Supreme Court

New South Wales

Case Title: Creative Building Services v Jolene Investments

Medium Neutral Citation: [2013] NSWSC 391

Hearing Date(s): 17/04/2013

Decision Date: 17 April 2013

Jurisdiction: Equity Division - Technology and Construction List

Before: McDougall J

Decision: Adopt referee's report. Judgment for plaintiff accordingly with cots.

Catchwords: BUILDING AND CONSTRUCTION – construction contracts - whether compliance with a contractual mechanism for claiming progress payments formed a condition precedent for payment of the entire contract sum

Legislation Cited: Building and Construction Industry Security of Payment Act 1999 (NSW) Civil Procedure Act 2005 (NSW) Home Building Act 1989 (NSW) Uniform Civil Procedure Rules

Category: Procedural and other rulings

Parties: Creative Building Services Pty Ltd (Plaintiff)

Jolene Investments Pty Ltd (Defendant)

Representation

- Counsel: Counsel:

M Orlov (Plaintiff)

DJ Hand (Defendant)

- Solicitors: Solicitors:

Meyer Vanderberg Lawyers (Plaintiff)

HWL Ebsworth (Defendant)

File Number(s): 2011/7717

JUDGMENT (EX TEMPORE - REVISED 17 APRIL 2013)

1 HIS HONOUR: On 1 November 2006, the plaintiff (the builder) and the defendant (the proprietor) entered into a "cost plus" building contract. Under the contract, the builder was to construct a residence at Murrumbateman in the state of New South Wales, to be occupied by the principals of the proprietor.

The disputes

2 Work under the contract was completed in about October 2008. By then, the parties had fallen into dispute. The proprietor had made periodic payments totalling in excess of $1,073,000. The builder asserted that the total cost of the works was of the order of $1,657,530. The builder sued to recover the balance, quantified at $583,870. The proprietor cross-claimed for the cost of defect rectification. The asserted cost of rectification of defects was $393,422.

3 In addition, the proprietor asserted that the builder had no contractual entitlement to be paid. An understanding of that defence requires some attention to be paid to the conditions of the contract, to which I now turn.

Relevant provisions of the contract

4 Schedule 2 of the contract set out the way in which the cost of the building works was to be assessed. Schedule 3 provided for a builder's fee of 18 per cent on the cost of building works. Schedule 4 described the progress stages as being, "Monthly basis based on costs plus margin".

5 Schedule 5 said that, "Warranty insurance" was "N/A". As will be apparent, that was a mistake.

6 Clause 3.1 of the contract required the proprietor to pay the price of the building works, and other money payable under the contract, "in the manner and at the times stated in this contract".

7 Clause 13 dealt with the question of "progress payments". It provided as follows:

13.1 The builder cannot demand or receive any payment under this contract until warranty insurance described in Schedule 5 is in force and the owner is provided with a certificate of insurance for such insurance.

13.2 The owner must pay the price of the building works progressively as claimed by the builder .

13.3 The builder must give the owner a written claim for a progress payment at each progress state described in Schedule 4.

13.4 A progress claim is to include details of the cost of the building works for the building works carried out, the proportion of the builder's fee claimed and of other moneys then due to the builder pursuant to the provision of the contract .

13.5 A progress claim is to be accompanied by such invoices, receipts or other documents as may reasonably be expected to support the claim and evidence the cost of the building works being claimed.

13.6 The owner must pay a progress claim within 5 working days of the builder giving the claim.

13.7 Unless the owner disputes the amount of a progress claim by giving the builder a written notice detailing the dispute within 5 working days of receiving a progress claim, the progress claim is accepted by the owner as the cost of materials, labour and other items provided by the builder which are the subject of the claim. This clause does not limit the owner's right to claim that the building works done by the builder are not in accordance with this contract.

8 Clause 13.1 reflected the operation of s 92 of the Home Building Act 1989 (NSW) as it stood at the relevant time. I set out s 92 (in the form that it then had) and, because it was raised in the proceedings, s 94(1A):

92 Contract work must be insured

(1) A person must not do residential building work under a contract unless:

(a) a contract of insurance that complies with this Act is in force in relation to that work in the name of the person who contracted to do the work, and

(b) a certificate of insurance evidencing the contract of insurance, in a form prescribed by the regulations, has been provided to the other party (or one of the other parties) to the contract.

(2) A person must not demand or receive a payment under a contract for residential building work (whether as a deposit or other payment and whether or not work under the contract has commenced) from any other party to the contract unless:

(a) a contract of insurance that complies with this Act is in force in relation to that work in the name of the person who contracted to do the work, and

(b) a certificate of insurance evidencing the contract of insurance, in a form prescribed by the regulations, has been provided to the other party (or one of the other parties) to the contract.

(3) This section does not apply if the contract price does not exceed the amount prescribed by the regulations for the purposes of this section or (if the contract price is not known) the reasonable market cost of the labour and materials involved does not exceed that amount.

(4) If the same parties enter into two or more contracts to carry out work in stages, the contract price for the purposes of subsection (3) is taken to be the sum of the contract prices under each of the contracts.

(5) (Repealed)

(6) To avoid doubt, this section extends to residential building work

that is also owner-builder work.

...

94 Effect of failure to insure residential building work

...

(1A) Despite section 92 (2) and subsection (1), if a court or tribunal considers it just and equitable, the contractor, despite the absence of the required contract of insurance, is entitled to recover money in respect of that work on a quantum meruit basis.

...

9 The builder had not obtained warranty insurance. That was due to some mistake on its part. It did however obtain warranty insurance after completion of the works, on 23 April 2009. A copy of the certificate of insurance was not given to the proprietor until about 10 March 2010.

Reasons for non-payment

10 The proprietor said, in defence of the builder's claim to be entitled to pay any amount at all, that:

(1) there was no insurance in place at the time the works were done, and thus s 92 of the Home Building Act and cl 13.1 of the contract disentitled the builder to be paid;

(2) likewise, because no certificate of insurance had been provided to the proprietor at the time the building works were done, the proprietor was not entitled to be paid because of the operation of s 92 and cl 13.1; and

(3) the progress claims, or as the proprietor had it, purported progress claims, that were from time to time given were not effective because they were not supported by documents of the kind referred to in cl 13.5.

11 It does not appear that the deficiency in documentation prevented the proprietor from paying in excess of $1 million for work done, but that, I suppose, is not strictly speaking relevant to the question of contractual entitlement.

Reference out

12 All issues in dispute in the proceedings, save for the question of costs, were referred to a referee, Mr David Plaister, pursuant to UCPR r 20.14.

Mr Plaister provided a report to the Court dated 20 December 2012. In that report, he concluded that:

(1) the builder was entitled, subject to the question of defective work, to be paid the amount of its claim - the figure of about $583,870 to which I have referred;

(2) the builder was entitled to interest, assessed (up to the date of the report) at $137,297 (the assessment was made at the rate from time to time applicable pursuant to s 100 of the Civil Procedure Act 2005 (NSW), and not at the higher rate provided under the contract);

(3) there was to be set off, against the total due to the builder, the cost of rectification of defective building work, assessed at $61,690.

13 It is apparent that the referee structured his conclusions in this way because he assessed the cost of rectification at the date of the report and not at the date of breach. The parties do not challenge that approach to the problem.

The parties' submissions

14 Initially, the builder sought to vary the referee's report by extending the period for which interest was payable. That was abandoned at the outset of the hearing in relation to the adoption of the report, for which the builder pressed.

15 The proprietor claimed that the report should not be adopted, in so far as it found that an amount was due to the builder, because the contractual conditions of entitlement had not been met. In addition, the proprietor challenged the referee's quantification of a particular aspect of defect rectification. That latter challenge was abandoned at the hearing.

16 Thus, the issue for decision is whether, as the referee concluded, the builder is entitled to be paid, notwithstanding the provisions of cl 13.1 of the contract.

17 It should be noted that, in its reply, the builder said, in the alternative, that it was entitled to be paid the amount of its claim on a quantum meruit basis. Mr Orlov of counsel, who appeared for the builder, acknowledged that this would only be relevant if, for whatever reason, its claim under the contract failed.

18 Mr Hand of counsel, for the proprietor, submitted that at no stage during the execution of the works had the builder complied with the requirements of cl 13 of the contract. That submission was based on the three propositions that I have outlined earlier in these reasons.

19 Further, Mr Hand submitted, the builder could have no claim to payment under the contract until, having obtained and provided the certificate of insurance, it provided progress claims documented in the way required by cll 13.4 and 13.5 of the contract.

20 Mr Hand submitted, correctly I think, that the purpose of those provisions of the contract was to give the owner an opportunity of assessing the quantification of any progress claim, and of raising any question as to the amount claimed.

21 Mr Orlov submitted that, by the time these proceedings had commenced, the builder had done all that was necessary to entitle it to payment under the contract. He referred to the following matters of fact:

(1) on 5 March 2010, the builder's solicitors submitted to the proprietor's then solicitors a letter which enclosed, "for your information, copies of our client's progress payment invoices bundled with supporting project cost reports and invoices". The letter said that the builder would rely on that bundle at the hearing of proceedings in the Supreme Court of the Australian Capital Territory, scheduled for 16 and 17 March 2010. It is unnecessary to go to the detail of the issues in those proceedings.

(2) A letter written by the builder's solicitors to the proprietor's solicitors on 10 March 2010, enclosing a copy of the certificate of insurance.

(3) A further letter between the same parties dated 27 July 2010, noting that the builder would commence proceedings in this Court to recover the amount claimed (then assessed at a little over $592,000) together with interest, said to amount to $213,000 at the date of the claim. Although this letter was said to be, "without prejudice save as to costs", it was relied on, so far as I can tell without objection, both before the referee and before me in relation to the builder's claim.

22 Mr Orlov submitted that, through those documents, the builder had provided all that was required, and, having done the work (as the referee had determined, and as is now not in dispute) was entitled to be paid the (now undisputed) balance.

Decision

23 The starting point is the obligation of the proprietor to pay the price of the building works in accordance with cl 3.1. That obligation is to pay the price in the way, and at the times, stated in cl 13, read in conjunction with sch 4.

24 The subject of cl 13 is, in terms, progress payments. What it establishes is a regime for payment of the amount due under the contract, for the building works, by instalments. It is, in substance, a regime for liquidation of the balance of the price from time to time, by instalments.

25 Unless it can be said that cl 13 provides a condition precedent to any entitlement to be paid the entire price, the proprietor's defence is not sustainable. That analysis seems to me to focus attention on the role that cl 13 pays in the scheme of the contract as a whole.

26 It is not cl 13 that imposes the obligation to pay, and gives the entitlement to be paid. That function is served by cl 3.1. What cl 13 does is provide an entitlement to, and a mechanism or instalment pattern for, progress payments.

27 Progress payments seem to me to have benefits for both parties to a building contract. From the builder's perspective, they serve the vital function of providing cash flow (the importance of which is recognised, although not in a manner relevant to the issues in these proceedings, by the Building and Construction Industry Security of Payment Act 1999 (NSW).

28 From the proprietor's perspective, provisions such as cl 13 provide an opportunity to pay the cost of the works by instalments, accompanied by an opportunity to assess the amount of each instalment as it is claimed.

29 But to go further, and to say that a mechanism as to how payments are to be claimed and made has the further function of conditioning, precedentially, the entitlement to payment of the price as a whole seems to me to be putting far too high a burden on cl 13, either read on its own or in the context of the contract as a whole.

30 It may be accepted that a failure to comply with the requirements of cl 13 would provide a proprietor with a defence to a claim for a particular progress payment. Thus, if the builder had taken the opportunity to sue for one or more of the unpaid progress claims that it rendered, the proprietor could have raised, by way of defence, failure to comply with (for example) cll 13.1 and 13.5. If, factually, those defences were made good, then the entitlement to the progress claim would be defeated.

31 But it does not seem to me that this analysis applies when the claim is brought for the balance of the price, in circumstances where the works have been completed and where the unpaid cost of the works and the cost of rectification of defects have both been assessed. If it were otherwise, it would be necessary for the builder to resubmit (as already it has done) all the invoices, together with all their supporting documentation, and the insurance certificate. In circumstances where that would do no more than give an opportunity, which is now meaningless, to analyse the amount of the claim, it does not seem to me that the Court should construe clause 13, so as to impose that as an obligation to be satisfied before the now defined balance due is paid, unless the language is intractable. And for the reasons I have given, I do not think that it is.

32 Thus, as a matter of construction of the contract, I do not think that the defence is made good.

33 There are two other answers to this aspect of the defence. The first is that, functionally, the requirements of cl 13 have been satisfied. That has been achieved through the correspondence to which I have referred earlier in these reasons. Thus, if (contrary to my view) it were necessary for the documents to be supplied before there were any entitlement to be paid, those documents have been supplied.

34 The alternative approach is that, the builder having done all the work and the cost thereof and the offset in cost of defects rectification having been agreed, the builder has a claim on a quantum meruit basis. But since, as I have said, I think that the contractual claim is made good, it is not necessary to go any further.

Conclusions and orders

35 The result of all this is that the report of the referee should be adopted and that (the figures not being in dispute) the builder should have judgment in the amount claimed by its amended notice of motion.

36 Accordingly, I make orders in terms of Prayers 1 and 2 of the amended notice of motion filed in court for the plaintiff today.

[Counsel addressed.]

Costs

37 The builder seeks its costs of the proceedings. It relies on the letter of 27 July 2010 to which I have referred. I should point out at this stage that I erred in suggesting that the letter was admitted without objection before the referee. Mr Hand has informed me that he did object to the tender of the letter, but that the referee admitted it. Since it was not submitted that I should decline to adopt the report on the basis that the referee erred (if he did, and I express no view) in admitting the letter, that correction can be left to sit where it is.

38 Mr Hand accepts that the builder should have some order for its costs. However, he submitted that the proprietor had enjoyed some success on its cross-claim for the cost of remedying defective workmanship.

39 As I have noted, the proprietor assessed the cost of rectification of alleged defective work at $393,422. After an exhaustive process which included conclaves between two sets of experts (relating to building, and relating to costing) and inspection by the referee, the referee assessed the amount to be allowed for defective work at $61,690, or less than one-sixth of the amount claimed.

40 It is apparent that the ambit of the claimed defects was very much wider than the amount that the referee was prepared to allow. That is so both in terms of the actual work said to have been performed defectively and in terms of the amount claimed.

41 To make any allowance other than trivial in respect of the cross-claim would have the effect of giving the proprietor a costs benefit in circumstances where, on the referee's report, the builder was required to meet a claim, in respect of defective work, that was far wider than was justified. That does not seem to me to be appropriate.

42 Further, it is to be noted that the claim for defective work was raised not only by way of cross-claim but also by way of defence to the builder's claim. That was done of course because the proprietor asserted that, for reasons that I have dealt with already and rejected, there was no amount due to the builder.

43. In the result, the cross-claim has had effect as a defence. The effect of the defence has been to reduce, to the amount found by the referee, the amount of the judgment to which the builder is entitled.

44 In those circumstances, it seems to me that the appropriate guide to costs is that contained in r 42.1. The builder has substantially succeeded on its claim. The proprietor has failed on its cross-claim because it is not obtaining a judgment for any amount. The defence based on defective workmanship has been taken into account in arriving at the amount for which the builder is entitled to succeed.

45 Thus, the relevant event is that the builder has succeeded. To the extent that it did not succeed (because its claim was reduced in the manner I have described), its relative failure does not seem to me to warrant any departure from the position suggested by r 42.1. To do that would be to engage in what I perceive as an inappropriate approach to assessing costs, in a case of this nature: namely to engage in dissection and analysis of particular issues, and to assess the relative success and failure on those issues.

46 In a case for recovery of the cost of building work, accompanied (as is usual) by a defence claiming an offset for the cost of repairing defective work, it seems to me that the overall outcome is that which should guide the court, unless that overall outcome is so disproportionate to the claim that some other course is justified. That cannot be said to be the position in this case.

47 Accordingly, I order the defendant to pay the plaintiff's costs of the proceedings.

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