RCM Construction v S & Y Painting and Decoration

TEXTS CITED: Carter on Contract (2002, v2) Butterworths

PARTIES: RCM Construction Pty Ltd (Plaintiff) S & Y Painting and Decoration Pty Ltd (Defendant)

Mr D MacFarlane (for the plaintiff) COUNSEL: Ms M Fraser (for the defendant) Mr N Ghabar (for the defendant

SOLICITORS: Mr K Tang (for the plaintiff) Mr J Pappas (for the defendant)

RCM Constructions Pty Ltd v S & Y Painting and Decoration Pty Ltd File no: 1572/07 Hearing Dates: 20/10/08 - 3/11/08

D: Ms M Fraser and Mr N Ghabar of counsel with J Pappas.

On 9 June 2005, S & Y Painting and Decoration Pty Ltd (S & Y, Mr Musallam) quoted the sum of $450,000 plus GST to perform painting work for RCM Constructions Pty Ltd (RCM, directed by the Touma brothers) on a new residential/commercial development at Westmead. On 29 June 2005, the parties signed a contract. From about August 2005, work proceeded. RCM paid S & Y's first three progress claims but RCM did not pay the claims made on 22 November and thereafter alleging that S & Y was over invoicing. S & Y says that RCM increased the scope of works to include additional preparation (rectifying the defective work of other contractors) and work on walkways. RCM issued S & Y with a construction programme. On 17 January 2006, S & Y left the site, refusing to continue until outstanding invoices were paid. On 23 January 2006, RCM terminated the contract. RCM engaged contractors to complete the work.

(1) Whether the written contract of 29 June 2005 and the plans comprised the whole contract. (2) The scope of works under the contract. (3) Whether the scope of works was varied. (4) The progress of work as at 17 January 2006. (5) Whether S & Y repudiated the contract by refusing to work until invoices were paid, entitling RCM to terminate the contract. Whether RCM repudiated the contract and S & Y lawfully terminated it. (6) Whether S & Y breached the contract by failing to complete works in a workmanlike manner, failing to exercise due skill, care and diligence, failing to complete works within the time specified, or failing to provide a subcontractor statement and insurance certificates and/or was negligent in the performance of work. (7) Damages and S & Y's quantum meruit claim.

S & Y argued that, under clause 3 of the written agreement dated 29 June 2005, no invoice would be paid until RCM had approved it first as inspector of the work, second as the developer and finally as the builder. At each of the three stages, approval was within RCM's unfettered discretion. Consequently, the consideration was illusory and the contract fails: Placer Developments Limited v Commonwealth of Australia (1969) 121 CLR 353; Biotechnology Australia Pty Ltd v Pace (1988) 15 NSWLR 130.

The contention was first raised in closing submissions under protest by RCM, but I will deal with it.

Particularly in the case of commercial arrangements, a narrow or pedantic approach is unwarranted and the court will strive to avoid uncertainty by construing a contract so as to give effect to the contractual intention of the parties: Upper Hunter County District Council v Australian Chilling and Freezing Co Ltd (1968) 118 CLR 429. Often, an apparently unfettered discretion may be read as inferring a promise to act honestly and/or reasonably: Carter on Contract (2002), [04-060]; Meehan v Jones (1982) 149 CLR 571; Biotechnology Australia at 136 and 155. In this case, it must have been the parties contractual intention that RCM would unreasonably withhold approval neither as inspector, developer nor builder. Such a construction accords with business efficacy.

S & Y faintly contended that the quotation comprised the whole of the contract. I find that the quotation was only ever intended to be a quotation. It was 'valid for 30 days only' and it was 'subject to confirmation'. There are many important differences between the quotation and the later contract, including differences as to the time within which invoices would be paid and as to the basis upon which variations would be paid.

Alternatively, S & Y contended that the quotation formed part of the contract. This was mentioned for the first time during cross-examination, when Mr Musallam indicated that the quotation was physically attached to the contract when he signed the contract. He then said that, when he signed the contract, Mr Norman Touma held up the quotation and said that it would be attached to the contract. Neither Mr Norman Touma nor Mr Sam Kassis, a friend of Mr Musallam who was present when the contract was signed, corroborate Mr Musallam on this point, and I do not accept Mr Musallam's evidence about the matter. Further, the significant differences between the quotation and the later contract are such that the two cannot stand together.

Another matter that S & Y argued contrary to concessions made in the pleadings was that S & Y should not be bound by the contract because Mr Musallam did not receive or consider the contract before 29 June, and on that day he did not read or understand it before he signed it. He signed it under pressure because he was about to catch a plane overseas.

Inter alia for the reasons set out above, Mr Musallam was not a reliable witness. I prefer the evidence of Messrs Norman and Charlie Touma that Mr Musallam received a copy of the contract several days before 29 June. Consistent with their evidence, the document that was signed on 29 June had been printed out on 23 June. However, even if Mr Musallam's version of events was accepted for the sake of argument, he was a very experienced painter who, after attending the site and viewing plans, elected to sign an obviously significant commercial document in the face of a warning by his friend, Mr Kassis, knowing that the document would affect legal relations. Before doing so, he noted and queried the liquidated damages clause. To the extent that Mr Musallam signed the document without reading it, he chose to do so and is bound by the terms of the document: Toll (FGCT) Pty Ltd v Alphapharm Pty Ltd [2004] HCA 52; (2004) 1 BFRA 280.

In the pleadings, S & Y admitted that the plans formed part of a contract entered on 29 June 2005. The contract comprised the written contract signed on 29 June 2005 and the plans, as referred to on pages 6 and 7 of the contract.

The construction of a contract is to be determined by what a reasonable person in the position of the parties would have understood it to mean. That requires consideration of the text of the document, the surrounding circumstances known to the parties', and the purpose and object of the transaction: Pacific Carriers Ltd v BNP Paribas (2004) 218 CLR 451. Evidence of surrounding circumstances may elucidate the parties true objective intention even where the contract is not overtly ambiguous: Lion Nathan Australia Pty Ltd v Coopers Brewery Ltd (2006) 156 FCR 1.

S & Y submitted that, under the contract, the scope of works did not extend to: (1) treating the soffits (ceilings) of long walkways or coating the walkway walls with Granosite (not paint); (2) treating the balcony/walkway hobs; (3) treating six full height columns; or (4) extra preparation attributable to defective work by HD Projects (which installed Architectural Framing Systems -AFS- fibro cement walls) or Paraform (which poured concrete into the AFS walls);

Residential units in the development have private balconies. There are also long walkways or balconies providing common access. For the sake of clarity, in evidence these areas were distinguished by using the terms 'private balconies' or 'walkways'.

The contract states that all works are to be executed 'as per the plans'. It requires a Granosite finish on the 'concrete balcony' and 'soffit balcony'. Otherwise, relevantly, it distinguishes between internal work and external work. Internal walls are to be painted with an undercoat and two topcoats. External walls and 'soffit balcony' are to be coated with Granosite, a treatment that is significantly more expensive than painting. The contract does not use the terms 'walkway', 'private balcony' or 'common balcony'.

S & Y contended that walkway soffits were not included in the contract, although private balcony soffits were included. S & Y contended that walkway walls were to be treated as internal walls required painting only, although private balcony walls were to be treated as external walls. In evidence, Mr Musallam asserted that Mr Norman Touma said to leave the walkway soffits out of the quotation. Mr Musallam considered that the walkway walls were internal. In support of the assertion that the contract required no treatment of walkway soffits and that walkway walls were to be treated as internal walls requiring painting only, S & Y relied upon the surrounding circumstance that, according to Mr Musallam and his friend Mr Darwich (who was responsible for introducing Mr Musallam to RCM) on a pre-contractual site inspection, Mr Norman Touma said that the total external area requiring Granosite was about 5000 square metres. If one excluded walkway walls and soffits, the total external area requiring Granosite was, in fact, about 5000 square metres.

I do not accept that Mr Norman Touma made the alleged statement. As stated above, Mr Musallam was an unreliable witness. The alleged statement by Mr Touma does not appear in Mr Musallam's affidavit. Mr Darwich is a friend of Mr Musallam. His affidavit was sworn in July 2008. I do not accept his assertion that he is 'certain' about a statement made in mid 2005. Mr Norman Touma was not involved in building practicalities and I accept his evidence that he had no idea of the square metre area requiring Granosite.

Mr Musallam conceded that the walkways were characterised by the same type of upturns (protective barriers) and edges as were the private balconies. The walkways looked like balconies and were exposed to the elements in the same way as balconies. There was no logical reason to apply a different treatment to the walkways. I conclude that the walkways were balconies within the meaning of the contract. Where the contract refers to balconies, it should be construed as referring to both public and private balconies.

Hobs are constructed where it is necessary to minimise water entry. In this development, the balconies/walkways have hobs. The hobs are contiguous with other parts of the balconies. It must have been the case that, where a balcony was to be treated, its hobs were to be treated in the same way.

The plans are part of the contract. The seven-page contract signed on 29 June may not use the word 'column' but it does refer to external work. The columns are external to the main part of Block B and the plans indicate the particular finish to be applied to the columns (for example, at pages 46 and 50 of Mr Musallam's affidavit).

Although I do not consider that the contract is ambiguous, I accept RCM's submission that, insofar as the contract picks up and repeats the words 'internal', 'external' and 'soffit balcony' from the quotation and those words are ambiguous, the contract should be construed contra proferentum, ie against S & Y: Thomas National Transport (Melbourne) Pty Ltd v May & Baker (Australia) Pty Ltd (1966) 115 CLR 353, 376.

I find that S & Y probably did undertake preparation work beyond that reasonably contemplated by the contract. Mr Ghannam, one of the few witnesses whose honesty was above reproach, said that preparation was usually 5% of a job (not 2% as stated by Mr Musallam), but in this case there was an extraordinary amount of grinding and patching to walls and soffits. HD and Paraform (the concreters) did some remediation, but it was inadequate. When Mr Ghannam complained to Mr Musallam, Mr Musallam would reply "Continue, please". Other witnesses agreed that Mr Musallam repeatedly complained to RCM about the standard of remediation. Common sense suggests that, having completed a job, contractors may do a minimum by way of remediation. Mr Musallam's DVD shows many problematic areas. However, as the DVD was recorded between September and November 2005, it is possible that some of the recorded defects were later remedied by Paraform or HD. The extent to which S & Y's preparation work went beyond that reasonably contemplated by the contract is not clear. Because Mr Musallam was not a reliable witness, I have no confidence in his assertion that S & Y spent 30 to 40% of its time on preparation work. Mr Awad, another witness whom I found to be truthful, said that most faults were remediated by HD 'give and take'.

Was the Contract Varied To Include The Extra Preparation Work?

It is not enough for S & Y to prove that the preparation work went beyond that reasonably contemplated by the contract. S & Y must also prove that RCM agreed to pay for the extra preparation work: Trimis v Mina [1999] NSWCA 140, [64].

There was no written variation of the contract.

I do not accept Mr Musallam's evidence that RCM orally varied the contract. First, as indicated elsewhere in these reasons, Mr Musallam was not a reliable witness. Second, the evidence does not sit comfortably with the undisputed evidence, including documentary evidence. Third, it is improbable that a developer would orally vary a written contract in relation to a substantial development.

When S & Y complained that surfaces were not adequately finished for paint or Granosite, RCM approached HD and Paraform to undertake or pay for remediation. On 17 October 2005, Mr Musallam wrote to RCM complaining that walls and ceilings required rectification before he could proceed. The letter is consistent with the practice that S & Y would complain to RCM and RCM would pursue the relevant contractor to rectify the problem, rather than asking S & Y to undertake remediation.

Clause 5 of the contract states that, S & Y 'shall not be entitled to claim payment for any variation not authorised in writing'. No variation was authorised in writing.

Mr Musallam said that, in October 2005, he had an argument with Mr Charlie Touma in which Mr Touma asserted that he should be putting Granosite on the walkway walls and soffits and Mr Musallam asserted that the walkway walls were internal work and the walkway soffits were not included in the contract. According to Mr Musallam, he subsequently sent the letter dated 18 October 2005 which is annexure Q to his affidavit. I accept that Mr Touma did not receive the letter. RCM did not reply to the letter. On other occasions when RCM received correspondence with which it disagreed, it replied immediately. The letter of 18 October itemises the extra work as being the walkway soffits, the fire stairs and the long columns. There is no reference to extra preparation work. Further, the letter concludes: 'Your written approval of the above is required prior to commencement of the above-mentioned work'.

If the letter was created on 18 October 2005, it shows that, at that stage, Mr Musallam was not minded to claim extra preparation work as a variation and that he understood the need for written approval of variations.

Mr Musallam said that, when S & Y left the site on 17 January 2006, in Block B, Granosite had been applied to all external walls, the internal ceilings in Block B were painted and Grano roll on had been applied to the walkway soffits on levels 1 and 2 of Block A. Invoices were issued on that basis (T361.50).

DH2, a set of photographs taken by Mr Hughes, shows that the Granosite application on Block B was far from complete where the photographs were taken. DH2 photographs 4, 5, 170, 292 to 294 and 310 show substantial areas of Block B where Granosite application had not commenced. They accord with parts of Mr Touma's DVD. The DVD also shows balcony walls, upturns and edges, external staircase walls, window reveals and hobs that do not have Granosite. Mr Hughes said that the photographs were taken on 18 January 2006,

S & Y argued that Mr Hughes must be mistaken about the date on which the photographs were taken.

I find that Mr Hughes was not mistaken. He was adamant that his photograph filing system was foolproof (T268). He took contemporaneous notes (Annexure C to his affidavit), with which he was able to compare the photographs (T268 - 269). The contents of DH2 are consistent with a DVD taken by Mr Ray Touma on 21 and 23 January 2006. DH2 is also consistent with contemporaneous correspondence between RCM and S & Y. I prefer the documentary evidence (photographs, DVD, contemporaneous notes and correspondence) to the recollection of witnesses. Mr Ghannam and other witnesses may have concluded that the application of Granosite on Block B was complete because they recall having moved from Block B to work on Block A. However, the move from Block B to Block A may be explained by a rainy period from 13 January (when S & Y resumed work after the Christmas break - page 38 of Mr Charlie Touma's affidavit), which prevented the finalisation of external work on Block B.

The construction programme formulated on 9 January (page 30 of Mr Charlie Touma's affidavit) provides 'Completion of all Granosite to wall, columns and staircases finishing date February 4th', indicating that, as at 9 January, it would take four weeks to complete the Granosite application on Block B. RCM's letters of 11, 13 and 16 January 2006 (pages 34, 37 and 39 of Mr Charlie Touma's affidavit) confirms that position. In his letter of 11 January (page 35 of Mr Charlie Touma's affidavit), Mr Musallam did not dispute the programme. He said that he would 'do his best' if he received payment.

On 18 January 2006, Mr Hughes noted that internal ceilings on Block B were undercoated (Annexure C). His contemporaneous notes do not refer to top coating.

Mr Hughes gave evidence that, as at 18 January 2006, only a small portion of Grano roll on had been applied to the level 1 and 2 walkway soffits of Block A (Annexure C, DH2, photographs 22, 60 and 79).

I find that, as at 18 January 2006, the state of the works was as depicted in Mr Hughes' evidence and Mr Ray Touma's DVD.

Clause 9 (i) of the contract provides that if S & Y 'wholly suspends the work before completion' then RCM 'may by notice in writing determine to recover from the subcontractor damages for any breach'. Clause 9(ii)-(iv) refer to other serious breaches which afford to RCM the same entitlement.

The common intention of the parties as expressed in the language of their contract and understood in the relationship established by the contract and its commercial purpose determines whether a term is essential to a contract so that any breach will justify termination: Koompahtoo Local Aboriginal Land Council v Sanpine Pty Ltd (2007) 24 ALR 88, [48].

Part 3 of the Building and Construction Industry Security of Payment Act 1999 provides a legislative scheme for the settlement of disputes over progress payments, but S & Y did not activate that process. Between 17 and 23 January 2006, RCM repeatedly requested that S & Y return to the site and S & Y asserted that it would not return until invoices were paid. In the context of the commercial relationship between the parties (which had, as its main purpose, the undertaking of painting work and in relation to which there was a statutory procedure for resolving disputed progress claims), the clause 9 restriction on suspending works was an essential contractual term. S & Y's indefinite suspension of works entitled RCM to determine the contract and recover damages.

Alternatively, by over-invoicing (Mr Musallam invoiced for work that, as I have found, had not been done) and then refusing to resume work until three invoices were paid, S & Y evinced an intention to no longer be bound by the contract and thereby repudiated it: Adelaide Brighton v Ostabridge [2005] NSWSC 737, [129] - [130].

S & Y claimed for unpaid extra work on a quantum meruit basis.

A quantum meruit claim is a claim for restitution based on the execution of work (a benefit) which is accepted by the defendant: Pavey & Matthews Pty Ltd v Paul (1987) 162 CLR 221.

I have found that, although S & Y's preparation work went beyond that contemplated by the contract, RCM did not agree to accept the work. It preferred to oblige other subcontractors to remediate their defective work.

44. There will be a verdict for RCM on the claim and cross claim.

45. RCM is entitled to damages for loss of the bargain, ie the cost of completing the work that S & Y contracted to perform less the sum payable to S & Y. The cost of completion by J & M Decorative Coatings Pty Ltd (painting) and The Renderers Pty Ltd (Granosite application) was not disputed (paras 71 and 73, Annexures X, Y and Z to Mr Charlie Touma's affidavit). The work undertaken by J & M included minor additional work in relation to commercial units that was not included in S & Y's contract. Paid to S & Y under the contract (incl GST) $62,700 Paid to J & M ($220,116 less $16,500 re commercial units $201,966 in Block A, less GST $1,650) Paid to The Renderers ($260000 plus GST) $286,000 Total: $550,666 Less payable to S & Y under contract (incl GST) -$450,000 Total: $100,666 Plus interest calculated as agreed by parties: $17,616 10% over 1 year 9 months (from February 2006) Total: $118,282

46. RCM abandoned a claim for $12,500 for the cost of hiring extra scaffolding.

47. Verdict for RCM on the claim and cross-claim and judgment for RCM in the sum of $118,282.

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