24 August 2022
On 30 September 2021, the NSW Civil and Administrative Tribunal (NCAT) Appeal Panel (the Panel) handed down its decision in Day v Quince’s Quality Building Services Pty Ltd [2021] NSWCATAP 296.
The case relates to how the contract price in a fixed-price Residential MBA BC4 construction contract should be adjusted due to changes made during construction which result in less work for the builder.
Importantly, the decision highlights that a Court or Tribunal will take a common-sense approach when interpreting contractual terms.
On 17 May 2017, the Owners entered into a BC4 Contract with a Builder for the construction of a duplex.
The BC4 is a standard form contract published by the Master Builders Association NSW.
During construction, a dispute arose between the parties regarding adjustments to the Contract Price for changes to three (3) key components of work under the Contract, being Hydraulic Works, Cladding Works and Painting Works.
The Hydraulic Works under the Contract included the supply and installation of two underground rainwater tanks, and two “Atlantis Flo” drainage systems under the decks of the duplexes.
However, the Builder instead installed an above-ground rainwater tank at the side of the building (which was agreed by the Owners).
Due to the change, the Builder was no longer required to excavate the ground, purchase and install the “Atlantis Flo” detention systems, or purchase any materials or undertake labour that would otherwise be associated with that work.
The Cladding Works under the Contract included the supply and installation of hardwood timber cladding.
However, the hardwood timber was substituted for a different product which required less labour to install.
Painting Works were required under the Contract to the exterior of the building.
However, due to a change of the cladding product and the use of powder-coated aluminium screens on the sides of the building, significantly less external painting work was required.
The key point in dispute in this case was whether the Owners were entitled to a reduction in the Contract Price due to the change in work undertaken by the Builder.
The Owners relied on clause 14(f) of the Contract to argue that the contract price ought to be reduced to reflect the changes and ‘omissions’ in respect of the Hydraulic, Cladding and Painting works.
Relevantly, clause 14(f) of the Contract stated:
Where the works are decreased or omissions from the works are made the cost of the work not now required is to be deducted from the contract price. Cost in this case means the actual cost of labour, subcontractors or materials saved by the Builder because the work is now not required to be done. No other deduction is required by reason of the work or aspect of work being decreased or omitted.
The Builder argued that the clause did not entitle the Owners to a deduction of the Contract Price for the changes to the work.
Rather, the Builder submitted that the only reductions which are allowed under the Contract arise where the work is not required to be done at all.
The Builder said that in this case, the work was still “required to be done” but just in a different manner to what was originally planned.
Put simply, the Builder’s case was that the Owners contracted for a water tank and received a water tank, and the Contract did not allow the Owners to claim for the difference in cost between the planned below-ground rainwater tanks and the delivered above-ground rainwater tanks.
The Builder applied the same reasoning to the Cladding and Painting works.
At first instance, the Tribunal found for the Builder on the basis that:
a) clause 14(f) of the Contract only operated where work was not done, not the situation where work was done but in a different manner to achieve the same or a similar result; and
b) ultimately, the work itself was still done and therefore did not fit in with clause 14(f) which allowed a deduction for work that was “not required to be done.”
The Tribunal at first instance stated:
[83] In a fixed price or lump sum contract, both parties are at risk where “work done” is more expensive or cheaper than the allowance in the contract. Just as the respondent is not entitled to additional payment if the work turns out to be more expensive, so the applicants are not entitled to a discount or refund where the work turns out to be less expensive, provided always that the “work done” is actually done.
In other words, according to the Tribunal, the Builder was entitled to the benefit of the difference in the costs between what was originally contracted for and what was delivered.
The Owners appealed the Tribunal’s decision.
The Appeal Panel allowed the appeal and remitted the matter back to the Tribunal for determination.
The Appeal Panel said that clause 14(f) had to be read in the context of other clauses in the Contract, and referred to clauses 14 (g), (h) and (i), which all relate to price changes as a result of decreased or omitted work and additional work.
(g) Where the work to be done is increased, the cost of the extra work is to be added to the contract price. The Builder can choose when and how often to claim payment for variation work and is not required to wait until the next stage claim.
(h) Where price has not been previously agreed for variation work and the price to be paid for the work will be the cost as calculated in accordance with Sub-Clause (i) below, together with the allowance specified in ltem 1 of Schedule 2 for overhead and profit.
(i) The cost referred to in Sub-Clause (h) above, unless otherwise agreed, will be calculated as follows: …
The Appeal Panel said that cl 14(f) provides for the situation where the works are decreased or omissions from the works are made.
In that case, the cost of the work now not required is to be deducted from the contract price.
This was in the context of clause 14(g) which provides that where the work to be done is increased, the cost of the extra work is to be added to the contract price.
The Appeal Panel noted that if the Builder was correct, in a fixed-price contract there would be windfall gains to a builder if the costs of the works decreased, and windfall gains to the homeowner if the costs increased.
Applying a common-sense interpretation to the Contract, the Appeal Panel said that would be an unreasonable result and that it did not make sense for a commercial contract.
Therefore, the Appeal Panel found that the Tribunal at first instance misinterpreted clause 14.
In arriving at this conclusion, the Appeal Panel provided a useful summary of the principles applied when interpreting contractual terms.
Those principles include:
(a) Commercial contracts have to be given a businesslike interpretation (at [50], citing McCann v Switzerland Insurance Australia Ltd (2000) 203 CLR 579));
(b) The following need to be considered (at [50], citing Nadarasa v Vansan Construction Pty Ltd [2018] NSWCATAP 270 and International Air Transport Association v Ansett Australia Holdings Ltd (2008) 234 CLR 151:
i. The language used by the parties;
ii. The circumstances addressed by the Contract;
iii. The objects that the Contract intends to secure;
iv. The genesis of the transaction, the background and the market; and
v. The background and purpose of the Contract;
(c) A Court or Tribunal will presume that the parties do not intend for the terms to operate unreasonably (at [51(1)], citing L Schuler AG v Wickman Machine Tool Sales Ltd [1974] AC 235;
(d) Where a particular construction of the contractual terms would achieve an unreasonable result, a Court or Tribunal should be reluctant to accept that was what was meant by the parties (at [51(2)], citing TCN Channel 9 Pty Ltd v Hayden Enterprises Pty Ltd (1989) 16 NSWLR 130); and
(e) a “business commonsense” approach must be taken in the interpretation of commercial contracts (at [51(3), citing Anataios Compania Naviera SA v Salen Rederoerna AB [1985] AC 191].
The key takeaways from this case are:
[ ALL IN A DAY’S WORK – NCAT Adjusts Fixed Price Building Contract ]
Please contact Anish Wilson, Senior Associate (anish.wilson@kreisson.com.au) on (02) 8239 6500 if you have any questions regarding anything above or if you need any assistance.
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