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Brewarrina Shire Council v Beckhaus Civil Pty Ltd & 1 Or [2005] NSWCA 248 and the theory of Temporary Disconformity

By October 29, 2019 No Comments

Summary

  1. The decision of the Court of Appeal in Brewarrina Shire Council v Beckhaus Civil Pty Ltd & 1 Or [2005] NSWCA 248 should not be taken to be authority for the proposition that there can be no claim for breach of contract arising from defective works while the contract remains on foot, or that there can be no damages arising from such a breach, and that, to the extent that certain decisions of the Appeal Panel of the New South Wales Civil and Administrative Tribunal suggest otherwise, those decisions should be treated with caution.

 

  1. The decision in Brewarrina may be authority for the proposition that an owner cannot, in the same proceedings, hold the builder to its obligation to carry out and complete the work and at the same time claim damages for the builder’s failure to do so, where these are inconsistent remedies under the applicable contract.

 

Temporary Disconformity

  1. Hudson’s Building Contracts (13th Edn) addresses the question of whether or not a breach can arise from defective work before practical completion and handover at paragraph 4-074, under the heading “Temporary Disconformity”.

 

The temporary disconformity theory is to the effect that a Contractor who carries out defective work will not be in actual breach of contract until completion and handover. If that were correct, no injunction could be obtained to prevent a recalcitrant contractor from continuing to build in breach of the specification or drawings. It would be particularly damaging to Employers in informal contracts with no express powers of rejection, or in cases where the express powers in many standard forms afford only the often impractical remedy of demolition and removal.

 

  1. In the ensuing discussion the learned authors observed that the principle owed its origin to one passage in the dissenting speech of Lord Diplock in P & M Kaye Ltd v Hosier & Dickinson Ltd [1972] 1 All ER Rep 121 (HL), but went on to note that a number of later cases do not support the temporary disconformity theory and conclude at 4-075, that:

In all these authorities where the “temporary disconformity” is adopted, it is limited to defects which are genuinely temporary. It is not applied where the Contractor has refused to put the work right at the proper time, is covering up or building on unsatisfactory work, or cases where the defects are already so serious or numerous enough to cause substantial delay or loss.

 

Owners of Strata Plan 80458 v TQM Design & Construct Pty Ltd [2018] NSWSC

  1. The passage in Hosier v Dickinson was expressly addressed by Hammerschlag J in Owners of Strata Plan 80458 v TQM Design & Construct Pty Ltd [2018] NSWSC 1304 (23 August 2018).

 

  1. The facts of that case were that an owners corporation brought a claim for damages against the builder who had contracted with a developer to build the building vested in the owners corporation.

 

  1. Before the works the subject of the contract had reached practical completion, the builder had suspended the works pursuant to a statutory entitlement arising from non-payment of a progress claim. The developer subsequently purported to exercise a right to take out of the builder’s hands the whole of the work remaining to be completed, a right that was disputed by the builder.

 

  1. The developer then refused the builder access to the site. Although there was no evidence of formal termination, the parties seemed to agree, before the Court, that the contract must at some stage have been abandoned.

 

  1. As part of its argument, the builder argued that it was denied the opportunity to remedy any defects because the developer took the work out of its hands unlawfully and that, applying the temporary disconformity theory, any defects were merely temporary and, therefore, not a breach of the Contract for which the developer could sue.

 

  1. The argument was rejected. Hammerschlag J referred to the passage in Lord Diplock’s dissenting judgment, which said this:

During the construction period it may, and generally will, occur that from time to time some part of the works done by the contractor does not initially conform with the terms of the contract either because it is not in accordance with the contract drawings or the contract bills or because the quality of the workmanship or materials is below the standard required by cl 6(1). The contract places on the contractor the obligation to comply with any instructions of the architect to remedy any temporary disconformity with the requirements of the contract. If it is remedied no loss is sustained by the employer unless the time taken to remedy it results in practical completion being delayed beyond the date of completion designated in the contract. In this event the only loss caused is that the employer is kept out of the use of his building beyond the date on which it was agreed that it should be ready for use. For such delay liquidated damages at an agreed rate are payable under cl 22 of the contract.

On a legalistic analysis it might be argued that temporary disconformity of any part of the works with the requirements of the contract even though remedied before the end of the agreed construction period constituted a breach of contract for which nominal damages would be recoverable. I do not think that makes business sense. Provided that the contractor puts it right timeously I do not think that the parties intended that any temporary disconformity should of itself amount to a breach of contract by the contractor.

  1. Hammerschlag J said that the passage was self-evidently of limited application, and concerned the specific provisions of a specific form of building contract against particular factual circumstances which had arisen, namely, where a conclusive certificate was issued after defective work had been remedied. But he went on to say that the passage was not without its difficulties:

 

[194]      If a contract requires work to be done in a proper and workmanlike fashion and the builder does defective work, it is difficult to understand why, even if the work is later remedied, there was no initial breach. The contract might provide a mechanism to assuage the breach and avoid loss which might otherwise be suffered if the breach were not remedied, but the initial breach still occurred. The conventional approach would be to consider whether given other contractual provisions and the conduct of the employer, the employer has an exigible claim for damages.

 

 

Brewarrina Shire Council v Beckhaus Civil Pty Ltd & 1 Or [2005] NSWCA 248

  1. The material facts of Brewarrina Shire Council v Beckhaus Civil Pty Ltd & 1 Or [2005] NSWCA 248 (4 August 2005) were that Brewarrina let a construction contract to Beckhaus.

 

  1. Beckhaus thought that the works had reached practical completion and requested that practical completion be certified. When Brewarrina refused to certify the claim they commenced proceedings claiming money. Brewarrina cross claimed alleging that Beckhaus had not completed the work in accordance with the Contract and the Council, in consequence, had suffered loss and damage being the costs of rectification. At a late stage it sought to amend its pleadings alleging, additionally, liquidated damages.

 

  1. The Court of Appeal addressed Brewarrina’s claim for defective and incomplete work under the heading “Claiming damages for defective performance while the Contract was on foot”.

53 The notice of contention raises the question whether the Contract was terminated by mutual agreement. The Council long denied this proposition but, on the third day of the appeal, assented to it. Despite the Council’s late acceptance of the proposition, the question remains relevant as it exposes a misconception by both parties in the way the issues were addressed at trial. The misconception was that the Council could claim damages from Beckhaus for defective and incomplete work while the work was still in Beckhaus’ possession and while Beckhaus was still obliged (and entitled) to execute the work to practical completion. This misconception permeated the conduct of the case by all involved and complicated the identification of the true issues in the case.

54 The reason for the Council’s stand is not hard to find. It lies in cl 35.6 of the General Conditions which provided:

“If [Beckhaus] fails to reach Practical Completion by the date for Practical Completion, [Beckhaus] shall be indebted to [the Council] for liquidated damages at the rate stated in the Annexure for every day after the Date for Practical Completion to and including the Date of Practical Completion or the date that the Contract is terminated under Clause 44, whichever first occurs.”

The Council wished to assert that the Contract remained on foot so as to enable it to make a large claim for liquidated damages. Thus, the Council believed that it was in its interests to contend that the Contract had not been terminated but, at the same time, to claim damages for defective and incomplete work.”

55 It is helpful to identify Beckhaus’ obligations to perform the work under the Contract, Beckhaus’ rights to be paid for its work, and the Council’s rights in respect of breaches of the Contract by Beckhaus. Once those obligations and rights are identified, consideration must be given as to whether there was an agreed termination and, if so, how they were affected by the agreed termination.

56 By cl 3.1 of the General Conditions, Beckhaus undertook to execute and complete the work under the Contract and the Council undertook to pay Beckhaus:

“(a)         for work for which the [Council] accepted a lump sum, the lump sum;

(b)           for work for which the [Council] accepted rates, the sum ascertained by multiplying the measured quantity of each section or item of work actually carried out under the contract by the rate accepted by the [council] for the section or item,

adjusted by any additions or deductions made pursuant to the contract.”

Thus, by cl 3.1, the Council’s obligation was to pay Beckhaus for the work executed and completed.

57 Clause 30.3 provided that, if the superintendent discovered material or work provided by Beckhaus that was not in accordance with the Contract, the superintendent might direct Beckhaus to remove the material from the site, to demolish the work, or to reconstruct, replace or correct the material or work. Thus, by cl 30.3, the Council was entitled to require Beckhaus to remedy defective work before the Council was obliged to pay for it.

58 Clause 35.2 provided that Beckhaus should execute the work under the Contract to the stage of practical completion by the date for practical completion. Beckhaus was obliged, on the date of practical completion, to give possession of the site and the work to the Council and, on that date, the Council was obliged to accept possession.

59 At least while the Contract endured, until practical completion was achieved Beckhaus had no obligation and no right to deliver the work to the Council and the Council had no right to take possession of the work.

60 The Contract provided that the date for practical completion of Separable Portion A was 20 weeks after “Date of Acceptance of Tender” and for Separable Portion B “10 weeks after commencement date for Separable Portion B”. Mr Christie, who together with Ms Culkoff, appeared for the Council, accepted that the superintendent probably would have allowed extensions of time to the dates for practical completion until about March 2002. This is not a matter on which any concession was forthcoming from Beckhaus, but it may be accepted that the dates for practical completion were not earlier than March 2002.

61 By cl 37, the defects liability period commenced on the date of practical completion. In terms of cl 37, Beckhaus was obliged to rectify any defects or omissions in the work existing at practical completion. Prior to the fourteenth day after the expiration of the defects liability period, the superintendent could direct Beckhaus to rectify any omission or defect in the work existing at the date of practical completion or which became apparent prior to the expiration of the defects liability period.

62 Clause 42.1 provided for the payment of progress claims; it stated:

“Payment of monies shall not be evidence of the value of work or an admission of liability or evidence that work has been executed satisfactorily but shall be a payment on account only ….”

Thus, a payment of a progress claim was a payment on account.

63 Clause 44.1 provided:

“If a party breaches or repudiates the Contract, nothing in Clause 44 shall prejudice the right of the other party to recover damages or exercise any other right.”

64 Clause 44.5 provided that, should the Council take the work out of Beckhaus’ hands, the Council should complete the work. Clause 44.6 provided:

“When work taken out of the hands of [Beckhaus] under Clause 44.4(a) is completed the Superintendent shall ascertain the cost incurred by the [Council] in completing the work and shall issue a certificate to the [Council] and [Beckhaus] certifying the amount of that cost.

If the cost incurred by the [Council in completing the work] is greater than the amount which would have been paid to [Beckhaus] if the work had been completed by [Beckhaus], the difference shall be a debt due from [Beckhaus] to the [Council]. If the cost incurred by the [Council] is less than the amount that would have been paid to [Beckhaus] if the work had been completed by [Beckhaus], the difference shall be a debt due to [Beckhaus] from the [Council].”

65 No provision of the Contract prevented the Council from suing Beckhaus for damages for breach of contract under common law; but that is not to say that, simply by reason of a failure, by the date for practical completion, to complete the work to the standard required, the Council would be entitled to damages for defective or incomplete work.

66 An important part of the Council’s case at trial was that Beckhaus at no stage achieved practical completion of either Separable Portion A or B. Master Macready upheld this assertion and, for reasons that I later set out, I have come to the same conclusion.

67 Accordingly, as at the judgment date, the Council rightly denied that practical completion had been achieved. But, it continued – at that stage – to hold Beckhaus to its contractual obligations to perform the work. Thus, on the Council’s contention, at the date of judgment, the work remained in Beckhaus’ possession; the Council, in effect, having refused to accept possession.

68 While, on this assumption (the Contract still being on foot), the Council may have been entitled to claim damages for delay arising out of Beckhaus’ failure to achieve practical completion by the date for practical completion, it could not sue Beckhaus for defective or incomplete work. As long as the Council maintained that the Contract was alive and had not been terminated, and held Beckhaus to its obligation to complete the work in accordance with the specification, on its contention the work remained lawfully in Beckhaus’ possession. In other words, it was an inevitable incident of the Council’s argument that the work had not been delivered to and accepted by the Council (Beckhaus – on the Council’s argument – being in possession of and obliged to complete the work). While the work was in Beckhaus’ possession, the Council suffered no loss by reason of defective or incomplete work; the work, not being in the Council’s possession, did not at that stage form part of its patrimony.

69 This situation would have changed when the Contract was terminated. When that occurred, the work (in its defective and incomplete state) was handed over to the Council. At that stage, the Council suffered loss by being in possession of defective and incomplete work.

 

Little v J & K Homes Pty Ltd [2017] NSWCATAP 84

  1. The facts of this case were that a builder commenced work to build a new home which was required to be completed within 120 days. Work ceased after the 120 days had elapsed.

 

  1. Thereafter the builder issued three documents to the owner: a notice of intention to terminate the contract, a notice of suspension, and a claim for extension of time. It was common ground at the hearing that the contract had not been terminated.

 

  1. The Appeal Panel held that Brewarrina Shire Council v Beckhaus Civil Pty Ltd & 1 Or [2005] NSWCA 248 was authority for the proposition that while the contract remains on foot as long as the builder remains in possession of the site it cannot be said that it has failed to fulfil its contractual obligations to deliver the work free of defects. While the contract remains on foot, it is open to the builder to rectify any defect, at least as long as the owner maintains that practical completion has not been achieved, with the consequence that an entitlement to damages has not yet accrued.

 

  1. It then went on to say that the proposition had no application where the claim was a claim for a work order, rather than damages for breach of contract.

 

Thacker v Bonham [2017] NSWCATAP 217

  1. The facts of Thacker v Bonham were that Tribunal at first instance made orders finding, in summary, that a written home building contract between the appellant as owner and the respondent as builder had not been determined and remained on foot, that the builder was to return to the site to complete incomplete works and rectify defective works and complete those works.

 

  1. The owner appealed, seeking damages. The Appel Panel said this at [32]:

 

There is a further reason that the appeal should be dismissed that was canvassed before us in argument. Once the primary member found that the contract had not been terminated, it was not possible for general law contract damages to be awarded for incomplete or defective work which was the only form of relief sought by the owner at first instance: Little v J&K Homes PL[2017] NSWCATAP 84, explaining and applying at [20]-[23] Brewarrina Shire Council v Beckhaus Civil PL[2005] NSWCA 248 at [65][69]. The same conclusion is inevitable before us once there was no challenge to the findings of the primary member that the contract remained on foot.

 

Some difficulties

  1. The Appeal Panel appears to have treated the decision in Brewarrina as authority for the proposition that it is not possible to claim for damages for incomplete and defective work while the contract remains on foot.

 

  1. This approach is not without difficulties. Those difficulties can be illustrated by the decision in Tapp, McFarlane v Clarke (Home Building) [2013] NSWCTTT 619 (6 December 2013).

 

  1. The facts, which are not uncommon in disputes of this nature, were that the parties entered into a building contract and the builder ceased work because he was not receiving payment. The Contract did not come to an end by either party terminating it. Nor was it completed by performance. The owner then claimed damages from the builder arising from defective and incomplete works.

 

  1. The Tribunal referred to the decision in Brewarrina, noting that the contract had not been terminated, but concluded that the parties had agreed by their conduct to terminate the contract and this occurred when the builder stopped working at the premises. It then went on to decide that it was implicit in the termination agreement that the provisions of the contract that dealt with termination would apply.

 

  1. While the implication of a contractual termination by conduct is an eminently sensible way of achieving justice in individual cases, it might be more difficult to establish, as a matter of law, where the question of whether or not the contract had come to an end was the subject of contest. It is also difficult to reconcile with orthodox doctrines of contract law.

 

  1. A party may communicate an intention, by words or conduct, no longer to be bound by the terms of the contract. In those circumstances, the other party is faced with a decision. It may accept that the contract is at an end or elect to treat the contract as remaining on foot. Until the contract is brought to an end, there can be no breach for loss of a bargain following repudiation. To imply from conduct an agreement to terminate the contract risks depriving one or other party of the right to make an election to treat the contract as being on foot.

 

  1. An implied agreement to terminate the contract also sits uneasily with the conventional doctrine of abandonment. The applicable principle was stated by McColl JA in Ryder v Frohlich [2004] NSWCA 472 at [135 – 137]:

 

Where it is plain from the conduct of parties to a contract that neither intends that the contract should be further performed the parties will be regarded as having so conducted themselves as to abandon or abrogate the contract: DTR Nominees Pty Limited v Mona Homes Pty Limited[1978] HCA 12(1978) 138 CLR 423 at 434 (per Stephen, Mason and Jacobs JJ with whom Aickin J agreed); Summers v The Commonwealth[1918] HCA 33(1918) 25 CLR 144 at 151–152 per Isaacs J. The inference of abandonment will be drawn where ‘an “inordinate” length of time has been allowed to elapse, during which neither party has attempted to perform, or called upon the other to perform, a contract made between them …  What is really inferred in such a case is that the contract has been discharged by agreement, each party being entitled to assume from a long-continued ignoring of the contract on both sides that … “the matter is off altogether” ’: Fitzgerald v Masters(1956) 95 CLR 420 at 432; [1956] HCA 53 per Dixon CJ and Fullagar J.

 

Whether there is abandonment or abrogation of a contract is a matter of fact to be inferred from an objective assessment of the conduct of the parties: see CIC Insurance Limited v Bankstown Football Club Limited (1995) 8 ANZ Ins Cas 61–232 per Kirby P; Wallera Pty Limited v CGM Investments Pty Limited[2003] FCAFC 279 at [2] per Ryan J, at [30]–[32] per Kiefel J; at [57] per Gyles J; Marminta Pty Limited v French[2003] QCA 541 at [22] per Jerrard JA, Williams JA and Philippides J agreeing.

 

The underlying premise of the abandonment cases is that a period of time elapses during which neither party to the contract manifests any intention to perform the contract, leading to the inference that the contract has been abandoned. It is clear that the question whether an ‘inordinate length of time has been allowed to elapse’ is relative. In DTR Nominees Pty Limited v Mona Homes Pty Limited the High Court was prepared to infer abandonment after a period of less than five months had elapsed during which neither party took any steps to perform the contract. In Fitzgerald v Masters it was held that a contract for the sale of land had not been abandoned even though proceedings for its specific performance were not commenced until 26 years after its execution.

 

  1. Where there is no inordinate, or even significant, period of time during which the parties have ignored the contract, it would appear that the conventional doctrine of abandonment is not being applied. Moreover, where the contract is abandoned, the terms of the contract cease to operate to regulate the rights and obligations of the parties: ‘the matter is off altogether’.

 

A suggested resolution

  1. It is submitted that the decision in Brewarrina should not be treated as authority for the proposition that there can be no breach of contract where work is carried out otherwise than in accordance with the contract, but the contract remains on foot. This was the approach that was rejected by Hammerschlag J in Owners of Strata Plan 80458 v TQM Design & Construct Pty Ltd and see also the decision of Roskill LJ in Lintest Builders v Roberts (1980) 13 BLR 38 where he said that “the building owner acquired a right at the time the defective work was done”.

 

  1. The question of whether or not a breach of contract has caused loss or damage is not a question of law, but a question of fact. It is possible for loss or damage to be caused by defects where the contract remains on foot, but in some circumstances, such as where the defects are of a temporary nature and would or will in the normal course be rectified if the contract proceeds, it is possible that the breach will not cause loss or damage. The issue of causation will, in each case, depend on the nature of the evidence.

 

  1. Because the question of causation is a question of fact in each case, it is submitted that the decision in Brewarrina should not be taken to have established the legal proposition that it is not possible to recover damages for breach of contract arising from defective or incomplete work while the contract is still on foot.

 

  1. It is suggested that the decision in Brewarrina may be authority for the proposition that an owner cannot, in the same proceedings, hold the builder to its obligation to carry out and complete the work and at the same time claim damages for the builder’s failure to do so, where these are inconsistent remedies under the applicable contract.