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[2012] ACTSC 18
Supreme Court of the ACT
2012-01-27
Katzmann J
Original judgment source is linked above.
1. Judgment be entered in favour of the plaintiff in the sum of $19,887.
1. Martti Honkanen is a licensed builder, who runs a building consultancy known as Mareva Building Consultants ("Mareva") in partnership with his wife, Eva. Harry Zevon knew Mr Honkanen from church. He approached Mr Honkanen with a view to having a house built for him and his wife, Vida, on land he held in Gungahlin. In due course Mr Honkanen provided Mr Zevon with a quotation for the cost of the building work. Mr Zevon rejected the quotation but accepted a revised version in a reduced amount. Before building work had begun, however, Mr Zevon decided not to proceed with the project. Instead, he offered Mr Honkanen the opportunity to both design and build another house in Bruce on another block of land Mrs Zevon had purchased in her name. Mr Honkanen accepted Mr Zevon's new proposal. He prepared (and then, at Mr Zevon's request, amended) construction drawings for the new house. He quoted for the new house and included in the quotation a sum for the drawings. Mr Zevon did not accept the quotation. Mr Honkanen then sent him a bill for the drawings. Mr Zevon refused to pay the bill. He contended that the drawings were for a house outside his price range and contrary to what had been agreed. In the result, the relationship broke down and Mr Honkanen sued the Zevons. The action is brought in the partnership name pursuant to r 286 of the (ACT) ("").
2. Mareva claims damages of $65,000 for "loss of profits" under a contract it says it had made with the Zevons to build the Gungahlin house, together with 20% interest on late payments under that alleged contract. In the alternative, Mareva pleads that, as a result of the conduct of both parties, the Zevons are estopped from denying the alleged contract. Another alternative claim based on a quantum meruit was not pressed.
3. Mareva also claims damages against the Zevons in the sum of $13,000 for the preparation and amendment of the drawings for the Bruce house, together with interest at an unspecified rate. Mareva describes the work as having been performed under a design contract and then a second design contract.
4. Mr and Mrs Zevon deny liability. In particular, they deny that they had an enforceable contract with Mareva. Although they admit they accepted Mr Honkanen's quotation for the Gungahlin house, they say that acceptance of the quotation was, to Mr Honkanen's knowledge, conditional on them securing finance. They also deny that Mareva has suffered any damage or that he received any benefit from the contract. In the case of the Bruce house, Mr Zevon admitted that he asked Mareva to prepare design drawings and that he has not paid Mareva but denies that it is entitled to claim for the work done because, he says, Mareva did not prepare the documents in accordance with Mr Zevon's request. At the same time he asserted that the agreement was that he only pay $10,000 if he decided not to proceed with the construction of the house but it was Mareva, not he and his wife, who withdrew from the project.
(a) the parties had a binding contract for Mareva to build the Gungahlin house;
(b) alternatively, the Zevons are estopped by reason of Mr Zevon's conduct from denying such a contract;
(c) in the event that there was a contract to build the Gungahlin house, Mareva suffered damage as a result of its breach;
(d) Mareva is entitled to recover the unpaid fees for the drawings for the Bruce house.
6. Mr Zevon presented the case, himself, on behalf of both defendants. The parties relied on a number of documents, including various emails. Only Mr Honkanen and Mr Zevon gave oral evidence. Despite differences between them about some matters, Mareva made nothing of Mrs Zevon's absence from the witness box, although she was present in court throughout the hearing. Before Mr Zevon closed his case, Mareva indicated it would not ask that any adverse inference be drawn from Mr Zevon's failure to call her.
7. On 19 September 2003 Mr Zevon was granted a 99 year lease over a parcel of land in Gungahlin described as Section 158 Block 1. The lease was granted for the purpose of erecting a single dwelling. The lease was registered on 8 October 2003 and the same day Mr Zevon registered a mortgage with the National Australia Bank ("the NAB").
8. In November 2004 Mr Zevon telephoned Mr Honkanen and told him he was building a house in Gungahlin. He then asked Mr Honkanen whether he would be interested in quoting him a price to build the house. He said he had some drawings (which had been prepared by DUB Design Pty Ltd) and Mr Honkanen asked to see them. Mr Zevon obliged and Mr Honkanen inspected them. On 12 November 2004, after he inspected the drawings, Mr Honkanen emailed Mr Zevon a list of pre-tender queries. Mr Zevon replied within hours saying he did not have answers to all the queries but was happy to discuss the matter over the weekend and said he would call Mr Honkanen to arrange a convenient time. They then discussed the queries and Mr Honkanen went on to prepare a quotation. He calculated the quantities of materials he would require from the drawings and established the rates by obtaining quotes from specialist trades, such as for electrical work, and by drawing on his experience in the building industry.
9. Mr Honkanen has considerable experience in the industry and was well qualified. After graduating from the University of New South Wales with a Bachelor of Science in Architecture, he underwent a cadetship with the Commonwealth Department of Housing and -Construction from 1972-1975 in work involving documenting and supervising major building projects. He then worked for a year or two as an estimator/designer on residential construction, designing, scheduling and construction of residential building projects, both cottages and multi-unit developments. From 1977-1988 he worked as a contract administrator, project manager and branch manager for Citra Constructions Limited, a large construction company, on a variety of large commercial and institutional projects. From 19892002 he was a director of a company involved in project managing and developing small to medium sized commercial and residential projects. In the Mareva consultancy, which he ran until 2007, he undertook a variety of tasks including feasibility assessments, general building advice, building inspections, contract administration and project management. He holds a Class A Builders Licence and a NSW Supervisor Certificate, is a mediator, and a Grade 3 arbitrator accredited by the Institute of Arbitrators and Mediators Australia. He has been arbitrating disputes since 1997, mostly involving residential building projects, and has given expert evidence in a variety of jurisdictions since 1995. He is a member of the Institute of Arbitrators and Mediators Australia, the Housing Industry Association and the Master Builders Association of the ACT.
10. On 17 January 2005 Mr Honkanen supplied the Zevons with the first of two quotations to build a house on the Gungahlin land. The amount he quoted was $434,000 plus GST. Mr Zevon told Mr Honkanen the price was higher than he anticipated and asked him whether there were any savings that could be made. Mr Honkanen then considered Mr Zevon's request and offered a number of suggestions. Consequently, Mr Honkanen received from Mr Zevon a second set of drawings, which incorporated one of Mr Honkanen's suggestions (the removal of the loft). Mr Honkanen then prepared a new quotation for $399,600 plus GST, which he attached to an email to Mr and Mrs Zevon on 2 May 2005 ("the revised quotation" or "the 2 May letter"). Mareva's case is that this letter was a letter of offer that Mr Zevon accepted on behalf of himself and his wife by an email sent on 30 May 2005.
11. The salient parts of Mareva's letter (without alteration) are as follows:
The quotation is based on drawings 05/537 no 1 to 9 Version d prepared by DUB Design Pty Ltd.
We confirm that the following insurances and licences will be provided by us:
We propose that we meet to discuss this proposal so that all aspects of it can be more fully explained, your queries can be answered and any changes you wish to make may be accommodated.
12. Within two days of receiving the revised quotation Mr Zevon sent Mr Honkanen an email acknowledging receipt of the quotation and asking him to look at some issues and answer some questions. He listed them as follows:
We would like to include ducted gas heating, and cooling as earlier discussed. Did you get around to following up ACTEW[AGL]'s quotation for that work? You mentioned some difficulties with installing the ducts for gas. Is that still the case? Is that why you have left them out?
What about the site cleaning costs? Is it substantial? I am still keen to perform that task if the savings are worth it.
13. Mr Honkanen replied by email the next day. He offered to meet with Mr Zevon that night and he made the following comments about the issues Mr Zevon had raised in his email of 2 May 2005:
ActewAGL declined to quote in the end because the open configuration and raked ceiling of the construction was such that ducts could not be hidden in the building fabric. Some modifications would need to be done such as provision of built bulkheads and vertical ducts or alternatively different systems adopted to achieve the result. I am confident that this can be done, but the various options will require more effort than the suppliers are prepared to put into a design at a stage when I can not confirm to them that ultimately I will be doing the building. I think that we just have to leave this issue for sorting out later to arrive at the most suitable solution.
It is now difficult to give you an accurate assessment what effect on the price the deletion of one loft has had, as quite a few other prices have increased in the months since I first looked at these plans. I suspect that the benefit of deleting of the loft would be around $12k.
There is no site cleaning that you can do yourself, as it would be done [by] machinery. What you could do, however, is some internal cleaning of floors on a regular basis as the trades leave debris behind. There may be some other minor labouring also. We can have a look what is involved.
14. Mr Honkanen discussed the quotation with Mr Zevon.
15. It is at this point that the parties' account of the facts begins to diverge.
16. At about the same time Mr Honkanen said he supplied Mr Zevon with some additional documents. Mr Honkanen said he could not be specific about the date and his best recollection was that it was around mid-May. The documents consisted of a blank copy of the standard home building contract for residential building work, written and distributed by the ACT Master Builders Association, and what Mr Honkanen referred to as a partially completed set of schedules to that contract. He also said that some time between 2 and 30 May 2005 he asked Mr Zevon about the content of the schedules and that Mr Zevon indicated to him that he was happy with them. Mr Honkanen said that, soon after 2 June, at his request, Mr Zevon returned the blank contract.
17. The "schedules" were in fact appendices to the home building contract. In appendix A asterisks were placed at a number of points where information was still called for:
▪ The name of the lending authority (if applicable) (A4);
▪ The commencement date (the notation in the document was that a specific starting date should only be specified if all planning and building approvals have been obtained and have been received by the builder) (A9);
19. Appendix B contained a schedule of progress payments and was otherwise apparently complete.
20. Appendices D (deed of guarantee and indemnity "if required"), E (exclusions), and F (notices such as the time variation notice and the cost variation notice) remained blank.
21. Appendix C was not tendered, apparently through an oversight.
22. The first page of the contract contains in upper-case letters and bold type the words "HOME BUILDING CONTRACT" under which appears the description:
This is a lump sum contract for residential building work. For minor works use MBA Minor Works Contract.
WRITTEN AND DISTRIBUTED BY THE MASTER BUILDERS ASSOCIATION (A.C.T).
23. Then, there is a box for inserting particulars of the parties, the site, and the works. Mr Honkanen entered all those particulars save for the name of the building certifier and the contract reference number. Beside the words "owner/s name/s" appears "Harry Zevon" with a large space between Mr Zevon's first and last names. Mr Honkanen explained the gap:
Mr Zevon, when he had a look at this schedule, he said "No, it's only going to be in my name." And that is why at that stage the schedules were prepared in pencil. I simply took my rubber out and scrubbed out Vida's name. That's why there is such a gap between the name Harry and Zevon.
24. Mr Zevon denied he had received (or, indeed, had seen) either document. His evidence was that instead of the Master Builders Association home building contract for residential building work, Mr Honkanen gave him a pro forma "Project Management Agreement - PM2". This was a form of agreement that provided for the appointment of a project manager to control, manage and co-ordinate obtaining necessary approvals for the completion of particular projects by a contractor. It appears to contemplate multiple projects as it requires (in cl 13) the project manager to prepare a project management plan for each project. He said that the document came in the same envelope as the letter of 2 May containing the revised quotation. Mr Zevon said, in cross-examination, that he had carefully read the 2 May letter and noted the paragraph referring to the standard Master Builders Association home building contract. The only reference in the Project Management Agreement to the Master Builders Association appears in the clauses dealing with dispute resolution (33 and 34). Clause 33 dealt with the selection and compensation of a neutral adviser, mediator, adjudicator or conciliator, who was to be chosen from a panel maintained by the Association and clause 34 contained a provision for the President of the Association to nominate an arbitrator.
25. Even though the project management agreement was patently not the Master Builders Association standard home building contract for residential building work, and Mr Honkanen denied giving it to Mr Zevon, Mr Zevon insisted this was the document that Mr Honkanen gave him. Moreover, he did so even after he realised that the document contained a footer that reads "PM2 NOV 2005.doc", giving rise to the obvious inference that it was created in November 2005 - six months after Mr Zevon said that he received it and three months after the plan to build the home had been shelved. But in an affidavit sworn after the evidence had closed Mr Zevon said that his confidence in the origin of the document "diminished" somewhat when he discovered the footer. He tried to explain the November 2005 error away by surmising that the date was "anticipatory" and was inserted as the date that Mr Honkanen intended to commence construction (although there was no evidence to support this).
26. Mr Zevon's evidence in this regard is not credible. At the time he gave it he looked decidedly uncomfortable. He said that he had been unable to find the contract when Mr Honkanen later asked him to return it but that he happened to find it on the first day of the hearing. This evidence emerged in a very unsatisfactory way:
HER HONOUR: How long afterwards do you say you found exhibit J, the project management contract?---[MR ZEVON:] Probably after 2009 when this action - long after that. It would have been - because I kept looking because all of a sudden I - - -
- - - four years later, possibly five years later?---Yes, yes. Possibly five years later. I'm just hoping my wife could help my recollection but it was a big moment for me when I found it. Your Honour, I'm very sorry, we found it two days ago.
27. Seemingly, in the face of the inconsistency between his initial response and his last statement, Mr Zevon then volunteered that he had included the document in his discovered list but had lost it again and did not find it until he was preparing for court.
28. I accept that Mr Zevon did include in his list of documents "a blank MBA building contract document received from MH". But I do not accept that Mr Honkanen gave him the project management contract. In submissions Mr Zevon again sought to justify his position by arguing that builders are really project managers who employ subcontractors to do the work, so that there was nothing odd in an experienced builder like Mr Honkanen, who was about to enter into a contract for the building of a house, proffering a "project management contract".
29. I reject the argument. I believe that Mr Zevon was disingenuous in this regard. At times he put himself forward as an ignorant, gullible individual who was duped by Mr Honkanen. I do not accept this self-portrait. In cross-examination it emerged that Mr Zevon is an economist by profession and holds a PhD in economics from Curtin University in Western Australia. The subject of his doctoral thesis was restructuring in mergers and acquisitions using transaction cost economics principles. At the time he was negotiating with Mr Honkanen he managed research and development funding in the Department of Industry, administering funding grants for potential technology development projects running into many millions of dollars, and was regularly involved with the entering into and administration of contracts.
30. I consider it highly unlikely that Mr Honkanen would send Mr Zevon a pro forma project management contract when on the face of his quotations he intended to incorporate the terms of the standard Master Builders Association home building contract. If he had, and Mr Zevon had read it, as he said he did, I believe he would have raised with Mr Honkanen the possibility that the contract that was sent was not the contract to which the 2 May letter referred. Whoever was the source of the pro forma project management contract, I conclude from the footer that it came into existence well after 2 May. I think it is more likely than not that the real reason Mr Zevon was unable to produce a copy of the blank contract Mr Honkanen sent him was that he had returned it, as Mr Honkanen said.
31. In contrast to Mr Zevon, I found Mr Honkanen to be a reliable witness, whose account of his dealings with Mr Zevon was presented dispassionately, coherently and consistently. In general, therefore, where there is a difference in the accounts, I prefer the evidence of Mr Honkanen. On the question of whether Mr Honkanen supplied Mr Zevon with a copy of the standard Master Builders Association housing contract or the project management contract I unreservedly accept Mr Honkanen's evidence that it was the former. For these reasons I also accept Mr Honkanen's evidence that he gave Mr Zevon the partially completed appendices (or schedules) to the contract. What is more, the evidence about the circumstances in which he had erased Mrs Zevon's name was compelling. Mr Zevon could not explain it. I am therefore satisfied that Mr Zevon was apprised of the content of the appendices.
32. Mr Honkanen said (and I accept) that during the preparation of his quotation he had some difficulties getting anyone to price the air conditioning. He said that the building was not conducive to having air conditioning ducts installed. He tried to interest a number of subcontractors but said that they were getting frustrated with the uncertainty surrounding whether the job would go ahead. He said that he relayed this information to Mr Zevon and insisted on certainty. Mr Honkanen said he needed:
to have the issue of whether I am going to build this house or not resolved in definite terms because - and I did explain to him also, I said to him that I cannot talk to my sub-contractors because they are unwilling to deal with the problem of the air conditioning because the plans need to be changed if the air conditioning is going to be installed and secondly, they were not really interested in talking to me because I was not the builder.
33. Mr Honkanen said that he told Mr Zevon that he could not continue any further until he had an "unequivocal undertaking":
that I will be building and I will be the builder. I can't really do any more work. I need to have this issue resolved.
34. Following that conversation, on 30 May 2005 Mr Honkanen received an email from Mr Zevon ("the 30 May email"), telling him:
Vida and I are happy for you to undertake the construction for us based on the submitted plans. As such, we would like to ask you to formally commence the drawing of a building contract for us based on the most recent quotation you provided us. This means that you can now commence pursuing suitable and viable heating/cooling options for our consideration as soon as possible, as per our recent discussions in your office.
We would like to finish all the necessary documentation so that once we sign the contract, we can be ready with bank approvals prior to ACTPLA's approval. This way you can also prepare to commence soon afterwards. We are looking forward to commencement of construction by the beginning of July 2005.
We are looking forward to what we believe will be an exciting time as we bring this building plan of ours to fruition. We pray that the Almighty God will guide and assist us all the way through so we can use the experience to glorify his name.
This letter constitutes an acceptance of your price quotation dated 2nd May 2005.
35. In an email sent on 2 June 2005 ("the 2 June email") Mr Honkanen thanked Mr Zevon for the email "accepting our quote for the building of your new home". After apologising for not having replied earlier, explaining that he had been busy after returning from a short break, he stated:
In reliance of [sic] your acceptance I am now proceeding with admin matters, pricing etc. and in particular relating to the heating and cooling. What I need from you are the following:
36. Mr Zevon's response came the next morning. It was crisp. He merely said he would provide both documents to him that evening or over the weekend. As I mentioned earlier, Mr Zevon said he did not return the blank form of contract (he claimed he could not find it), although Mr Honkanen's recollection is to the contrary. There is no dispute, however, that he did send Mr Honkanen the development conditions presumably some time on or after 28 June 2005 when planning approval was granted.
37. After the exchange of emails on 2 June Mr Honkanen proceeded with what he described as the preparation work - that is, checking over his quantities in the quotation and contacting some suppliers and subcontractors. He went to ActewAGL, the services provider, to establish the services connection points. He also went to some trouble exploring alternative heating and cooling options, including conducting some research on the possible use of geothermal systems, and obtained a variety of quotes from subcontractors in several trades.
38. Mr Zevon went off to shore up his finances but was apparently unable to obtain the necessary money. He said he told Mr Honkanen at church in the presence of his wife that their finance had not "gone through" and so "we will not be proceeding with this construction". He said that Mr Honkanen responded sympathetically, saying he was sorry it did not work out and inviting them to come and talk to him in the future if they needed any help about building and construction matters.
39. Mr Zevon said he and his wife shopped around for project homes, spoke to the bank and also put a deposit on another block of land in Bruce. He said that in October/November 2005 he convened a meeting with Mr Honkanen to give him the opportunity of doing the project. He said that Mr Honkanen was keen to do it, told him he was happy to and would like to do the drawing himself because that is the way he prefers to do things. Mr Zevon claimed that Mr Honkanen then told him he would do "the drawings" at no cost to him and his wife.
40. Mr Honkanen's account differs. He said that it was in early August that Mr Zevon came to him saying he was thinking of "putting the Gungahlin house on hold". He said he had a block of land in Bruce and asked him whether he would like to build the house on the Bruce block, instead of the Gungahlin block. Mr Honkanen's evidence was that he told Mr Zevon he would be "happy to have a look at it" because he had the time available anyway and if the Gungahlin house did not proceed it did not really matter to him. He was, he said in effect, indifferent as to which house he built.
41. Mr Honkanen said that that it was in early August 2005 that he had a meeting with Mr Zevon in his office. He said they discussed the overall design parameters for the Bruce house. He said he asked Mr Zevon what his expectations were and he said he wanted something very similar to the Gungahlin house. He said that Mr Zevon had told him he had been looking at project homes to be built on the block and Mr Honkanen told him that would be a much cheaper option, with which he could not compete. In cross-examination Mr Honkanen was emphatic that he told Mr Zevon that there was "absolutely no way" he could build a house for the sort of money project home builders could (Mr Zevon had spoken of project home orders between $200,000 and $230,000). Mr Honkanen denied that Mr Zevon had mentioned that he had banking approval up to $230,000 and he repeatedly denied he was told what Mr Zevon's budget was. He said that Mr Zevon particularly wanted something that was "individualistic", that he had visited Mr Honkanen's home and had expressed the desire for something with a similar feel to it.
42. I consider that Mr Honkanen's account is the more plausible. I note that Mr Zevon conceded in cross-examination that he was under pressure to put a house on the Bruce land, the lease over which was subject to a building and development covenant, and that if he got finance to build the house at Gungahlin he might have trouble financing the building at Bruce.
43. It is common ground that Mr Honkanen said he would prepare concept plans. Mr Zevon disputed the August 2005 date but the concept plans are in fact dated August 2005. I therefore accept Mr Honkanen's evidence on this point. Mr Honkanen said he told Mr Zevon that if he did not like the concept drawings he did not owe him any money for the preparation of them. Towards the end of the year Mr Zevon told Mr Honkanen he would like to take the matter further. Mr Honkanen wrote to the Zevons on 21 December 2005 advising that it was difficult to prepare a realistic estimate of the cost of the house because so much depended on the level of inclusions and the facilities. On the basis of the Gungahlin house, however, he estimated it would cost around $300,000, less if modest inclusions were allowed. He said it would be a struggle to get the price down to $250,000. He asked the Zevons to call him to discuss what they wanted to do, and he set out some options for them to consider.
44. In January 2006 Mr Honkanen had a meeting in his office with Mr and Mrs Zevon. He said that he discussed the development of the concept drawings and told Mr and Mrs Zevon that he had prepared the concept plans without an expectation of getting paid, but he could not continue on the same basis. He nominated a price of $10,000 plus GST to prepare the drawings. He said that Mr and Mrs Zevon were not very pleased, telling him that the fee was much higher than they would have anticipated. He said that he needed to charge that amount because this was a one-off design on a difficult block of land and would require a lot of time and effort. He said that the Zevons informed him that they were told that with project homes there would be no separate price for design and asked him why he could not do the same. At this point Mr Honkanen suggested that the amount could be included in the overall price of the building, but he said he made it quite clear to them that it would be an additional or separate cost. He said that at no time did he say anything to the effect that the payment of the $10,000 fee was contingent on getting the go-ahead for the construction of the building. He said that Mr Zevon reluctantly agreed.
45. Mr Zevon said he remonstrated with Mr Honkanen when the $10,000 fee was raised, urging him to absorb the price and not pass it on. Mr Zevon said Mr Honkanen concluded the conversation with the words "Look, this is not going to happen". Nevertheless, Mr Zevon said he did not agree to pay the $10,000 fee.
46. On 6 March 2006 Mr Zevon emailed Mr Honkanen confirming that he and his wife had together reviewed the concept plans and were happy for him to go ahead with the drawings, proposing at the same time a revision. Mr Honkanen said that at this point Mr Zevon did not indicate that there was any limitation on the finance he had available to pay for the construction of the house. By the end of March the drawings were almost complete when the Zevons requested a substantial further variation involving moving one of the bedrooms from the first floor to the ground floor, changes in the building materials for the external walls from cedar to brickwork, increasing the size of the living areas, having a canopy over the front door, adding balconies and providing for additional storage. Mr Honkanen said he told Mr Zevon that would increase the price. On 10 April 2006 Mr Honkanen presented revised drawings.
47. Then, on 4 May 2006, Mareva sent an email to Mr and Mrs Zevon attaching a detailed quotation for the building work in the sum of $381,500 plus GST. Included in the quotation was an amount for $9,500 for the original drawings (noting the quote of $10,000) and $2,500 for the redesign (noting the quote of $3,000), to which 10% GST was added. Mr Honkanen drew these matters to Mr Zevon's attention in the covering email. He then asked him whether he should send the plans and the quotation to Mr Zevon's bank.
48. Mr Zevon responded by email the same day. He wrote:
It appears that with this quote we have major problems if we can't find ways that will allow us to stay within budget.
The quote is way off the mark in terms of what the bank is prepared to loan (as provided/discussed previously, the bank is lending us $230,000; your current estimate is 50% over that amount).
Much of the detailed costs are not provided for our benefit or that of the bank
There may be some marrying up of costs, such as the provisions for kitchen and hot plates);
There is no obvious economy gained from having the drafts-person also being the builder (- the drawing costs are not market costs and I suggest that you reconsider them; I have been uncomfortable about that level of drawing fee when you first mentioned it, but I hoped it would be absorbed/accommodated in a very competitive quote, and that it may not become an issue on its own; obviously I have been wrong, but we can still discuss).
If we submit this to the bank without any trimming, we will get a straight-out decline. But, I will call up the Home Finance manager to seek advice on this as we do not wish to lose our pre-approval; if allowable, we may submit this now to keep our pre-approval status alive as we try to prune the costs or the plan itself.
Please feel free to e-mail me your ideas about possible ways forward.
49. Mr Honkanen replied by letter dated 11 May 2006. In it he was emphatic that Mr and Mrs Zevon had never told him before their email of 4 May what their financial limit was. He said that, had he known, he would "not have even attempted the futile design work" he completed. He reiterated this point in his evidence. After discussing the other issues raised in the email, the letter concluded by suggesting that it might be more appropriate if the Zevons engaged a builder/designer prepared to undertake the task on terms with which they would be more comfortable.
50. Thereafter, Mr Honkanen conducted no further work for the Zevons.
Did the parties have a binding contract to build the Gungahlin house?
51. Mareva argues that the 30 May email "formed" a binding contract for the construction of the Gungahlin house. Mareva claims that the terms of the contract were as follows:
(a) Mareva was to construct a house on Block 1 Section 158 Gungahlin;
(b) Mareva's fee for the construction work was $399,600 plus GST;
(c) The construction was based on drawings 05/537 Nos. 1-9 prepared by DUB Design Pty Ltd;
(e) Further terms were in accordance with the standard Master Builders Association contract and the partially completed schedules which had been supplied to the Zevons "save that the price was $399,600 plus GST".
52. In his defence Mr Zevon admitted that he accepted the quotation given on 2 May 2005 but denied that the acceptance of the quotation formed a binding contract for the building of the house. He says that Mareva was aware that acceptance of the quotation was conditional upon Mr Zevon obtaining finance.
53. Mareva's position is that the parties had finalised all the terms of their bargain and intended to be immediately bound to the performance of those terms, but at the same time proposed to have the terms restated in a form which would be fuller or more precise but no different in effect. If it is right, then there is a binding contract; the parties are bound to perform the agreed terms whether or not the contemplated formal agreement comes into existence and to join (if they have so agreed) in settling and executing the formal agreement: Masters v Cameron [1954] HCA 72; (1954) 91 CLR 353 at 360.
54. Alternatively, Mareva submitted that this was a case where the parties were content to be bound immediately and exclusively by the terms they had agreed upon while at the same time expecting to make a further contract in substitution for the first, containing, by consent, additional terms. In such a case there will also be a binding contract upon the basis of the agreed terms: Sinclair, Scott & Company Ltd v Naughton [1929] HCA 34; (1929) 43 CLR 310 at 317; Baulkham Hills Private Hospital Pty Ltd v G R Securities Pty Ltd (1986) 40 NSWLR 622 at 628.
55. Mr Zevon's position is, in effect, that this case falls within the third class in Masters v Cameron, namely, that the intention of the parties was not to make a concluded bargain at all, unless and until they execute a formal contract.
56. The parties' subjective intention is irrelevant. Their intention is to be determined objectively, that is to say, by deciding what a reasonable person in the position of the parties intended. In considering this question, the Court must consider the text of the relevant documents, the surrounding circumstances known to the parties at the time and the purpose and object of the transaction: Pacific Carriers Ltd v BNP Paribas [2004] HCA 35; (2004) 218 CLR 451 at [22]; Australian Securities and Investment Commission v Fortescue Metals Group Ltd [2011] FCAFC 19; (2011) 190 FCR 364 ("Fortescue Metals") at [221] per Finkelstein J.
57. Mr Zevon's evidence was that he bought the block of land at Gungahlin (which was subject to a development covenant) and arranged for the bank to finance it to the tune of $375,000. Evidence from the NAB shows that he had loan approval on 12 October 2004 for $535,000 (incorporating an existing loan of approximately $163,000) and an indicative loan offer dated 17 November 2004 for a loan amount of $560,000).
58. Mr Zevon said that he told Mr Honkanen that the first quote was expensive and above his budget. He said that after he received the revised quote he had a discussion with Mr Honkanen the substance of which concerned the price. He said Mr Honkanen asked him what he was expecting. He said he replied that the architect had told him that what he had drawn would cost around $300,000. He was vague about where the discussion had taken place. He said that he told Mr Honkanen in that discussion that the price was "still off [his] budget" and that they would "need to seek additional finance to be able to afford building with [him]". He did not, however, dispute that Mr Honkanen had told him that he was not going to continue exploring any options until he knew that he was the builder. Indeed, he embraced it. But he said that when Mr Honkanen insisted, he told him:
"Look, there are a number of things that I'm not ready for this project. First of all, our finance is still below what you quoted for. We will need to look for more funding - finance, if we should meet this level of quotation." In fact, we would need more because there were - because of the exclusions. I also spoke about the fact that we didn't have approval, regulatory approval from ACTPLA. We didn't have a contract either. Mr Honkanen then responded that along the lines of it's normal in the industry - you know, it's normal in the industry, it's a practice in the industry to accept quotations subject to - to finance, and and other things. Now, that warmed up, you know - you know - sort of told me that well, if Mr Honkanen is keen to be nominated before he explores any further option for us, and we had warmed up to him as well, that he would build for us. We didn't know very many people in Canberra who were builders, and there were all kinds of stories about builders and how they do stuff to you. And so we warmed up to this idea that this is an elder in our church, this is a person we know very well, who more can we trust to do the right thing by us. So I accepted his idea of providing - you know, doing a contract subject to these approvals - finance and ACTPLA approval.
59. Mr Zevon later went further, saying that Mr Honkanen had told him that the normal practice in the industry is to sign contracts "subject to finance". In cross-examination Mr Honkanen emphatically denied he had told Mr Zevon there was an industry practice to enter into a building contract subject to finance. Indeed, he said there was no such industry practice and he had never entered into such a building contract. He also denied that Mr Zevon had ever said to him at any relevant time that the contract was subject to finance. He said that in their discussions soon after 2 May 2005 Mr Zevon told him he was now happy with the price. He did say that, after Mr Zevon received the revised quotation, there was mention of the bank's involvement, but it was he, not Mr Zevon, who raised the subject. He said:
I advised Mr Zevon that we needed - before we were - before I intended to issue the actual written - the completed contracts to him, that it would be a good idea if we would get the air-conditioning issues resolved, that the planning approval was in place, although it wasn't - it's not necessary and also that the reference to the banking was that I did say to him that you will probably want to show the contract to your bank before they issue you with the - the formal approval of your of your loan. He had already told me before that he had a - a bank approval in principle in place, so there was a mention that the bank normally wants to see a copy of the contract.
60. I do not doubt that Mr Zevon was concerned about money throughout his negotiations with Mr Honkanen and that he repeatedly tried to persuade Mr Honkanen to lower the price. Nevertheless, I am not satisfied that he made Mr Honkanen aware of any difficulty he had about securing finance or about the amount of the bank's in principle approval.
61. Neither am I satisfied that Mr Zevon told Mr Honkanen that the quotation was accepted subject to finance. Nor do I accept that Mr Honkanen suggested to him that the contract could be subject to finance. Mr Honkanen's repeated and express desire for certainty about the project is inconsistent with him proffering the suggestion. In any event, in the email of 30 May Mr Zevon urged Mr Honkanen to pursue suitable and viable heating and cooling options "as soon as possible, as per our recent discussions in your office". A reasonable person would construe this as a reference to the discussions concerning Mr Honkanen's insistence that he have an assurance that he was the builder, not that the parties had an agreement "subject to finance". The email is far more consistent with Mr Honkanen's account of formal bank approval being required than it is with Mr Zevon's. It does not state that the agreement was "subject to finance", although Mr Zevon said that he had a firm recollection that Mr Honkanen had used those very words in their discussions and he knew what they meant. In all the circumstances, if, as Mr Zevon intimated, financial approval was his overriding concern and if he only agreed to accept the quotation because Mr Honkanen told him he could agree "subject to finance", it is highly unlikely that there would not have been at least one reference to that qualification in an email before 30 May, if not in that email itself. The 30 May email has all the hallmarks of an agreement subject only to the formal contract being drawn up.
62. Although it would have been prudent for him to have made the inquiry at the outset of his dealings with Mr Zevon, as Mr Honkanen himself acknowledged, I accept his evidence that he did not ask Mr Zevon about his financial situation and that Mr Zevon did not volunteer it. In his evidence in chief Mr Zevon said that he told Mr Honkanen that the first quotation was expensive and above his budget but he did not say he told him what his budget was. He said that Mr Honkanen asked him what he was expecting; he did not say he asked him how much money he had. In cross-examination he agreed he did not tell Mr Honkanen at that time what the limit of his budget was. Even when he received the revised quotation in May, Mr Zevon said that he simply thanked Mr Honkanen for the quote and told him it was still expensive.
63. I think it is likely that the reasons lie in the relationship the parties had at the time. The parties were well acquainted with each other. They worshipped at the same church. They had served together on the church building committee. Mr Zevon said Mr Honkanen was respected among the group for his knowledge of the building industry. I am sure the parties regarded each other as men of integrity. To some extent they took each other on trust. That would have involved making certain assumptions. Mr Honkanen said that they had known each other for a number of years and he did not think it was necessary to ask Mr Zevon about his financial situation. He said that Mr Zevon appeared to have the funds available and was simply trying to get the best return for his money. Doubtless that was an appearance Mr Zevon wanted to maintain. It is true that Mr Zevon later said that he told Mr Honkanen that his finance was below what he quoted for. But I do not accept that his memory is reliable in this respect. He may honestly believe he told Mr Honkanen as much (or because he thinks he should have, he believes he must have), but I am persuaded by Mr Honkanen's evidence that he did not.
64. Of course, if an arrangement is incomplete, it may be impossible to find that a contract has come into existence, regardless of what the parties intended. As Finkelstein J said in Fortescue Metals at [223]:
For a contract to be valid the agreement must be sufficiently definite and explicit so that the parties' intention can be ascertained with a reasonable degree of certainty. Put another way, a court cannot enforce a contract unless it can determine what the contract is, applying all applicable rules of formation and interpretation. Otherwise the court would be imposing its own perception of what the bargain is rather than implementing what has been agreed by the parties.
65. Despite the areas where agreement had not been reached, however, I do not think it could be said that the agreement here was not sufficiently definite and explicit so that the parties' intention could not be ascertained with a reasonable degree of certainty. It is not uncommon for work to be excluded from building contracts and for variations to be made throughout the building process. The standard Master Builders Association contract provided for the possibility of both. I accept that Mr Zevon was particularly concerned about having a proper heating and cooling system in the house. Yet that does not mean that the parties did not have a binding contract. The parties were working on the heating and cooling issue and, had it been resolved, it could have been the subject of another agreement. As Lord Loreburn said in Love & Stewart Ltd v S Instone & Co Ltd (1917) 33 TLR 475 at 476:
It was quite lawful to make a bargain containing certain terms which one was content with, dealing with what one regarded as essentials, and at the same time to say that one would have a formal document drawn up with the full expectation that one would by consent insert in it a number of further terms. If that were the intention of the parties, then a bargain had been made, none the less that both parties felt quite sure that the formal document could comprise more than was contained in the preliminary bargain.
66. In my view, that is what occurred here. I am therefore satisfied that the parties had a binding contract. Mareva concedes, however, that Mrs Zevon was not a party to that contract and in relation to this cause of action she should have a verdict in her favour.
Are the Zevons estopped from denying the existence of a contract?
67. Mareva's alternative case was that, by reason of their conduct, the Zevons are estopped from denying the existence of a binding contract to build the Gungahlin house. Because of the view that I have reached on the first question, it is strictly unnecessary to determine this issue. Were it necessary to do so, however, I would hold that the alternative case is made out.
68. The relevant principles are set out by Brennan J in Waltons Stores (Interstate) Ltd v Maher [1988] HCA 7; (1988) 164 CLR 387 at 428-9. Applying those principles to the facts of this case, Mareva needs to prove that:
(1) Mr Honkanen (as its principal) assumed that Mareva had a binding agreement with Mr Zevon;
(2) Mr Zevon induced Mareva to make that assumption;
(3) Mareva acted or abstained from acting in reliance on that assumption;
(4) Mr Zevon knew or intended him to do so;
(5) Mareva's action or inaction will occasion detriment if the assumption is not fulfilled; and
(6) Mr Zevon failed to act to avoid the detriment whether by fulfilling the assumption or otherwise.
69. I am well satisfied that each of these matters has been proved.
70. In my view, the 2 June email (particularly when read in context with the correspondence that preceded it) and Mr Honkanen's conduct thereafter demonstrate that Mr Honkanen assumed Mareva had a binding agreement with Mr Zevon and that he acted in reliance on that assumption. I find that Mr Zevon's statements in the email of 30 May induced him to make the assumption. The tenor of the 30 May email also indicates that that was Mr Zevon's intention. Mr Zevon's response to the 2 June email tends to show that he understood its effect.
71. The detriment Mareva was likely to suffer, and in fact did suffer, was the trouble and expense to which Mr Honkanen was put of preparing for the building work, securing competitive quotes from subcontractors, and exploring the alternative heating and cooling options. Mr Honkanen also said, and I accept, that he did not pursue other work because he knew the Gungahlin house would take "a good part" of his working time for the ensuing few months. Mr Zevon did nothing to avoid the detriment.
72. Paragraph 11 of the statement of claim pleads that, in breach of the contract, in August 2005 Mr and Mrs Zevon informed Mareva that they were not proceeding with construction of the Gungahlin house. The defence does not plead to this paragraph. The contest on the pleadings relates to the existence of a contract and the question of damage.
73. Nevertheless, in its statement of facts and contentions Mareva accepted that one of the issues was whether the contract had been breached. The question, then, is whether Mr Zevon repudiated (or renounced - see Koompahtoo Local Aboriginal Land Council v Sanpine Pty Ltd [2007] HCA 61; (2007) 233 CLR 115 at [44]) the contract, and whether Mareva accepted the repudiation (or renunciation) and rescinded the contract.
74. Mareva contends that when Mr Zevon informed Mr Honkanen in August 2005 that he did not want to proceed with construction of the Gungahlin home, he did so in breach of the contract, in effect signalling that he was unwilling or unable to perform his part of the bargain, thereby evincing an intention no longer to be bound by the agreement: Almond Investors Ltd v Kualitree Nursery Pty Ltd [2011] NSWCA 198 at [62].
75. There is no dispute that at about this time Mr Zevon told Mr Honkanen not to proceed with building the Gungahlin home. No formal contract was signed and the building work did not go ahead. Mr Honkanen's evidence was that in early August Mr Zevon said to him that he was thinking of "putting the Gungahlin house on hold". He said he had a block of land in Bruce and asked Mr Honkanen whether he would like to build the house on the Bruce block instead. Mr Honkanen said he would be "happy to have a look at it", that it was a matter of indifference to him which house was to be built, and arranged to meet with Mr Zevon to discuss the proposal. Mr Honkanen then agreed to draw up plans for the Bruce house and in May 2006 quoted on it. But when that project fell through, Mr Honkanen sued for breach of the Gungahlin contract.
76. It is clear that Mr Zevon had decided he could not afford the Gungahlin home, had no real prospect of acquiring the necessary finance, and had no intention of proceeding with the contract to build it. I am satisfied that by relinquishing his proposal for the Gungahlin house, Mr Zevon evinced an intention not to proceed with the contract.
77. The next question is whether Mr Honkanen accepted the repudiation and rescinded the contract.
78. Mr Walker, counsel for Mareva, argued that the Gungahlin project was simply deferred, relying on the evidence from Mr Honkanen that Mr Zevon said he was thinking of putting the Gungahlin house on hold. Mr Honkanen's evidence was that this conversation took place in August. Mr Zevon's account differed. He said he told Mr Honkanen he was not going ahead with Gungahlin. He also said that it was two months after the initial conversation that he raised the prospect of building on the Bruce land.
79. While in general I regard Mr Honkanen as the more reliable witness, neither party had a contemporaneous note of this conversation. One thing, however, seems clear. Whether or not Mr Zevon used the expression "putting the Gungahlin house on hold", the Bruce project was intended to be in substitution for, not in addition to, the Gungahlin project. That is what Mr Honkanen understood. He referred in his evidence to the project having been abandoned, not deferred. Furthermore, Mr Honkanen said nothing to Mr Zevon to indicate that he regarded Mr Zevon's action as a breach of their contract. Indeed, his conduct points in a different direction.
80. It seems to me that once Mr Honkanen accepted Mr Zevon's offer to design a house to be built at Bruce, rather than to proceed with the building of the Gungahlin home, neither party intended that the Gungahlin contract should be further performed. In these circumstances, the parties must be taken to have agreed to abandon the contract.
81. In DTR Nominees Pty Ltd v Mona Homes Pty Ltd [1978] HCA 12; (1978) 138 CLR 423 Stephen, Mason and Jacobs JJ, with whom Aickin J agreed, said at 434:
[T]here can be no doubt that ... when these proceedings were commenced, neither party, whatever may have been their reasons, regarded the contract as being still on foot. Neither party intended that the contract should be further performed. In these circumstances the parties must be regarded as having so conducted themselves as to abandon or abrogate the contract.
82. That, in my opinion, is the position here. Alternatively, the contract was discharged by agreement, the consideration for which was the opportunity to design and build on the Bruce land, if not the right to enforce the original contract. See Seddon NC and Ellinghaus MP, Cheshire and Fifoot's Law of Contract (9th ed, LexisNexis, 2008) at [22.8]. Mr Honkanen did not make discharge of the Gungahlin contract conditional on the Bruce project proceeding to completion. How could he? At the time he agreed to walk away from the building of the Gungahlin house he had not even quoted on the Bruce house.
83. In the result, I am not satisfied that the contract was terminated for breach so as to entitle Mareva to sue for damages. Put differently, the loss to Mareva did not result from a breach by Mr Zevon of the Gungahlin contract
84. In the event, however, that my conclusion is wrong, I shall state my views about the assessment of damages.
85. Where a contract is rescinded for breach, the damages are to be calculated in accordance with the rule in Hadley v Baxendale [1854] EngR 296; (1854) 9 Ex 341 at 354; (1854) 156 ER 145 at 151. The innocent party is entitled to such damages as may fairly and reasonably be considered either arising naturally (that is, according to the usual course of things) from the breach itself, or such as may reasonably be supposed to have been in the contemplation of both parties at the time the contract was made as the probable result of the breach. If a contract is profitable, the profits lost and the costs actually and reasonably incurred in performance are properly compensable: The Commonwealth of Australia v Amann Aviation Pty Ltd [1991] HCA 54; (1991) 174 CLR 64 at 99 per Brennan J. Here, no claim is made for costs incurred. The claim, in effect, is for lost profits.
86. The sum Mareva seeks is $65,000. This is a figure Mr Honkanen calculated at the time he prepared the revised quotation. He described it as his allowance of what, in his experience, he would need "to put in time-wise into this kind of project". He said it was approximately the industry standard for that kind of job. In his working notes it appears as an amount referable to "overheads, administration, supervision and margin". Of course, as the project did not go ahead, there was no supervision and there were no overheads or administration costs. In his oral evidence Mr Honkanen estimated those expenses as "of the order of $5,000".
87. Mr Zevon did not challenge this evidence and there is nothing inherently implausible about it. Mareva's claim represents roughly 19% of the cost of the works for which the revised quotation provided. Mr Zevon gave evidence that he had been told that builders' margins could be as high as 30 to 40%. In all the circumstances, there is no good reason not to accept Mr Honkanen's evidence.
88. Taking into account the expenses, which have not been incurred, I would assess damages at $60,000.
Is Mareva entitled to its fees for the construction drawings for the Bruce house?
89. I do not doubt that Mr Honkanen offered to do the concept plans for free, but I accept that Mr Honkanen told Mr and Mrs Zevon that it would cost $10,000 plus GST to prepare the detailed construction drawings. Indeed, there does not seem to be much dispute about that. The dispute is as to whether it was agreed that Mr Honkanen would charge a fee.
90. It is possible, if not likely, that Mr Zevon mistakenly believed that the offer to do the concept plans for free incorporated a proposal not to charge for the detailed drawings. But when the time came for those drawings to be done, Mr Honkanen made it plain that he would have to charge for them. I think it is highly unlikely that he would have conducted further work for no cost, particularly in the circumstances in which he then found himself, having spent months working towards the commencement of the Gungahlin building only to find Mr Zevon unwilling to go ahead with it. I accept that Mr Zevon did not want to pay, but I also accept Mr Honkanen's evidence that he reluctantly agreed that the fees would be included in the overall price for the house in order to enable him to borrow against the amount. I do not doubt that it was only upon extracting Mr Zevon's agreement that Mr Honkanen embarked upon the work. I am persuaded that Mr Honkanen did not know Mr Zevon's budget. Although the letter from Mr Honkanen to Mr and Mrs Zevon of 21 December 2005 is consistent with both versions, I consider it improbable that Mr Honkanen would have drawn plans and submitted the quotation he did if he had been informed of the Zevons' budget. I think it is likely that Mr Zevon has convinced himself that he told Mr Honkanen what his budget was but that, in reality, he merely indicated what he was expecting or hoping to spend. The home he wanted was the home he asked Mr Honkanen to build but, unbeknown to Mr Honkanen at the time, it was a home beyond his means.
91. Mr Honkanen said that in March 2006 he had a telephone conversation with Mr Zevon in which he told him that he could not do the major change he wanted for nothing. Mr Honkanen said that he agreed to limit the maximum fee for revising the drawings to $3,000 plus GST. He said that Mr Zevon was agitated, and argued that he should not have to pay extra, but that he ultimately agreed. I accept Mr Honkanen's account. It accords with a contemporaneous email of 28 March in which Mr Honkanen said that he would have to charge additional fees and Mr Zevon's email of 4 May 2006. In that email Mr Zevon did not say that Mr Honkanen had agreed not to charge for the drawings. He merely referred to his discomfort about the fees and his hope that they would be absorbed or accommodated in a competitive quote. He did not say that there was any agreement that they would be absorbed. This is consistent with Mr Honkanen's evidence that Mr Zevon had reluctantly agreed to pay them. Only after he received the bill did Mr Zevon come up with the version of events he gave in evidence.
92. I am therefore satisfied that Mr Zevon agreed to pay for the drawings and their revision. As Mr Honkanen provided an initial set of drawings, which he then revised at Mr Zevon's request, he is entitled to his fees.
93. The amount claimed in the originating claim is $13,200. In the statement of claim the amount pleaded is $13,000. It is likely that is a typographical error. The sum mentioned in the originating claim is the amount claimed in the invoice and that is the sum I propose to award in damages. To that sum should be added interest at the rates prescribed under r 1616 and Sch 2 of the Court Procedures Rules from 19 May 2006 when the invoice was rendered. To the date of judgment (not inclusive) that is $6,687.16, which I would round down to $6,687. Principal and interest total $19,887. That is the amount to which Mareva is entitled.
94. Mareva had a contract to build the Gungahlin house. The contract was abandoned or discharged by agreement, however, in favour of a different project on land in Bruce. Mareva had an agreement with Mr and Mrs Zevon to design a home on that land and that agreement involved a fee for the drawings, though not the concept plans. Mr Zevon also agreed, albeit unhappily, to pay an additional amount for additional drawings to accommodate variations to the original drawings. Mareva is entitled to recover its fees as damages, together with interest.
95. There will therefore be judgment in favour of the plaintiff in the sum of $19,887.
96. This leaves the question of costs. My provisional view is that, as Mareva failed on one of its two causes of action, it should have only half of its costs. I will make an order to that effect unless, within seven days of the pronouncement of judgment, I am notified that such an order is opposed. In that event, I will make orders in chambers directing further submissions to be made in writing.
I certify that the preceding ninety six (96) numbered paragraphs are a true copy of the Reasons for Judgment herein of her Honour, Justice Katzmann.
Counsel for the defendants: The defendants appeared in person.
Mareva Building Consultants
Zevon [2012] ACTSC 18
(2011) 190 FCR 364
(1986) 40 NSWLR 622
(1991) 174 CLR 64
(1978) 138 CLR 423
(2007) 233 CLR 115
(1954) 91 CLR 353
(2004) 218 CLR 451
(1929) 43 CLR 310
(1988) 164 CLR 387