Jurisdiction : SUPREME COURT OF WESTERN AUSTRALIA

Citation : DALCON CONSTRUCTION PTY LTD -v- JONES & ORS [2004] WASC 272

Commercial Arbitration Act 1985 - Building contract - Progress payment - Variations in building contracts

Commercial Arbitration Act 1985 (WA), s 38

First Respondent : Mr N W McKerracher QC & Ms S B Armstrong

Concrete Constructions Group Pty Ltd t/as Concrete Constructions (ACT) v Coddlestone Pty Ltd [1995] ACTSC 91

Dalcon Construction Pty Ltd v Jones & Ors [2004] WASC 272

Gilbert-Ash (Northern) Ltd v Modern Engineering (Bristol) Ltd [1974] AC 689

LU Simon Builders Pty Ltd v HD Fowles [1992] VicRp 60; [1992] 2 VR 189

Main Roads Construction Pty Ltd v Samary Enterprises Pty Ltd [2005] VSC 388

Meehan v Jones [1982] HCA 52; (1982) 149 CLR 571

Algons Engineering Pty Ltd v Abigroup Contractors Pty Ltd (1998) 14 BCL 215

Construction Services Civil Pty Ltd v J & N Allen Enterprises Pty Ltd (1985) 1 BCL 363

Egan v State Transport Authority (1982) 31 SASR 481

Novawest Contracting Pty Ltd v Taras Nominees Pty Ltd [1998] VSC 205

Ownit Homes Pty Ltd v Batchelor [1983] 2 Qd R 124

Promenade Investments Pty Ltd v New South Wales (1992) 26 NSWLR 203

Re Concrete Constructions Group Pty Ltd [1997] 1 Qd R 6

Re Sanders Constructions Pty Ltd [1969] Qd R 29

Triden Contractors Pty Ltd v Belvista Pty Ltd (1986) 3 BCL 203

UDR Equipment Pty Ltd v Afkos Industries Pty Ltd [2000] WASC 57; (2000) 22 WAR 221

1 WHEELER JA: This is an appeal from a decision of Master Sanderson, granting the first respondent leave to appeal pursuant to s 38 of the Commercial Arbitration Act 1985 (WA) on a question of law arising out of an award delivered by the second respondent as Arbitrator in an arbitration between the appellants and the first respondent. The Master granted leave and allowed the appeal, setting aside the award of the Arbitrator (Dalcon Construction Pty Ltd v Jones & Ors [2004] WASC 272).

2 The appellants were the owners of land in Mandurah. The first respondent carried on business as a builder. Pursuant to a written contract, which was a standard form agreement, the first respondent agreed to prepare working drawings for, and to construct, a brick and tile residence for the appellants on their land at Mandurah. The Arbitrator found, in findings which are not currently in dispute, that when the appellants arrived at the meeting to sign the contract on 6 August 1999, the contract sum was already written into the contract. Changes were made to the proposed construction during the course of the meeting. The parties agreed to proceed with the execution of the contract while agreeing to the variations orally.

3 Various clauses of the contract deal with variations to the contract, and with progress claims and settlement of disputes. I shall turn to those shortly. Purportedly acting pursuant to the clause allowing for progress claims, the first respondent sent to the appellant progress claims dated 16 February 2001, totalling $30,579.30. As at 12 March 2001, the appellants had paid $14,331.90 in respect of those claims. The first respondent then, on 12 March, served the appellants by hand with a notice purporting to be notice of default in respect of the unpaid amounts. On 23 March 2001, the first respondent purported to terminate the contract by notice in writing, based upon the appellants' failure to remedy a default within five days of notice of default. By notice dated 29 March 2001, the appellants purported to accept the first respondent's repudiation of the contract. The second respondent was then appointed to arbitrate the dispute.

4 The second respondent's reasons do not set out a summary of the dispute and of the contentions of each party in the way that one would expect in a judgment. It appears, however, that the competing contentions, very broadly put, were as follows. The appellants' position was that the contract sum was inclusive of the various alterations, while the first respondent's position was that the appellants had orally agreed

that they would pay any extra amounts which might be required by reason of those alterations. Having examined the contract, an estimating worksheet upon which the parties placed considerable emphasis, marked-up drawings, plans, drawings marked "superseded", and having heard the evidence on behalf of the parties, the Arbitrator reached the view that the appellants' evidence should be accepted. That is, that a variety of alterations from the original drawings were agreed upon between the parties to be encompassed within the contract price.

5 There was also a practice in relation to variations, which was described by the Arbitrator as follows:

" ... that the parties proceeded with the execution of the contract whilst agreeing to variations orally and having them confirmed as and when the respective variation was completed. This situation of course works well while there is no disagreement between the parties, but as occurred at the latter part of the contract becomes unmanageable when matters such as the bifold doors are involved."

6 The "bifold doors" reference was a reference to one item, apparently involving significant cost, which the appellants had maintained was encompassed within the contract price and which the first respondent had maintained was one of the items orally agreed to be the subject of a future variation.

7 The Arbitrator found, as I understand it, that the amounts of the progress claims not paid by the appellants were amounts which were claimed in respect of variations. The progress claims themselves were not before us, but it was agreed by both counsel before us that the disputed claims purported to be for variations. The Arbitrator found that the variations had not been raised in accordance with the contract. The Arbitrator's finding is as follows:

"PROGRESS PAYMENTS

As argued by both parties, it is common ground that payments pursuant to this (and most building contracts of this type) are 'payments on account'. This is a well established and accepted doctrine, and as that principle relates to variations being payments due under the contract - I do need to elaborate.

Pursuant to the contract provisions, variations, once performed become due and payable at the next progress claim - ref cl 16(e) 'after the execution of such work'. Therefore, once the work is completed and billable it becomes part of the contract sum and is caught by the general provisions of clause 25 Progress Payments.

In principle variations are to be treated similarly to the contract sum itself - the contract becomes 'valid' when terms are agreed and the documents signed, so too the variation will not form part of the contract until the parties have agreed to the cost (and all other terms) and the claim signed.

The Claimant's closing submission in various places reflects this approach (for e.g. paras 2, 3, 5, 6 and citing several cases) and is consistent with the Respondent's closing submission para 2, page 3 which cites cl 25(d) of the General Conditions of Contract (as part of Exhibits 34 and 7).

It follows that in the absence of an agreement as to the costs of variations, those costs cannot be 'part of the costs of the works' and accordingly are not due until that agreement is reached. It is the Respondent's own irresponsibility that he then found himself exposed by carrying out the work before having the costs agreed to in writing before hand. I refer again to cl 16(a) of the agreement."

8 Relevant provisions of the contract are as follows. The "Contract Sum" is defined in the "Particulars of Contract" at (ii), which provides:

"The Owner will pay to the Builder the sum of five hundred and twenty four thousand eight hundred and ninety dollars ($524,890.00) (the Contract Sum) as may be adjusted in accordance with the provisions of this Contract, at the times and in the manner specified in the Conditions."

(a) This Contract may be varied at the request of the Owner by omissions from the Works or by the performance of extra work with the consent of the Builder; which consent shall not be unreasonably withheld. No variation shall vitiate the contract.

(b) The Builder may decline to execute any variation required by the Owner unless the Owner has first given notice in writing detailing the requirements.

(c) If the Builder agrees to undertake the variation, the variation shall be in writing and signed by both the Builder and the Owner.

(d) The value of all omissions from the Works less the allowance specified in item 1 of Appendix I shall be deducted from the contract sum.

(e) The value of all extra work shall be added to the contract sum and shall be added to the next progress payment due after the execution of such work.

(f) Where practicable the following shall apply. In calculating the price for extra work the rates of labour shall be those set out in item 3 of Appendix I, and the price for materials used in the said extra work shall be the actual cost to the Builder plus the percentage stated in item 1 of Appendix I. The Builder shall not be entitled to any discount other than a discount for prompt payment.

(g) Notwithstanding the previous provisions, the Builder shall not be entitled to payment for any variations which are due to his own default."

10 Clause 20 provides for the suspension of works by the builder should the owner fail to pay a progress payment, or commit any other breach of the contract. It reads:

(a) Should the Owner fail to pay or cause to be paid any progress payment as required by Clause 25 or commit any other breach of this Contract the Builder may, without prejudice to his right to determine his employment under this contract in pursuance of the provisions of Clause 22 give ten (10) days notice of his intention to suspend the Works. If the Owner's default continues for ten (10) days after such notice, then the Builder may suspend the Works. If he does so suspend the Works he shall promptly give notice of such suspension in writing to the Owner. The Builder shall lift the suspension within twenty (20) days of the progress payment being made or the breach being remedied and the Date for Practical Completion of the Works shall be extended by the period equivalent to the number of days during which the works were suspended and any consequential delays."

11 Clause 21 provides for determination by the owner in a variety of circumstances, including the failure of the builder to commence or proceed with the works with due diligence, or the builder suspending the carrying out of the works without reasonable cause. Clause 22 provides for determination by the builder in a variety of circumstances, including the failure of the owner to pay a progress payment within 10 days of the period provided for in the appendix. Clause 23 provides for the adjustment of the contract sum in relation to amounts allowed by way of provisional sum, which are either not expended or exceeded. Clause 25, which deals with payment, reads as follows:

(a) The Contract Sum shall be paid to the Builder by payments made progressively during the execution of the Works. Progress claims shall be made not more frequently than each four weeks

(b) A claim for payment submitted to the Owner by the Builder shall show:

(i) The accumulative percentum of the Contract Sum appropriate to the stage to which the Works have progressed.

(ii) A schedule of Variations in accordance with Clause 16 and any adjustments occasioned by provisions of this contract - each briefly described and quantified and with a total for the schedule.

(iii) The total value of the works executed being the total of (i) and (ii).

(iv) A schedule of the amounts paid and received to date with a total for the schedule.

(v) The amount now claimed being the difference between (iii) and (iv).

(vi) Amount to be retained.

(c) Payment of the progress claims shall be made by the Owner to the Builder within the period stated in Item 4 of Appendix I or, if not stated, within ten (10) days of the date of submission to the Owner of the said claim or account.

(d) The making of any payment to the Builder shall not be taken as proof or admission that any Works have been executed in accordance with the drawings and specification but shall be taken to be a payment on account.

(e) Should the Builder not receive from the Owner any or part of any progress payment by the due date therefore the Builder shall be entitled to interest thereon at the rate specified in Item 6 of Appendix I.

(f) In the event that the Owner disputes the entitlement to any of the claims made by the Builder, the Owner shall be entitled to refer that dispute in accordance with Clause 31."

12 In relation to cl 25, the Master in his reasons expressed these views (at [13] - [17]):

"13 This clause gives to the builder considerable discretion. It stands in contrast to clauses found in commercial building contracts where a progress claim is certified by an architect or some other party, and thereafter payment is required. This clause anticipates the owner of being, to a significant extent, at the mercy of the builder. But in my view, it clearly anticipates that when a progress claim is made, it will be paid. It does not anticipate an owner making payment of as much of the progress claim as the owner thinks is proper and appropriate. The first respondents would read into the clause a requirement that the progress claim be 'reasonable'; or, to adopt the wording used in par 6(2) of the defence to counterclaim, progress claims be 'properly made'. In my view there is no warrant for reading cl 25 in that way.

14 It is important to bear in mind how progress claims fit in with the scheme of a building contract. A builder is required to commit his funds to take the construction up to a certain point. He then estimates the percentage of the building works which have been completed. He is entitled to payment for those completed works. He is also entitled to be paid for variations. He might overestimate or underestimate the amount of work that has been completed. That is a risk which both parties have accepted by the terms of their contract. But once the progress claim is made, it must be paid in full by the owner. That is the obligation under the bargain - the counterpoint to the builder's obligation to expend his funds to take the construction to a point where the progress claim can be made.

15 If the owner is dissatisfied with the builder's claim, he has rights to take the matter to arbitration. Those rights are specifically preserved by cl 25(f). Moreover, by making payment of a progress claim, the owner does not make any admission that the claim is justified in whole or in part: see cl 25(d). But however aggrieved an owner might be by a progress claim, the contract does not allow him arbitrarily to decline to make payment, or pay only that part of the claim which he believes is due. To reach that conclusion, as the Arbitrator did, runs counter to the clear intent of the contract.

16 Counsel for the first respondents, in support of his submissions, postulated a situation where in his first progress claim a builder claimed 99 per cent of the contract price when it was clear that no more than 10 per cent of the building work had been done. In that situation, counsel submitted, the owner could not be required to pay the full amount of the progress claim. To require him to do so would be absurd. It followed, in counsel's submission, that there had to be a requirement of reasonableness read into cl 25.

17 In my view, even in that situation, an owner would be obliged to make payment of the progress claim. Pursuant to cl 25(b)(i), the progress claim must show the accumulated percentage of the contract sum appropriate to the stage to which the works have progressed. Doubtless, if the claim was made that a certain percentage of works had been completed and that claim was obviously wrong, it would not take an arbitrator long to put things to rights. But even in that situation the commercial risk of being asked to make an overpayment lies with the owner. That is the agreement that has been reached."

13 The first respondent supports these conclusions by reference to cases relating to progress claims in other building contracts: see, for example, LU Simon Builders Pty Ltd v HD Fowles [1992] VicRp 60; [1992] 2 VR 189; Concrete Constructions Group Pty Ltd t/as Concrete Constructions (ACT) v Coddlestone Pty Ltd [1995] ACTSC 91. It is not clear that the reasoning in these cases can be applied so as to reach the same conclusion in relation to this contract, because of the substantial difference in the contractual terms between those cases and this.

14 In LU Simon, for example (a case upon which the first respondent particularly relied), Smith J made the following observations, which would appear to be applicable to the present contract (at 193):

"I refer firstly to the power given to LU Simon, by cl 12.06 to terminate the contract. It allows the builder to suspend or determine its employment under the agreement in the event, inter alia, that the proprietor fails to pay the builder the amount due on any progress certificate issued by the architect within the period for payment of that certificate as provided for in the agreement on the giving of 10 days' notice: cl 12.06. If the defendant's construction is correct, the builder would not know whether he could terminate the contract where the proprietor was disputing the accuracy of the certificate or raising cross-claims until a decision was made on the relevant disputes. Until that was done it would not be possible to determine whether the proprietor had 'failed to pay' the amount due under the certificate. The power given to the builder would be rendered worthless in practice on the construction put forward by the defendants. As Giles J commented in Sabemo, at p 28: ' ... it is ... not to be expected that a right so important to the builder should be nullified by the raising of a cross-claim or the reference to arbitration of a dispute over the amount of the certificate.' Clause 12.06 confirms the importance of cl 10.07 and the intention of the parties that the obligation to pay on the progress certificate should be absolute.

I refer next to cl 13, the arbitration clause. It provides for any dispute or difference whatsoever arising out of the agreement or its performance whether before or after final completion to be referred to an arbitrator. As I have stated, the right to refer disputes to arbitration includes the right to refer disputes about progress certificates.

...

It will be essential for the practical viability of any contract that the builder continue to receive progress payments pending resolution of any dispute and thus be enabled to perform its obligations under cl 13(6). Without progress payments, the intent of the parties that the builder continue will be put at risk and, in many cases, will be frustrated because of the inability of the builder to finance the works. Further, if the builder is not rendered bankrupt by non-payment of progress payments, its efficient performance of the contract will be put at risk and, in many cases, frustrated. Such consequences cannot have been the intention of the parties. The entitlement to progress payments is clearly the quid pro quo for the obligation to continue working while the parties are in dispute."

15 However, his Honour referred also to a number of provisions which are absent from the present contract. They included provision for an architect to certify progress claims, a "final certificate" stage at which only undisputed sums must be paid, and a requirement for the builder to provide security. It was because of the "comprehensive scheme to balance the rights and obligations of the parties and to provide protections to the parties, particularly the proprietor" (at 194) that his Honour found that the contract should be construed as requiring progress payments to be made without set off, even where there was dispute. It may be that the present contract should not be approached in the same way as one containing the checks and balances described by his Honour.

16 The appellants, however, primarily attack the learned Master's reasons on a much narrower basis than that referred to above. They are concerned, not with the right of the builder to require payment of a progress claim notwithstanding a dispute, but with the identification of a "progress claim". From reading the Master's reasons, it is not clear to me whether or not the appellants raised this issue squarely before him. There is certainly an undesirable imprecision in the contention in the defence and counterclaim that they are required to pay only progress claims "properly made" in accordance with the contract. However, the identification point does seem to me to be raised both by the grounds of appeal and by the appellants' submissions on the appeal, and the first respondent does not suggest that the appellants attempt to take impermissibly a point not raised below.

17 The portion of the grounds of appeal which perhaps most clearly raises the issue with which I am presently concerned is the assertion in ground 2(d) that the learned Master should have found that " ... the only portion of the progress claims that the appellants ... had not paid was the claim made by the first respondent ... for payment of amounts which were claimed to be Variations but which Variations had not been made in accordance with clause 16 of the contract ... ". Accepting, for the purpose of the present appeal, that even where there is a dispute about the scope or quality of the work performed, or some issue which might give rise to a set-off, or some other dispute, a progress claim must nevertheless be paid in full and any dispute referred to arbitration, the anterior question arises of how the owner identifies a "progress claim" pursuant to cl 25 which must be paid. Indeed, the stricter the requirement that the owner pay such claims without deduction, the more important it is that such a claim be able to be identified.

18 The terms "progress claim" and "progress payment" are not defined. However, it is my view that cl 25(b) describes the form and content of a progress claim. That paragraph has few and simple requirements, but if they are not complied with, then the claim is not a "progress claim", and the owner is not required to pay it. Arguably, the owner is not required to pay any part of it, and in paying a proportion of the claim, the appellants have done more than they were required to do under the contract; however, this issue was not addressed during the course of argument and it is not necessary to determine it.

19 The limitation which this clause imposes upon the ability of the builder to make progress claims, is simply that the claims must be either for a "percentage" of the "Works" as defined by the contract, or for variations "in accordance with clause 16". Clause 16, as set out above, prescribes the way in which a variation can be identified: by par (c), if the builder agrees to undertake it, "the variation shall be in writing and signed by both the Builder and the Owner".

20 Contrary to the first respondent's submissions, reading cl 25 in this way is not to "read into" that clause words which are not there; rather, it is to give effect to the words which are there, they being "in accordance with clause 16".

21 Although somewhat differently phrased, it seems to me the conclusion that I have reached is, in essence, the same as that of the Arbitrator, in the passage from which I have quoted. That is, that a variation is only a variation in accordance with cl 16, and therefore only capable of being the subject of a claim pursuant to cl 25, when in writing and signed by both parties. This was an issue apparently not considered by the learned Master, whether by oversight, or whether because the argument was not squarely raised before him, is not clear.

22 In either event, in my view, the appeal must be allowed. Since s 38 of the Commercial Arbitration Act 1985 provides that the Court is not to grant leave to appeal an Arbitrator's award unless there is either a manifest error of law on the face of the award, or "strong evidence that the Arbitrator ... made an error of law", it follows from my conclusion that the learned Master should not have granted leave. The appropriate order, then, would be to quash the orders of the Master and in lieu thereof dismiss the first respondent's (applicant's) application for leave to appeal.

23 McLURE JA: I have read the reasons for judgment of Wheeler JA and Pullin JA. I agree with Wheeler JA that the appeal must be allowed. The first respondent (Builder) terminated the building contract it had with the appellants (Owner) because of their failure to pay so much of two progress claims as related to claimed variations. The second respondent (Arbitrator) subsequently found in an arbitration that the Builder was not contractually entitled to be paid for the claimed variations and that the first respondent's termination of the building contract was wrongful.

24 The first respondent sought and obtained leave to appeal the Arbitrator's decision under s 38 of the Commercial Arbitration Act 1985 (WA). The learned Master upheld the appeal.

25 The only issue in this appeal is whether the appellants were contractually obliged to pay the full amount of the progress claims within the contractually specified period notwithstanding their claim, subsequently upheld, that the Builder was not entitled to payment.

26 There is no convenient summary of the relevant facts in the Arbitrator's interim award, the Master's reasons for decision or the parties' submissions. Further, the progress claims and supporting documentation are not before us. As far as I am able to glean from the Arbitrator's award, there were a number of separate variation claims and his reasons for rejecting them were not identical. For analytical purposes it appears the claimed variations fall into two categories. The first category (into which the bulk of the claims fall) is where the Arbitrator found that work or materials the subject of the variation claims were included in the contractual scope of works. The second category relates to claims for extra work. The Arbitrator rejected the variation claims on their merits and found that the appellants had not breached the obligation to pay the progress claims because the variation claims were not in accordance with the building contract. The Master found that the Arbitrator erred in this respect. He held that the appellants breached the building contract by failing to pay the disputed progress claims within the specified time and the first respondent was therefore entitled to terminate the building contract.

27 The building contract was a standard form agreement described as "Lump Sum Contract For Medium Works (for use in Works without an Architect)". The central provision of the building contract is cl 25 which deals with payment of the "Contract Sum". Clause 25 provides:

"PAYMENT

(a) The Contract Sum shall be paid to the Builder by payments made progressively during the execution of the Works. Progress claims shall be made not more frequently than each four weeks

(b) A claim for payment submitted to the Owner by the Builder shall show:

(i) The accumulative percentum of the Contract Sum appropriate to the stage to which the Works have progressed.

(ii) A schedule of Variations in accordance with Clause 16 and any adjustments occasioned by provisions of this contract - each briefly described and quantified and with a total for the schedule.

(iii) The total value of the works executed being the total of (i) and (ii).

(iv) A schedule of the amounts paid and received to date with a total for the schedule.

(v) The amount now claimed being the difference between (iii) and (iv).

(vi) Amount to be retained.

(c) Payment of the progress claims shall be made by the Owner to the Builder within the period stated in Item 4 of Appendix I or, if not stated, within ten (10) days of the date of submission to the Owner of the said claim or account.

(d) The making of any payment to the Builder shall not be taken as proof or admission that any Works have been executed in accordance with the drawings and specification but shall be taken to be a payment on account.

(e) Should the Builder not receive from the Owner any or part of any progress payment by the due date therefore the Builder shall be entitled to interest thereon at the rate specified in Item 6 of Appendix I.

(f) In the event that the Owner disputes the entitlement to any of the claims made by the Builder, the Owner shall be entitled to refer that dispute in accordance with Clause 31."

28 The Contract Sum is defined in the consideration provision of the building contract as follows:

"The Owner will pay to the Builder the sum of ... $524,890 (the Contract Sum) as may be adjusted in accordance with the provisions of this Contract, at the times and in the manner specified in the Conditions."

29 Clause 16 deals with variations and provides one mechanism for an adjustment to the Contract Sum. Clause 16 provides:

"VARIATIONS

(a) This Contract may be varied at the request of the Owner by omissions from the Works or by the performance of extra work with the consent of the Builder; which consent shall not be unreasonably withheld. No variation shall vitiate the contract.

(b) The Builder may decline to execute any variation required by the Owner unless the Owner has first given notice in writing detailing the requirements.

(c) If the Builder agrees to undertake the variation, the variation shall be in writing and signed by both the Builder and the Owner.

(d) The value of all omissions from the Works less the allowance specified in item 1 of Appendix I shall be deducted from the contract sum.

(e) The value of all extra work shall be added to the contract sum and shall be added to the next progress payment due after the execution of such work.

(f) Where practicable the following shall apply. In calculating the price for extra work the rates of labour shall be those set out in item 3 of Appendix I, and the price for materials used in the said extra work shall be the actual cost to the Builder plus the percentage stated in item 1 of Appendix I. The Builder shall not be entitled to any discount other than a discount for prompt payment.

(g) Notwithstanding the previous provisions, the Builder shall not be entitled to payment for any variations which are due to his own default."

30 By cl 20(a) of the building contract, the Builder was entitled to suspend the works under the building contract "[s]hould the Owner fail to pay or cause to be paid any progress payment as required by Clause 25 ... ".

31 By cl 22, the Builder was entitled to terminate the building contract if the Owner failed to pay any progress payment within 10 days or the period provided in the appendix to the building contract.

32 Clause 31 provided for the settlement of disputes. It required a party to give written notice to the other party of the existence of any dispute or a difference between the Owner and the Builder in connection with the contract. There is no finding that this obligation was breached. After seven days from the giving of the notice, the dispute or difference may then be submitted to arbitration.

33 The proceedings below and the appeal were conducted on the basis that the claimed variations were variations to which cl 16 applied. I have significant reservations as to the correctness of that approach in respect of the first category of claimed variations. Clause 16 only applies to variations (deletions or additions) to the contractual scope of works. It does not apply to work and materials already included in the scope of works which the Builder is obliged to perform and provide for the agreed sum of $524,890. However, I will proceed on the basis that cl 16 applies to all the claimed variations.

34 The first respondent contended that on the proper construction of the building contract, the Builder had an unconditional right to payment within the specified period of progress claims made by it in good faith under cl 25 of the building contract. The right is to receive and retain the payment until any disputed liability to pay is authoritatively determined. The first respondent supported that submission by a further submission that the building contract expressly excluded the Owner's rights, otherwise available by operation of law, to set-off (legal and equitable) where the Builder had breached the building contract.

35 The common law defence of abatement and the common law and equitable doctrines of set-off operate to diminish or extinguish a builder's entitlement to payment under a building contract. However, those defences can be excluded by agreement between the parties. For a helpful summary of the relevant law on these matters see Chitty on Contracts Vol 2 at [37-143] - [37-149] and Dorter and Sharkey, Building and Construction Contracts in Australia (2nd ed) Vol 1 at [10.310] - [10.340]. In the leading English case on common law abatement in building contracts, Gilbert-Ash (Northern) Ltd v Modern Engineering (Bristol) Ltd [1974] AC 689, Lord Diplock said:

"So when one is concerned with a building contract one starts with the presumption that each party is to be entitled to all those remedies for its breach as would arise by operation of law, including the remedy of setting up a breach of warranty in diminution or extinction of the price of material supplied or work executed under the contract. To rebut that presumption one must be able to find in the contract clear unequivocal words in which the parties have expressed their agreement that this remedy shall not be available in respect of breaches of that particular contract."

36 There is certainly no presumption that the parties intended to exclude the rights and remedies that arise by operation of law. Further, I agree with Wheeler JA that the authorities relied on by the first respondent in support of its claim that the building contract excluded the right to set-off are arguably distinguishable. However, it is unnecessary for the resolution of this appeal to determine whether defences of that nature have been excluded by the building contract. The appellants did not put their case on the basis that the Builder had breached the building contract which breach had caused damage that diminished or extinguished the appellants' obligation to pay the full amount of the progress claim. The appellants relied primarily on a narrow point of construction of cl 25. They contended that, on a proper construction of cl 25(a) and (b), an obligation to pay for variations forming part of a progress claim only arises if the variation complies with the conditions of cl 16 that enliven the Builder's right to payment. In other words, where the progress claim includes payment for variations, the obligation to pay is conditional on the variation being in accordance with cl 16. The first respondent did not object to this matter being raised on the appeal from which I infer it was raised below.

37 The starting point is the proper construction of the variation clause. Clause 16 relates to alterations, whether by addition or omission, to work which the Builder is required by the building contract to perform. Clause 16(c) requires the variation to be in writing and signed by both the Builder and the Owner. The requirements for writing and execution are conditions that must be satisfied as a prerequisite to a contractual entitlement to payment for extra work. They are in effect conditions precedent to payment. Those conditions were not satisfied in this case in which event the Builder was not entitled to payment for the variations. That being so, the value of the claimed variations cannot be added to and does not become part of "the Contract Sum" as defined. The Contract Sum is the consideration payable to the Builder under the building contract. The Particulars of Contract (which form part of the building contract) expressly provide that "The Owner will pay to the Builder the sum of ... $524,890 (the Contract Sum) as may be adjusted in accordance with the provisions of this Contract, at the times and in the manner specified in the Conditions". Thus, there is, and can be, no element of subjectivity in the determination of the Contract Sum. Adjustments to the nominated figure can only be made in accordance with the contract, and at the time and in the manner contractually specified.

38 The obligation under cl 25(a) to make progress payments is confined to payment of the Contract Sum. It does not expressly or impliedly provide for payment of what the Builder (even if acting honestly and reasonably) believes is the Contract Sum. This construction is consistent with cl 25(b)(ii) which requires that the progress claim show a schedule "of Variations in accordance with Clause 16".

39 Although not contended for by either party I note, without deciding, that this analysis may have no application if, notwithstanding the failure to comply with the conditions enlivening the Builder's entitlement to payment, the Builder is able to prove a relevant variation to the terms of the building contract or perhaps a waiver of the conditions. There was no finding in the arbitration that the conditions had been contractually excluded or waived. Moreover, the result would in my view be the same for the first category of claimed variations even if cl 16 variations did not have to be in writing and signed by the parties. The Owner's obligation to make progress payments is confined to the Contract Sum. There is no proper basis for construing the building contract to require the Owner to make progress payments, even on an interim basis, when the claim (subsequently vindicated) is that the work could not be the subject of a cl 16 variation so as to result in an adjustment to the Contract Sum. In this regard, the contrast is between a situation where there is no (and never was any) valid adjustment to the Contract Sum and thus no contractual obligation to make any payment of the amount of the claimed adjustment for variations and a situation where, but for the breach of a separate obligation, the right to pay would otherwise arise (as in set-off and abatement). I have insufficient information to assess whether this

analysis of the first category also applies to the second category of claimed variations.

40 For these reasons, I am satisfied the Master erred in construing the building contract to require the appellants to pay the progress claims within the specified time pending the determination of their claims. The Arbitrator arrived at the correct result. Accordingly, I would allow the appeal, set aside the orders made by the Master and in lieu thereof dismiss the first respondent's application for leave to appeal.

41 PULLIN JA: This case is about the proper construction of the contract between the appellants and the first respondent.

42 Clause 25 of the contract imposes an express obligation on the appellants to pay the builder the amount due on progress claims. This is by reason of cl 25(a) and (c). Clause 25(f) allows an owner to dispute the entitlement to any of the "claims" made by the builder and to refer the dispute to arbitration in accordance with cl 31. There is nothing in the clause which says that if a dispute arises, and it is referred to arbitration, that the owner is relieved of the obligation to make payment.

43 The suggestion was made, during the hearing, that this would allow fanciful claims by the builder. Two examples were given by counsel for the appellant. The first was that the builder might, before doing any work on site, send a progress claim, claiming 100 per cent of the contract sum. The other was that the builder might send a progress claim for 200 per cent of the contract sum. This would not be possible because there must be an implied term that the builder must act honestly in arriving at his assessment of the information to be included in the progress claim. See Meehan v Jones [1982] HCA 52; (1982) 149 CLR 571 at 581.

44 In this case, we were informed by the respondent, and it is conceded by the appellants, that the progress claim was in a form which complied with s 25(b) and there is, and was, no contention at any stage that the builder was not acting honestly in the presentation of that claim. In my view, nothing more was required, and it is not for the owners to decide that they had a complaint about the content of the progress claim and then to ignore the contractual obligation to pay the amount that was due on the progress claim.

45 It is of no relevance that later the owners' contentions about the wrong inclusion of a variation claim in the progress claim was held to be

correct. Indeed, the builder does not dispute that such a determination was made and does not seek to challenge it.

46 The issue is about whether the owners were entitled to refuse to make payment of the full amount of the progress claim, based on its unresolved claim that the variation claim was unjustified. In my opinion, the owners had no such right. The owners were under a contractual obligation to pay the progress claim. Their remedy, if they wished to dispute the claim, was to go to arbitration. Pending the arbitration, payment was required. Their refusal to make payment amounted to a repudiation of the contract.

47 The same view is expressed in Main Roads Construction Pty Ltd v Samary Enterprises Pty Ltd [2005] VSC 388 and LU Simon Builders Pty Ltd v HD Fowles [1992] VicRp 60; [1992] 2 VR 189. The language was different in the contracts in those cases, and it is true that there was a certification process leading up to the issue of the progress certificates, but those differences do not give rise to any features which would distinguish those cases and make them inapplicable here.

48 There is nothing in this contract which confers a right on the owners to pick and choose about when progress payments will be made. The promise is to pay the progress claims. They are payments on account and do not result in any implied concession by the owners that the claim is justified and leaves open the resolution of any disputes before an arbitrator. I agree with Smith J's comments in the Simon Builder's case that it is essential for the practical viability of any contract that the builder continue to receive progress payments pending resolution of any dispute. A builder, unless the contract is terminated or suspended, is required to continue performing its obligations. Without progress payments, the intent of the parties that the builder continue to perform will be put at risk, and in many cases frustrated, because of the inability of the builder to finance the works.

49 Having said that I agree with those comments, I also agree, however, with the submissions made during this case that the proper construction of the contract will determine the outcome. I have set out what I consider to be the proper construction of the contract.

50 There was passing reference in the case to whether or not the right of set-off was or was not excluded by this contract. It is unnecessary to consider that issue because in this case the appellants expressly and correctly disclaim that any question of set-off arises. There was no claim by the owners for damages which might be set off against the claim. Their only claim was that they were entitled to refuse to make payment based on what at the time was a mere assertion that there were no variations pursuant to cl 16. The fact that later the assertion was upheld is not, in my opinion, of any relevance.

JURISDICTION : SUPREME COURT OF WESTERN AUSTRALIA

CITATION : JONES & ANOR -v- DALCON CONSTRUCTION PTY LTD & ANOR [2006] WASCA 205 (S)

Costs - Suitors' Fund Act 1964 (WA) - Indemnity certificate

Suitors' Fund Act 1964 (WA), s 10(1)

First Respondent : Mr N W McKerracher QC & Ms S B Armstrong

Richards v Faulls Pty Ltd [1971] WAR 129

1 WHEELER JA: At delivery of judgment in this matter on 10 October 2006, the first respondent sought a certificate pursuant to s 10(1) of the Suitors' Fund Act 1964 (WA). Pursuant to leave granted at that time, the first respondent has now supported that application with a written outline of submissions.

2 Section 10(1) relevantly reads:

"(1) Where an appeal against the decision of a Court in any proceedings -

(a) to the Supreme Court;

...

on a question of law succeeds, the Supreme Court may ... grant to the respondent to the appeal ... an indemnity certificate in respect of that appeal."

3 I accept that the appellants were successful on a question of law, that question being the proper construction of the contract between the appellants and the first respondent. The fact of success of the appellant on a question of law is a precondition to the grant of an indemnity certificate to the respondent. However, the question which then arises is whether the power which the fulfilment of that precondition prefers upon the Court, to grant a certificate, should be exercised.

4 The principles governing the exercise of the discretion are, as the first respondent accepts, contained in Richards v Faulls Pty Ltd [1971] WAR 129, at 137 - 139. The discretion, as the Court pointed out in that case, is a discretion to grant, rather than a discretion to refuse. It is therefore necessary for the unsuccessful respondent to show some ground calling for the exercise of the discretion in the respondent's favour. It should be borne in mind, in considering what might call for the exercise of the discretion in that way, that while the intention of the Act is to relieve a litigant from the burden of costs in an appeal which has been lost because the Court below erred on a question of law, the purpose of the Act is neither to promote litigation nor to provide legal aid.

5 In Richards v Faulls, the Court considered that, in broad terms, the discretion might be exercised where there is a question of law which might reasonably be resolved in different ways, "so that in a sense the unsuccessful party may be thought to have suffered some 'misfortune' owing to a doubt about the correct rule of law to be applied" (at 138). I

accept that in the present case, the question of law might at least reasonably be resolved in different ways. The dissent of Pullin JA in the present case demonstrates that more than one view is open concerning the construction of the building contract.

6 However, the question identified in Richards gives rise to a broad assessment of the conduct of the case, the issues arising, and the role of the unsuccessful respondent. In the present case, the first respondent was the unsuccessful party to an arbitration, in which the Arbitrator resolved a number of questions of fact, unfavourably to the first respondent, and based upon a view of the law which the first respondent did not accept. It was the first respondent which chose to invoke the appellate process, in order to contend for a view of the Arbitrator's decision which was ultimately not upheld. Further, as all members of the Court noted in the present case, the first respondent was found by the Arbitrator to have wrongly claimed as variations matters which were not capable of being claimed as variations at all. The first respondent does not challenge that finding, and it was ultimately that conduct which precipitated the dispute, the arbitration, and the appeals. The "misfortune" in this case is one of which the first respondent may be regarded as substantially the author.

7 An additional matter to which the Court turned its attention in Richards was the question of the degree to which the question of law involved was some question of general application, or was of a more "particular" nature. In one sense, there was involved in the present case an issue concerning the proper construction of a building contract which was, we were informed, in wide use. However, the primary contention of the appellant, and the contention which led to the appeal succeeding, rested upon a particular aspect of the first respondent's conduct in failing to reduce to writing certain matters which were claimed to be variations. This was not so much, then, a case involving a doubt about the "rule of law" which should be applied, but rather one which involved the application of well understood rules of law, not only to a particular contract, but to particular conduct.

10 PULLIN JA: Wheeler JA has set out the section which authorises the grant of a certificate under the Suitors' Fund Act 1964 (WA). Her Honour has also referred to Richards v Faulls Pty Ltd [1971] WAR 129 which states the principles which govern the grant of a certificate.

11 In my opinion the question before this Court was one of general importance. It would be of interest in the building industry for builders to know whether a builder is entitled to insist upon payment of a progress claim in circumstances where the owner raises a contention that part of the progress claim is in dispute. It would be of some significance to builders to know whether a builder may insist upon payment in full or whether it must wait for a determination of the dispute before taking action to terminate the contract due to non-payment on a progress certificate.

12 It is very common in the industry to see disputes about variation claims and about whether they have been processed or authorised in accordance with the particular contract. It is true that the situation depends upon the wording of the particular contract but the contract here was one commonly used in the industry.

• Provisions of the building contract
• Interpretation of the building contract