Australia: Undocumented variations and the Home Building Act (NSW): Clarity and a ray of hope for builders
Building and construction update

Edwards v Sydney Building Group Pty Ltd [2011] NSWCA 154

A decision handed down by the Court of Appeal on 23 June 2011 in Sydney Building Group v Edwards (Edwards' Case) has provided clarity and a ray of hope for residential builders in NSW seeking payment for construction work not expressly set out in the building contract or a written variation order.

Background

The Home Building Act 1989 (NSW) (HBA) contains strict documentary obligations often resulting in builders finding it difficult or seemingly impossible to recover payment for works which are not agreed in writing^[1].

In Edwards' case, in which the builder was represented by Gadens Lawyers, the Edwards and the Builder entered into a standard contract for the construction of a home at Avalon, on the stunning Northern Beaches (Contract).  As construction progressed the Edwards directed that soil be removed from the site (Soil Works).  There was no provision in the Contract for the Soil Works.

The Builder invoiced the Edwards for the Soil Works claiming ($26,239.60).  This was paid by the Edwards but the payment was accompanied by a letter querying the amount and requesting further information regarding the Soil Work.

The works progressed and the Edwards paid all of the subsequent progress claims under the Contract less an amount of $25,145 which remained outstanding.  The Builder understood that outstanding amount related to variations and adjustments agreed under the Contract.  The Edwards eventually asserted that the withheld amount related to the Soil Works.

As a result of the Edwards' failure to pay the $25,145, the Builder issued a notice of suspension of work and later suspended its works.  In response, the Edwards alleged unlawful suspension of the works and a failure to carry out the works in accordance with the Contract.  On 16 February 2007, the Edwards terminated the Contract.

The Builder disputed the Edwards' right to terminate. It took the termination as an act of repudiation, which it accepted and on that basis, it terminated the Contract.  The Edwards filed an application for damages in the Consumer, Trader and Tenancy Tribunal (CTTT).

CTTT

The CTTT determined that there was no variation under the Contract for the Soil Works and so, the amount due under it should be reduced by the amount charged by the Builder and paid by the Edwards for it.

While the CTTT acknowledged that the Builder could make a quantum meruit claim, the CTTT had narrowed the scope of its decision to consider which party had wrongfully terminated the Contract and, as a consequence, who would be liable for the losses as a result.  The CTTT then added the amount claimed for the Soil Works to the amount due under the Contract and concluded that the Edwards had paid the total amount required under the Contract.  In effect, the CTTT determined the Builder was not entitled to the cost of the Soil Works at all.

The Builder appealed this to the District Court.

District Court

Elkaim DCJ found that the CTTT had made an error of law by characterising the payment for the Soil Works as a payment under the Contract.  He held that the CTTT had determined that the invoice for the Soil Works was not within the scope of the Contract, and so the CTTT should not have applied the payment to the Contract.

To put it simply, if the Soil Works were not works under the Contract, then the Edwards' payment for the Soil Works could not be applied to amounts owed under the Contract.  Elkaim DCJ concluded that applying the payment for the Soil Works to counter the suspension of the Contract by the Builder was an error of law.

The Edwards appealed to the Court of Appeal.

Court of Appeal

The Edwards argued that the payment for the Soil Works was made in good faith and was paid generally on account of the Contract and not specifically for the Soil Works.

The Builder argued that the substance of the invoice and the terms of payment clearly showed that the payment was made in relation to the Soil Works.  The Builder further argued that, given that there was no basis for the payment under the Contract, the payment must be applied to the claim for to the Soil Works.

The leading judgment of Allsop P cited English authorities concerning appropriation and construction disputes^[2] and distinguished the facts from those at hand.  His Honour held a critical distinguishing factor was that there was no dispute between the parties that the owners were liable to pay for the Soil Works and that the liability for the Soil Works did not arise under the Contract but under a separate agreement between the parties.  As it was not open to the Edwards to assert that the payment was made under the Contract, as the Soil Works were not under the Contract, the Court of Appeal agreed with the Builder and unanimously dismissed the appeal.

Conclusion

The Court of Appeal's decision is just and appropriate.  The Soil Work was unquestionably requested, the work was done well and there was no sustainable dispute as to the amount charged.  It is only right that the builder be paid and not exposed to the immense claims for losses arising out of a termination.  But there is an easier way. 

Where works additional to those contemplated in the contract are requested, a builder should always obtain those instructions as a written variation under the contract.  It is so much simpler and certain than exposing oneself to technical arguments as to the validly of the claim, appropriation of payment and the vicissitudes of restitution.  Good administration and documentation practice is the key to avoiding such disputes in the first place.

[1] s 7 Home Building Act 1989  (NSW)

[2] Lamprell v The Guardians of the Poor of the Billericay Union, in the county of Essex  (1849) 3 Ex 283; 154 ER 850; and
A Smith & Son (Bognor Regis) Ltd v Walker  [1952] 2 QB 319

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This report does not comprise legal advice and neither Gadens Lawyers nor the authors accept any responsibility for it.