Plaintiff v Defendant

2 On 8 July 2019, the builder and the developer entered into a construction contract ('the contract'), which, inter alia, provided for the builder to undertake construction works for a lump sum of $28,826,000 (exclusive of GST), to be paid in accordance with the contract. The contract followed standard terms and included provisions, inter alia, for the payment of sums due under the contract, including the pricing and payment for variations, as well as provisions for the payment by the builder of liquidated damages in the event of delay.

3 By a loan facility agreement dated 1 November 2019 ('the facility agreement'), entered into between the developer and a lender, Monland Pty Ltd ('the lender'), the developer obtained a construction finance facility with a $40 million facility limit to facilitate the payment of construction costs incurred during the course of construction, including the payment of sums owed to the builder.

4 Among other things, the facility agreement provided, in clause 5.3, for any proceeds of sale (from the apartments when constructed) to be paid to the lender and applied to reduce amounts owed by the developer under the facility agreement.

5 The facility agreement was entered into contemporaneously with and referred to a builder's side deed ('the builder's side deed'), which was entered into between the lender, the developer and the builder on 31 October 2019. The recitals to the builder's side deed recorded that the lender had agreed to provide certain financial accommodation to the developer to fund payments to the builder for the construction works in accordance with the facility agreement, and that the developer had given security to the lender, including in the form of a first registered mortgage over the property.

6 The builder's side deed contained provisions requiring the builder prior to making any progress claim, which would require the developer to request the lender to fund the payment of that progress claim under the facility agreement, to provide evidence satisfactory to the lender that all subcontractors and suppliers who were to be paid under any previous claim had been paid. It otherwise provided the lender with certain step-in rights to assume the rights of the developer under the contract.

7 Relevantly, pursuant to clause 3.3(b) of the builder's side deed, the builder undertook to the lender that it would not take, or maintain any security interest over the property or the developer's other assets, or lodge a caveat against the property, or any part of the property, without the lender's consent.

8 On 29 July 2021, the builder and the developer entered into a deed of variation of the contract ('the first deed of variation') which, inter alia, increased the contract sum from $28,826,000 (exclusive of GST) to $37,000,000 (exclusive of GST). The amended contract sum included all variations to the construction works as at the date of the deed and otherwise amended the date for practical completion from 4 July 2020 to 18 August 2021. Further, the first deed of variation provided that the developer would execute and provide the builder with an executed mortgage over the property, and that if the developer failed to pay the builder any part of the contract sum due and payable under the contract within 90 days after the date of practical completion of the works, the developer would be required to obtain the consent of the first mortgagee, the lender, to the registration of the mortgage.

9 On 20 September 2021, the builder and the lender entered into a deed of amendment to the facility agreement. By the deed of amendment, the lender and the builder extended the period of the facility agreement and relevantly varied clause 5.3 of the facility agreement so as to provide that instead of the lender receiving all the proceeds from the sale of any of the apartments, the lender would be entitled to 95% of the proceeds of sale for the first 40 lots settled under the contract of sale and thereafter all proceeds of sale (save for various other exceptions which are not relevant). Thus, as a result of the deed of amendment, the builder became entitled to 5% of the sales proceeds from the first 40 apartments sold.

10 On 8 October 2021, the superintendent issued a certificate of practical completion.

11 Relevantly, also on 8 October 2021, the builder and the developer entered into a further deed of variation ('the second deed of variation'), which varied the terms of the contract and otherwise replaced the first deed of variation.

12 Under the second deed of variation, the builder and the developer agreed, inter alia:

(a) to increase the contract sum from $28,826,000 (exclusive of GST) to $37,088,635 (exclusive of GST), which amended contract sum included all variations in the works as at the date of the deed;

(b) to amend the date for practical completion from 4 July 2020 to 15 October 2021;

(c) that the developer would provide the builder with an executed mortgage, and that if the developer failed to pay the builder any part of the contract sum due and payable under the contract, the developer would be required to obtain the consent of the registered mortgagee to the registration of the mortgage in certain circumstances, including relevantly if 547 days had elapsed after the date of practical completion.

13 Additionally, clause 2(c)(v) of the second deed of variation provided as follows:

(v) the balance of the money owed shall be paid as follows from settlement money of any apartment at the Works to a purchaser of an apartment, 2.5% of the net sales proceeds must be paid to the Contractor from the first 40 sales:

1. The first $226,144.11 money to be received by the Contractor shall be paid against the acknowledged debt relating to Unpaid GST owing by the Principal from Tax Invoice No. 8984-30 and Tax Invoice No. 8984-31.
2. For the $2,804,250.03 unpaid under the Contract Sum inclusive of GST, the Principal will notify the Contractor of each further payment and the Contractor will issue a Tax invoice including GST for that amount and the amount owing by the Principal to the Contractor will be reduced by
3. After 40 sales have occurred, neither the Principal or the Contractor shall receive any further payments from the net sale proceeds as in subclause (v) above until such time as the Lender confirms all its loans have been repaid and securities are released. Thereafter the Contractor will receive 50% of the net sale proceeds until the outstanding amount of the Contract Sum inclusive of GST is repaid in full.

14 The $226,144.11 represented the GST owing with respect to two invoices.

15 The builder subsequently forwarded 13 invoices to the developer, totalling $348,480.22, representing the 2.5% entitlement for the sale of the first 40 lots. The builder's operations manager, Brett Chalmers ('Mr Chalmers'), gave evidence that the invoiced amounts matched information that Mark Oman ('Mr Oman'), the director of the developer, provided to the builder as to the sales figures for various apartments. Based on this information, the builder created an invoice for that amount which was forwarded to the developer.

16 Mr Chalmers also tendered an extract from the builder's accounting records (in effect a debtor's ledger) which set out a list of all payments that had been received from the developer, inclusive of GST, and the relevant invoice that related to those payments. The ledger showed that the developer had made payments to the builder totalling $38,353,325.17, of which $360,072.22 was paid after the second deed of variation, and of which $348,480.22 corresponded to the invoices for the 2.5% of the net sales proceeds of the first 40 lots sold.

17 Therefore, the builder claims that it is entitled to payment of the contract sum agreed to be owing as at the date of the second deed of variation (8 October 2021) of $37,088,635, plus GST of $3,708,863.50, which in total equals $40,797,498.50. The builder also claims to be entitled to be paid for additional variations after the date of the second deed of variation, totalling $5,022.60. When this sum is added to the GST inclusive contract sum of $40,797,498.50, the total said to be owed is $40,802,521.10. From this sum, the builder deducts the payments made by the developer to date which total $38,353,325.17. The builder's claim is for the difference, which is $2,449,195.93.

18 Putting aside the debtor's ledger, the figure can also be cross-checked as follows: clause 2(c)(v) of the second deed of variation acknowledges unpaid GST of $226,144.11, together with an amount unpaid under the contract as at the date of the second deed of variation of $2,804,250.03 (inclusive of GST). The sum of these amounts is $3,030,394.14. The debtor's ledger records payments made after the date of the second deed of variation of $360,072.22, of which $348,480.22 relate to the 2.5% sales entitlements for the first 40 lots. The difference is $2,670,321.92,which is a slightly higher amount than that now claimed by the builder. The difference was not raised by the developer or explained by the builder. In any case, the builder is now claiming a lesser sum, so any discrepancy works in the developer's favour.

19 The developer advanced three defences. First, as a matter of the proper construction of the second deed of variation, the developer had no further liability to the builder aside from those amounts that were able to be paid from the proceeds of sale of the lots; secondly, that the second deed of variation was entered into in breach of an undertaking given by the builder under the builder's side deed and as such constitutes an illegal contract which is unenforceable by the builder as against the developer; and thirdly, that the builder is estopped from asserting that there are further moneys due to it because the builder signed the final certificate issued on 8 December 2022 by the superintendent, the Ellis Group Architects Pty Ltd ('Ellis Group Architects'), acknowledging that 'all certified money by the Ellis Group Architects has been settled in full between both parties'.

20 Each of the defences fail. Whilst the entering into of the second deed of variation constituted a breach of the undertaking provided by the builder in the builder's side deed, this does not mean that the second deed of variation is illegal and unenforceable. Whilst a contract which involves the commission of a legal wrong is illegal if entered into with the intent to commit the wrong, the mere fact that the entry into of one contract may give rise to a breach of another contract does not amount to an intention to commit a legal wrong in the relevant sense. Nor does the contract fall within any other recognised category of illegality such as contracts prohibited by statute, contracts injurious to public life, contracts purporting to oust the jurisdiction of courts, contracts prejudicial to the administration of justice, immoral contracts or contracts prejudicial to the status of marriage.

21 The breach by the builder of the builder's side deed, occasioned by the entering into of the second deed of variation could have been actionable at the suit of the lender if the lender suffered loss and damage and chose to take action as a consequence. However, it has not.

22 The particular matters of breach arguably relevant to this case are the increase in the contract price and the grant of a mortgage (albeit unregistered). The increase in the contract price could arguably prejudice the lender if the lender chose to step in and take over the benefit of the contract. Given that this did not occur, the breach is of no consequence. Further, given that the mortgage was an unregistered mortgage subordinate to the lender's first registered mortgage, the grant of the equitable mortgage likewise was not consequential. The illegality argument therefore is misconceived and is rejected.

23 During the trial, the developer hinted at an interpretation of the second deed of variation to the effect that because it was common ground that the developer had in fact paid the builder 2.5% of the net sales proceeds of the first 40 lots sold and was not said to have breached clause 2(c)(v), the builder had no right to recover any further sum.

24 In determining the meaning of the contract in question, it is necessary to ask what a reasonable businessperson would have understood the terms to mean. That enquiry requires consideration of the language used by the parties in the contract, the circumstances addressed by the contract and the commercial purpose or objects to be secured by the contract.[1]

25 The developer's interpretation finds no support in the language used in the second deed of variation. Such an interpretation is akin to a limited recourse clause or a release by the builder of sums due beyond those able to be paid from the proceeds of sale. Such an interpretation finds no support from clause 2(c)(ii) of the second deed of variation which gave the builder certain rights in the event that the developer failed to pay any part of the contract sum due and payable under the contract, and clause 2(c)(v) which is an acknowledgment by the developer of money owed by the developer to the builder as at the date of the second deed of variation (8 October 2021). Whilst clause 2(c)(v) contemplates a mechanism for payment of the sum outstanding, it does not in terms or by any process of legitimate implication provide that if those sums are not sufficient, that the balance of the sum outstanding will be written off. In short, the developer's interpretation is one which would imply a release by the builder of the developer's obligation to pay the amounts due under the contract. Where a party is said to give up certain accrued rights, clear words are required. That is not the case here.

26 Nor does the builder's signing of the building superintendent's final certificate dated 8 December 2022 have any significant consequence. The developer asserted that by signing the document, the builder was representing that there were no moneys owed under the contract, and that in those circumstances, the builder is now estopped from pursuing the alleged outstanding debt. There are two answers to this. First, the builder's signature on the final certificate does not confirm that no moneys are owed. All that it acknowledges is that all moneys that had been certified by the superintendent had been settled in full between the parties. Mr Chalmers gave evidence that, prior to the signing of the second deed of variation, there had been disputes between the builder and the developer regarding, inter alia, the certification by the superintendent of variations as well as the claims for delay brought by the developer. Mr Chalmers said that the builder was confident that, upon challenge, the superintendent would approve the full amount of variations sought. In any event, under the terms of the second deed of variation, both the builder and the developer acknowledged and agreed that certain moneys were owed.

27 The second problem with the estoppel claim is that there is no plea, much less any evidence of any detriment on the part of the developer consequent upon that alleged representation. The provision of the final certificate, amongst other things, resulted in the developer releasing a bank guarantee which had been provided by the builder to the developer for the sum of $837,878. This no doubt was of benefit to the builder and arguably could amount to detriment on the part of the developer, had such detriment been properly alleged and had evidence been given to that effect. However, even in that case, detriment could only arise if there had been some entitlement on the part of the developer to retain the bank guarantee and proceeds of the bank guarantee or the bank guarantee itself with security for some pending claim, and there is no evidence of this.

28 Accordingly, none of the three defences provide a valid answer to the claim. The only aspect of the builder's claim which I do not accept is that which relates to the variations of $5,022.60 after the date of the second deed of variation, which the builder seeks to add to the sum claimed. There was no substantive evidence given Mr Chalmers as to the circumstances which gave rise to these variations, nor any evidence as to whether they were approved or whether they were agreed. Nor were such matters put to the developer's director, Mr Oman, in cross-examination.

29 Accordingly, I would reduce the amount sought by the builder by $5,022.60.

30 This reduces the plaintiff's claim from $2,449,195.93 to $2,444,173.33.

31 There will be judgment for the plaintiff against the defendant for the amount of $2,444,173.33. I will hear from the parties as to interest and costs.

[1] Mount Bruce Mining Pty Ltd v Wright Prospecting Pty Ltd [2015] HCA 37; (2015) 256 CLR 104, 116.