New South Wales Court of Appeal CITATION : Tan Hung Nguyen & Anor v Luxury Design Homes Pty Limited & 2 Ors [2004] NSWCA 178 HEARING DATE(S) : 22/10/03 JUDGMENT DATE : 11 June 2004 JUDGMENT OF : Hodgson JA at 1; McColl JA at 12; Einstein J at 57 DECISION : Appeal dismissed with costs. CATCHWORDS : Building and construction - Contract - progress payments - disputes over second progress payment - referral to referee for report under Pt 28B r 2(1) of the District Court Rules 1973 - referee's report adopted by trial judge - appeal against reasons given in judgment - proper construction of the contract - insufficiency of reasons - proper approach to calculations - construction of termination clause - whether contract an "entire contract" - whether entire performance a condition precedent to payment - rule in Sumpter v Hedges [1898] 1 QB 673 - Proper construction of contract to exclude common law rights to relief for repudiatory conduct LEGISLATION CITED : District Court Rules 1973 Baltic Shipping Co v Dillon (1993) 176 CLR 344 Banbury & Cheltenham Direct Railway Co v Daniel (1884) 54 LJ Ch 265 Besser Industries (NT) Pty Ltd v Steelcon Constructions Pty Ltd (1995) 129 ALR 308 Biscayne Partners Pty Ltd v Valance Corp Pty Ltd [2003] NSWSC 874 Brewarrina Shire Council v Beckhaus Civil Pty Ltd [2003] NSWCA 4; 56 NSWLR 576 Carpenter v McGrath (1996) 40 NSWLR 39 Chalet Homes Pty Limited v Kelly [1978] Qd R 389 Commonwealth v Amann Aviation Pty Ltd (1991) 174 CLR 64 Connor v Stainton (1924) 27 WALR 72 Corio Guarantee Corporation Ltd v McCallum [1956] VLR 755 Dawnays Ltd v FG Minter Ltd and Trollope and Colls Ltd [1971] 1 WLR 1205 Egan v State Transport Authority (1982) 31 SASR 481 GEC Marconi Systems Pty Limited v BHP Information Technology Pty Limited (2003) 128 FCR 1; [2003] FCA 50 Gilbert-Ash (Northern) Limited v Modern Engineering (Bristol) Limited [1974] AC 689 Hoenig v Isaacs [1952] 2 All ER 176 Hungry Jacks Pty Ltd v Burger King Corp [1999] NSWSC 1029 CASES CITED : Hyundai Heavy Industries Co Ltd v Papadopoulos [1980] 1 WLR 1229 McLachlan v Nourse [1928] SASR 230 Madras, The [1898] P 90 Mahoney v Lindsay (1980) 55 ALJR 118 Markham & Andrews v Bernales (1906) 8 WALR 208 Mertens v Home Freeholds Company [1921] 2 KB 526 Ownit Homes Pty Ltd v Batchelor [1983] 2 Qd R 124 Peter Turnbull & Co. Pty. Ltd. v Mundus Trading Co (Australasia) Pty Limited (1954) 90 CLR 235 Philips v Ellinson Brothers Pty Ltd (1941) 65 CLR 221 Pickering v Ilfracombe Railway Company (1868) LR3CP 235 Robinson v Harman (1848) 1 Exch 850 Rocci & Anor v Diploma Construction Pty Ltd [2004] WASC 18 Sanders Constructions Pty Ltd, Re [1969] Qd R 29 Steele v Tardiani (1946) 72 CLR 386 Sumpter v Hedges [1898] 1 QB 673 Tharsis Sulphur and Copper Company v McElroy & Sons (1878) 3 App Cas 1040 Walsh v Kinnear (1876) 14 SCR(NSW) 434 Wenham v Ella (1972) 127 CLR 454 Tan Hung Nguyen (First Appellant) Cam Dung Lu (Second Appellant) PARTIES : Luxury Design Homes Pty Limited (ACN 003 129 815) (First Respondent) Lyn Frohlich (Second Respondent) Jack Reitsma (Third Respondent) FILE NUMBER(S) : CA 40200/03 COUNSEL : Dr C Vaccaro (First and Second Appellants) Miss E Olsson SC, Mr Walsh (First, Second and Third Respondents) SOLICITORS : Mark Mullins (First and Second Appellants) Turnbull Bowles Lawyers (First, Second and Third Respondents) LOWER COURT District Court JURISDICTION : LOWER COURT DC 6138/02 FILE NUMBER(S) : LOWER COURT Payne DCJ JUDICIAL OFFICER : IN THE SUPREME COURT OF NEW SOUTH WALES COURT OF APPEAL CA 40200/03 DC 6138/02 HODGSON JA McCOLL JA EINSTEIN J 11 June 2004 NGUYEN & ANOR. V. LUXURY DESIGN HOMES PTY. LTD. & ORS. Judgment 1 HODGSON JA: I agree with the orders proposed by Einstein J, and substantially with his reasons. 2 In my opinion, the correctness of the decision of the primary judge depends substantially on the provisions of cl.24 of the building contract, which is entitled "Ending of Contract by Owner". The first part of this clause has the sub-heading "Due to the Fault of the Contractor", and is in the following terms: If the contractor; · is unable or unwilling to complete the work or abandons the work; · suspends the work before completion without reasonable cause; · becomes bankrupt, assigns assets for the benefit of creditors generally, makes a composition or other arrangement with creditors or, if the contractor is a company, goes into liquidation or receivership; · fails to proceed diligently with the work; · fails to remedy defective work or remove faulty or unsuitable materials which substantially affect the work or without reasonable cause fails to comply with an order or direction of a public authority with respect to defective or incomplete work, which would substantially affect the quality and/or progress of the work, the owner may, if such default can be remedied, notify the contractor in writing that unless the default is remedied within 10 working days or such longer period as specified, the owner will end the contract. If the contractor does not comply with the owner's request within the time allowed, or if the default cannot be remedied, the owner may end this contract by giving written notice to that effect to the contractor. If the owner ends the contract due to the fault of the contractor, any unfixed materials or fittings on the site may be retained by the owner. If the reasonable cost of completion of the work exceeds that which would have otherwise been due under the contract the difference will be a debt payable by the contractor to the owner. Should the reasonable cost of completion be less than otherwise due under the contract the difference will be a debt payable to the contractor. Until completion of the work the contractor will not be entitled to any further payment under this contract. However, nothing contained in this clause may take away any right the contractor may have to payment under the dispute resolution procedure in Clause 26. 3 Dr. Vaccaro, the solicitor for the appellants, advanced three reasons why, in his submission, the respondent could not succeed on the basis of this clause. 4 First, he submitted, what occurred in this case was a repudiation of the contract by the builder and acceptance of that repudiation by the appellants, entirely outside the provisions of cl.24; so that cl.24 did not apply to the adjustment of the rights of the parties. Accordingly, he submitted, the matter had to be approached on the basis that the contract was an entire contract. 5 In my opinion, cl.24 discloses an intention that, if the contract is terminated for the default of the builder, then cl.24 should apply to the adjustment of the rights of the parties. It is true that it is expressed in terms that the owner "may" give a notice requiring remedy, and that the owner "may" end the contract by written notice; but in my opinion this does not indicate that the owner has the alternative of bringing about termination outside cl.24 so as to escape the adjustments described by cl.24. It may be that, where the builder is guilty of repudiatory conduct, the owner can accept the repudiation without following the procedures proscribed by cl.24. However, in my opinion cl.24 indicates the intention of the parties as to how their rights are to be adjusted if the contract is terminated for default of the builder, even if its procedures are not followed: it makes it clear that the parties did not intend the contract to be an entire contract. Furthermore, the correct analysis in such a case may be that, where the conduct of the builder indicates that it would be useless to go through the motions of the cl.24 procedure, the owner may not have to do so but may simply terminate: cf. Peter Turnbull & Co. Pty. Ltd. v. Mundus Trading Co. (Australasia) Pty. Limited (1954) 90 CLR 235 at 246-7, Mahoney v. Lindsay (1980) 55 ALJR 118. 6 Next, Dr. Vaccaro submitted that the referee did not in any event undertake the adjustment required by cl.24. He submitted that she did not assess the reasonable cost of completion of the work, but rather assessed the value of what the builder had done on a quantum meruit basis. 7 In my opinion this is not so. The referee dealt with the question in pars.227-234 of her report, under the heading "The Additional Costs of a Builder to Complete the Residence in accordance with the Building Contract". She rejected the appellants' evidence as to these costs. In substance, she concluded that the reasonable cost was the difference between the amended contract price and the value of the work performed ($536,323.00 less $258,671.00 = $277,652.00), plus certain additional items, namely GST $27,756.00, re-establishment costs $10,000.00, escalation costs $15,000.00, and GST on these items $2,500.00, giving a total of $55,265.00. Thus the reasonable cost of completion, leaving aside the figure for defective/incomplete work, was $332,917.00. According to cl.24, that had to be subtracted from the amount which otherwise would have been due under the contract, namely $421,951,00 ($536,323.00 - $114,372.00), giving $82,034.00. From this had to be taken $8,304.00 for defective/incomplete work and $1,000.00 damages for stress, giving the judgment figure of $79,730.00. 8 Finally, Dr. Vaccaro submitted that the builder did not claim on that basis, but only the basis of default by the owner or alternatively quantum meruit. He submitted that if the builder had claimed on that basis, the focus before the referee would have been different, that is, on the reasonable cost of completion and not on quantum meruit. 9 In my opinion, it is plain that the reasonable cost of completion was a central issue in the case before the referee. The appellants were seeking damages, and claimed that the reasonable cost of completion was in excess of what would otherwise have been due to the builder. The respondent has now sought leave to include a claim on this basis, and in my opinion there is no prejudice to the appellants that would make it appropriate to refuse that leave. In my opinion, all relevant issues were fully contested before the referee. I note that the document provided by the respondent, as set out in par.[40] of Einstein J's judgment, has some small errors and discrepancies in the figures; but I do not think this matters. The correct figures are as set out above. 10 I would add that in my opinion the alternative claims made by the builder, in particular those based on the making of a new contract, were claims that could not succeed. The communications between the parties at the time when the builder left the project could not have amounted to a consensus as to the terms of a new contract; and in my opinion a new contract would not be implied from the mere circumstance that the owners in effect took the benefit of the builder's work and had it completed by someone else. In the circumstances, they had little alternative. 11 For those reasons, in my opinion the appeal should be dismissed with costs. 12 McCOLL JA: Justice Einstein has stated the relevant facts in this appeal in his judgment in a manner which does not require any further elucidation on my part. 13 I agree with the orders Einstein J proposes and essentially with his reasons but would add the following observations. Adoption of the referee's report 14 Payne DCJ adopted the referee's report. She held that the contract was not an entire contract because: a It provided for progress payments which were enforceable (clauses 11, 13 and 23). b It contemplated partial performance of the contract in so far as it made express provision for the rights of the parties in the event that the contract was determined prior to practical completion (clause 24). 15 Payne DCJ also held that if, contrary to her view, the contract was entire, then: a The work was substantially performed so that the matter fell within the Hoenig v Isaacs exception, enabling the builder to recover the contract sum less the value of the defective work and incomplete works and other damages; and b After determination, the owners elected to accept the works and continue building the house, rectifying the relatively minor defects along the way, thereby waiving their right to withhold payment. 16 Payne DCJ also accepted that the referee's report should be adopted because the contract made express provision in clauses 23 and 24 for the rights of the parties in the event that it was determined prior to completion and "the referee's approach and decision were broadly consistent with clause 24". The appeal 17 The appellants ground their appeal principally upon the proposition that the Home Building Contract between the first appellant and the first respondent dated 28 September 1999 (the "Contract") was an entire contract. This proposition, if correct, was said to lead to the result that the first respondent could not recover any moneys in respect of the value of the work the first respondent had completed whether that recovery be by virtue of a contractual entitlement or in accordance with the principles of quantum meruit. 18 The appellants rely upon the principles as to entire contracts expressed in Sumpter v Hedges [1898] 1 QB 673 at 674. First, that "where there is a contract to do work for a lump sum, until the work is completed the price of it cannot be recovered". Secondly, where a builder abandons building work partially completed, the builder may not recover for the work done on a quantum meruit unless there is evidence of a fresh agreement to pay for the work already done. The reason a fresh agreement is required is because, as Chitty LJ pointed out (at 675 – 676): "In the case of a building erected upon land the mere fact that the defendant remains in possession of his land is no evidence upon which an inference of a new contract can be founded." 19 The appellants also submit that the fact that the Contract provides for progress payments does not prevent it from being construed as an entire contract. Entire contracts 20 In Gilbert-Ash (Northern) Limited v Modern Engineering (Bristol) Limited [1974] AC 689 at 717 Lord Diplock described a building contract as an entire contract for the sale of goods and work and labour for a lump sum price payable by instalments as the goods are delivered and the work is done. 21 Hudson's Building & Engineering Contracts (Sweet & Maxwell 1995, 11th Edition at p 475, 4.006, p 476, 4.008) elaborates upon this proposition stating that "[t]he essence of a building contract is a promise by the contractor to carry out work and supply materials in consideration of a promise by the building owner to pay for it…[t]he great majority of building contracts in the traditional form consist of an undertaking to complete the work for a contract price either ascertained (in the case of a specification form of contract without quantities) or ascertainable (in the case of a measurement contract with quantities or schedules of rates) and are therefore 'lump sum' or entire contracts, in the legal sense". 22 Hudson's also expresses the view (at p 475, 4.006) that "[i]n most contracts for major works the contractor is given an express right to payment by instalments on account of the contract price as the works proceed, and so to that extent no question of an entire contract arises. But the rules as to entire contracts will still apply to the last instalment, or to any general balance due, or to any individual instalment if the work is abandoned or brought to an end before the instalment is completely earned." 23 The entire contract principle is "an essential and necessary sanction to discourage the deliberate breaking or abandonment of contracts, which would be absent if in such cases the builder was entitled to demand partial payment notwithstanding his own breach": see Hudson's Building & Engineering Contracts (Sweet & Maxwell 1995, 11th Edition at p 476, 4.007). Thus, according to Hudson (at pp 476 – 477, 4.008): "[th]e vast majority of priced building contracts, sophisticated or simple, for the construction of a block of flats or a garden shed, will be construed as being entire, even where there is no express undertaking to complete, or whether the job is to be cost-based. Only contracts of a day-to-day jobbing character are likely to escape such an interpretation, which in the absence of express provision will depend on examination of the 'matrix' or 'genesis and aim' of the transaction between the parties". 24 The principles to be applied in relation to entire contracts and entire obligations were discussed recently in GEC Marconi Systems Pty Limited v BHP Information Technology Pty Limited [2003] FCA 50; (2003) 128 FCR 1 at 164 – 165 by Finn J at [702] – [706] in the following terms: "702 (i) An entire contract, or an entire obligation, is one in which, or in relation to which, the consideration for the payment of money or the rendering of some other counter performance is entire, indivisible and not severable: Baltic Shipping Co v Dillon , [(1993) 176 CLR 344] at 350; Steele v Tardiani (1946) 72 CLR 386 at 401; Phillips v Ellinson Brothers Pty Ltd (1941) 65 CLR 221 at 233ff. 703 (ii) If a contract or an obligation is entire its complete performance is a condition precedent to payment or counter performance: Phillips v Ellinson Brothers Pty Ltd , above; Hoenig v Isaacs [1952] 2 All ER 176 at 181; see Cheshire and Fifoot, Law of Contract , para 26.13 (8th Aust ed). The court has no power to apportion the consideration which, in the case of money, is thus regarded as a "lump sum": see generally Chitty on Contracts , vol 1, para 22-030 (28th ed). 704 (iii) The question whether a contract or an obligation is entire or is, in contrast, divisible, is a question of construction: Ownit Homes Pty Ltd v Batchelor [1983] 2 Qd R 124; Hoenig v Isaacs , above. While building contracts … have commonly been regarded, prima facie, as entire or "lump sum" contracts: see Gilbert-Ash (Northern) Ltd v Modern Engineering (Bristol) Ltd [1974] AC 689 at 717; Chitty on Contracts , vol 2, para 37-139 (28th ed); and see Halsbury's Laws of Australia , vol 3(2) "Building and Construction", 65-1255; such contracts commonly provide to the contrary by, for example, apportioning the consideration: eg Walsh v Kinnear (1876) 14 SCR(NSW) 434; but cf Hyundai Heavy Industries Co Ltd v Papadopoulos [1980] 1 WLR 1129 where the contract provided both for the payment of instalments and for their refund if the contract was cancelled in specified circumstances. As was said in the first edition of Halsbury's Laws of England , vol 3, §458-459: "458. The large expenditure which builders and contractors have to incur in carrying out the works which they have undertaken to construct renders it usual for the contract to provide for payments on account of the price during the construction of the works. The manner in which these payments on account are regulated varies according to the terms of the contract. Sometimes the several instalments become due on the completion of particular stages of the work ...; sometimes the interim payments are to be not less than a fixed sum …; or, again, at fixed periods, irrespective of amount .... ... 459. Whichever method is agreed upon as that in accordance with which payment is to be made, nothing becomes due to the contractor until he has done everything to entitle him to receive payment. Each certificate for an instalment creates a debt due, and the contractor is entitled to immediate payment thereof subject to the terms of the contract and any right of the employer to any set-off or counterclaim damages." 705 (iv) The usual rule in relation to instalment payments is as stated above: see also Brooking on Building Contracts , [4-16] (3rd ed); Keating on Building Contracts , 4-06, 4-17 (7th ed); Unidroit, Principles of International Commercial Contracts , Art 6.1.4, Comment 2; Farnsworth, Contracts , 564 (3rd ed). Once the right to payment has accrued it is enforceable as a debt: Pickering v Ilfracombe Railway Co (1868) LR3CP 235; and that right is not lost notwithstanding that the contract is subsequently terminated because of the default of the party possessing the right to payment: McLachlan v Nourse [1928] SASR 230 at 233-234; see also Markham v Bernales (1906) 8 WALR 208 (a quantum meruit case). Again as was stated in the first edition of Halsbury (above, at §460): "Where, after the payment of money to the contractor on account, he fails to complete owing to his own default or abandons the contract without good cause, the employer may be entitled to recover back the instalments paid on the ground that the consideration has wholly failed; but at all events the employer would have a ground of action for a breach of the contract to complete, in which the damages recovered might equal or exceed the amount paid on account." 706 (v) If a contract or obligation is to be found to be entire notwithstanding that the contract or obligation provides for payment by instalments, the contract on its proper construction must indicate that the instalments are nonetheless conditional upon complete performance of the contract or obligation, ie. that they are refundable if this does not occur because of the default of the party that is to render the performance: cf Hyundai Heavy Industries Co Ltd v Papadopoulous , above, at 1131." 25 It is true that in Hoenig v Isaacs [1952] 2 All ER 176 at 180 Denning LJ observed: "When a contract provides for a specific sum to be paid on completion of specified work, the courts lean against a construction of the contract which would deprive the contractor of any payment at all simply because there are some defects or omissions." 26 The contract Denning LJ was considering in Hoenig v Isaacs was, as Hudson's points out (above, at p 484, 4.019), one to "make and supply furniture" for a flat. It was not a building contract. This meant that the fact that the owner entered into possession of the flat and used the furniture as his own, including defective items, had the consequence that even if entire performance was a condition precedent, the condition was waived: Denning LJ at 181. The fact that Denning LJ did not regard the contract with which he was dealing as falling within the principles relating to building contracts can be seen from the fact that shortly after the observation I have set out, he referred (at 181 – 182) to the principles in Sumpter v Hedges (including the proposition that the contractor can only be paid if there is "something to justify the conclusion that the parties have entered into a fresh contract" – as opposed to any waiver) without demur. 27 The reason building contracts are construed as being entire, even where there is no express undertaking to that effect, is plain. It is of the essence of such a contract that the consideration for the payment of the contract sum is "entire and indivisible". A partially completed building is of little use to the owner of the land upon which it is to be constructed. 28 Baltic Shipping Co v Dillon, above, usefully illustrates the proposition. In that case the contract was held not to be an entire obligation because the respondent (the passenger) had "enjoyed" 8 days of the cruise before the cruise vessel sank: see Mason CJ (with whom Toohey J agreed) at 353, Gaudron J at 386 - 387 and McHugh J at 392 - 393. 29 In contrast, an owner of land will gain little "enjoyment" from a partially completed building. Thus, even though the price may be payable as the work progresses, that fact will not militate against the construction for which the appellants contend. Progress payments 30 The appellants submit that, contrary to the view expressed by Denning LJ in Hoenig v Isaacs, the Contract is not prevented from being an entire contract because it provides for progress payments. 31 In Hoenig v Isaacs (at 180) Denning LJ said: "It is …always open to the parties by express words to make entire performance a condition precedent. A familiar instance is when the contract provides for progress payments to be made as the work proceeds, but for retention money to be held until completion. Then entire performance is usually a condition precedent to payment of the retention money, but not…to the progress payments. The contractor is entitled to payment pro rata as the work proceeds, less a deduction for retention money. But he is not entitled to the retention money until the work is entirely finished, without defects or omissions." 32 The following points might be made about Denning LJ's statement. As a general proposition it is at odds with Lord Diplock's statement to which I have earlier referred. Secondly, the effect a provision for progress payments has in the characterisation exercise turns upon the terms of the particular contract. Thirdly, the observation is inconsistent with two Queensland authorities upon which the appellants rely. 33 In Chalet Homes Pty Limited v Kelly [1978] Qd R 389 Connolly J considered a building contract which provided for progress payments and held (at 391), albeit in obiter, that the contract was "essentially an entire contract". In his Honour's view the fact that the contract provided for progress payments did not affect its "essential nature", "for progress payments are provisional and subject to adjustment at the end of the contract". 34 In Ownit Homes Pty Limited v Batchelor [1983] 2 Qd R 124 Thomas J considered a building contract which provided for progress payments. His Honour found (at 134) that the conduct of the owner amounted to a repudiation of the contract and that the builder was justified in terminating it. In such circumstances his Honour considered whether the builder was entitled to insist upon receiving his progress payments or whether he was entitled to damages for the defendant's breach. 35 The progress payments were not conditioned upon a party's certification but (at 134) were "payments at specified convenient stages in the construction towards the full contract price". Thomas J held (at 134 - 135) that they "were obviously to be provisional and subject to adjustment at the end of the contract…[and] more closely resemble a right to a payment on account [rather] than an accrued right to final payment". 36 Thomas J referred with approval (at 135) to Connolly J's observations in Chalet Homes that a "contract is not prevented from being an entire contract merely because progress payments are to be made". In his Honour's view (at 135) the building contract was "an entire contract with provisional progress payments". Thomas J held that the builder was entitled to damages rather than the progress payments both because the builder's "rights" to the payments had not "accrued due" so as to be unaffected by the termination of the contract (cf Hudson's Building and Engineering Contracts 10th ed at pp 255-7 to which his Honour referred at 134) and secondly (at 135) because once the contract had been terminated, the "right to claim …a progress payment became merged in the right to recover damages for breach of contract." 37 The appellants rely upon the fact that cl 11 of the Contract provides for the payment of a progress claim to be "…merely a payment on account". In addition, it might be noted that like the progress payments in Ownit Homes Pty Limited v Batchelor, the payments were not conditioned upon certification, but were paid at specified convenient stages in accordance with a "Bank Progress Payment Schedule". 38 In addition to the authorities upon which the appellant relied, I would refer to Besser Industries (NT) Pty Ltd v Steelcon Constructions Pty Ltd (1995) 129 ALR 308 at 311 where Branson J, in holding that the fact that Heads of Agreement provided for a lump sum as the contract sum did not tell against the intention that the contract sum should be payable by instalments observed that "[m]any authorities recognise that there is no necessary inconsistency between a lump sum contract price and progress payments: see, for example, Tharsis Sulphur and Copper Co v McElroy & Sons (1878) 3 App Cas 1040; Banbury v Daniel (1884) 54 LJ Ch 265; Re Sanders Constructions Pty Ltd [1969] Qd R 29; Dawnays Ltd v FG Minter Ltd and Trollope and Colls Ltd [1971] 1 WLR 1205; Chalet Homes Pty Ltd v Kelly [1978] Qd R 389; Egan v State Transport Authority (1982) 31 SASR 481; Ownit Homes Pty Ltd v Batchelor [1983] 2 Qd R 124." 39 Secondly, in Rocci & Anor v Diploma Construction Pty Ltd [2004] WASC 18 at [13], EM Heenan J commented: "The fact that a contract contains provisions for progress or staged payments will not change its character from being an "entire contract", at least in relation to the entitlement of any one of the periodical payments, when that is claimed, or to the final payment when that is demanded. In each case the builder will only be entitled to the progress payment or final payment if it has fully performed the obligations provided in the contract and has met the conditions for entitlement to that particular or final payment." 40 In my view, the fact that the first appellant was obliged to make the progress payments pursuant to cl 13 does not detract from the conclusion that the Contract was an entire one. The obligation in cl 13 was subject to notification of disputes which were to be resolved pursuant to cl 26. Work was to continue pending resolution of disputes (cl 26). Clause 11 itself made it plain that a progress payment was merely a "payment on account". 41 I accept the appellants' submission that Payne DCJ erred in holding that the contract was not an entire contract because it provided for progress payments. The effect of clause 24 42 The appellants complain that the first respondent should not be allowed to rely upon cl 24 because it had not been pleaded. I agree with Einstein J that the first respondent should be given leave to amend the further amended notice of cross-claim in this respect. 43 My conclusion that Payne DCJ erred in concluding the Contract was not an entire contract due to the provision for progress payments is not, however, the end of the matter. 44 I agree with Hodgson JA and Einstein J that the inclusion of cl 24 in the Contract means that the parties did not intend it to be an entire contract. 45 I say that with due deference to the decisions in both Chalet Homes and Rocci & Anor v Diploma Construction Pty Ltd where the presence of similar conclusions did not prevent the conclusion that the relevant contracts were entire contracts. 46 Clauses 29 and 30 of the contract with which Connolly J was dealing in Chalet Homes provided that if the contractor abandoned the work and the owner completed it the contract sum was adjusted. If after completion of the building the moneys provided under the contract were insufficient to complete the works, then the deficiency was to be paid by the contractor to the owner on demand but, conversely, if after the owner had paid for the building work there was any balance due to the contractor under the contract, then that balance was to be paid to the contractor or his order. In other words, as with cl 24, cll 29 and 30 recognised an entitlement on the part of the builder to be paid despite the builder failing to complete the works. 47 In Rocci & Anor v Diploma Construction Pty Ltd, above, EM Heenan J's view that the contract was an entire one was reached despite the contract containing provisions (see [14], cll 13 and 15) which permitted the builder, even in the event of the owner terminating because of the builder's breach, to recover payment "forthwith for all work done and materials used or procured by him and properly chargeable to that date" (cl 13(c)). Allowance was to be made "for all payments on account of the Contract Price already made by the Owner to the Builder". 48 EM Heenan J characterised cl 13(c) as providing "that in the event of termination for breach the only entitlement to remuneration for the builder is to be assessed on the basis of a quantum meruit plus an allowance for profits and giving credit for previous payments made by the owners". In the context of the present debate, that conclusion makes it plain that the clause was intended to avoid the obstacle to a quantum meruit claim which would be posed by the Sumpter v Hedges requirement of a fresh agreement to pay for work already done. 49 It does not appear that Chalet Homes or Rocci & Anor v Diploma Construction Pty Ltd was argued on the basis that the clauses permitting the builder to recover payment having failed to complete the works meant the contracts should not be characterised as entire contracts. 50 However it is plain, in my view, that the inclusion of such clauses was intended to overcome the effect of Sumpter v Hedges. The effect of the first appellant claiming damages 51 Finally, it should be noted, independently of the decision concerning cl 24, the entire contract debate was, to a certain extent academic because the first appellant sued the first respondent for damages. 52 As will be apparent from the principles which developed in relation to entire contracts, such contracts offered a considerable advantage to an owner who could, if the rule in Sumpter v Hedges applied, obtain the benefit of the work done by the builder prior to abandoning the task. However, that advantage enured to the owner only as long as the owner did not sue the builder. If the owner sued the builder for damages then credit had to be given for the sums due under the contract. That is because "an entire performance defence is an alternative to advancing a claim for damages": see Rocci & Anor v Diploma Construction Pty Ltd, above, at [23]. This was explained in Hudson's in the following terms: "Thus where the contract is entire, the owner may get the benefit of valuable works not entirely completed by the builder without having to pay for them, unless the circumstances are such as to justify a quasi-contractual remedy. So a builder who has not fully completed the work, through no fault of the owner, cannot overcome his difficulty by ignoring the contract and sue on a quantum meruit for the work he has done. However, the rigours of this rule are often considerably reduced because, in a large number of cases where there is not entire performance, the owner may decide to sue the builder for damages for breach of contract. If he does, he will, on general principles of damages for breach of contract, have to give credit for what he would have had to pay had the contract been properly performed. But in a case where the owner decides not to sue he may derive considerable advantage from the foregoing rules, which are, however, an essential and necessary sanction to discourage the deliberate breaking or abandonment of contracts, which would be absent if in such cases the builder was entitled to demand partial payment notwithstanding his own breach...." and at 1033 (8.114): "But it remains true that an owner should weigh carefully the damages recoverable, on the one hand, against the advantage he may derive under the [entire contract rule] from the builder's inability (depending on the state of the accounts) to sue for the balance of the price of the work, on the other, since if the owner decides to sue for damages he will have to give credit under the basic Robinson v Harman … principle … for what the work would have cost him if properly completed or performed." 53 The "basic Robinson v Harman principle" is a reference to the fundamental principle that the measure of damages for breach of contract is that where a party sustains a loss by reason of a breach of contract, that party is, so far as money can do it, to be placed in the same situation, with respect to damages, as if the contract had been performed: Robinson v Harman (1848) 1 Exch 850 at 855; Wenham v Ella (1972) 127 CLR 454 per Gibbs J at 471; Commonwealth v Amann Aviation Pty Ltd (1991) 174 CLR 64 at 80 per Mason CJ and Dawson J, at 98 per Brennan J, at 134 per Toohey J, at 148 per Gaudron J and at 161 per McHugh J; see also Carpenter v McGrath (1996) 40 NSWLR 39. 54 Hudson's cites Mertens v Home Freeholds Company [1921] 2 KB 526 in support of the proposition that an owner who decides to sue for damages will have to give credit under the principle in Robinson v Harman. In that case Lord Sterndale MR held (at 535) that if the owner decides to sue under a building contract for damages the owner must give credit for what would have been due and payable to the builder if the builder had completed the house in accordance with the contract. Warrington LJ (at 538) and Younger J (at 541) were of the same opinion. 55 This course would not, however, have availed the first respondent in its bid for damages, to recover which it had to have recourse to its cross claim and cl 24. Note 56 Finally I note that although the Contract was only between the first appellant and the first respondent, no point has been taken about the joinder of the second appellant. 57 EINSTEIN J: Building Contract 58 The appellants were at all material times the registered proprietors of a parcel of land situate at 304 Woolooware Road, Burraneer. On 28 September 1999 the first appellant entered into a building contract for the design and construction of a house with the first respondent, Luxury Design Homes Pty Ltd which was a licensed builder. 59 The building contract was a standard form Department of Fair Trading home building agreement. It provided for payment by progress instalments at the completion of specified stages of work. In or about February 2000, the first respondent made a claim for progress payment number 1. The appellants met the claim, paying the sum of $114,372 including a deposit which had been credited. However by May 2000 the first respondent was substantially behind in terms of its contractual obligations to complete. 60 On 10 May 2000, the first respondent made a claim for progress payment number 2 in the sum of $128,700. A dispute emerged between the parties. The appellants complained of defective and unfinished work, and delay by the first respondent in the scheduled timing of the work. They refused to meet the progress claim. On 30 May 2000 the first respondent wrote that it intended to end the building contract after 10 days unless the stage 2 progress claim was paid. On 31 May 2000 the first respondent filed an application in the Fair Trading Tribunal seeking payment of the claim, outstanding costs and to "end the contract". On 6 June 2000, the appellants informed the first respondent that they did not want the first respondent to complete the construction of the residence. The proceedings 61 The appellants commenced proceedings in the District Court claiming damages against the first respondent. No point has been taken concerning the joinder of the second appellant in circumstances where the first appellant had pleaded that he had entered into the contract for himself and the second appellant. They claimed that the respondent was in breach and/or had repudiated the building agreement, which repudiation had been accepted by the appellants. They claimed damages and also that the respondent was not entitled to any claim in contract for the value of the work it had performed, and that it was liable to repay the sums already paid to it to the appellants. The appellants also made claims in relation to breach of duty of care and breaches of the Trade Practices and Fair Trading Acts, which are not the subject of this appeal. 62 The first respondent cross-claimed. It alleged in its cross claim that the appellants had breached the contract by failing to pay the second progress claim. Alternatively, the claim was made that the appellants had themselves repudiated the contract on 6 June when they informed the first respondent that they did not want it to complete the construction of the residence. Alternatively, the claim was made that the appellants had breached a new agreement said to have been made with the first respondent on 6 June 2000 that the appellants would pay for the work to date. 63 The claims for relief against the second and third respondents do not require examination as the appeal does not affect them and as they have submitted to any order to save an order as to costs. 64 An order was made pursuant to Part 28B rule 2 (1) of the District Court Rules 1973 referring the whole of the proceedings to a referee for report. The referee's report dated 19 July 2002 was adopted by Payne DCJ and consequential orders were made. The appeal is from her Honour's reasons for judgment. The Referee's findings 65 The referee made detailed findings in relation to the evidence generally to the following effect: · The contract provided for a construction period of 25 weeks. In addition to this, an additional week should be allowed for work related to a variation in respect of piers. She therefore allowed for a construction period of 26 weeks from 11 November 1999, bringing the date for completion to 11 May 2000 (at Red 68). · The second progress claim was made on 10 May 2000 and the builder stopped work on 26 May 2000. On the evidence, the construction work as at 11 May 2000 was only about 45% complete. In the referee's view, the first respondent was clearly in breach of the contract in terms of the progress made to that stage (at Red 68). · The referee found that the first respondent had repudiated the agreement prior to 6 June 2000 and that on 6 June the first appellant had accepted the repudiation and brought the contract to an end (at Red 71). No explicit finding was made as to whether the termination was pursuant to the general law or pursuant to rights conferred by clause 24. However it is clear that albeit making allowances for appropriate adjustments, the referee applied the clause 24 formula by (i) Assessing the reasonable cost of completion; (ii) Awarding the first respondent the difference between the contract sum and the reasonable cost of completion. · The evidence of repudiation by conduct evincing an intention not to be bound was the incomplete state of the work as at the time for completion; the first respondent having made a claim for payment which it was not contractually entitled to make; the first respondent having put the appellants on notice that it would cease work if not paid; the first respondent then ceasing work and five days later lodging a claim to the Department of Fair Trading requesting an order that the contract be terminated. · The referee found, however, that the first respondent was nevertheless entitled to be paid for the work it had performed up until the date of the repudiation. · The referee also found (at Red 73) that while there were defects in performance, substantial parts of the work were not defective and had been incorporated into the final house. Grounds 1-3, 5-7, 9, 10, 13-17 66 It is convenient to deal with these grounds compendiously. They essentially deal with the proper construction of the building contract, the alleged insufficiency of reasons given by the trial judge and the proper approach to calculations. Rule in Sumpter v Hedges [1898] 1 QB 673 67 The appellant's principal contention in the appeal relies upon the concept of an entire contract which becomes material when the court is called upon to decide whether complete performance by one party is a condition precedent to the other's liability to pay the stipulated price or to render an agreed counter-performance: Hoenig v Isaacs [1952] 2 All ER 176 at 180-181: Baltic Shipping Co v Dillon (1993) 176 CLR 344 at 350. The submission is that the referee and the trial judge failed to apply what has been referred to as the rule in Sumpter v Hedges. The short proposition for which that and cases cited by Starke J in Philips v Ellinson Brothers Pty Ltd (1941) 65 CLR 221 [at 233-234] are authority, is put in the following terms in Brooking on Building Contracts 3rd ed by DJ Cremean, Butterworths, 1995 at [8.1]: "A builder who has contracted to do an entire work for a specific sum can recover nothing unless the work be done or unless it can be shown that it was the other party's fault that the work is incomplete, or that there is something to justify the conclusion that the parties have entered into a fresh contract". 68 The proposition is that if the contract be indivisible and not severable, nothing can be recovered under the contract unless it be completed according to its terms or a new contract is made or is to be implied from the acts of the parties, giving rise to new rights: cf The Madras [1898] P 90 at 94. 69 The phrase "completed according to its terms" requires some qualification and this concerns the rule referred to as the doctrine of substantial performance under which a substantial performance may be treated, not as fulfilling the condition, but as enabling the party in default to recover the stipulated price or other consideration, less a reduction in respect of the incompleteness of his performance: Corio Guarantee Corporation Ltd v McCallum [1956] VLR 755 at 760. 70 The question of what may be regarded as substantial performance is one of fact depending upon the nature of the contract and all the circumstances. Brooking on Building Contracts at [8.2] puts the test as follows: "[I]f, after completion of the work left incomplete by the builder, the structure will be of an entirely different character from that which the builder contracted to erect, the builder cannot be said to have substantially performed the contract." [citing Connor v Stainton (1924) 27 WALR 72 as authority for this proposition] 71 Contracts falling within that rule are described as 'entire' or 'entire and indivisible', as opposed to 'divisible' contracts. In Balitic Shipping Mason CJ [at 350] put the matter as follows: "An entire contract or, perhaps more accurately, an entire obligation is one in which the consideration for the payment of money or for the rendering of some other counter-performance is entire and indivisible." 72 In Brewarrina Shire Council v Beckhaus Civil Pty Ltd [2003] NSWCA 4, Young CJ in Eq has recently had occasion to observe that it is instructive to remember that a building contract is rarely considered to be an entire contract, citing in that regard the discussion in Hoenig v Isaacs [1952] 2 All ER 176. Denning LJ in Hoenig put the matter as follows: "…[T]he first question is whether, on the true construction of the contract, entire performance was a condition precedent to payment. It was a lump sum contract, but that does not mean that entire performance was a condition precedent to payment. When a contract provides for a specific sum to be paid on completion of specified work, the courts lean against a construction of the contract which would deprive the contractor of any payment at all simply because there are some defects or omissions." [at 180]. 73 There is nothing to be found in the judgment of Hudson J in Corio Guarantee to suggest otherwise than that the question is always one of construction, the issue concerning whether completion is a condition precedent to the right of the builder to be paid the price. 74 The building contract presently for consideration made provision for payment of the contract price by progress payments at the completion of the stages of work nominated in the Schedule of Progress Payments. [clause 11]. Clause 14 provided for the making of a final payment of the amount unpaid under the contract when the work was complete. But most particularly of all, clause 24 expressly dealt with the circumstances in which the contract might be ended by the owner due to identified default of the contractor. The clause provided that if the contractor: · "is unable or unwilling to complete the work or abandons the work; · suspends the work before completion without reasonable cause; · becomes bankrupt, assigns assets for the benefit of creditors generally, makes a composition or other arrangement with creditors or, if the contractor is a company, goes into liquidation or receivership; · fails to proceed diligently with the work; · fails to remedy defective work or remove faulty or unsuitable materials which substantially affect the work; or · without reasonable cause fails to comply with an order or direction of a public authority with respect to defective or incomplete work, which would substantially affect the quality and/or progress of the work. the owner may, if such default can be remedied, notify the contractor in writing that unless the default is remedied within 10 working days or such longer period as specified, the owner will end the contract. If the contractor does not comply with the owner's request within the time allowed, or if the default cannot be remedied, the owner may end this contract by giving written notice to that effect to the contractor. If the owner ends the contract due to the fault of the contractor, any unfixed materials or fittings on the site may be retained by the owner. If the reasonable cost of completion of the work exceeds that which would have otherwise been due under the contract the difference will be a debt payable by the contractor to the owner. Should the reasonable cost of completion be less than otherwise due under the contract the difference will be a debt payable to the contractor. Until completion of the work the contractor will not be entitled to any further payment under this contract. However, nothing contained in this clause may take away any right the contractor may have to payment under the dispute resolution procedure in Clause 26." 75 There are no words in the building contract expressly making entire performance a condition precedent. In Hoenig, Lord Denning made the point that it was always open to the parties by express words to make entire performance a condition precedent. His Lordship went on to add: "A familiar instance is when the contract provides for progress payments to be made as the work proceeds, but for retention money to be held until completion. Then entire performance is usually a condition precedent to payment of the retention money, but not, of course, to the progress payments. The contractor is entitled to payment pro rata as the work proceeds, less a deduction for retention money. But he is not entitled to the retention money until the work is entirely finished, without defects or omissions…" (at 181) 76 The proper construction of the building contract presently under consideration is clearly that entire performance was not a condition precedent to payment. Hence the trial judge was correct in concluding that the contract was not an entire contract because, by its very terms, it contemplated an entitlement on the builder's part to receive payment despite failure to substantially complete the works. Her Honour specifically referred to clause 24 in her reasons, noting that the contract had made express provision for the rights of the parties in the event that the contract was determined prior to completion and that what the referee had decided and her approach was broadly consistent or in conformity with clause 24. 77 Her Honour also drew attention to the provision for progress payments and referred to clause 23 which gave the contractor the right to suspend the work where the owner without reasonable and substantial cause failed to pay a progress payment. 78 As the respondent has submitted it could not be suggested that nothing is due under the contract simply because the builder is in default or even if the builder has repudiated the contract. The machinery provisions of clause 24 are premised on the assumption that the builder has engaged in precisely such conduct. If no moneys are treated as due because of the builder's conduct, clause 24 would clearly be rendered unworkable. 79 It does not seem to me that the proper construction of the contract is that the provisions for the making of each progress payment represent separate entire contracts. It cannot be said that each divisible application of the contract is entire. The challenge to the adequacy of the reasons 80 Whilst the reasons given by the trial judge may be regarded as at the outer edge of providing adequate reasoning processes and in some instances threw up inconsistencies which in the light of the above holding as to the proper construction of the agreement have not been required to be dealt with on the appeal, the reasons given did include a statement of the essential ground upon which the decision rested. The challenge based on the inadequacy of provision of reasons fails. 81 It follows that the grounds of appeal 1-3, 5-7, 10,12-15 and 17 have no substance. The proper construction of clause 24 – Ground 12 82 Properly construed, clause 24 provides that if one or more of the identified events of default take place, if the default cannot be remedied the owner may end the contract by giving written notice to that effect to the contractor. This is precisely what occurred here – notwithstanding that the appellants did not expressly allude to clause 24. 83 A threshold question arises as to whether upon the happening of one of the identified events of default, the owner may end the contract if and only if it has first notified the contractor in writing that it will end the contract unless the default is remedied within 10 working days [or such longer period as is specified]. The matter is one of construction. 84 Notwithstanding the treatment given in recent decisions concerning the proper construction and approach to be taken to contractual termination clauses requiring the giving of notices to cure breaches [cf Hungry Jacks Pty Ltd v Burger King Corp [1999] NSWSC 1029; Biscayne Partners Pty Ltd v Valance Corp Pty Ltd [2003] NSWSC 874], in my view the proper construction of clause 24 in this particular building contract is that the owner may without giving the ten day notice, terminate the contract by simply giving the notice of termination to the contractor upon the happening of an identified event of default which cannot be remedied. 85 Bearing in mind the expansive range of events of default provided for in clause 24 which properly construed would include the evincing of an intent not to carry out the contract [vide being unable or unwilling to complete or abandoning the work] it seems to me that the parties are seen to have intended clause 24 to cover the field, in the sense that the common law rights to relief for repudiatory conduct were excluded. 86 It is next convenient to consider the approach taken by the referee and in particular the extent to which, if at all, the referee determined what was the reasonable cost of completion of the work which remained to be carried out following the termination of the contract. 87 It seems clear that the referee in fact set herself the task of determining precisely that figure. She referred in the last sentence of paragraph 228 of the report to being unable to rely upon particular evidence to establish the reasonable actual cost to complete the work of the original contract. [See also paragraphs 233 and 234] The same task was required by the appellants pleaded case. 88 Implicit in the findings of the referee adopted by the trial judge was the finding that the reasonable cost of completion was 51.8 percent of the contract sum. 89 In my view the approach taken by the referee and adopted by the trial judge in terms of each of the parameters taken into account, was precisely the approach mandated by the mechanism provided for in clause 24, albeit that the referee did not specifically avert to clause 24. Ground of appeal 4 – Fresh Agreement 90 It becomes unnecessary to deal with this ground of appeal which deals with her Honour's alternative holding that if the finding that the contract was not an entire contract be incorrect then the parties had, on or about 6 June 2000, entered into a fresh agreement that the contract be terminated and that the builder be paid for the value of work it had carried out to that point. Ground of appeal 16 – acceptance of the benefit 91 This ground asserts that there was no evidence before the Court to support the taking of the benefit of the unfinished house following the default by the first respondent. The proposition for which the appellants contend is that they had no free choice but to accept the partially completed dwelling. 92 This ground simply repeats that part of the principle in Sumpter v Hedges which denies a defaulting builder a claim in quantum meruit because, unlike a partly completed contract for a chattel, the purchaser is unable to reject the goods. The argument however depends upon the principle in Sumpter v Hedges otherwise being applicable. Clearly enough if the contract is not an entire contract and the parties, as here, by their bargain, have contemplated an entitlement on the part of the builder to receive payment even though through its default the premises have not been substantially completed, the free choice aspect of the rule in Sumpter v Hedges will not be applicable. 93 The purpose of clause 24 is to ensure that the builder is compensated for works performed even though he be in default and by its express terms the agreement excludes the free choice parameter which underlies the Sumpter v Hedges principle. 94 There is no substance in ground of appeal 16. The pleading point – Grounds of appeal 8 and 11 95 It is clear enough that the first respondent in its defence denied the allegation made in the amended ordinary statement of claim that the contract was an entire contract. The referee noted that during the hearing counsel for the respondent foreshadowed an application to the Court to amend the notice of cross-claim by pleading that further, or in the alternative, the respondents claimed on a quantum meruit, a reasonable remuneration for work performed being $258,671 less $114,372 paid. The referee indicated during the hearing of the reference that she intended to proceed on the assumption that a successful application for leave to so amend would be made to the Court. A further amended notice of cross-claim dated 21 October 2002 was prepared seeking to make such a claim. A notice of motion seeking leave to file the further amended notice of cross-claim was before the trial judge who granted leave to file the document. 96 During the hearing of the appeal the first respondent sought leave to further amend the further amended notice of cross-claim by seeking the following orders: "22 The Cross Claimant alleges that if the Cross Defendant owner determined the contract in accordance with Clause 24 for breach by the first defendant (which is denied) then the first defendant is entitled nevertheless to a sum representing the difference between the reasonable cost of completion of works and that which would otherwise have been due under the contract. Particulars Clause 24 of the contract. The sum is calculated as follows Reasonable Cost to Complete (a) Approximate percentage of work incomplete 51.8% (b) Adjusted contract sum $536,323 (c) 51.8% of the adjusted contract sum $277,815 (d) Amount required to complete incomplete work if first defendant had performed contract $277,815 (e) Additional cost to complete works by third party builder $ 55,265 Reasonable cost to complete add (d) and (e) $333,080 Plus allowance for defective work and stress $ 8,304 $ 1,000 Total reasonable cost to complete work $342,384 23. Amount "otherwise due" under the contract (a) Adjusted contract sum $536,323 (b) Less payment made $114,372 (c) Amount "otherwise due" if contract not ended $421,951 24. Reconciliation Reconciliation cost to complete $323,776 less amount due $421,951 _______ Amount owed to builder $79,567 25. The Cross Claimant claims:- (a) Damages (b) Interest pursuant to the contract (c) Costs." 97 The submission by the appellants in opposing this leave now being given, asserted that they would suffer prejudice as they would have dealt with their case below differently had they been aware that the first respondent would put its cross-claim squarely under clause 24. The appellants were not however able to identify any particular tangible otherwise approach which they are likely to have taken had the cross-claim been squarely so put. In my view this is a circumstance in which: · by reason of the manner in which clause 24 was clearly litigated; · by reason of the manner in which it is possible to follow the calculations set out in the ultimate orders as being specifically the approach mandated by clause 24; and · there being no relevant prejudice to the appellants, the proper exercise of the discretion is to allow the leave to amend. 98 It follows that grounds of appeal 17 and 18 fail. Remaining grounds of appeal 19 and 20 99 It is unnecessary to deal with the remaining grounds of appeal [19 and 20] which are generally consequential. Orders 100 In my view the appeal should be dismissed with costs. ********* I certify that this and the preceding 30 pages are a true copy of the reasons for judgment of the Hon Justice C Einstein and the Court _________________ 11 June 2004 Associate Last Modified: 06/28/2004 DISCLAIMER - Every effort has been made to comply with suppression orders or statutory provisions prohibiting publication that may apply to this judgment or decision. The onus remains on any person using material in the judgment or decision to ensure that the intended use of that material does not breach any such order or provision. Further enquiries may be directed to the Registry of the Court or Tribunal in which it was generated.