The High Court has allowed an appeal from a judgment of the Court of Appeal of the Supreme Court of Victoria concerning the amount of remuneration a Builder is entitled to for work and labour done under a contract to which the Domestic Building Contracts Act 1995 (Vic) (“the Act”) applied.
Even though the case was decided based on the specific language of the Victorian Act, the reasoning has consequences for owners and Builders in New South Wales and elsewhere.
- The Owners entered into a Building Contract with the Builder for the construction of two townhouses at a fixed price of $971,000.00.
- The contract provided for progress payments to be made at the completion of certain stages of the work.
- During the course of the work, the Owners orally requested 42 variations without giving any written notice in accordance with the contract and as was required by Section 38 of the Act (s.38).
- The Builder carried out the requested variations, also without giving written notice as required by s.38.
s.38 relevantly provides that a builder is not entitled to recover any money in respect of a variation unless the builder has complied with certain notice requirements or the Victorian Civil and Administrative Tribunal (“the Tribunal“) is satisfied that:
a) there are exceptional circumstances or that the builder would suffer significant or exceptional hardship; and
b) that it would not be unfair to the building owner for the builder to recover the money (s.38(6)(b)).
- After an invoice claiming an amount for variations was issued by the Builder, the Owners repudiated the contract.
- The Builder accepted the repudiation and terminated the Contract.
The Builder then brought a claim in the Tribunal seeking damages for breach of contract or, in the alternative, restitution for work and labour done and materials supplied.
The value of the work and labour claimed was $944,898 (being an amount of $1,898,673.00, which had been determined by an expert engaged by the Builder to be the total value of work and labour done under the contract, less payments that had already been made by the Owners).
The Tribunal held that s.38 of the Act did not apply to restrict the circumstances in which a claim for restitution could be made, and made an order requiring the Owners to pay the Builder the sum of $660,526.41, calculated as follows:
|Value of the work assessed without defects||$1,722,611.00|
|LESS rectification of defects as above||$116,297.59|
|Value of the benefit conferred upon the Owners||$1,606,313.41|
|LESS net amount paid||$945,787.00|
|Amount due to the Builder||$660,526.41|
That amount found to be payable to the Builder was considerably more than the Builder would have received had the contract been performed, or might have recovered if the claim been confined to one for breach of contract.
An appeal by the Owners to the Supreme Court of Victoria was dismissed (but for a modification to the amount payable in order to correct a mathematical error), and a further appeal to the Court of Appeal of the Supreme Court of Victoria was also dismissed.
The Owners ultimately appealed to the High Court, which allowed the appeal and set aside the orders made by the Court of Appeal.
The High Court unanimously determined that s.38 excluded the availability of restitutionary relief for variations implemented otherwise than in accordance with that section.
The consequence of that was that, having not complied with the terms of the Act requiring the details of variations to be put in writing, the Builder’s only right of recovery for variations would be if VCAT was satisfied, for the purposes of s.38(6)(b) of the Act, that there were exceptional circumstances or that the builder would suffer a significant or exceptional hardship and that it would not be unfair to the owner for the builder to recover money.
As to the portion of the Builder’s claim that was not for variations, the High Court unanimously held that:
- The Builder’s only right to recovery in respect of any stage of the contract completed by the time of termination was for the amount of the applicable progress claim due under the contract on completion of that stage, and to damages for breach of contract; and
- In respect of any uncompleted stage of the contract, the Builder was entitled to claim damages for breach of contract.
A majority of the Court went on to also hold that:
- The Builder was entitled, in the alternative, to recover restitution for work and labour done and materials supplied in respect of uncompleted stages of the work under the Contract (other than for variations); but
- There was no reason for the Builder to achieve a better result by way of restitution than it stood to achieve under the contract, and that the amount recoverable should not exceed a fair value calculated in accordance with the contract price or the appropriate part of the contract price.
The proceedings were remitted to VCAT so that a determination can be made, in light of the High Court’s ruling, about whether the Builder is entitled to any further payment in respect of variations under s.38(6)(b) of the Act or in respect of uncompleted stages of the work under the Contract.
Firstly, the decision serves as a reminder of the importance of ensuring that the details of any variations to a residential building contract are recorded in writing, and that any contractual and statutory requirements in relation to the variations are followed, so as to limit the scope for dispute.
Indeed, the potential impact of the decision arguably makes it critical for Builders to carefully document variations to residential building contracts so that rights can be enforced.
In light of the decision:
Builders claiming payment or damages for residential building works performed cannot rely upon a claim in restitution where contractual rights to payment exist.
Where a claim in restitution is available the claim will ordinarily be limited to a fair value, calculated in accordance with the contract price or the appropriate part of the contract price (including lost profits on uncompleted parts of the work) so as to properly reflect the fact that the contract price evidences the parties’ agreed allocation of risk.
It may be that a restitutionary claim might still be available where it is necessary to achieve a fair result (for example, where the Builder is only entitled to payment is the whole of the contract is performed and the termination of the contract results in a total failure of consideration, or it would be unconscionable to confine the Builder’s claim to the contractual measure in the circumstances of the case), however it appears as though such an outcome would only be available in exceptional circumstances.
Following this decision, owners may be more inclined to assert alleged rights under a residential building contract, including termination, where they consider the builder to be in breach of contract because, even if such actions are later found to be repudiatory, the remedy to which a builder is entitled will be limited to the contractual measure of damages and there may questions about the Builder’s ability to enforce any verbal variations.
Disclaimer: This publication by Morrissey Law & Advisory is for general information and commentary only and should not be considered or relied upon as legal advice. Formal legal advice should be sought in relation to any matters or transactions that may arise in relation with communication.