architect as well, perhaps, as it reflects the magnitude of the difficulties associated with aspects of the sub-contract work. Be that as it may, I do not see how the subsequent liquidation of the Sub-Contractor more than seven months later can affect the rights which had long since vested in the proprietor.

14. I would allow the appeal, set aside the judgment of the Full Court and restore the judgment of Matheson J.

BRENNAN J. The appellant as proprietor entered into a contract with the respondent as builder for the construction of the Adelaide Festival Theatre. The contract consisted of Articles of Agreement, attached Conditions, and certain drawings, specifications and letters described in a schedule to the Articles of Agreement. The Articles of Agreement and the Conditions were in the form approved by The Royal Australian Institute of Architects (Edition 5a) ("the RAIA form"). Article 1 of the Articles of Agreement provided:

" For the consideration hereinafter mentioned the Builder will

upon and subject to the Conditions attached hereto execute and

complete the whole of the works shown upon the Contract Drawings

and/or described by or referred to in the said Specifications, and

each of the provisions of this Contract shall be read and construed

as subject to this primary responsibility."

By art.2 the proprietor agreed to pay the builder $4,760,000 ("the contract sum") or "such other sum as shall become payable" under the contract.

15. The contract works included the supply and installation of various mechanical services. Among them were air conditioning, ventilation, hot water, cold room refrigeration and gas service. A sub-contract for the carrying out of this work was let by the builder to W. Curl & Sons, a partnership of six companies. W. Curl & Sons had earlier submitted to the consulting engineers a tender for carrying out the work, and the architects had nominated that firm as sub-contractor to carry it out and had supplied the builder with the terms and conditions of a sub-contract to be let to that firm and with copies of all relevant documents. That was done before the builder submitted its tender, following the procedure specified in cl.15(g)(ii) of the Conditions. Sub-contractors nominated in accordance with one of the procedures specified in cl.15(g) are in a special category, notwithstanding that their appointment is governed by the general provisions of cl.15(a) which govern the appointment of all nominated sub-contractors. Under cl.15(a) the architect is not permitted to nominate a sub- contractor unless it is first ascertained that the builder does not object to that sub-contractor and unless the nominee is willing to enter into a sub-contract with the builder containing the several conditions specified in cl.15(a), including -

" (v) That if the nominated sub-contractor shall fail to complete

the sub-contract Works, or where the same are to be completed in

stages any stage thereof, within the period specified or within any

extended period to which the nominated sub-contractor may become

entitled under the provisions of his sub-contract the nominated

sub-contractor shall pay or allow to the Builder the amount of all

loss and/or damage thereby suffered or incurred by the Builder."

16. The sub-contract price was $584,124.00. That sum was included as a prime cost in the contract sum. Clause 15(a) required the sub-contract price to be expended in favour of the nominated sub-contractor. Clause 18(a) provided that where "any such sum is expended by the Builder in favour of a nominated sub-contractor ... pursuant to a provision of this Contract" then in the event "of the sub-contract amount ... expended in respect of any such provision" exceeding or being less than "the amount included in the Contract Sum in respect thereof" the contract sum payable to the builder was to be adjusted. This sub-clause is not as lucid as one would wish, but its meaning seems to be clear enough. If the amount payable and paid by the builder to a nominated sub-contractor for carrying out the work in respect of which a prime cost sum has been included in the contract sum exceeds or is less than the prime cost sum, an adjustment is to be made in accordance with the formulae set out in cl.18(a)(i) and (ii).

17. The builder was at liberty to sub-let any part of the contract works subject to the consent of the architect whose consent could not be unreasonably delayed or withheld (cl.13(b)). The builder's responsibility for work to be carried out by a sub-contractor, whether nominated or not, was expressed in cl.13(c) of the Conditions:

" The Builder shall not be relieved of responsibility under this

Contract for such parts of the Works as are sub-let to

sub-contractors or suppliers pursuant to this clause or to nominated

sub-contractors or nominated suppliers pursuant to clauses 15 and 16

of these Conditions."

18. W. Curl & Sons substantially carried out the sub-contract works but some of the work done by that firm was defective and remedial work was needed to make it accord with the contract. However, in December 1973, the members of the firm had got into financial difficulty, and a special manager had been appointed. The builder regarded the firm as being in default under the sub-contract, and advised the architects on 14 December 1973:

" We have been advised by the nominated sub-contractor for air

conditioning and Mechanical services on this contract, (W. Curl &

Sons), that he has gone into liquidation.

Pursuant to clause 15(f) of the General Conditions of Contract, we

formally advise that the NSC mentioned above has defaulted in his

contract, and we seek your instruction."

The reference in that letter to cl.15(f) would appear to be inappropriate, since cl.15(f), the provisions of which are set out below, does not apply in the case of a sub-contract to which cl.15(g)(ii) applies "except in the case of the bankruptcy or liquidation of the nominated sub-contractor". In fact the member companies of the W. Curl & Sons partnership were not in liquidation on 14 December 1973. They did not go into liquidation until 18 April 1975.

19. A proposal made by the special manager to the builder on 17 December 1973 to allow W. Curl & Sons to engage others to do the outstanding work was not approved by the architects. On 1 February 1974, the architects wrote to the builder:

"We believe W. Curl & Sons has defaulted on the performance of his

work and urge you to take all necessary steps to terminate the

sub-contract you have entered into with him and arrange with another

sub-contractor to complete the works.

In this regard we would approve the firm of Carrington Air

Conditioning Pty. Ltd. if you wish to use them for this work."

In reply, the builder advised "having negotiated with Carrington Air Conditioning Pty. Ltd. to attend to the necessary works on the above project". The builder then advised the sub-contractor that arrangements had been made for Carrington Air Conditioning Pty. Ltd. to carry out the works, and that all costs would be debited against the sub-contract. On 30 May 1974 or thereabouts, the architects notified the builder of outstanding items of work to be done under the sub-contract. On 31 May 1974 the architects wrote to the builder referring, inter alia, to the list of items awaiting attention and saying:

"Will you please arrange for all work necessitated by the defects

lists noted to be carried out as soon as possible and at the

convenience of the Proprietor." On 3 September 1974 the architects

wrote to the builder:

"We refer to the Architects Instructions dated 29th May 1974

enumerating the outstanding items to be completed or made good by W.

Curl & Sons in their subcontract with you for the Mechanical

Services at the Adelaide Festival Theatre.

Some of the items have been completed, but we hereby give notice

in accordance with Clause 1(c) of the Conditions of Contract that

unless you, within 7 days, comply with our instructions to commence

the work of making good the remainder of the items and diligently

proceed with this work, the Proprietor will employ and pay others to

execute any work whatsoever which may be necessary to give effect to

our instructions and all costs properly incurred in connection

therewith shall be recoverable from you by the Proprietor."

To understand the reference to cl.1(c) it is necessary to refer to the context of the provisions relating to defects and to the architect's authority to give instructions for the remedying of defects. If defects appear in the work during the defects liability period, as they did in this case, the architect may require them to be made good at no cost to the proprietor if the defects "are due to materials and/or workmanship not being in accordance with (the) Contract" (cl.26(a)); if the defects are due to other causes, the cost of making them good is treated as a variation to be added to the contract sum (cll.26(b) and 19). The architect is empowered by cl.1(a) to give written instructions to the builder respecting the carrying out and completion of the contract work including the sub-contract work. The architect is thus empowered to give the builder instructions to remedy defects in sub-contract work. If the instructions are not carried out, cl.1(c) of the Conditions arms the proprietor with a remedy:

"If within 7 days after receipt of a written notice from the

Architect requiring compliance with any Architect's Instructions

previously given the Builder does not comply therewith, the

Proprietor may employ and pay others to execute any work whatsoever

which may be necessary to give effect to such Architect's

Instructions and all costs properly incurred in connection therewith

shall be recoverable from the Builder by the Proprietor as a debt.

Such costs may be deducted by him from any moneys due or to become

due to the Builder under this Contract."

The remedial work was not done by the builder or by the sub-contractor. The proprietor employed others to do it. Before the remedial work was completed, the member companies of the W. Curl & Sons partnership went into liquidation. The remedial work was completed at a cost of $80,381.25. The proprietor sued the builder in the Supreme Court of South Australia to recover that amount. Matheson J. gave judgment for the proprietor but the Full Court allowed the appeal and gave judgment for the builder. This appeal is brought from that judgment.

20. The Full Court's judgment must stand if the builder was not entitled and therefore not obliged to do the work entrusted to W. Curl & Sons in the absence of the architect's nomination of a new sub-contractor to do it. A direction given to the builder to remedy the defects in the sub-contract work could not then found a claim arising under cl.1(c). It is submitted that the builder was neither entitled nor obliged to do the work entrusted to W. Curl & Sons. On this argument, when the sub-contractor defaulted in completing its work, the work could be completed only by another sub-contractor nominated for the purpose. But there had been no nomination, although cl.15(f) (assuming it applied in the circumstances) would have permitted the making of a nomination. Clause 15(f), provides:

"If a nominated sub-contractor shall default in his sub-contract

with the Builder in such manner as would, if such default were a

default of the Builder enable the Proprietor to determine the

employment of the Builder under this Contract pursuant to clause 22

of these Conditions, the Builder shall advise the Architect in

writing and the Architect shall thereupon issue instructions to the

Builder. All costs and expenses necessarily incurred by the Builder

in complying with such instructions shall be deemed to have been

incurred or expended under or by virtue of the sub-contract

concerned and the Contract Sum shall be adjusted in accordance with

the provisions of clause 18 of these Conditions as if all such costs

and expenses consisted wholly of sums expended by the Builder in

favour of another party pursuant to a provision of this Contract.

Should the Proprietor so desire he may proceed against the

defaulting nominated sub-contractor in such manner as he may choose

in the name of the Builder for recovery of his damages arising out

of the default aforesaid provided he shall have first adequately

indemnified the Builder against all costs to or expenses of the

Builder arising out of or incidental to such proceedings and the

Proprietor shall be entitled to retain for his own benefit the

amount of damages that may be awarded or recovered in any such

proceedings."

21. As we have seen, cl.15(f) applies only "in the case of the ... liquidation of the nominated sub-contractor" (cl.15(g)(ii)), so that cl.15(f) did not apply before the notice of 3 September 1974 was given. Indeed, it could not have applied until after 18 April 1975 when the member companies of W. Curl & Sons went into liquidation. Part of the remedial work was then completed. However, I do not find it necessary to decide whether the liquidation of the member companies of W. Curl & Sons gave cl.15(f) a retrospective operation so that it governed the relationship of builder, proprietor and architect when the notice was given on 3 September 1974. Assuming that it did so operate, that the sub-contractor's default was of the kind therein mentioned and that the builder advised the architect of that default so as to satisfy the conditions of cl.15(f), I am unable to accept the argument that, in the absence of an instruction by the architect in accordance with cl.15(f), the builder had no obligation to comply with the architect's direction of 3 September 1974 to complete the sub-contract work. The argument to support the builder's case relied on North West Metropolitan Regional Hospital Board v. T.A. Bickerton & Son Ltd. (1970) 1 W.L.R.607, a case where the contract (the form then adopted by the Royal Institute of British Architects) made no express provision for what was to happen if a sub-contract was terminated before the sub-contract work was completed. Lord Reid, holding that the principal contractor had "no right or duty to do the work himself when the nominated sub-contractor drops out" construed the contract as requiring the proprietor to make a new nomination, or, if he did not wish the sub-contract work to be continued, to give an instruction to that effect by way of variation (see pp.611,613). Lord Hodson, Lord Guest, Viscount Dilhorne and Lord Wilberforce were of substantially the same opinion (pp.616,620,621,624,626). The principle in Bickerton, though criticized by some text writers (see Hudson's Building and Engineering Contracts 10th ed. (1970), pp.333-337), has since been cited with approval by the House of Lords: see Percy Bilton Ltd. v. Greater London Council (1982) 1 W.L.R.794. It is unnecessary to consider the meaning and effect of the RIBA form contract. The question here is whether, under the RAIA form, a builder has any right or duty himself to do the work of a nominated sub-contractor if the sub-contractor "drops out".

22. Unless other and inconsistent provisions of the contract prevail over art.1 and cl.13(c), those provisions place on the builder the ultimate responsibility for carrying out the whole of the contract works, including the sub-contract works which the builder lets out to nominated sub- contractors. Prima facie, the builder is not relieved of that responsibility if the sub-contractor fails to carry out all or any part of the sub-contract work or carries out that work defectively. A contrary view might be entertained if a provision of the contract prevented the builder from doing or from having done the work left undone by the defaulting sub-contractor or if the builder could not recoup the cost of doing that work or having it done.

23. The architect's authority to nominate sub-contractors to execute particular classes of work trenches upon the builder's choice of the manner in which he will discharge his responsibility "to execute and complete the whole of the works". The architect's authority is restricted to the nomination of sub-contractors to execute work in respect of which a prime cost sum has been included in the contract sum. If the architect does not nominate a sub-contractor to execute that work, the work nevertheless remains as part of the contract works to be done for the consideration stated in art.2. Specialist work which is beyond the skill or capacity of the builder may need to be done by sub-contract but the builder is permitted to sub-let those parts of the work with the architect's consent (cl.13(b)). The architect retains authority to issue written instructions with respect to the whole of the contract works including the work of nominated sub-contractors (cl.1(a)(i)). Except to the extent that the architect exercises his authority to nominate a sub-contractor, the builder may choose whatever manner he thinks fit consistent with the specifications or other contractual provisions for discharging his contractual responsibility, provided he obeys the architect's instructions given in accordance with cl.1.

24. When a nominated sub-contractor defaults in the performance of a sub-contract, the builder is not absolved from responsibility for the sub-contract work, but his responsibility may be affected by instructions given under cl.15(f) where that sub-clause applies. That sub-clause applies to defaults by nominated sub-contractors who are not nominated in accordance with the particular procedures prescribed by cl.15(g)(i) or 15(g)(ii); it applies also to defaults by the particular categories of nominated sub-contractors who are nominated in accordance with those procedures "in the case of the bankruptcy or liquidation of the nominated sub-contractor". It does not apply if a sub-contractor nominated in accordance with a procedure prescribed by cl.15(g) makes default, even if the default is in a manner mentioned in cl.22, unless the sub-contractor becomes bankrupt or goes into liquidation. Where cl.15(f) does not apply, the responsibility of the builder for the sub-contract work is unaffected. In such a case, if the builder determines the sub-contract after the sub-contractor -

(i) without reasonable cause, wholly suspends the carrying out of

the works before practical completion thereof; or

(ii) fails to proceed with the works with reasonable diligence or

in a competent manner; or

(iii) refuses to or persistently neglects to comply with written

notice from the architect requiring him to remove defective work or

improper materials or goods and by such refusal or neglect the works

are materially affected;

(the defaults mentioned in cl.22), the builder's responsibility is to execute or to have executed by another sub-contractor the work that the defaulting sub-contractor has not done. Where cl.15(f) does apply, it provides for four matters:

(i) the giving by the builder to the architect of written advice

of the sub-contractor's default;

(ii) the issuing of instructions by the architect to the builder;

(iii) the adjustment of the contract sum by treating the costs and

expenses incurred in complying with the instructions as an

expenditure falling within cl.18(a); and

(iv) the right of the proprietor to proceed in the name of the

builder against the nominated sub-contractor.

Clause 15(f) authorizes the architect to instruct the builder to take the course which the architect thinks appropriate: he may instruct the builder to do no more of the sub-contract work, or to do the outstanding sub-contract work himself or to get another sub-contractor to do it. The architect is authorized to give an instruction overriding the builder's discretion as to the completion of the sub- contract work. Pending receipt of the architect's instruction, the builder does not know how he may be instructed to discharge his contractual responsibility with respect to the completion of the sub-contract work. The architect is thus under a duty to give an instruction within a reasonable time and the builder may be entitled to the relief specified in cl.24 if he does not. But it does not follow that a failure by the architect to give a timeous instruction necessarily prevents the builder from doing or having done the work left undone by the defaulting sub-contractor. That depends upon the nature and extent of the sub-contract works to be done. If,without an instruction, it is reasonable and practicable to identify the work to be done and to do it or have it done, the absence of an instruction leaves the builder a choice as to the manner of doing it or having it done. It does not remove from thecontract the sub-contract work remaining to be done. The builder may be held up waiting for an instruction that does not come, and he cannot bring his costs and expenses of doing the work under cl.18(a), but he is not prevented by lack of instruction from doing work that can reasonably and practially be identified as work included in the contract works which the builder undertook to execute.

25. The payment of the builder for discharging his responsibility for sub-contract work that a nominated sub-contractor has not carried out is not provided for by cl.18(a). That sub-clause provides for an adjustment of the contract sum accordidng to the amount expended by the builder in favour of a nominated sub-contractor. Except in the case where costs or expenses are incurred in complying with an architect's instruction under cl.15(f), the costs and expenses incurred in executing work left undone by a nominated sub-contractor are dealt with by cl.18(c) which provides:

"Where the Builder pursuant to a provision of this Contract

executes work or provides materials or goods for which a Prime Cost

Sum or like monetary provision is included in the Contract Sum the

procedure for the valuing of such work, materials or goods unless

otherwise agreed shall be in accordance with Clause 19 of these

Conditions and in the event of such valuation exceeding or being

less than the relevant Prime Cost Sum, Provisional Sum or like

monetary provision the amount of the difference shall be added to or

deducted from the Contract Sum as the case may require."

However, the adjustment to which a builder is entitled under cl.18(a) (i) for expenditure exceeding the prime cost is enhanced by a builder's margin of 5%, whereas the adjustment to which he is entitled under cl.18(c) upon a valuation exceeding the prime cost is not so enhanced. It may be that a builder who would have been entitled to the benefit of that 5% had the architect given an instruction under cl.15(f) may be entitled to claim that 5% as damages for breach of contract in failing to give the instruction. Whether or not that is so, the contract makes provision for covering the builder's costs of doing or having done work that a nominated sub-contractor fails to do.

26. It follows that under the RAIA form of contract, a builder has a right or duty himself to do the work of a nominated sub-contractor if the sub-contractor "drops out" - except in those cases where the absence of an architect's instruction makes it unreasonable or impractical to identify the work which remains to be done or to do that work or to have it done and the architect fails to give an instruction. Exceptional cases could arise where nobody with the expertise needed to do the work of the defaulting sub-contractor was reasonably available to do the work at the relevant time. But apart from exceptional cases, neither cl.15(f) nor any other provision of the contract furnishes a ground for implying that, if the nominated sub-contractor should default in carrying out the sub-contract and the architect fails to nominate a new sub-contractor, the sub-contract work does not have to be done.

27. In the present case, the work remaining to be done was clearly identified by the notice given by the architects on or about 30 May 1974. Another sub-contractor was available to do the work. Despite the absence of a formal nomination of a new sub-contractor, the builder was responsible for remedying or having remedied the work which W. Curl & Sons left in a defective state. It follows that the notice given in accordance with cl.1(c) on 3 September 1974 was validly given. However, the proprietor's entitlement to recover under cl.1(c) may be deducted by the proprietor from moneys due or to become due to the builder under the head contract, and it is desirable to see how the liability arising under cl.1(c) may affect the accounts between the proprietor and the builder, and between the builder and the sub-contractor. It is convenient first to refer to the position of the sub-contractor.

28. The builder was not intended to be without remedy against a nominated sub-contractor if the latter should default. Clause 15(a) envisages that sub-contracts would provide for the sub-contractor to assume the same responsibilities to the builder in respect of the carrying out of the sub-contract works as the builder undertakes under the head contract. The provisions of the head contract as to progress payments and amounts to be retained in the retention fund as security for the carrying out of the builder's obligations (cll.28 and 30) are intended to be reflected in the sub-contract: see cl.15(a)(vii). Provided the sub-contract contained a provision having the operation envisaged by cl.15(a)(vii), the builder would retain 10% from progress payments due to the nominated sub-contractor up to a maximum of 5% of the sub-contract sum. When a progress certificate issued to the builder under cl.28 includes an amount in respect of work done by a sub- contractor under a sub-contract, cl.15(b) requires the architect to issue to the builder and sub-contractor, on the request of either of them, particulars of the sub-contract amount. That amount less appropriate retentions, deductions and withholdings is to be paid to the sub-contractor (cl.15(b)). If sub-contract work is not done, its contract value is not included in a progress certificate (cl.28) and is not included in the particulars issued to the builder and sub-contractor under cl.15(b). As the retention fund is security for the builder's performance of its obligations under the head contract, so the amount retained from the sub-contractor is security for a sub-contractor's performance of its obligation under its sub-contract.

29. If the builder has retained from the sub-contractor the percentages specified in cl.15(a)(vii) and he has protected himself by provisions in the sub-contract in accordance with the conditions set out in cl.15(a), the builder may resort to the retention fund, so far as it extends, in order to make good any failure to perform the sub-contract work or any defects in the sub-contract work due to materials and workmanship not being in accordance with the contract. If that fund is not sufficient, cl.18 enables the builder to pass on to the proprietor any increase in the cost of completing the sub-contract works consequent upon the default of a nominated sub-contractor. The editor of the 10th edition of Hudson's Buiding and Engineering Contracts, understanding that that was also the result of their Lordships' decision in Bickerton, thought that thereafter a sub-contractor could repudiate his sub-contract with impunity as the main contractor would suffer no damage thereby. In the editor's opinion, the effect of Bickerton was to subvert the entire system of nomination under the RIBA standard forms (see p.335). The effect of Bickerton on a RIBA standard form contract is not for our determination. But I do not think that the builder's entitlement under cl.18 of the RAIA form to pass on increased costs to the proprietor subverts the system of nomination envisaged by that contract. A sub-contractor who refuses or fails to complete his sub-contract does not escape liability for the reasonable cost of doing the sub-contract work under a plea that a third party (the proprietor) will become liable under the head contract to pay an amount equal to that cost. The natural consequence of his failure to complete is the incurring of the reasonable cost of completing the sub-contract less any unpaid balance of the sub-contract price (Mertens v. Home Freeholds Co. (1921) 2 K.B.526; Ventura v. Svirac (1961) W.A.R.63). Those damages are recoverable under the first branch of the rule in Hadley v. Baxendale (1854) 9 Ex.341 (156 E.R.145) and it is immaterial that the builder has no claim under the second branch. The builder's right under the head contract to recoup from the proprietor any increase in the cost of completing the sub-contract does not relieve the sub-contractor from liability to the builder; the measure of that liability depends, of course, on the sub-contract. But if a proprietor pays the builder a sum representing an increase in the contract price occasioned by the sub-contractor's default, the proprietor is subrogated to such rights as the builder may have to recover that sum against the sub-contractor (cf. Constant v. Kincaid & Co. (1902) 4 Sess.Cas.F.901). Clause 15(f) which confers a contractual right upon a proprietor to proceed in the name of the builder against a defaulting nominated sub-contractor is drawn on the assumption that the sub-contractor's liability to the builder is unaffected by the proprietor's liability to the builder for the costs and expenses incurred in complying with the architect's instructions given pursuant to that sub-clause.

30. If, pursuant to cl.1(c), the proprietor employs another to complete sub-contract work that the sub-contractor and the builder have not completed and recovers from the builder the costs thus incurred, the builder is entitled to payment of the contract sum on the footing that the contract works have been completed in that respect. The builder is not liable to indemnify the proprietor for the costs incurred in having the works completed and to suffer a reduction in the contract sum for a failure to complete the works. Such a reduction in the contract sum is in truth damages for breach of contract (see Bellgrove v. Eldridge (1954) 90 C.L.R.613, at pp.617-618) and cl.1(c) would impose a penalty if it were construed as authorizing the recovery of the cost of completion in addition to damages for non-completion. A proprietor's claim under cl.1(c) for the cost of completing sub-contract work cannot result in the recovery of more than the actual damage suffered by him, that is to say, the excess of the cost incurred by him in getting the work done over what he is liable to pay for that work under the contract. The "moneys due or to become due to the Builder" are calculated for the purposes of cl.1(c) on the footing that the builder, being liable for the actual cost incurred by the proprietor in having the sub-contract work done, is entitled to credit in accordance with the contract for its being done.

31. In this case, however, it seems that the whole of the work in respect of which the action was brought consisted of defects "due to materials and/or workmanship not being in accordance with (the) Contract" which were to be made good without cost to the proprietor (cl.26(a)). The doing of the remedial work gave the builder no right to further payment. At all events, there was no set-off raised by the builder against the proprietor's claim under cl.1(c). The only question raised was whether the notice of 3 September 1974 was validly given. In my opinion it was validly given. The appeal should be allowed, the judgment of the Full Court should be set aside and the judgment of Matheson J. should be restored.

DAWSON J. I agree with the reasons for judgment of Wilson J., which I have the advantage of reading, and have nothing to add.

Appeal allowed with costs, order of the Full Court of the Supreme Court of South Australia set aside and, in lieu thereof, order that the appeal to that Court be dismissed with costs.

Corporation of the City of Adelaide v Jennings Industries Ltd [1985] HCA 7;

At a glance

Court

Decision date

Before

Source

Judgment (75 paragraphs)

Corporation of the City of Adelaide v Jennings Industries Ltd [1985] HCA 7; (1985) 156 CLR 274 (14 February 1985)

Parties

Cases Cited (1)