Oberon Property Holdings Pty Ltd v R & D Panelform Limited Partnership [2009] NSWSC 1429 | Case summary

2797/09 OBERON PROPERTY HOLDINGS PTY LTD V R & D PANELFORM LIMITED PARTNERSHIP JUDGMENT (ex tempore, revised on 15 December 2009) 1 HIS HONOUR: By originating process filed on 12 May 2009, the plaintiff seeks an order under s 459G of the Corporations Act 2001 (Cth) to set aside a statutory demand dated 17 April 2009 served on the defendant on about 23 April 2009. The statutory demand is founded on two debts said to have been due and payable at the time of the demand, namely, debts said to arise out of a contract variation dated 23 June 2008 in a sum of $19,556.90 and a contract variation dated 23 July 2008 in the sum of $401.01. 2 No issue has been taken by the defendant concerning proper service of the originating process and the supporting affidavit of Franko Vellar sworn on behalf of the plaintiff on 12 May 2009. In that affidavit Mr Vellar said that at no point during the contract period did the defendant provide the plaintiff with a notice of variation by reference to the amounts demanded in the statutory demand, and at no point did the plaintiff direct the defendant to proceed with the variation works, or give consent or authorise the defendant to do so. He said that the plaintiff disputed the amount claimed in the statutory demand, on the basis that, had the defendant provided the plaintiff with a notice of variation, then the plaintiff would have been able to assess the quantum of the variation, and would have been able to decide whether or not the additional costs associated with the variation could have been avoided in part or in full. Plainly, Mr Vellar's affidavit seeks to have the statutory demand set aside on the ground in s 459H(1)(a), that is to say that there is a genuine dispute between the plaintiff and the defendant about the existence or amount of the debt to which the demand relates. I infer from the affidavit that the asserted genuine dispute is about the existence of the debt. 3 In order to establish such a genuine dispute, the plaintiff needs to do no more than establish a plausible contention requiring investigation - a concept that is closely similar to whether there is a "serious question to be tried": Eyota Pty Limited v Hanave Pty Limited (1994) 12 ACSR 785. This is not the occasion for the Court to determine the dispute between the parties, but only to decide whether a genuine dispute exists. Creditors of corporations who invoke the statutory demand procedure frequently fail to understand that point and they, therefore, serve a statutory demand on the corporation against whom they claim debts when the correct procedure to be followed should have been the initiation of a proceeding for recovery of the alleged debt. 4 The contract between the plaintiff and the defendant was to supply and install tilt up wall panels for the construction of industrial warehouses at an address in Fairy Meadow. The initial quoted contract price was $268,000. It is clear from the terms of that quote that the quotation was made on the basis of certain assumptions. A note to the letter of quotation, which is dated 21 July 2007, is as follows: " > Maximum brace hire allowed for is four (4) weeks. Braces required after this period will be charged at a rate of $9.90 per standard brace per week and $12.80 per extended brace per week. > All pricing stated within this quotation will be held for a period of three (3) months after which time all pricing will be reviewed. > All panel design and reinforcement has been assumed. The above price will be subject to review on receipt of engineers' details." 5 On about 8 November 2007, the plaintiff sent to the defendant a contract entitled "Major Works for Services Contract", and the evidence is that the defendant signed and returned the contract. The contract provides for a contract sum of $263,000. It describes the plaintiff as "VC" and the defendant variously as the "Contractor" and the "Subcontractor". The parties agree that in clause 9, references to the Subcontractor are references to the defendant. 6 As I have said, the contract is a fixed price contract, but as is normal in an agreement between a project manager and a contractor, there is a provision for variations in the contract price. The variation clause is as follows: "9. VARIATIONS The Subcontractor shall only vary the work under the Contract if so directed by VC. No variation shall invalidate the Contract. VC may direct the Subcontractor to: - a) increase, decrease or omit any part of the work under the Contract; b) change the character or quality of any material or work; c) change the levels, lines, positions or dimensions of any part of the work under the Contract; d) execute additional work; e) change the sequence or timing of any part of the work under the Contract; f) demolish or remove material or work no longer required by VC. Wherever possible, the price for a variation shall be agreed prior to the execution of the variation and shall be added to or deducted from the Contract Sum as the case may be. A variation price shall be determined using: - g) where applicable, rates or prices included in the Contract for similar work; or h) in the absence of (a), agreed rates and prices based on a bill or schedule of prices submitted by the Subcontractor with its tender; or i) in the absence of (a) and (b), reasonable rates and prices as determined by VC. In determining a deduction for decreases and omissions of work, the deduction shall include a reasonable amount for overheads and profit. VC may direct the Subcontractor to carry out variation work on a dayworks basis. When dayworks are directed:- a) wherever possible rates and conditions shall be agreed between the parties before the work is commenced and failing agreement VC shall determine the rates and conditions to apply; b) the Subcontractor shall record and submit on a daily basis, details of the work carried out in duplicate and in a form acceptable to VC. VC shall sign those records of which it approves and the Subcontractor shall retain one copy so signed." 7 The defendant conceded in submissions that the contract superseded the letter of quotation, in the sense that the statement in the letter of quotation that the price would be subject to review on receipt of the engineer's details was to be considered, after the making of the contract, in light of clause 9, and therefore any review of the price would have to be a variation as provided by that clause. 8 As was plain from the original letter of quotation, engineering drawings were to be supplied before the contract work could be carried out. The engineering drawings that were supplied were received on 7 February 2009, and they are in evidence. They provide for SL82 mesh for each face and 175 mm thick panel. The contract work was carried out and came to an end in about May or early June 2008. In fact, it seems that the bracing was removed from the tilt up panels on 23 June 2008. I shall come back to that point. 9 Various payment claims were made under the contract and were eventually paid. The last contract claim, dated 23 July 2008, made reference to another variation but did not refer to the variations that are the subject of the statutory demand. 10 The evidence is that the variations that led to the statutory demand arose out of a telephone conversation between Mr McKeown of the defendant and Mr Vellar of the plaintiff, followed by a site meeting on about 6 June 2009, and then a letter from Mr McKeown to Mr Vellar on 13 June 2009. The letter explained that when the original quotation was made by the defendant, the defendant had in mind standard industry practice requiring a minimum of SL72 mesh each face to 175 mm thick walls. As I have mentioned, the engineering drawings specified SL82 mesh. It is not clear to me from the evidence whether the plaintiff was aware that the quotation was based on SL72 mesh, because the quotation itself does not appear to mention that grade. After receiving the engineer's drawings, the defendant did not immediately contact the plaintiff and say the specification of SL82 mesh would be more costly, but in the letter of 13 June 2008 Mr McKeown maintained that the requirement of SL82 mesh led to an additional nine tonnes over and above the allowance that the quotation had made, and therefore, the defendant was claiming for the difference in cost for the supply of mesh between SL72 and SL82 and the supply and installation of the nine tonnes additional bar. 11 The question is whether in these circumstances there is a genuine dispute about the first purported contract variation. In its final form, the contract variation dated 23 June 2008 was for $17,779 plus Goods & Services Tax, amounting in total to $19,556.90, which is the amount stated in the statutory demand for that variation. 12 As I have said, the plaintiff's contention is that the defendant should have notified the plaintiff that there would be an additional cost, so as to give the plaintiff the opportunity to investigate the matter with the engineers and decide whether to proceed at the additional cost or to make some other arrangement. Clause 9 does not expressly require the Subcontractor to notify VC of the cost of an additional variation. What it says is that the Subcontractor shall only vary the work under the contract if so directed by VC. 13 The defendant submitted that the engineering plans supplied on 7 February 2008 amounted to a variation of the contract under clause 9. I am not sure that is so, because the engineering plans merely stipulated a particular kind of mesh (SL82) which, according to the defendant, was different from its expectation. But assuming there was somehow implied in the engineering plans a direction to use SL82 notwithstanding that SL72 had previously been in contemplation, there is still an issue about whether a variation is effectively made if there is no response by the Subcontractor until after the work is done and additional expense is incurred. It seems to me as a commercial matter it is unlikely that a project manager such as VC would put itself in the position of being bound by a contract variation without first knowing how much extra cost would be entailed if the variation were made. 14 The drafting of clause 9 leaves a great deal to be desired. In particular, there is no express requirement of notification. But it seems to me arguable that, in circumstances where the price for a variation could readily be supplied if requested, there is an implied obligation on the part of the Subcontractor to communicate with VC so as to obtain a valid direction by VC authorising the variation. 15 Clause 9 says that "wherever possible" the price for a variation is to be agreed prior to the execution of the variation. It was not submitted on behalf the defendant that there was any impossibility in agreeing the price for the variation before implementation in the present case. Reference was made to the provision of clause 9 to the effect that the variation price was to be determined by using rates or prices included in the contract for similar work, and the submission was made that the rates in the present case, at least in part, could be obtained from the quotation, but it seems to me as a matter of construction that the primary proposition about pricing in the clause is that the price is to be agreed where possible. That did not occur prior to the execution of the variation by the defendant. 16 As I have mentioned, it is only necessary for the plaintiff to show that there is a genuine dispute as to the existence of the debt. It seems to me there is a reasonably strong argument for the plaintiff, as I have outlined, to the effect that there was an implied obligation on the part of the defendant to notify the plaintiff of the expected additional cost before the variation was executed, and "wherever possible" to agree a price for the variation. 17 What is less clear is the consequence of failing to comply with that implied obligation. I received only limited submissions on this subject, but it seems to me that various at least a plausible contention that failure to notify and obtain agreement to the variation price would leave the project manager with no contractual obligation to pay the additional price demanded by the Subcontractor. The Subcontractor may have a claim for quantum meruit for work done. However, as counsel for the plaintiff pointed out, the statutory demand does not purport to assert any such claim, and the benefit of performance of the variation would presumably be for the owner rather than the project manager, so such a claim might well encounter difficulties. 18 I have concentrated so far on the first variation, which was the larger one. As to the variation for $401.01, that appears to have arisen because the bracing was removed from the tilt up panels only on 23 June and, therefore, the defendant incurred an additional three days of costs in respect of that matter. 19 There is evidence given on behalf of the plaintiff that the instruction to remove the bracing was given somewhat earlier and that the bracing could, in fact, have been removed by the defendant three days earlier than it was. That evidence has not been tested in cross-examination and I simply note there is a conflict of evidence. I have no reason to believe one version or the other, but that actually means that if that were an issue, there would be a genuine dispute about it. 20 The defendant's counsel raised, in respect of both variations, the Graywinter principal (Graywinter Properties v Gas and Fuel Corporation (1996) 21 FCR 581), to argue that it was not open to the plaintiff to claim that the instruction to remove the bracing was given three days earlier, because that issue was not raised in Mr Vellar's initial affidavit. 21 What Mr Vellar said in his initial affidavits about both contract variations was that there was no notice given in respect of them. It seems to me that this assertion establishes a genuine dispute in relation to both contract variations for the reasons I have given. 22 My conclusion, therefore, is that the statutory demand should be set aside. My orders are: (1) that the statutory demand dated 17 April 2009 and served by the defendant on the plaintiff on about 23 April 2009 for an amount of $19,957.91 is set aside. (2) that the defendant pay the plaintiff's costs as agreed or assessed. **********

Oberon Property Holdings Pty Ltd v R & D Panelform Limited Partnership

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