Hope v Hutchings; Hutchings v Hope

The Homeowners' Appeal

1. The homeowners also appeal on the basis of an error of law and seek leave to appeal. The homeowners' appeal relates to the Tribunal's finding in relation to the "sham contract". They submit that as a matter of law, a party seeking to prove that an executed contract is a sham must provide clear and convincing proof that the subjective intention of the parties at the time the contract was entered into was that it was not intended to be the real transaction. They submit that the Tribunal failed to identify evidence that constituted 'clear and convincing' proof to overcome the 'high threshold' required for a finding that the subjective intention of all the parties that will naturally be inferred from the execution of an agreement and was unduly influenced by the fact that the agreement was prepared to satisfy the bank's requirement for finance.
2. The homeowners rely on a series of cases in that regard, including Lewis v Condon [2013] NSWCA 204 as support for the proposition that a party seeking to prove that an executed contract is a sham must provide clear and convincing proof that the subjective intention of the parties at the time the contract was entered into was that it was not intended to be in truth their real transaction.
3. Further, the homeowners cite Morgan v 45 Flers Avenue Pty Ltd (1986) 10 ACLR 692 at 694-695 for the proposition that entering into a contract for a purpose other than its ostensible purpose does not mean that it is a sham and is not to be treated as enforceable.
4. The homeowners also cite five problems with how the Tribunal came to its findings on the sham contract. We deal with each of those problems below. Having considered those problems, and the submissions of the parties we are not of the view that the Tribunal fell into an error of law or that we should allow leave to appeal.

Problem 1 - no clear and convincing proof

1. The Tribunal found that in circumstances where it was not possible to resolve the issue of whether the contract was a sham solely by reference to the assertion of witnesses concerning the critical conversations, it instead should consider the surrounding circumstances, including the initial discussions between the parties and the manner in which the construction of the dwelling subsequently proceeded. The homeowners submit that the Tribunal's weighing up of those circumstances was at least equivocal and could not, in any circumstances, be taken to constitute clear and convincing proof of the subjective intentions of the parties.
2. The homeowners set out the issues and the considerations which the Tribunal weighed in concluding in favour of the builder on the 'sham' issue, in a document marked 'Annexure A' attached to their submissions to the Appeal Panel.
3. The findings relating to the sham contract are identified in the Tribunal's consideration of the matters at [176]-[193] of the reasons for decision. At [194] - [197], the Tribunal concluded: 194 As noted above, the burden upon the builder of proving that the contract was not intended to be enforceable in accordance with its terms is a heavy one, but I am comfortably satisfied in this case that the parties did intend at the time of execution of the contract that it was not to bind the parties or govern their contractual relations. I accept that Mr Hutchings did say at the time of execution of the contract words to the effect "the contract can be torn up once the loan is approved". 195 I reach that conclusion primarily on the basis that the builder's evidence of the statement he asserts Mr Hutchings made at the time of execution of the contract document was corroborated by the evidence of Mrs Hope, which was not challenged by cross-examination. That evidence, although hearsay, would, even if the rules of evidence had applied, have been admissible to refute the suggestion that the builder's evidence was a recent invention. 196 I have also taken into account the fact that Mr Hutchings failed to give evidence in support of the homeowners and that his absence was not adequately explained. I also base my conclusion upon: the builder's submission of the invoice of 4 July 2014 and the home owners' payment of that invoice without demur; the fact that the home owners obtained an owner-builder permit; the fact that the home owners made substantial payments to suppliers from their own accounts; the absence of detailed specifications in the plans attached to the contract; and the significant discrepancy between the builder's initial costing of $457,000 and the fixed price referred to in the contract of $300,000. 197 It is inherently unlikely in my view that the builder would have intended to be bound by a fixed price contract which required him to reduce the cost of the construction to that degree. I accept that the home owners entered into arrangements with the builder hoping to reduce the cost of the build by employing the builder on an hourly rate and by undertaking the purchase of significant materials on their own account.
4. We are not satisfied that the Tribunal's conclusion and analysis of the evidence demonstrates an error. The Tribunal clearly found the following considerations of the surrounding circumstances as being determinative: 1. Mr Hutchings' statement at the time of execution of the document to the effect that "the contract can be torn up once the loan is approved". 2. The payment of the builder's initial invoice without objection. 3. The fact that the homeowners obtained an owner-builder permit. 4. The fact that the owners made substantial payments for material from their own account. 5. The absence of detailed specifications from the contract. 6. The significant discrepancy between the builder's initial costing of $457,000 and the fixed price in the contract of $300,000.
5. Those were findings open to the Tribunal on the evidence and we are satisfied that as analysed by the Tribunal they do amount to 'clear and convincing proof.' We are satisfied that the Tribunal was entitled on the evidence to arrive at the conclusion that it was "comfortably satisfied" on the evidence. We are not of the view that it was unreasonable for the Tribunal to consider the initial discussions between the parties and the manner in which the construction of the dwelling subsequently proceeded as part of the determination as to whether the written contract amounted to a sham. We find that the Tribunal's weighing up of those circumstances did in fact constitute clear and convincing proof of the subjective intentions of the parties.

Problem 2 - No express finding of subjective intention

1. The homeowners submit that there is no express finding of the subjective intention of the parties. They refer to the case of Briginshaw v Briginshaw [1938] HCA 34 itself at 361-362 for the proposition that In such matters 'reasonable satisfaction' should not be produced by inexact proofs, indefinite testimony, or indirect inferences.
2. They also submit that it was not put to Mrs Hutchings in cross-examination that it was her intention that the contract was not intended to bind the parties or that her husband had said that ''the contract can be torn up once the loan is approved".
3. In relation to the alleged lack of an express finding as to the subjective intention of the parties, that issue is squarely addressed in the reasons at [194]-[197] as extracted above. There is a clear finding that the Tribunal was comfortably satisfied that the parties did intend at the time of execution of the contract that it was not to bind the parties or govern their contractual relations. We accept given the Tribunal's findings in the preceding paragraphs, that there was evidence to support the Tribunal's comfortable satisfaction. Further, the matters relied on by the Tribunal in coming to the conclusion about the state of mind of the parties in relation to their subjective intentions do not amount to 'inexact truths, indefinite testimony or indirect inferences'. The Tribunal was faced with two competing views in relation to the contract and in circumstances where the intention for the parties to be bound by the contract was being challenged, the Tribunal has clearly identified the matters it did take into consideration in finding the subjective intention of the parties.
4. The homeowners' submissions that it was not put to Mrs Hutchings in cross-examination that it was her intention that the contract was not intended to bind the parties or that her husband had said that ''the contract can be torn up once the loan is approved" requires an analysis of the transcript.
5. Beginning at T52.34-46 of the transcript, Counsel for the builder asks about the contract. Mr Carolan: No, Madam, you know the proposition Mr Hope has is that the contract was never [intended to be signed]. Isn't that right? Mrs Hutchings: If that's his premise, yes. Mr Carolan: And that's something that was put to your husband at the time of the signing, wasn't it? Mrs Hutchings: [No]. Mr Carolan: And your husband said that the thing was to be ripped up after it was signed and given to the bank, isn't that right? Mrs Hutchings: I do not recall him saying that.
6. Cross examination in relation to the intention of the contract to bind the parties is found at T73.42 -74.15 of the transcript: Mr Carolan: The purpose of the question is you didn't ask Mr Hope to provide the insurance because you weren't intended to rely on this contract were you? Mrs Hutchings: I'll deny that statement. Mr Carolan: And your husband had said to Mr Hope that the only purpose of the document was to obtain the mortgage. Mrs Hutchings: I deny hearing Matthew say that to Mr Hope. Mr Carolan: The only reason you asked Mr Hope to provide it is that correct is because the bank had told you it required them that's it isn't it? Mrs Hutchings: Yes. Mr Carolan: And other than that there was no reason for the contract to be created was there? Mrs Hutchings: We hadn't entered into any agreement.
7. In the homeowners' submissions in reply, the homeowners submit that the cross examination is not relevant because just because a contract is entered into for one reason alone does not mean that it is not binding on the parties. While we agree that a contract can be entered into for more than one reason, the question here was whether the contract was entered into to bind the parties. For the reasons outlined above, we accept that there were sufficient grounds for the Tribunal to find that the contract was not entered into for the purposes of binding the parties and was a sham.
8. Further, it was submitted by the homeowners in reply that it was not put to Mrs Hutchings that her husband had said that 'the contract can be torn up once the loan is approved'. It was put to her that her husband had said that 'the thing was to be ripped up after it was signed and sent to the bank'. This was denied by Ms Hutchings.
9. The issues in relation to the statement was dealt with at [158-176] of the reasons for decision and the relevant parts are extracted below. 158 The builder alleges a conversation, at the time of execution of the contract, in which Mr Hutchings told him the contract would be torn up and that the contract was only for bank purposes. Both home owners were present at the meeting at which the builder alleges that statement was made. If I accept that that conversation occurred in the terms alleged by the builder, it would in my view be clear that the contract was a sham and not intended to govern the legal relations between the parties. 159 Mrs Hutchings disputed that that conversation had occurred. If I concluded that I was able to accept the evidence of either the builder or Mrs Hutchings in preference to the other, that would be sufficient to resolve the issue. If I accepted the builder's evidence, I would find the contract was a sham. If I accepted Mrs Hutchings' evidence, I would not find that the contract was a sham. 160 As I did not observe the witnesses giving oral evidence I am not able to base any conclusions concerning the credit of witnesses on demeanour or other visual or aural clues. Neither party suggested such elements were relevant. Having read the transcript of the cross-examination of both Mrs Hutchings and the builder, I do not consider that I can accept the evidence of either witness unequivocally. 161 The builder's evidence was unsatisfactory in a number of respects. His written statement lacked detail concerning significant issues. In particular, the statement does not explain his initial costing of the project and exactly how he considered that the proposal he claims to have put to the home owners in the meeting of 25 February 2014 would have enabled them to reduce the cost of the project to the extent necessary to meet a target of $350,000, which the builder asserted Mrs Hutchings had stated was the home owners' budget. …. 166 Mrs Hutchings' evidence concerning her recollection of the meeting on 21 May 2014 and what was said was not consistent and varied between her written statement and her oral evidence. In her written statement she denied that Mr Hutchings had said that "the contract can be torn up after the loan is approved". Her evidence in cross-examination was initially that she did not recall Mr Hutchings saying that. She subsequently denied hearing Mr Hutchings say those words. 167 Again, this question was not fully explored in cross-examination, but the inconsistency in Mrs Hutchings' evidence leaves me unable to accept her evidence unequivocally. 168 The only direct evidence of the critical conversation on 21 May 2014 was the evidence given by the builder and Mrs Hutchings. However Mrs Hope, the builder's wife, did provide some corroboration of the builder's evidence in the form of hearsay evidence that the builder had reported to her a conversation concerning the signing of the contract consistent with the builder's version of the discussions. Mrs Hope was not cross-examined. 169 Mr Hutchings, who was present at the time and signed the contract, is alleged by the builder to have made the statement that the contract could be torn up and signed the contract. He did not give evidence. The explanation for Mr Hutchings not giving evidence, given by Mrs Hutchings in the course of cross-examination, was as follows: Q. Is there some reason why Mr Hutchings hasn't provided an affidavit? A. Yes. Q. And what's that reason? A. He is suffering psychological trauma from this situation. Q. From this situation? So he doesn't remember what happened in the negotiations, is that right? A. That's not what I said. 170 The reasons for Mr Hutchings' failure to give evidence were not further explored in cross-examination. As recorded above, the builder submitted that a Jones v Dunkel inference arises from the absence of Mr Hutchings, and that I should more readily accept the builder's evidence because it was not contradicted by evidence from Mr Hutchings. 171 The home owners submit that the principle in Jones v Dunkel only arises where the absence of a witness is unexplained. 172 I am not persuaded that Mr Hutchings' failure to give evidence was fully or adequately explained. 173 I accept that, if it were established that Mr Hutchings was so traumatised by his experience of the construction of their home that he was unable to give evidence, that would constitute a satisfactory explanation for his failure to give evidence. However, in my view the evidence did not establish that proposition. There was no medical evidence submitted by the home owners to establish that Mr Hutchings was so traumatised that he was unable to provide a statement. 174 In the absence of such evidence I do not regard the bare assertion of Mrs Hutchings that Mr Hutchings was suffering from psychological trauma as sufficient explanation for his failure to give evidence. 175 I accept that Mrs Hutchings' assertion was not challenged in cross-examination, but I do not consider that it was incumbent upon Counsel for the builder to explore the matter further. The issue was squarely raised by the question put by Mr Carolan, counsel for the builder, and, the issue having been raised, to avoid a Jones v Dunkel inference arising from Mr Hutchings' absence, a proper explanation was necessary. 176 In circumstances where it is not possible to resolve the issue of whether the contract was a sham solely by reference to the assertions of the witnesses concerning the critical conversations, it is necessary to consider the surrounding circumstances including the initial discussions between the parties and the manner in which the construction of the dwelling subsequently proceeded. A number of factors are identified in the parties' submissions. It is appropriate to consider them in turn.
10. It is clear from the reasoning that the Tribunal has not simply relied on the cross examination to determine whether the statement was made. Rather the Tribunal proceeded to consider surrounding circumstances and initial conversations to determine whether the statement was made and came to the conclusion that it had. Having considered those reasons we find no error of law on this ground or that it was not open to the Tribunal to come to the conclusion that the statement had been made in circumstances where there was competing evidence on the point.

Problem 3 - The budget

1. The third issue raised by the homeowners is that the Tribunal appears not to have taken into account the submission and evidence that the works were to be carried out to a budget and that Mr Hope knew that the works were to be carried out to a budget. They submit that in those circumstances it would have made no commercial sense for the owners to have entered into an agreement for a builder to work unlimited hours and pay subcontractors at an undisclosed rate.
2. They refer to cross examination about a meeting which took place on 29 January 2014 in which the following questions and answers were given: Q. Do you recollect [Mrs Hutchings] saying she had a budget? A. 'Yes. . Q. You do have a recollection. And your recollection is that at least at that stage she said that the budget was three hundred and fifty thousand dollars isn't that correct? A. That's what she said
3. They also refer to an email sent after a meeting on 25 February 2014 when Mrs Hutchings sent an email to Mr Hope saying: Hi John Thanks for seeing us on Tuesday, we would love to work with you. Matt has contacted council re: the driveway, just waiting for a response today. I'm going to get onto the owner builders course asap. . We just need to double check finance with the bank, but if we can keep the whole build capped at $300,000 we should scrape in. I'm not sure what documents are needed for the loan so will chase that today, and call you if I hear from council.
4. These matters were dealt with at [177]-[188] of the reasons for decision. In particular from [181] of the reasons where the Tribunal relevantly set out: 181 However, the absence of complete specifications in the plans is a further element that suggests the contract was not intended to be enforceable. It would be unusual that a builder would bind themselves to a fixed price for the construction of a building which was not fully specified. On the other hand the breadth of the items listed in the schedule of prime cost items may explain why the builder was prepared to enter into the contract. The items included in the prime cost schedule amounted to over $180,000 of the $300,000 contract price. That circumstance possibly provides an explanation why the builder would have been prepared to undertake a fixed price contract without detailed specification of the nature of the finishes and other elements which he was required to provide. The builder's invoice of 4 July 2014 and the payment of that invoice by the homeowners 182 As the builder described in his submissions, the builder's invoice of 4 July 2014 sought payment to the builder of an amount identified as "labour only" calculated at $85 per hour. The $85 per hour figure does not appear on the invoice but the amounts charged are clearly calculated at that rate. For example $2,550 for 30 hours between 3 September 2013 and 16 June 2014. 183 That invoice was paid without demur by the home owners. In cross-examination, Mrs Hutchings asserted that she paid the invoice "so that Mr Hope wasn't out of pocket". Had that been the explanation it might have been expected that the home owners would have sought to claim back the payment at the time of the first progress payment either by the reduction of the payment claim or reimbursement from the builder. Neither occurred. 184 In my view the home owners' payment of the July invoice is evidence tending to support the builder's version of events. The builder's submission of claims for progress payments 185 The home owners rely in support of their case on the submission by the builder of claims for progress payments in accordance with the schedule of progress payments set out in the amended schedule attached to the contract. The first three of those claims used the phrase "as stated in agreement" or "as per agreement in contract". That is potentially evidence supporting the home owners' argument that the contract was intended to be enforceable. However that conduct could also be explained on the basis that the builder understood that the payments were to come from the bank as drawdowns of the home owners' loan and that the progress payment claims needed to be appropriate for submission to the bank. I regard the payment claims as equivocal. The difference between the builder's initial estimate and the contract price 186 Mrs Hutchings disputed that she had been made aware of the builder's initial estimate for the cost of the build at $457,000. Nevertheless, the home owners had previously received an estimate from Mr Sheather of $435,000. 187 It is difficult to identify a rational basis upon which the builder might have agreed to construct the dwelling for a fixed price of $300,000 (even allowing for the extent to which that price included prime cost items) when he had estimated the building cost at $457,000. The evidence suggests that the home owners were, by the time the builder became involved, already committed to proceeding with the construction, having, on Mrs Hutchings' own evidence, already committed $40,000 to brick and timber suppliers at the time of their first meeting with the builder. By 21 May 2014, when the contract was executed, the home owners had engaged with the builder to a degree that suggested they were committed to proceeding with him as their builder. 188 I consider that the builder is correct in submitting that the significant discrepancy between the builder's estimate and the $300,000 set out in the contract is a factor suggesting the contract was not intended to be binding on the parties.
5. It is clear from the reasoning that the Tribunal did take into account the submission and evidence that the works were to be carried out to a budget and that Mr Hope knew that the works were to be carried out to a budget. However, the Tribunal gave reasons as to why it did not accept that submissions. Parties enter into agreements for work on an hourly basis regularly, it cannot be said that does not make commercial sense. We find no error on this basis.

Problem 4 - Conduct in relation to the contract unlikely

1. The fourth problem the homeowners refer to is that the Tribunal failed to take into account that it was unlikely that the parties would enter into a scheme to deceive the bank, or that the builder would knowingly contract to do residential building work in contravention of legal requirements as acknowledged by Mr Hope. They submit that it was never put to Mrs Hutchings that she knowingly entered into a scheme to deceive the bank, or that her husband did.
2. It is also unclear from the homeowners' submissions as to why such conduct in relation to the contract would be unlikely. The issue was whether the contract was intended to bind the parties and that was what the Tribunal considered. It would appear to us that in the circumstances, the likelihood of such conduct is irrelevant to that question. In submissions in reply the homeowners refer to the case of Baron Corporation Pty Ltd v Owners of Strata Plan 69567 [2013] NSWCA 238 which involved quite different circumstances. At paras 58 to 59 the Court of Appeal held: According to that submission, Metro is to be taken to have promised to do "residential building work". But by virtue of s 4(1) of the Home Building Act, Metro was forbidden to contract to do "residential building work" because (as is common ground) it never held a licence under the Act. If the unlicensed contractor's promise extended to the doing of "residential building work", a court, having regard to s 10, might not enforce the promise, with the result that Baron could not be said to have had any right to the performance of any of the "Services" that entailed "residential building work". The construction for which the Owners Corporation contends should be rejected on that basis. 59 In any event, a court will not lightly impute to contracting parties an intention to make a contract prohibited by statute where, as here, there is an express provision excusing or excluding performance to the extent that it entails the doing of things that it is unlawful to contract to do. The effect of such a provision can only be to confine the scope of the promise to perform so that it does not extend to the doing of those things. That is a further reason for rejecting the construction propounded by the Owners Corporation.
3. In these circumstances, we are not satisfied that the Tribunal did take lightly the intention of the parties. As highlighted in its reasons for decision, it carefully considered the surrounding circumstances and decided the contract was a sham.

Problem 5 - Prime cost allowance

1. The fifth issue raised by the homeowners is that the Tribunal failed to take into account that the builder drafted and signed a document entitled 'prime cost allowances' that was not necessary for bank purposes and would have been pointless.
2. At [181] of the reasons the Tribunal stated: 181 However, the absence of complete specifications in the plans is a further element that suggests the contract was not intended to be enforceable. It would be unusual that a builder would bind themselves to a fixed price for the construction of a building which was not fully specified. On the other hand the breadth of the items listed in the schedule of prime cost items may explain why the builder was prepared to enter into the contract. The items included in the prime cost schedule amounted to over $180,000 of the $300,000 contract price. That circumstance possibly provides an explanation why the builder would have been prepared to undertake a fixed price contract without detailed specification of the nature of the finishes and other elements which he was required to provide.
3. It is clear from the reasoning that the Tribunal was aware of the prime cost allowance and did consider it as part of the reasoning as to whether the contract was a sham and has weighed it up as part of the reasoning. The fact that it did not come to the view that it was 'pointless' to the bank does not create an error.
4. Having considered all five problems raised by the homeowners we are not satisfied that any give rise to the error of law articulated by the appellants or that the matters are factors which would weigh against the conclusion that the evidence could be clear and convincing so as to satisfy the relevant threshold.

Leave to Appeal

1. We are also not persuaded to grant leave to the homeowners to appeal against the Tribunal decision on the basis that the decision was against the weight of evidence. As explained in relation to the builder's appeal, leave will only be granted if the homeowners persuade us that they may have suffered a substantial miscarriage of justice because the decision was against the weight of evidence.
2. The homeowners' submissions in support of this aspect of the appeal are brief. Firstly, the homeowners state that the builder has been able to avoid the consequences of a contract, executed and freely entered into. It is not entirely clear what those consequences are. The homeowners submit that they are consequentially unable to recover the cost addressing defective and incomplete work. However, the effect of the Tribunal's decision was not to find that there was no contract at all; it did find a contract. In circumstances where a contract for building works has been found between the parties and where the builder has done residential building works for the homeowners, the homeowners would still be entitled to claim for any defective works that were within the scope of works of the builder and any incomplete works for which the homeowners have paid the builder. Given our findings above that on the evidence it was open to the Tribunal to find the sham contract, the homeowners' submissions that they have been found to have entered into a transaction that involved deceit and moral culpability and that they have lost an opportunity that was fairly open to them of achieving a better outcome than that which occurred, are irrelevant to any miscarriage of justice.
3. Accordingly, we do not grant leave to appeal and the appeal is dismissed.

Costs

1. At the conclusion of the hearing, we indicated we would call for further submissions on cost if either party seeks to make a costs application. Each party has failed in its appeal and on that's basis our preliminary view is that each party should pay their own costs. However, if either party seeks to make a costs application, then directions to facilitate the costs application have been made as part of the orders.

Orders

1. For the reasons provided in relation to both appeals: 1. Leave to appeal is refused 2. The appeal is dismissed 3. If either party seeks to make an application for costs that they are to provide to the Appeal Panel and the other party the application in writing, either in person or by post, any submissions and documents in relation to any application for costs by 12 February 2021. 4. The respondent to any cost's application is to provide to the Appeal Panel and the costs applicant in writing, either in person or by post, submissions and documents on costs by 19 February 2021. 5. Costs will be determined on the papers. If either party seeks to be heard in person, they should advise the Registry prior to 19 February 2021 setting out the reasons why and the Appeal Panel will advise of the decision in due course.

I hereby certify that this is a true and accurate record of the reasons for decision of the Civil and Administrative Tribunal of New South Wales. Registrar DISCLAIMER - Every effort has been made to comply with suppression orders or statutory provisions prohibiting publication that may apply to this judgment or decision. The onus remains on any person using material in the judgment or decision to ensure that the intended use of that material does not breach any such order or provision. Further enquiries may be directed to the Registry of the Court or Tribunal in which it was generated. Decision last updated: 04 February 2021