You say toma­to, I say tom­ah­to: The bat­tle of forms and build­ing contracts

Intro­duc­tion

In the recent deci­sion of Stepanos­ki v Aslan [2018] NSWSC 1160, the New South Wales Court of Appeal had to grap­ple with whether:

1. the par­ties involved were bound by the first build­ing con­tract that they signed; or
2. whether the sub­se­quent con­tract, which was signed by the par­ties lat­er and back­dat­ed to the date of the ear­li­er con­tract, replaced the first contract.

The facts

On 14 Octo­ber 2014, the plain­tiffs entered into a cost-plus build­ing con­tract (Cost-Plus Con­tract) with the defen­dant builder in respect of the con­struc­tion of two res­i­dences on land that was owned by the plaintiffs.

In short, a costs-plus con­tract is a con­tract where the builder is paid the actu­al cost of work under­tak­en plus a per­cent­age over and above those costs on account of mar­gin and pre­lim­i­nar­ies. These con­tracts can be used when the total amount payable to the builder can­not be rea­son­ably deter­mined at the time of enter­ing into the con­tract, or the scope of the work is unknown, and the own­er takes the risk of that cost.

Sub­se­quent­ly, the plain­tiffs and the defen­dant signed anoth­er build­ing con­tract, being a home build­ing con­tract for work over $5,000 (Lump Sum Con­tract) and back­dat­ed to the date at which the Cost-Plus Con­tract was signed by the parties.

Under a Lump Sum Con­tract, a sin­gle 'lump sum' price for all the works is agreed before the works are com­menced by the builder.

The plain­tiffs alleged breach­es of the build­ing con­tract by the defen­dant and com­menced pro­ceed­ings claim­ing damages.

In the course of the pro­ceed­ings, the Court was required to deter­mine the terms of the build­ing con­tract and, in rela­tion to that par­tic­u­lar issue, was asked by the par­ties to decide whether the Lump Sum Con­tract was intend­ed to replace the Cost-Plus Contract.

The defen­dant builder ini­tial­ly argued that the Lump Sum Con­tract was not intend­ed to replace the Cost Plus Con­tract to any extent and that it was, in effect, no more than a sham. He assert­ed that the Lump Sum Con­tract was brought into exis­tence sole­ly to enable the plain­tiffs to rep­re­sent to their bank (who were financ­ing the project) that they had a con­tract with a builder for a fixed sum, a require­ment spec­i­fied in a loan approval giv­en to the plain­tiffs by their bank.

In the course of oral address­es after all of the lay evi­dence had been com­plet­ed, the defen­dant builder's posi­tion changed.

In that regard, the defen­dant was grant­ed leave to amend his Response and Cross Claim to assert, among oth­er things, that in Jan­u­ary 2015, the par­ties signed the Lump Sum Con­tract which they dat­ed 14 Octo­ber 2014 for the sole pur­pose of pro­vid­ing the doc­u­ment to the plain­tiffs' bank to assist the plain­tiffs to obtain finance for the project, but:

1. the par­ties oral­ly agreed that they would con­tin­ue to be bound by and apply the Costs Plus Con­tract; and
2. the defen­dant builder had informed the first plain­tiff a num­ber of times, and the first plain­tiff had agreed, that the cost of the project would be greater than the amount stat­ed in the Lump Sum Contract.

Deci­sion

In deter­min­ing whether the par­ties were bound by the Cost-Plus Con­tract (which was signed by the par­ties first) or whether the Lump Sum Con­tract (which was signed lat­er but back­dat­ed to the date of the Cost-Plus Con­tract) pre­vailed, Emmett AJA found at [69] that despite minor incon­sis­ten­cies in the con­tem­po­ra­ne­ous mate­r­i­al, the major­i­ty of the doc­u­ments relat­ing to the project (which includ­ed the pro­posed build­ing doc­u­ments, such as archi­tec­tur­al draw­ings and a build­ing quote) point­ed to the par­ties' inten­tion as being bound by the Lump Sum Contract.

In reach­ing that con­clu­sion, his Hon­our found at [13] that it was not pos­si­ble to find any agree­ment that the Cost-Plus Con­tract was to remain bind­ing on any par­ty in any way and, despite the dis­sat­is­fac­tion of the defen­dant, the arrange­ments (as between the par­ties) were changed in a crit­i­cal respect by the sign­ing of the Lump Sum Contract.

Accord­ing­ly, his Hon­our decid­ed that the par­ties were bound by the Lump Sum Contract.

Lessons

This case demon­strates how the Courts deal with the exis­tence of two con­struc­tion con­tracts and decide which one ought to bind the parties.

In that regard, the deci­sion of Emmett AJA high­lights how, in deter­min­ing the terms of a build­ing con­tract, the Court will attach sig­nif­i­cant weight to the con­tem­po­ra­ne­ous mate­r­i­al rather than the oral evi­dence pre­sent­ed by at tri­al the parties.

The case also serves as a time­ly reminder to con­trac­tors that a sec­ond con­tract, entered into sole­ly for finance pur­pos­es can be found to be bind­ing, pro­vid­ed the par­ties act in a way which sug­gest the con­tract applies to them, as occurred in Stepanos­ki as detailed above.

For further information please contact:

Sean Greenwood, Associate
Phone: +61 2 9777 8315
Email: stg@swaab.com.au

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.