Australia: Ignore the contract at your peril: developer estopped from relying on contract

In the recent decision of Futurepower Developments Pty Ltd v TJ & RF Fordham Pty Ltd t/as TRN Group [2019] NSWSC 1554, the Supreme Court of NSW held that the Developer was estopped from relying on the strict interpretation of the contract due to its contract management with the result that the Builder was entitled to payment for additional works. The result validated the determination of the adjudicator under the Building and Construction Industry Security of Payment Act 1999 (NSW) (the SOP Act).

The dispute

The Developer and Builder entered into a building contract in respect of roads and drainage works. The Developer separately engaged Norther Western Surveys (NWS) to act as its surveyors and project managers. This included supervision of construction and contract administration, processing of claims and variations. The building contract specified Mr John Attard of NWS as the Superintendent.

During excavation, the Builder discovered areas of uncontrolled fill and asbestos contaminated soil on the site. The Builder arranged for its environmental consultant (PEA) and specialised demolition remediation consultant (EMS) to inspect and assess the material on the instruction of Mr Harding, an employee of NWS. Thereafter, there was a site meeting attended by a representative of the Developer and Mr Harding where pricing and removal of the material was discussed (as indicated in Mr Harding's diary note). The Builder subsequently arranged for EMS to remove the asbestos contaminated material in two lots, recorded at 718m³ and 236m³.

The adjudication

The Builder issued claims with respect to this work, which was accepted and certified by Mr Harding, and eventually submitted two payment claims pursuant to the SOP Act to the Developer. The Developer denied payment on the basis that none of Mr Harding's approvals, directions or certifications had any force as he was not the specified Superintendent. The Developer also claimed that the building contract requires variation to be communicated and approved in writing and the variations in dispute were not the subject of written notice or direction.

The Builder referred the payment claims to adjudication under the SOP Act. It was determined that a total of $922,622.12 was payable to the Builder.

Claw-back proceedings

The Developer commenced proceedings in the Supreme Court of NSW for the claw-back of a portion of the adjudicated amount on the basis that the Builder:

• failed to abide by the building contract in making the claims (Contract Point)
• the builder has engaged in misleading and deceptive conduct within the meaning of s 18 of the Australian Consumer Law, for the reason that the soil was not contaminated to the extent submitted by the Builder and the extent of fill removed was not justified. The Court did not accept this, given the Developer did not adduce evidence to support this contention.

On the Contract Point, the Court held that as evidence indicated that Mr Attard did not perform all aspects of the Superintendent role and both parties were proceeding on the basis that Mr Harding was the Superintendent, the Developer is estopped from denying that Mr Harding was the Superintendent. In that respect, the Court found that the Developer breached the contract by failing to ensure that Mr Attard performed his function and the Developer cannot refuse payment on this ground. This is consistent with the well-established principle at law that a party cannot benefit from its own breach of contract.

Having regard to this, the Court held that the Developer did instruct the Builder to proceed with the removal of the fill, which the Court characterised a latent defect (thereby a "deemed variation" under the building contract and "reasonable and necessary for the Builder to carry out"). The Builder acted on the instruction and removed the fill. The Developer was once again estopped from refusing payment.

Was it worth the challenge?

This decision reinforces well established principles of estoppel, and that a party will face challenges agitating terms of a contract that are contradicted by subsequent conduct and contract management. To avoid such situations it is essential that both parties to a contract keep to the contract to ensure the terms can be relied upon.

Whilst in this case the Court would not entertain the Principal avoiding the implications of the management of the contract by the individual purportedly carrying out the Superintendent's functions, it is worth keeping in mind that various unamended Australian Standards contracts such as the AS4000 and AS4902 include provisions that allow for the nominated Superintendent to appoint individuals (usually referred to as the "Superintendent's Representative") to exercise delegated functions. Proper discharge of that function would include to make such appropriate appointments to ensure the proper administration of the contract.

This publication does not deal with every important topic or change in law and is not intended to be relied upon as a substitute for legal or other advice that may be relevant to the reader's specific circumstances. If you have found this publication of interest and would like to know more or wish to obtain legal advice relevant to your circumstances please contact one of the named individuals listed.