Building and Construction Contracts: The Importance of Good Contract Administration

Adelaide’s landscape is constantly changing. Although the COVID-19 pandemic has stymied the growth of many industries, the State Government’s Renew Adelaide project and home-builder grants have ensured that there is no shortage of building and construction works being carried out in the CBD and greater Adelaide. With ever more construction works being carried out, a corresponding increase in building and construction disputes of various kinds is inevitable.

Against this backdrop, the recent decision of His Honour Judge O’Sullivan in Crea v Bedrock Construction Pty Ltd[1] provides a timely reminder of the importance of proper contract administration for builders and building owners alike.

The facts

In January 2016, the Applicant, a local restaurant owner (Owner), entered into a Simple Works contract with the Respondent builder (Builder) for the renovation and fit-out of his premises (Works). The Works were to be completed within 10 weeks or by 12 March 2016. A well-regarded interior designer was appointed to the role of architect pursuant to the contract (Architect), whose role was to administer and supervise the contract.

The terms of the contract provided for weekly progress payments and, following the completion of the works, the Builder was entitled to make a final claim for payment of the balance of the contract sum owing (plus any agreed changes to the contract sum for variations, prime cost items or delay).

On 22 April 2016, the Owner took possession of the Premises despite the Works not yet having been completed. Shortly after, the Owner gave notice that he intended to terminate the contract on the basis that the works were substantially defective in that they had departed in several areas from the contract drawings. The Builder then issued a final claim for payment of the balance of the contract sum plus unpaid variations.

The Owner issued proceedings for breach of contract, alleging that the Builder was liable to meet the cost of rectifying the Builder’s defective Works. The Builder issued proceedings for payment of agreed variations to the Works, alleging that the Owner and the Architect had given oral instructions to vary certain aspects of the Works from the original contract drawings. The two proceedings were subsequently joined and were heard together in the District Court.

The Builder’s case, upon which this article will focus, was based upon two claims:

  1. firstly, that the Builder was entitled to be paid for variations pursuant to the contract; and
  2. alternatively, that the Builder was entitled to payment for variations by virtue of an implied promise to pay.

Contractual v restitutionary remedies

The Builder’s primary claim was based on the building contract as agreed between the parties. Contrary to a restitutionary remedy, an award of damages for breach of contract is intended to reflect the contractual bargain struck between the parties, and is generally limited to the value of the contract (or to the portion of the contract that has been performed).

On the other hand, the Builder’s alternative claim for payment of variations by virtue of an implied promise to pay drew from the decision of Chief Justice Griffiths in Liebe v Molloy[2]. His Honour held that where a contractor has carried out additional building work at the instruction of the owner or principal, and where the contractor has a reasonable expectation of payment for that work, an implied promise to pay for that work will be presumed. Absent such a promise, and the consequent right to restitution, the owner would be unjustly enriched to the detriment of the builder.

So sound was the judgment of the Chief Justice and the principle that he posited, that it has remained largely undisturbed for over 100 years.

The award of a restitutionary remedy is generally intended to protect the interests of a disadvantaged party where there is no applicable contract or where an applicable contract no longer governs the relationship between the parties. The latter may occur when the contract is repudiated by one party, which may leave the other with no basis upon which to claim remuneration for work done. The classic example of a restitutionary claim is a claim in quantum meruit, for the value of services provided.

In the case of building contracts, the award of a restitutionary remedy is intended to prevent the building owner from being unduly enriched at the expense of the builder.

Contractual risk allocation – Mann v Peterson Constructions

The judgment of His Honour Judge O’Sullivan in Crea, whilst not putting into question the principle set down by the High Court in Liebe v Molloy, considered the recent judgment of the High Court in Mann v Paterson Constructions[3] in order to delineate the circumstances in which it is appropriate for restitutionary remedies to be awarded in disputes concerning building and construction contracts.

Mann was concerned with a similar scenario to that in Crea, namely a dispute concerning a builder’s request for payment for variations directed by the owner of the property. In coming to its ultimate conclusion, the majority was required to consider the interplay of contractual and restitutionary remedies in the context of building disputes.

In considering the dispute, the majority concluded that where there is a contractual right of payment which has not been displaced (either by rescission or some other means), then there can be no basis for the award of a restitutionary remedy that is inconsistent with the terms of the contract.[4]

Although the factual matrix and result of Mann were not considered, the obiter of Chief Justice Kiefel and Justices Bell and Keane was drawn upon by His Honour Judge O’Sullivan, who posited the following summary of the interplay between contractual and restitutionary claims:[5]

In my view, if there is an instruction for a Variation which comes within the provisions of the Contract … then there is no room for the principle in Liebe v Molloy to override the contractual provisions that then follow. To do so is to ignore the agreement between the parties and in particular the agreed risk allocation. If, on the other hand, there is an instruction to do work which does not come within the contractual framework for Variations, then depending on the facts as I find them, it may well be that [the Builder] is entitled to claim the cost of carrying out the Variation albeit classified as an “Extra”, on a restitutionary basis or applying Liebe v Molloy on the basis of an implied promise to pay.”

Variation or extra?

In order to understand the delineation of circumstances in which it would be appropriate for the Court to order restitution, it is first necessary to understand the distinction between an extra and a variation in respect of a building contract.

On the one hand, extras are works which do not fall within the scope of the owner or superintendent’s power to order an addition or additions to the works under the relevant building contract and, as such, cannot properly be considered to be governed by the contract.

Variations, on the other hand, are generally confined to changes or alterations to the works as defined within the contractual documents. As such, what exactly is defined as a variation will depend on the specific contract.

Compliance with the contract

In his reasons, His Honour sets out in detail the contractual mechanism for claiming, and in doing so becoming entitled to payment for, variations under the particular contract in that case.

The process required written correspondence between the Architect and the Builder in order to confirm that a variation was approved and, importantly, that the variation was to be reflected in the contract price.

There was no power under the contract for the Owner to direct a variation. Accordingly, His Honour found that whenever the Owner directed the Builder to carry out Works, those works were to be considered “Extras,” and the Builder was therefore entitled to a restitutionary remedy.

Where the work was requested by the Architect, or suggested by the Builder, the Builder’s failure to comply with the contractual regime for adjusting the contract price would be fatal to his claim for payment for those Works.

His Honour considered each of the 22 variations claimed by the Builder individually. In doing so, it was necessary to determine whether each variation was actually an Extra or a Variation and, if the latter, whether the Builder had complied with the contractual regime for payment.

Ultimately, largely as a result of his non-compliance with the contractual regime, the Builder was only entitled to payment for 10 of the 22 variations claimed.

Conclusion

In summary, the decision in Crea makes clear that where a contractual mechanism exists for claiming payment for variations to contract works, strict compliance with that contractual mechanism is required in order for a claim for that payment to be valid. To rely upon extra-contractual means of enforcement is wholly inconsistent with the contractual allocation of risk between the parties and subverts the inherent purpose of the contract – to set out the rights and obligations of the parties.[6]

It is not enough to rely upon the goodwill of either party – a handshake and a promise; both builders and building owners alike must understand the terms and requirements of the contracts in place between them and ensure that they are compliant with those requirements. Where the contract requires that consent or direction for a variation be given in writing, it is incumbent upon both parties to ensure that this is provided to avoid disappointment down the line.


[1] [2020] SADC 124 (Crea).

[2] (1906) 4 CLR 437.

[3] [2019] HCA 32 (Mann).

[4] Mann, 19.

[5] Crea, [170].

[6] NB. An Appeal to the Full Court has since been commenced.

For more information, please contact:
Joe De Ruvo

Joe De Ruvo
Director
p.  +61 8 8124 1872
e.  Email me

This communication provides general information which is current as at the time of production. The information contained in this communication does not constitute advice and should not be relied upon as such. Professional advice should be sought prior to any action being taken in reliance on any of the information. Should you wish to discuss any matter raised in this report, or what it means for you, your business or your clients' businesses, please feel free to contact us.

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