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Valmont Estopped In Its Tracks by Armani

The issue of estoppel in the context of a rejected variation claim was recently considered by the NSW Court of Appeal in Valmont Interiors Pty Ltd v Giorgio Armani Australia Pty Ltd (No 2) [2021] NSWCA 93.

In this case, Valmont Interiors Pty Ltd (Valmont) was led to assume that it would be paid for additional joinery works that were directed by Giorgio Armani Australia Pty Ltd (Armani) as a purported variation.  However, as the procedure for claiming and approving variations under the contract was not adhered to, Armani sought to rely on the time bar in the variation provision to reject the claim.

Facts

In early 2016, Valmont entered into a contract with Armani to provide fit-out works for the new Emporio Armani store at Sydney Airport. The scope of works originally excluded certain joinery items, which were to be sourced by Armani from a third party supplier. However, shortly after the works commenced, the third party supplier was not able to meet the tight schedule for delivery and Armani directed Valmont to supply the joinery items.

Valmont supplied the joinery items but Armani refused to pay for them on the basis that Valmont did not follow the procedure set out in clause 15 of the contract for claiming a variation and waived its claim.  Relevantly, this clause provided that if Valmont considered that a direction of Armani constituted a variation it was required to give notice of the purported variation with five business days.  This clause also provided that failure to provide notice within the specified time period resulted in Valmont releasing and waiving any entitlement to a claim.

Valmont’s position was that Armani should be estopped from relying on the time bar in clause 15 to reject the claim because Armani did also not follow the procedure in clause 15 for instructing the supply of the additional joinery items (as well as for previous other variations).  As a result of this, Valmont argued that Armani led it to assume that strict compliance with the procedure in clause 15 was not required in order to claim payment for the additional joinery work.

The First Decision

The primary judge held that, although Valmont did not strictly comply with the procedure set out in clause 15 of the contract for claiming a variation, Armani was estopped from relying on the time bar in that clause and that the costs of certain variation were recoverable by Valmont.

However, the primary judge also found that at a certain point in time (being 11 April 2016), email correspondence between the parties corrected Valmont’s assumption that it could claim payment for variations without complying with the procedure set out in clause 15 of the contract and that Armani would rely on strict compliance with that procedure for future variations.  Accordingly, it was held that the estoppel ceased on that date and the costs of purposed variations after that date (including the additional joinery works) were not recoverable.

The Appeal

On appeal the Court disagreed with the primary judge and found that the estoppel continued to operate after the 11 April 2016 email because:

  1. the email did not displace Valmont’s assumption that was induced by Armani that it would be paid for supplying the additional joinery works. This was partly because Armani’s email was not sufficiently clear to correct Valmont’s assumption (ie. that strict compliance with clause 15 of the contract was not required in order to be paid for additional joinery works);
  2. the email conveyed that the supply of the joinery was not a variation but additional works outside of the contract;
  3. Valmont was entitled to expect to be paid for the additional joinery works that were directed by Armani. The fact that it continued to incur liabilities after receiving the email from Armani demonstrated that the email did not correct Valmont’s understanding of the situation.  Further, Valmont relied on that understanding to its detriment, and as it was no longer possible for Valmont to comply with clause 15 of the contract it could not overcome the detriment already suffered; and
  4. in the circumstances, it was unconscionable for Armani to refuse to pay Valmont for the additional joinery works.

Take home tips

We understand that in administering contracts parties do not always strictly comply with the procedures and timing set out in the contract for claims, especially if the parties consider they have a good relationship or believe that strict compliance is too formal.  This case highlights the potential serious consequences of taking that approach.

Parties to a contract should be aware of the risks of acting inconsistently with their rights under the contract (ie. in Armani’s case, not requiring compliance with the terms of the contract for claiming variations and also not formally directing variations), as this could lead to those rights being lost and there not being a basis to reject claims.

If a principal or head contractor (or other party in a similar position) is concerned that a particular state of affairs exists between them and the downstream party that is inconsistent with the contract, it is crucial that the principal or head contractor:

  1. corrects that understanding by stating in clear and precise terms that the current understanding must be departed from and that strict compliance with the contract is required;
  2. provides sufficient notice of this so that the downstream party has time to comply with the procedure in the contract for claims and can attempt to overcome any detriment; and
  3. then strictly requires and enforces the procedure in the contract for claims so as to avoid any doubt that another state of affairs exists between the parties.

 

Cooler heads will prevail – Tribunal finds that direct notice of termination of a home building contract is not required

It is not uncommon in home building projects for disputes to occur at the end of the project in relation to the quality of the work carried out by the Builder and a claim for outstanding money by the Builder.  Inevitably, this can lead to the contract coming to end by way of abandonment, termination or repudiation.

If the matter proceeds to a Court or Tribunal, the first issue to be determined is:

  • whether the contract is still on foot;
  • whether the contract has been terminated; and
  • if the contract has been terminated, whether that termination was valid.

The answers to these questions will dictate the parties’ entitlement to claim damages (and the types of damages) and ultimately, the outcome of any legal proceedings.

In an ideal world, the terminating party would issue a notice of breach or default under the contract, which would result in a termination of the contract if the breaches are not remedied.

Building cases are never this clear cut and more often than not, the Courts and Tribunals have to delve into the conduct of the parties and what their intentions were in ascertaining whether the contract is still on foot, or whether it has been terminated validly or otherwise.

In the case of Rudas and Andrassy v Eid [2021] NSWCATAP 4 the Tribunal dealt with this very issue of termination of a home building contract by the Owners in the absence of any direct notice to the Builder and what circumstances or conduct would give rise to a finding that the contract was no longer on foot.

The first Tribunal determination

  1. The Owners entered into a home building contract with the Builder to carry out renovations at their property in Frenchs Forest (Site).
  2. In the first instance, the Tribunal found that the Builder abandoned the Site before completing the building works and thereby repudiated the building contract as the Builder ceased carrying out the building works at the Site and removed all of his tools and any materials that he felt he could use elsewhere.
  3. The Owners made a claim against the Builder under the Home Building Act 1989 (NSW) (HBA Act) for costs to complete the building works by another builder consequent upon their acceptance of the Builder’s repudiation of the building contract and its termination by them.
  4. The Tribunal held that even though the Builder had repudiated the contract, the contract still remained on-foot because the Tribunal was not satisfied that the Owners had terminated the contract by accepting the repudiation of the Builder. The Tribunal found that there was no evidence relied upon by the Owners that they accepted the Builder’s repudiation by their conduct of engaging another builder and further, there was no evidence that the Builder knew of this conduct.

The Appeal

5. The Owners appealed the determination principally on the basis that the Tribunal erred in failing to find that the contract had been terminated.

6. The appeal panel upheld the Owners’ appeal and determined that the Tribunal did determine this issue incorrectly for the following reasons:

(i)  there is no real issue as to the legal principles applicable to determine whether an innocent party to a contract has accepted the other party’s repudiation and thereby terminated the contract.  In other words, any communication or conduct which clearly conveys to the repudiating party that the aggrieved party is treating the contract as at an end is sufficient; and

(ii)  where the innocent party has by conduct elected to treat the contract as at an end, it is sufficient that the fact of election comes to the repudiating party’s attention.

Examples of conduct that would demonstrate that the contract has been terminated in the absence of any direct notice to the other party

In this case, the Tribunal said:

(i)   the commencement of the proceedings and/or the service of an appropriate pleading, claiming relief on the basis of termination for breach or otherwise clearly conveying in such pleading that the aggrieved party is treating the contract as at an end can be regarded as communication of the innocent party’s acceptance of repudiation and subsequent termination; and

(ii)    the commencement of the proceedings by the Owners claiming damages based upon the cost to complete the works will act as the communication of the prior election to treat the building contract as terminated, if this had not previously occurred. Indeed, the Owners in this case could have simply claimed damages on the basis of the contract coming to an end without more.

The Tribunal determination also contained a table of examples of cases where a termination has been held to have taken place, despite the absence of any direct notice to the relevant party, see below:

Case Paragraph
“The actual commencement of the hearing of lengthy and expensive litigation, directed to a final resolution of the parties’ rights, was conducted by both parties manifesting an intent ion wholly inconsistent with any continuing obligation of performance on either side Brewarrina Shire Council v Beckhaus Civil Pty Ltd (2005) NSWCA248 75
A maintenance provider was held to have accepted the  other party’s repudiation  by executing an agreement transferring  its  assets and employees to a third party although the transfer agreement did not purport to exercise any right to terminate WallaceSmith v Thiess Infraco (Swanston) Pty Ltd

(2005) FCAFC 49

103 and

152

Service of an appropriate pleading can be unequivocal election to terminate a contract. Janos v Chama Motors Pty Ltd (2011)NSWCA
na
23
The commencement of an action claiming relief on the basis of termination for breach normally amounts to an election to terminate the contract if such an election has not already been made. Perri v Coolangatta Investments Pty Ltd (1982) 149 CLR 537
A seller of land who on expiry of a notice to complete proceeded to advertise and sell the land was held to have manifested an election to t rea t the contract as terminated. Holland v Wiltshire

(1954)

HCA 42 ; (1954)

416 and

424

90 CLR409
The closing down of a business and vacating a premises
was held to be sufficient communication of the
termination of the lease.                                                         Karacominakis v Big 155                                                                                                       Country
Developments Pty Ltd
(2000)
NSWCA 313.

Quantum of damages

The Tribunal then went onto assess the quantum of damages.

To be consistent with the guiding principle of ensuring the just, quick and cheap resolution of the real issues in the proceedings, the Tribunal determined the question of damages, rather than remit the matter for further hearing.

The Tribunal then assessed the damages owing by the Builder to the Owner in the amount of $187,280.24 plus costs on the ordinary basis.

What does this mean for residential builders?

  • contracts need to be terminated carefully as the Court and Tribunal will consider the conduct of the parties if there is any argument that the contract was repudiated.
  • if the contract is not validly terminated it can affect the builder’s entitlements to damages.
  • if the homeowner terminates the contract, the builder would need to prove that the termination was wrongful in order to claim any loss of profits, demobilisation costs and loss of wages etc.
  • obtain legal advice before you terminate.

$1 per day LD’s in residential building contracts no longer rules out claims by owners for general damages for delay

Facts

In Cappello v Hammond & Simonds NSW Pty Ltd [2020] NSWSC 1021, Hammond & Simonds NSW Pty Ltd (Builder) entered into a standard form Housing Industry Association NSW Residential Building Contract for Works on a Cost Plus Basis (Contract) with Mr and Mrs Cappello (Owners) to renovate the ground floor of their house in Haberfield.

The LD’s for late completion was $1 per working day which was consistent with the default position under the Contract.

The works under the Contract were completed approximately 7 months late and the Builder made no requests for any extensions of time.  The Owners made various claims against the Builder, among them, was a claim for general damages for delay in the sum of $30,000.

Builder’s case

The Builder claimed that the Owners were only entitled to recover $1 per working day for delay in accordance with the LD clause in the Contract and that by making provision for LD’s in the Contract, the parties were taken to have intended to exclude a right for the Owners to also claim general damages for delay against the Builder.

Owners’ case

The Owners’ claimed that the LD clause did not provide the only remedy for the Builder’s delay because if it did, it would be void due to section 18G of the Home Building Act 1989 (NSW) (HBA) as it would have the effect of restricting the Owners’ rights in relation to the benefit of the warranty under section 18B(1)(d) of the HBA (that the work will be done with due diligence and within the time stipulated in the Contract).

What did the Supreme Court decide?

The Court found that:

  • the LD clause should not be interpreted as providing the only remedy for delay. Rather, by specifying the amount of LD’s so low at $1 per working day, instead the parties intended for the Owners to also have a right to claim general damages for delay (although in this case general damages were ultimately not awarded as the Owners did not meet the test for general damages that applies to breach of contract);
  • that an LD clause which limits a party to claiming nominal damages for a breach of a warranty restricts the rights of that person in respect of the warranty and is therefore void under section 18G of the HBA (which says that any agreement that restricts or removes the right of a person in respect of any of the statutory warranties is void); and
  • the outcome may have been different if the LD clause provided for the payment of a substantial amount in LD’s.

What does this mean for residential builders?

  • builders will be exposed in relation to existing contracts that stipulate $1 per working day (or a nominal amount for LD’s) as owners would be entitled to LD’s of $1 per working day plus general damages for delay by the builder;
  • any attempt to limit the builder’s liability for delay (including inserting a nominal amount for LD’s) will be void under section 18G of the HBA;
  • if builders wish to exclude general damages for delay in new contracts, they should insert a rate for LD’s that offers the owner a “substantial right” to compensation not just a nominal amount for breach of the statutory warranty (that the work will be done with due diligence and within the time stipulated in the contract); and
  • in order to limit the builder’s exposure for not only LD’s but also general damages for delay, builders should ensure that they claim all available EOT’s in relation to extending the contract period

When are settlement agreements concerning payment claims void under SOPA?

If a respondent fails to issue a payment schedule in time, but the parties then reach a settlement agreement in relation to the payment claim and construction contract, can the claimant still pursue summary judgment for the full claimed amount due to s.34 of the Building and Construction Industry Security of Payment Act 1999 (NSW) (SOPA)?

Facts

In Reward Interiors Pty Ltd v Master Fabrication (NSW AU) Pty Ltd [2020] NSWSC 1251, the claimant served a payment claim and the respondent did not respond within 10 business days as required by the SOPA.  The parties attended a meeting three weeks after the payment claim was issued and agreed to a reduced amount to be paid on the payment claim.[1]  The respondent paid the settlement amount the following day.[2]

The respondent then commenced proceedings against the claimant for damages arising from work performed by the claimant.

The claimant cross-claimed and sought summary judgment on the full payment claim amount. The claimant argued that s.34, which prohibits parties from contracting out of the SOPA, rendered the settlement agreement void.[3]

Decision

The claimant offered no authority for the argument that s.34 of the SOPA renders void settlement agreements which compromise a dispute concerning an amount claimed in a payment claim or the construction contract between the parties generally.[4]  The claimant had agreed not to move for summary judgment on the full claimed amount by accepting the reduced settlement amount.[5]

Stevenson J held that it was at least arguable that the settlement agreement was not rendered void because it acknowledged the operation of the SOPA, yet recorded the parties’ intention that in the particular circumstances their rights would instead be governed by their agreement.[6]  This did not constitute an ‘attempt to deter a person from taking action under’ the SOPA.[7]

Tips for binding settlement agreements on payment claims

The answer to the question posed in the introduction is no.  Assuming the settlement agreement seeks to properly compromise existing entitlements, it will not be voided by s.34 of the SOPA.

The terms should be clearly expressed and specific.  It should state that the claimant has agreed to accept the settlement amount in “full and final satisfaction” of the payment claim and claims made in the payment claim. The terms should provide that once the respondent pays the settlement amount, the claimant “releases” the respondent from any claims or proceedings in respect of the payment claim and claims made in the payment claim.

Where settlement agreement may be rendered void under s 34 is where it seeks to exclude or restrict rights or entitlements arising in the future.  For example, where the parties simply agree (without more) that the claimant will have no entitlement to submit further payment claims.

Of course, the respondent should always serve a proper payment schedule (scheduling nil or a reduced amount and giving reasons) in response to a payment claim, even if confident in securing a settlement, in order to avoid the type of argument raised in Reward Interiors.

[1] At [11].

[2] At [14].

[3] At [15].

[4] At [19].

[5] At [23].

[6] At [24] and [26].

[7] At [25], re s.34(2)(b).

Suspension of relief: take out notices, jurisdictional error and Security of Payment Act

In Parrwood Pty Ltd v Trinity Constructions (Aust) Pty Ltd, the Court confirmed that, for the purposes of the Building and Construction Industry Security of Payment Act 1999 (NSW) (SOPA), taking the work out of the hands of a contractor will not remove reference dates accrued before the take out notice is served, even if they are not actually used until after the take out notice is issued.

Although the facts were unusual and complicated, in the unique world of the SOPA they are not unheard of. This note is useful for parties considering whether:

  1. to issue a take out notice instead of a termination notice (particularly for NSW construction contracts entered into before 21 October 2019); or
  2. to withdraw an adjudication application in the event of jurisdictional error by an adjudicator on the first determination, to re-lodge before a new adjudicator.

The facts

The contractor was working under the principal in a residential building project. The contractor accrued reference dates on the 25th day of each month. The contract contained an AS standard clause where the contractor fails to show reasonable cause for its default:

“the Principal may by written notice to the Contractor:

(a) take out of the Contractor’s hands the whole or part of the work remaining to be completed and suspend payment until it becomes due and payable pursuant to subclause 39.6; or

(b) terminate the Contract.”

The parties fell into dispute and the principal asked the contractor to show cause.

Then:

  • on 25 August 2019, the monthly reference date for a SOPA claim came about;
  • on 3 September 2019, the principal issued a notice that took out of the contractor’s hands all of the work remaining to be completed, instead of terminating the contract; and
  • on 6 September 2019, the contractor issued a payment claim in the amount of $2,023,645.76. This payment claim was said to use the 25 August 2019 reference date.

In response, the principal scheduled “$Nil”.

The contractor applied for adjudication under the SOPA. The adjudicator declined to determine an amount that the contractor was owed (if any), finding the payment claim was invalid.

After it received the first adjudicator’s decision, the contractor “withdrew” its application, and made a second adjudication application. The contractor argued that the first adjudicator had failed to exercise his statutory function in declining to determine the amount owing. The second adjudicator considered the application and awarded over $400,000 to the contractor. The principal applied to the Supreme Court to set aside the second adjudication determination.

There were two broad issues that the Court was required to consider.

Suspension and payment claims

The first issue was what effect the take out notice had on the ability to issue payment claims.

The Court found that even though the payment claim was served after a take out notice, it was saved by the fact that it was served for a reference date occurring before the take out notice was made.

The outcome would have been different if the take out notice was served before the reference date. In this case, the contractor’s rights are suspended by the take out notice, and it cannot make a payment claim under the fast-track SOPA. It can, however, still make a claim under general law.

A take out notice cannot extinguish a right to make a payment claim that already exists.

Second Adjudication

Jurisdictional error

The second issue concerned the unusual circumstances in which a claimant may effectively redo its application.

The Court found that the first adjudicator had not made a ruling that, for example, the contractor was entitled to “$Nil”. Rather, the adjudicator had decided that, no matter what he thought about the facts, he could not determine any adjudicated amount (“I must decline therefore from determining …”).

The first adjudicator had failed to determine the amount of the progress payment (if any) to be paid, as required under section 22(1) of the SOPA. Therefore, the first purported determination was void.

Making a second application

Section 26(3) of the SOPA allows for a claimant to withdraw an application and make a new adjudication application, if the adjudicator accepts the application but then “fails to determine the application within the time allowed”. The claimant must withdraw and make the new application within five business days after it is entitled to withdraw the previous adjudication application.

This may occur where the adjudicator has made a jurisdictional error in failing to determine the application.

If the original decision is decided by a court to be valid (because there was no jurisdictional error), then the second application is wasted. However, if the original decision is declared void, then the second application may still be valid.

Conclusion

It pays to be aware of when reference dates arise, and when take out notices can and should be served. Principals concerned to issue effective take out notices should be mindful of existing reference dates which have or may accrue before that notice.

Claimants should be keenly aware of the existence of any jurisdictional error on the part of adjudicators. Such error may allow them to re-lodge an adjudication application.

 

 

NCC 2019 Amendment 1: Changes starting on 1 July 2020

In response to the recommendations of the Shergold Wier Building Confidence Report, the Australian Building Codes Board (ABCB) and the Building Ministers’ Forum have undertaken an out of cycle amendment to the National Construction Code (NCC). While the NCC was not due for review until 2022, the amendment known as “NCC 2019 Amendment 1” will be adopted by all Australian jurisdictions on 1 July 2020.

The NCC is a performance-based code containing technical standards for the design, construction and performance of buildings as well as for plumbing work and drainage systems. It is published and maintained by the ABCB and adopted by each Australian jurisdiction through its own legislation. For example, in NSW the NCC is given effect by the Environmental Planning and Assessment Act 1979 (NSW), the Plumbing and Drainage Act 2011 (NSW) and subordinate legislation.

The aim of the NCC is to create a uniform set of technical standards that apply to all Australian jurisdictions. However, as identified in the Shergold Wier Building Confidence Report, there have been a number of systematic issues with the implementation and enforcement of the NCC which has prompted NCC 2019 Amendment 1.

What will change?

Following a period of key stakeholder consultation last year, NCC 2019 Amendment 1 will introduce the following changes:

  • a new provision regarding egress from early childhood centres (NCC Volume One);
  • clarification of the concession that permits the use of timber framing for low-rise Class 2 and 3 buildings (NCC Volume One);
  • clarification that anti-ponding board requirements only apply to roofs where sarking is installed (NCC Volume Two);
  • an update to the Governing Requirements for all Volumes to require labelling of aluminium composite panels in accordance with SA Technical Specification 5344; and
  • correction of minor errors, including the correction of typographical errors and errors in diagrams.

In addition to the above, the ABCB announced last month that NCC 2019 Amendment 1 will also include a provision mandating the process for developing Performance Solutions. This process is based on the ABCB’s existing Development of Performance Solution Guideline and requires that the process for documenting Performance Solutions be commensurate with the complexity and risk of the design.

Unlike the other amendments, this amendment will not commence until 1 July 2021. However, as the process is included in NCC 2019 Amendment 1 there is plenty of time for industry participants to prepare necessary documentation to encompass the process for Performance Solutions prior to the amendment taking effect next year.

Other changes expected

It was also proposed that NCC 2019 Amendment 1 would include the new defined term of “building complexity”. The draft definition proposes a risk-based system from levels 0 to 5 for classifying complex buildings, which assists to identify buildings where additional regulatory oversight is needed during the design, construction and certification processes.

 

The ABCB announced last month that this new definition would not be included in NCC 2019 Amendment 1, however it has been published on their website with a six month consultation period for comments and feedback.

A copy of the preview of NCC 2019 Amendment 1 is available on the ABCB website via the NCC Suite.

If you or someone you may know is in need of advice regarding NCC 2019 Amendment 1 or the NCC generally, please contact our office by phoning (02) 9248 3450 or by email at info@bradburylegal.com.au.