Major Projects & Construction 5 Minute Fix 94: new contract to pay subcontractors directly, post-contract conduct, "cost plus", delayed Practical Completion and final payment

Compliance with contract processes for progress claims not a condition precedent to payment under "cost plus" contract; final accounting reduced by delay damages (lost rental income) and minor defects

The case of Renbar Constructions Pty Ltd v Sader [2022] NSWSC 172 concerned the right to payment under a "cost plus" contract, in circumstances where neither party enforced the terms of the contract and the works were completed well after the contract Date for Practical Completion.

The contract program required Practical Completion to be achieved within 52 weeks commencing in July 2014. However, the works were performed over multiple years and Practical Completion was eventually achieved in April 2018. From June 2014 to April 2018 the builder issued 12 progress claims claiming $1,690,432. This amount was paid by the owner. The parties fell into dispute when the builder claimed that the total fair and reasonable cost of the work performed was $3,266,198.61 (including margin). The owner disputed the total amount and did not pay any further claims above the $1,690,432 already paid.

The "cost plus" contract contained the following relevant clauses:

• Clauses 13.3 and 13.4 required the builder to provide various details with its monthly progress claims, including details of the costs of the building works, the building works carried out, the proportion of the margin and other moneys due under the contract, and to include invoices, receipts and other written records supporting the claim. The builder did not comply with these requirements in respect of its first 12 progress claims which were nevertheless accepted and paid by the owner.
• Clause 23.2 required the builder to give 5 days' notice of the achievement of Practical Completion and to annex to that notice a final progress claim. However, while the builder did issue a notice of Practical Completion to the owner around April 2018, the builder did not provide a final payment claim with the notice.

In around January 2019, nine months after Practical Completion was achieved, the builder provided an Excel "spreadsheet of expenses" which set out the final amount said to be due to the builder. After periodic discussions between the parties over the following months, in May 2019 the owner disputed the builder's entitlement to further payment on the grounds that compliant progress claims had not been submitted and more than 12 months have elapsed since Practical Completion. After the elapse of yet more time, in August 2020 the owner terminated the contract.

Justice Stevenson held that, on a proper construction of clause 13, strict compliance with the formal requirements of a progress claim was not a condition precedent to an entitlement to payment. This was because clause 13 did not oblige the builder to make progress claims. Rather, it was a facilitative clause that was designed to give the builder the option of submitting progress claims should the builder wish to obtain progressive payment. The owner remained under a contractual obligation to pay the "price of the building works" with or without a validly issued progress claim. Justice Stevenson identified a lacuna in the contract, which was its failure to codify the manner and times at which the owner must pay the "price of the building works". In these circumstances, Justice Stevenson held that there must be an implied term of the contract that:

"if [the builder] carried out work the subject of the contract but did not make progress claims which complied with the requirements of cl 13 (or did not make progress claims at all), then [the owner] was nonetheless obliged to pay the price of the building works within a reasonable time of the work being done and of adequate particulars as to the work being provided."

On the basis of this implied clause Justice Stevenson held that the builder had accrued a contractual right to payment prior to the contract being terminated in August 2020, which right therefore survived termination. Justice Stevenson preferred the assessment of the final recoverable costs undertaken on behalf of the builder, however ordered that this amount should be reduced to account for damages as a result of the builder's 141-week delay to achieving Practical Completion (delay damages to be quantified by reference to lost rental income) and the quantum of rectification of some minor defects.

Of additional interest is the supplemental findings of Stevenson J that:

• a 141-week delay in achieving Practical Completion was sufficient in the circumstances of this case to constitute a "serious breach" of the construction contract, which permitted the owner to validly terminate the contract under clause 31; and
• when assessing amounts payable under a "cost plus" contract, the relevant inquiry is the fair and reasonable cost of the construction works and not the value of the final asset.

Site meeting discussions render principal contractually liable to pay subcontractors directly

The central event considered in Yisheng Construction Pty Ltd v City Garden Australia Pty Ltd [2022] NSWSC 2022 was a site meeting involving the superintendent, principal (City Garden) and its accountant, and various subcontractors (including Yisheng Construction and Yisheng Air Con) that took place in a partially complete townhouse development.

The site meeting was called because the builder had ceased paying subcontractors and the subcontractors consequently slowed performance of the works, but the principal desired the project to continue to completion. After an examination of competing witness testimonies, it was held by Ball J that the owner of City Garden, Victor, had made the following "Site Meeting Representation":

"Victor agreed to pay amounts that were owed by the Builder rather than proposing some separate mechanisms by which subcontractors were to be paid. …

City Garden would pay amounts that were properly payable under [various subcontracts], relying on the assessments by the Builder of the amount of work that had been done since the last claim."

Justice Ball held that the "Site Meeting Representation" was sufficient to contractually bind City Garden to pay the pre-existing subcontractor invoices to the extent that they were properly payable under the subcontracts. This was because the "Site Meeting Representation" constituted a voluntary assumption of a legally enforceable duty, the circumstances in which it was made suggested that the parties objectively intended the arrangement to be legally enforceable, and the subcontractors accepted the offer by continuing to perform, and complete, the subcontract works on the development. In this context, it was held that it was implausible that the subcontractors "would be happy to return to work (which is what they did) simply on the basis that Victor would take up the payment of their invoices with the Builder, when the Builder had not paid their claims for several months". This analysis is an example of post-contract conduct informing whether a contract existed, and not the interpretation of prior contract terms.

Yisheng was successful in establishing that there existed a new contract between City Garden and the subcontractors with a term that City Garden would pay the subcontractors directly, bypassing the builder. This contractual obligation was limited to pre-existing unpaid claims (and not future claims for future subcontract works) and was subject to the amounts being properly payable under the subcontracts. The final qualification was critical for the ultimate dispensation of the case. Yisheng adduced unverified documentary records to assess the delta between the total assessed subcontract value and the amount of the payments already received from City Garden. However, this evidence was insufficient to prove that the amount of payments already received related only to the development project the subject of the dispute, nor did it establish that the delta represented an amount that was properly payable under the contract.

Accordingly, despite a finding that there was a new contract between the principal and the subcontractors, the principal avoided liability due to the subcontractors failing to adduce the correct evidence.

Using post-contract conduct to identify contracting parties

The judgment of Loureiro v Mac Aus Unit Pty Ltd (No 2) [2022] NSWSC 226 also involved consideration of post-contract conduct, this time to identify the correct parties to a contract.

The contracts in question were a series of loan agreements in connection with the acquisition and development of properties. It was not in dispute that one of the defendants, Antonio Conceicao, was a party to the loan agreements. However, the plaintiffs (Carlos Loureiro and Claudio Meireles) also contended that both Patricia Conceicao and Mac Aus Unit Pty Ltd were also parties to the loan agreements.

Justice Gleeson held that the identification of the parties to a contract involves the construction of that contract. Ordinarily, post-contract conduct is inadmissible when construing the terms of a contract. However, it was held that:

"the post-agreement conduct of one party known to the other, and communications between the parties, which reveal a common assumption as to the existence and terms of an agreement may provide evidence of such an agreement."

On the facts of this case it was held that neither Mac Aus Unit Pty Ltd nor Patricia were parties to the loan agreements. The following factors supported this conclusion:

• In respect of Mac Aus Unit Pty Ltd, while it was a mutually known fact that it had been incorporated prior to the loan agreements for the purposes of acquiring the properties, this alone was insufficient to establish an objective intention that Mac Aus Unit Pty Ltd would also be a borrower under the loan agreements. On the contrary, knowing that Mac Aus Unit Pty Ltd was the intended purchaser of the properties, the parties to the loan agreements could have, but did not, expressly identify Mac Aus Unit Pty Ltd as a joint debtor. In addition, generally, post-contract statements regarding the purpose for which the loaned amounts would be used, including on development projects in which Mac Aus Unit Pty Ltd had an interest, were not the same as evidence of an objective intention that Mac Aus Unit Pty Ltd be a joint debtor under the loan agreements.
• While Patricia was a director of Mac Aus Unit Pty Ltd at the relevant times, this matter was "entirely neutral". "The mere circumstance that Patricia was a director of Mac Aus does not evince an objective intention that Patricia would assume joint liability with Antonio as primary debtor". The fact that Antonio deposited the loaned monies into an account jointly held with Patricia was irrelevant, because it involved post-contract conduct of Antonio but not of Patricia. In addition, subsequent repayments made from the joint account of Antonio and Patricia did not constitute an admission by Patricia that she was also liable under the loan agreements.