Less work than initially planned? Who bears the cost?

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Day v Quince’s Quality Building Services Pty Ltd [2021] NSWCATAP 296

Key takeaways

Where a contract provides for a reduction in the contract amount for omitted or reduced work, the relevant consideration is a common sense analysis of whether any work has been omitted or reduced. It is not about whether the work is done, even in a different way, to achieve the same or a similar result.

This decision also confirms that the contractual rates are a cap for quantum meruit claims that arise when the parties do not document the variations in writing.

Facts

On May 17, 2017, Mr & Mrs Day (the owners) entered into a BC4 residential construction contract with Quince’s Quality Building Services Pty Ltd (builder) for the construction of duplex housing. Originally, the builder had undertaken to supply and place two underground rainwater tanks and two “Atlantis Flo” retention systems under the bridges. The builder had allocated $ 56,500 for the cost of this work. However, at the builder’s suggestion and with the owners’ approval, the builder installed an aboveground rainwater tank on the side of the building at a cost of $ 40,480. Likewise, the supply and installation of the initially agreed hardwood coating and painting services were later replaced with a different product which in turn required less labor. A dispute arose between the parties over defects in the builder’s work and adjustments to the amount of the contract.

On October 18, 2020, the owners initiated proceedings in NSW Civil and Administrative Court. The owners argued that with regard to the hydraulics, siding and painting, the “works” were “diminished” or there were “omissions” from these works, and therefore the contract price should be reduced. They invoked clause 14 (f) of the contract which provided:

(crowd the work is diminished or omissions of the work are made the cost of work now not required is to be deducted from the contract price. The cost in this case means the actual cost of labor, subcontractors or materials, except [sic] by the Manufacturer because the works are now no need to be done. No further deduction is required due to the reduction or omission of the labor aspect of the job.

The builder argued that the clause should be read as a whole. The only savings or credits resulting from the clause were that work, being a reduction or omission of work, “no longer needing to be done”. The builder also noted that the clause states that “no further deduction is required because of the work or the aspect of the work reduced or omitted”.

At first instance, the Court ruled in favor of the manufacturer. She determined that the owners had contracted to supply a rainwater system, that they had a rainwater system, although it was a significantly different system. “works”, and the builder was entitled to keep the difference in costs between what was contracted and what was actually supplied. The Tribunal applied the same justification for the exterior cladding and the paint. The Tribunal’s decision was made on the basis of the following:

  • Clause 14 (f) of the contract was reinforced when the work was not performed, not in the situation where the work was performed but in a different way to achieve the same or a similar result.
  • In the end, the work itself was still being done and therefore could not meet the stipulation in clause 14 (f) that the work “was not required to be done”; and
  • In a lump sum contract, both parties run a risk when the work performed is more or less expensive than the compensation provided in the contract.

The owners appealed the Tribunal’s decision on four grounds:

  1. Earth One: The Tribunal misinterpreted clause 14 and should have concluded that when the work is reduced or omissions are made, the cost of the work that is not currently required must be deducted from the contract price.
  2. Second land: The Tribunal did not determine the material issues raised by the owners, being a claim for damages in respect of a 162 working day delay in the completion of the work.
  3. Earth three: The Tribunal erred in concluding that the builder was remunerated on a quantum meruit basis and that is how it should be calculated. Separately, the owners also asserted that the Tribunal did not consider the question of the reasonableness of the amounts claimed by the builder and did not determine that the contract rates provided for the cap on reasonable remuneration on a quantum basis. merits in circumstances where the parties have not signed the written details of the variations as required by the contract.
  4. Four on the ground: The Tribunal did not grant procedural fairness or conduct proceedings in accordance with the rules of natural justice.

Decision

The Appeal Board allowed the appeal, set aside the Tribunal’s original decision, and returned the matter to the Tribunal for reconsideration.

Ground 1: Interpretation of paragraph 14 (f)

The appeals committee found for the owners. The Tribunal had erred in its approach and in its construction, and it should have turned its attention to whether the work had diminished or whether there had been any omissions in the work, so that there was had “work not required” to do. This construction made sense in the context of a construction contract in which the parties agreed that the scope of the “works” may be varied. The owners were therefore entitled to a reduction in the amount of the contract.

The Panel stated that when interpreting commercial contracts, a court or tribunal will apply a presumption that the parties did not intend the terms of the contract to operate unreasonably and that a common sense approach must be adopted. On this basis, the Panel concluded that clause 14 (f) of the contract should be read in conjunction with clauses 14 (g), (h) and (i) which provided:

g) When the work to be done is increased, the cost of the additional work must be added to the contract price. The builder can choose when and how often to claim payment for modification work and is not required to wait for the next step to claim.

h) When the price has not been previously agreed for the modification work and the price to be paid for the work will be the cost calculated in accordance with sub-clause (i) below, as well as the compensation specified in point 1 of annex 2 for overheads and profits.

i) The cost referred to in sub-clause (h) above, unless otherwise agreed, will be calculated as follows:

i) for work performed by the employees of the builder, the rates for this labor are those indicated in section 2 of appendix 2. If no rate is indicated, the rates to be used are the rates published by the Master Builders Association of NSW in effect at the time the variation is made; …

In view of this, the Appeal Board concluded that if the builder’s interpretation was correct:

  • clauses 14 (h) and (i) would never have any work to do; and
  • neither party would ever agree on a variation price, because there would be windfall gains for a builder if the cost of the work fell, and windfall gains for the owner if costs increased.

Second ground: Failure to determine the claim for damages

The appeals committee found for the owners. The Tribunal had identified the complaint, but the Panel concluded that it had not considered the matter.

Third reason: Remuneration on the basis of the quantum meruit

The appeals committee found for the owners. The Panel applied Paraiso v CBS Build Pty Ltd [2020] NSWSC 190 (which itself had applied Mann v Paterson Constructions Pty Ltd [2019] HCA 32), to conclude that the contractual rates are a cap for quantum meruit claims arising when the parties do not document the variations in writing. The Appeal Board concluded that the Tribunal had disregarded the upper limit imposed by clauses 14 (h) and (i).

Ground four: procedural fairness

The appeal committee found the builder. The owners’ main argument was that the Tribunal did not allow the owners to cross-examine the builder’s witnesses. The commission concluded that the owners had had the opportunity to cross-examine the builder’s witnesses on several occasions, but had not done so and could not see what the court might have said about more on this issue.


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