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Focus: Construction – September 2005

Dealing with common construction claims in Victoria

In brief: Partner Tom Yuncken and Articled Clerk Victoria Foster look at a recent Victorian Supreme Court decision that has clarified the approach for determining some of the common claims made by parties in construction disputes.

In the case of Kane Constructions Pty Ltd v Cole Sopov and Ors [2005] VSC 237, Chief Justice Warren made some important findings as to how parties should go about proving claims for extensions of time, what is relevant when assessing the value of work performed on a quantum meruit basis, and the circumstances that might place a superintendent in a position of partiality.

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Background

Kane Constructions Pty Ltd (Kane) entered into a contract with Sopov and others (Sopov) for the renovation and extension of a disused boiler house. Following a successful tender, Kane was given possession of the site and commenced works without contractual arrangements having been finalised. On 20 August 1999, some time after the works had begun, Kane and Sopov finally executed a written building contract (the Contract).

The works were to be completed in 130 working days, but a series of delays meant that the works were still incomplete one year later. On 18 September 2000, after Sopov had failed to pay two previous progress claims in full, Kane suspended works. Sopov responded with a show cause notice asserting that Kane had improperly suspended the work and claimed undue delays in the work. On 2 October 2000, Sopov threatened to serve a notice to call up the bank guarantees. Kane asserted that Sopov was not entitled to do so, treated the action as repudiation and terminated the Contract, having already removed its plant and equipment and vacated the site without warning.

Thereafter Sopov assumed control of the site and set about completion, largely through the engagement of a subcontractor previously retained by Kane. Kane alleged that, at the time of termination, the works were 90 per cent complete, while Sopov claimed only 70 per cent of the contracted work was completed and, in addition, extensive rectification works were necessary.

Kane made a variety of claims against Sopov, including claims for extensions of time, quantum meruit and undue influence by Sopov over the superintendent. These claims are discussed below.

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Quantum Meruit

Kane's primary claim in the proceeding was payment for the works performed on the basis of quantum meruit. This was said to constitute all expenditure incurred by Kane on the project plus a 10 per cent margin, less the amounts already paid by Sopov during the course of the project.

Kane claimed that if it made out its case on termination (which Chief Justice Warren found it had), as an innocent party having accepted repudiation, it had the option of either suing for damages for breach of contract or suing on a quantum meruit for the work done. Chief Justice Warren followed the Victorian case of Brooks Robinson Pty Ltd v Rothfield [1951] VLR 405 where Justice Dean (with whom Justices Martin and Scholl agreed) held that an innocent party could make such an election. Her Honour felt that this principle still applied, despite potential controversy regarding the application of restitutionary remedies in this manner, subsequent to the High Court's decision in Pavey & Matthews Pty Ltd v Paul (1987) 162 CLR 221.

Chief Justice Warren held that Kane was allowed to recover on the basis of a quantum meruit by way of an assessment of the fair and reasonable value of the work. Her Honour stated that making this assessment in the context of a building case would usually involve assessing the degree of completion of the work and the value of that work. A party claiming quantum meruit in a building context is therefore obliged to establish the work performed and its value as well as establishing that it was performed with proper skill and completed within a reasonable time.

Chief Justice Warren was satisfied that Kane had performed 90 per cent of the works and had proved the amounts claimed. In assessing the fair and reasonable value of the work performed, her Honour followed relevant case law and held that deductions could be made to a quantum meruit claim on account of the cost of rectifying the work to accord with the contract or to represent or record that the work was not left in a satisfactory state. Likewise, an entitlement to deduct liquidated damages from a quantum meruit amount arises if the work failed to reach practical completion unconditionally before the contract was terminated. Chief Justice Warren stated that it therefore follows that, notwithstanding the making out of the quantum meruit claim by Kane, the amount to which it is entitled should take account of delay, rectification and liquidated damages. This is consistent with the High Court decisions of McDonald v Dennys Lascelles Ltd (1933) 48 CLR 457 and Westralian Farmers Ltd v Commonwealth Agricultural Service Engineers Ltd (1936) 54 CLR 351.

Kane included in its quantum meruit claim a component for overhead and profit margin of ten per cent on the purchase order and sub-contract payments. Chief Justice Warren held, however, that this margin was invalid and made no allowance in the assessment on the quantum meruit for a profit margin as claimed by Kane. Her Honour stated:

It does not seem to me that a component of a margin is one contemplated by the authorities in the context of assessing a claim based on quantum meruit. It is the actual cost of the work done that is intended to be the subject of the assessment on a quantum meruit. A profit margin seems to me to lie more properly with contractual damages rather than on a quantum meruit.

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Extensions of time

The Contract made provision for the submission of a written claim for an extension of time (EOT) for practical completion. Kane claimed that it was delayed during the course of the works by various events and therefore the date for practical completion warranted EOTs. There were 18 EOT claims by Kane totalling approximately 180 days and Chief Justice Warren considered each of them individually after discussing in detail the principles generally applied to EOT claims. Her Honour stated:

an adjustment to the time of practical completion is only available where there has been an actual delay and the delay was caused by one of the events set out in the contract. Any delay that does not affect practical completion is irrelevant. Further, where the contractor has been delayed by one of the reasons set out in cl 35.5 of the contract, for example, delay caused by an act of the principal in combination with another valid delay, then the situation of concurrency may exist and the contractor would not be entitled to an additional extension of time; it would be calculated as if just one event of delay had occurred.

Chief Justice Warren examined the approach taken by courts to determine EOT claims applied in the UK Court of Appeal case of McAlpine Humberoak Ltd v McDermott International Inc (No 1) (1992) 58 BLR 1 (McAlpine). There the court considered that, as a general rule, a period of excusable delay should be added to the end of the contract period, but that the outcome of each case must depend upon the wording of the contract. According to Lord Justice Lloyd, the approach adopted by the defendants in that case of tracing the impact of every drawing revision, variation order and technical query was just what was required and that the appropriate approach to be taken in such cases involves a factual analysis with good records in support of relevant events, looking at their effect according to the time in which they occur and in the context of the work actually going on at the time.

Chief Justice Warren found McAlpine outlined the correct approach to be taken with respect to EOT claims and that Kane, as claimant, carried the burden of proof to establish actual delay. Chief Justice Warren also confirmed McAlpine's approach of requiring a builder to present a 'drawing by drawing, beam by beam, column by column, gutter by gutter, factual analysis' to show how a particular event had the effect of delaying other identified work. Chief Justice Warren then reviewed each EOT claim on this basis and allowed a total of 56 days.

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Superintendent

Kane also claimed that Sopov breached the Contract by failing to ensure that the superintendent acted fairly and honestly in the administration of the contract.

Chief Justice Warren considered the construction of the expression 'honestly and fairly' as stated in the Contract. While her Honour felt that the expression had not been judicially considered, she drew assistance from the judgment of Perini Corporation v Commonwealth of Australia [1969] 2 NSWLR 530 and various judgments in the context of securities law. Chief Justice Warren concluded from these cases that a superintendent is acting honestly and fairly 'when that individual is not dishonest, is just and impartial and conducts him or herself in a reasonable manner'.

Kane also sought a finding of undue influence by Sopov over the superintendent. Chief Justice Warren examined relevant commentaries and authorities and summarised what the authorities considered to be interference with a superintendent. Circumstances in which interference with a superintendent could lead to a lack of impartiality include:

  • when the superintendent allows judgment to be influenced;
  • when the superintendent is in a position whereby the certificate is deprived of value;
  • when the superintendent acts in the interests of one of the parties and by their direction;
  • when the position is misconceived and the superintendent acts as mediator;
  • when there is not sufficient firmness in order to decide questions based on his or her own opinion;
  • where the superintendent's judgment and conduct are controlled by the principal; and
  • where the superintendent:
    • considers the assent of the principal to be necessary;
    • has ceased to be a free agent; and
    • does not give full disclosure of every communication between the superintendent and the principal.

Her Honour also stated that a superintendent 'may lose independence without actually intending to do so or even without knowledge they have done so'.

Chief Justice Warren considered the fact that the superintendent in this case was at the same time acting as the certifier for the bank, affirming that this dual role affected his independence. Her Honour found that, while he did not act dishonestly and instead set about with the best intentions to resolve the dispute between Kane and Sopov, this was not within his role as superintendent. The superintendent 'had an undesirably close relationship with Sopov given the role the superintendent is expected to maintain and the superintendent failed to perform his role in a competent and independent way'. Chief Justice Warren stated that, while she was of the view that the superintendent 'failed to understand the obligations of his role and postponed making decisions he ought to have promptly made as superintendent, in all likelihood, because of the interference of Sopov', an allegation of undue influence is a very serious matter and she was not satisfied that the circumstances of this case constituted such an offence.

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Conclusion

This decision is a useful example of the application of the law relating to claims for quantum meruit, extensions of time and the role of the superintendent. It also confirms that the Victorian approach to determining construction disputes is consistent with the approach adopted in other states.

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