Introduction
In the recent decision of Stepanoski v Aslan [2018] NSWSC 1160, the New South Wales Court of Appeal had to grapple with whether:
- the parties involved were bound by the first building contract that they signed; or
- whether the subsequent contract, which was signed by the parties later and backdated to the date of the earlier contract, replaced the first contract.
The facts
On 14 October 2014, the plaintiffs entered into a cost-plus building contract (Cost-Plus Contract) with the defendant builder in respect of the construction of two residences on land that was owned by the plaintiffs.
In short, a costs-plus contract is a contract where the builder is paid the actual cost of work undertaken plus a percentage over and above those costs on account of margin and preliminaries. These contracts can be used when the total amount payable to the builder cannot be reasonably determined at the time of entering into the contract, or the scope of the work is unknown, and the owner takes the risk of that cost.
Subsequently, the plaintiffs and the defendant signed another building contract, being a home building contract for work over $5,000 (Lump Sum Contract) and backdated to the date at which the Cost-Plus Contract was signed by the parties.
Under a Lump Sum Contract, a single 'lump sum' price for all the works is agreed before the works are commenced by the builder.
The plaintiffs alleged breaches of the building contract by the defendant and commenced proceedings claiming damages.
In the course of the proceedings, the Court was required to determine the terms of the building contract and, in relation to that particular issue, was asked by the parties to decide whether the Lump Sum Contract was intended to replace the Cost-Plus Contract.
The defendant builder initially argued that the Lump Sum Contract was not intended to replace the Cost Plus Contract to any extent and that it was, in effect, no more than a sham. He asserted that the Lump Sum Contract was brought into existence solely to enable the plaintiffs to represent to their bank (who were financing the project) that they had a contract with a builder for a fixed sum, a requirement specified in a loan approval given to the plaintiffs by their bank.
In the course of oral addresses after all of the lay evidence had been completed, the defendant builder's position changed.
In that regard, the defendant was granted leave to amend his Response and Cross Claim to assert, among other things, that in January 2015, the parties signed the Lump Sum Contract which they dated 14 October 2014 for the sole purpose of providing the document to the plaintiffs' bank to assist the plaintiffs to obtain finance for the project, but:
- the parties orally agreed that they would continue to be bound by and apply the Costs Plus Contract; and
- the defendant builder had informed the first plaintiff a number of times, and the first plaintiff had agreed, that the cost of the project would be greater than the amount stated in the Lump Sum Contract.
Decision
In determining whether the parties were bound by the Cost-Plus Contract (which was signed by the parties first) or whether the Lump Sum Contract (which was signed later but backdated to the date of the Cost-Plus Contract) prevailed, Emmett AJA found at [69] that despite minor inconsistencies in the contemporaneous material, the majority of the documents relating to the project (which included the proposed building documents, such as architectural drawings and a building quote) pointed to the parties' intention as being bound by the Lump Sum Contract.
In reaching that conclusion, his Honour found at [13] that it was not possible to find any agreement that the Cost-Plus Contract was to remain binding on any party in any way and, despite the dissatisfaction of the defendant, the arrangements (as between the parties) were changed in a critical respect by the signing of the Lump Sum Contract.
Accordingly, his Honour decided that the parties were bound by the Lump Sum Contract.
Lessons
This case demonstrates how the Courts deal with the existence of two construction contracts and decide which one ought to bind the parties.
In that regard, the decision of Emmett AJA highlights how, in determining the terms of a building contract, the Court will attach significant weight to the contemporaneous material rather than the oral evidence presented by at trial the parties.
The case also serves as a timely reminder to contractors that a second contract, entered into solely for finance purposes can be found to be binding, provided the parties act in a way which suggest the contract applies to them, as occurred in Stepanoski as detailed above.
For further information please contact:
Sean Greenwood, Associate
Phone: + 61 2 9233 5544
Email: stg@swaab.com.au
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
