Sham building contracts for finance purposes
In the recent decision of Hutchings v Hope  NSWCATAP 59, the NSW Civil and Administrative Tribunal Appeal Panel (Appeal Panel) set aside the decision of the Tribunal and remitted it for hearing by a differently constituted Tribunal. The Tribunal had found that the building contract was a sham.
The owners and builder entered into:
- an oral agreement to carry out residential building works on 25 February 2014, which allegedly included a term that the builder would charge an hourly rate of $85 plus GST
- a fixed price building contract dated 21 May 2014 (written contract), with a contract price of $300,000.
The builder carried out the work and sought payment which exceeded $300,000. The owners refused to pay the excess over the value of the written contract, arguing that it was a fixed price contract. The builder commenced proceedings against the owners for the amount allegedly owing and the owners commenced proceedings against the builder for overpayment and defective works.
The Tribunal found that the written contract was a sham as it appeared to have been entered into solely for the purpose of obtaining bank finance for the works. Accordingly it was unenforceable. The Tribunal awarded the builder $120,145.14 on a quantum meruit basis, after deducting for the cost of rectifying defects.
Appeal Panel’s reasoning
In setting aside the decision, Appeal Panel reasoned that the Tribunal failed to consider:
- a finding as to the alternative contract that was entered into and the terms of that contract
- section 94 of the Home Building Act 1989 (NSW) (the Act) which prevents entitlement to quamtum meruit where there is a failure to insure
- the evidence to support an offer, acceptance and consideration in the formation of the written contract.
The Appeal Panel made it clear that a case involving a sham is rare and requires a careful examination of the subjective intention of both parties. As the builder performed the building works, the Appeal Panel suggested that there was at the least an “inferred contract”, relied upon by the parties.
Parties should be aware that if there is an ulterior mutual purpose to the entering of contract, and the contract is deemed a sham, the contract may be rendered unenforceable. This has particularly onerous consequences for builders in terms of entitlement to payment for the work and exposure to disciplinary action. Owners should also consider how this type of activity would be viewed by their lender.
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