20 July, 2016
In DCT Projects Pty Limited v Champion Homes Sales Pty Limited,1 the principal appealed the Supreme Court’s finding that the principal had wrongfully terminated the construction contract. This finding, of course, led the Supreme Court to find further that the principal’s wrongful termination amounted to repudiation of the construction contract, allowing the builder to accept the repudiation and lawfully terminate the construction contract (which the builder did).
The Court of Appeal rejected this ground of appeal.
This decision provides yet another example of the pitfalls of termination of a construction contract and why it is crucial to ensure that a basis for termination exists and that the process leading to lawful termination is properly followed before such rights are exercised.
DCT Projects Pty Limited v Champion Homes Sales Pty Limited
Background
This case concerned the construction of eight townhouses on land in south-west Sydney. The land was owned by the first appellant, DCT Projects Pty Limited (Projects). Projects put the building work to tender, and ultimately in May 2006 entered into a contract with the first respondent, Champion Homes Sales Pty Limited (Champion Homes) to undertake the building works (Contract).
In short, there were several issues and disputes between the parties in relation to delay and the progress of the work, variations to the work, and payment and in November 2007, Champion Homes suspended work
at the site. 1. [2016]NSWCA117
As a result, in December 2007, the parties entered into a ‘Modification Agreement’ pursuant to which, among
other things, the parties affirmed the Contract, and agreed that Projects’ quantity surveyor would value disputed variations, along with future variations.
However, in 2008, further disputes between the parties arose, leading Champion Homes to suspend the works on a further three occasions.
Following the final suspension, in June 2008, Projects gave notice purporting to terminate the Contract (without following the regime in the Contract, which required Projects to serve a notice of default and would have allowed Champion Homes ten working days to remedy the breach identified in the notice). In turn, Champion Homes treated Projects’ notice of termination as a repudiation of the Contract and, accordingly, itself purported to terminate the Contract and sued Projects for damages.
Although there were other claims and cross-claims made at first instance, and other findings challenged on appeal, this article focuses on the issues of repudiation and termination.
Supreme Court decision
At first instance,2 Projects claimed that it was entitled to terminate the Contract on the basis that Champion Homes had repudiated the Contract by not performing its obligations under the Contract for the 6 month period after the parties had entered into the ‘Modification Agreement’.
2. ChampionHomesSalesPtyLimitedvDCTProjects Pty Limited [2015] NSWSC 616
Projects’ claim failed. Justice Ball found that the evidence failed to establish that Champion Homes evinced an intention not to be bound by the Contract or an intention only to fulfil the Contract in a manner substantially inconsistent with its obligations. In particular, his Honour noted that:
a large part of Champion Homes’ delay in progressing the works was due to rain, Projects’ failure to provide Champion Homes instructions, Projects’ failure to settle disputes with neighbours regarding the works, and delay caused by works of other of Projects’ contractors.
Champion Homes’ suspensions of the works were as a result of its belief, with some justification, that it had not been paid amounts owing to it.
When Champion Homes suspended the works, it was open to Projects to serve a notice under the Contract giving Champion Homes ten days’ notice to resume work and Projects failed to do this.
Champion Homes continued to carry out work during the periods when work was not suspended.
Projects bore the onus of proving that work could have been, but was not, done and did not seek to discharge the onus.
while it is possible that Champion Homes could have done more and may have breached its obligation under the Contract to use all endeavours to proceed with the work under the contract with due expedition and without delay, this did not amount to a repudiation of the Contract.
Accordingly, his Honour concluded that Projects’ purported termination was wrongful, which entitled Champion Homes to terminate the Contract (which it did).
Court of Appeal decision
In a unanimous decision, the Court of Appeal rejected Projects’ appeal and confirmed the Supreme Court’s finding that Projects’ purported termination of the contract was wrongful.
In the course of considering this ground of appeal, Gleeson JA succinctly summarised the principles which apply to determine whether a party has repudiated its contractual obligations. Noting that Projects asserted that the Court should infer from Champion Homes’ words and conduct that it was unwilling to perform its obligations, his Honour highlighted that:
- repudiation is a serious matter and is not to be lightly found or inferred.
- for the conduct of a party to constitute a renunciation of its contractual obligations, it must be shown that the party is unwilling or unable to perform its contractual obligations.
- a renunciation can be made either by words or conduct, provided it is clearly made— the test being whether the conduct of one party is such as to convey to a reasonable person, in the situation of the other party, renunciation either of the contract as a whole or of a fundamental obligation under it.
So far as unwillingness is concerned, it must be shown that the other party has evinced an intention no longer to be bound by the contract, or stated that it intends to fulfil the contract only in a manner substantially inconsistent with its obligations and in no other way.
The ‘first and overarching’ matter Projects relied on in support of its position was Champion Homes’ delay in the performance of the Contract.
To start with, his Honour noted Projects’ submission that while the Contract required completion within 45 weeks, it was terminated after 98 weeks. The Court nevertheless observed that given the Modification Agreement affirmed the Contract, the focus needed to be on the period between the parties’ entrance into the Modification Agreement (13 December 2007) and Projects’ letter of termination (2 July 2008). His Honour noted the Court’s findings that during this period, among other things, work was undertaken, genuine payment disputes arose, and delay arose from an absence of instructions from Projects.
In further support of this contention, Projects alleged that Champion Homes failed to proceed with due diligence. The Court noted three difficulties with this contention:
- this was not a case where no work was undertaken during the relevant period;
- the lack of activity was explainable by a number of circumstances (including rain and the absence of instructions); and
- Projects bore the onus of establishing that work could have been done, but failed to discharge the onus.
Accordingly, the Court of Appeal wasvnot prepared to disturb the Supreme Court’s finding that while Champion Homes may have been able to do more to progress the works, and may have been in breach of its contractual obligations to do so, that did not amount to repudiation.
The Court then addressed further arguments raised by Projects, including in relation to threats made by Champion Homes to suspend the works, an invalid suspension of the works (based on a belief that payment of amounts due and owing were outstanding), the failure of Champion Homes to undertake ‘core’ work under the Contract after the Modification Agreement, and the failure to provide an updated works program. The Court was not prepared to find that any of these things, individually or collectively, amounted to repudiatory conduct.
Accordingly, the Court was not prepared to disturb the Supreme Court’s finding that Projects had failed to demonstrate that Champion Homes had repudiated the Contract.
Champion Homes was accordingly entitled to accept Projects’ unlawful, purported termination as repudiation and itself terminate the Contract, which it did, and sue for damages.
WHAT THIS DECISION MEANS FOR YOU
This case serves as a further reminder of the importance of carefully considering whether a basis of termination exists and following the relevant process for termination before purporting to terminate.
As this case demonstrates, a party faced with a breach which it considers to be repudiation should tread carefully.
If the party purports to terminate, and is found to have been wrong, that act itself will amount to repudiation. This will, of course, allow the other party to accept the repudiation and itself terminate the contract and sue for damages. This can have significant consequences for the party in error, including leaving the party faced with an unexpected liability for damages. On large construction projects, this liability can be significant, and may include things such as lost profit and costs associated with engaging a new party to complete the works. This will be an especially bitter
pill to swallow for a party who has otherwise conducted itself in accordance with its contractual obligations.
For further information, please contact:
Elisabeth Maryanov, Herbert Smith Freehills
elisabeth.maryanov@hsf.com
