Kane Constructions v Sopov [2005] VSC 237
In the Supreme Court of Victoria, Warren CJ held that building owners repudiated their contract by deducting liquidated damages from a certified progress payment and by calling up the builder's bank guarantees without the contractual entitlement or notice, so that the builder validly terminated by accepting the repudiation and was entitled, subject to deductions and with orders to follow, to recover on a quantum meruit [776], [791], [802], [806], [808], [809], [906], [907].
What the court decided
Kane Constructions Pty Ltd's contract with the owners was dated 20 August 1999 and incorporated the general conditions of AS 2124-1992 [35]. On 1 August 2000 the builder submitted progress claim 14 for $1,216,546.64 [739]. On 23 August 2000 the superintendent issued payment certificate 14 for $340,562 [740]. On 28 August 2000 the owners paid $132,618.20, having deducted $220,000 for liquidated damages [740]. The builder served a show cause notice on 8 September 2000 [742]. It suspended the work on 18 September 2000 [745]. The owners served their own show cause notice on 21 September 2000 [746]. On 6 October 2000 they cashed the builder's bank guarantees without notice, and the builder accepted their repudiation that day [748].
Her Honour considered herself bound by the adoption of Brewarrina in Aquatec-Maxcon, or at least that she ought to regard it as highly persuasive [766]. On that view, provision of sufficient evidence and information is a condition precedent to certification [769], [771]. Payment certificate 14 was therefore not invalid, and its lateness was not a valid trigger for the builder's show cause notice [772].
The owners were nonetheless obliged by clause 42.1 to pay not less than the certified amount of $340,562 by 29 August 2000 [773]. The deduction was unauthorised because the authorities did not permit liquidated damages to be deducted without an appropriate certificate, and the failure to pay was a substantial breach under clauses 42.1 and 44.7(a) [776].
The owners breached all three requirements of clause 5.5 for recourse to the security [790], [791], [806].
On repudiation, her Honour applied the test stated by Gibbs CJ in Shevill, whether the conduct would convey repudiation to a reasonable person in the other party's situation [793]. Relying on Sweet & Maxwell and DTR Nominees, she said that acting on a bona fide but incorrect interpretation makes repudiation less likely [795], [796]. Applying Vaswani, she held that an honest but incorrect interpretation does not prevent repudiation where the conduct is detrimental to the other party or inconsistent with the contract continuing, and found that the cashing of the guarantees had the hallmarks of a pre-emptive strike [799], [800], [807]. The owners' conduct was repudiatory because of the wrongful deduction and the cashing of the guarantees [808]. The builder's acceptance on 6 October 2000 ended the contract [802]. The owners' cases that the builder's suspension was repudiatory and that there was mutual abandonment failed [818], [819], [820], [821], [822], [823].
The builder did not expressly elect a quantum meruit but was taken to have done so, and the owners did not press the point [856], [863]. Her Honour noted doubts about the election rule after Pavey & Matthews but followed the approach that had developed [859], [864]. She allowed recovery of the fair and reasonable value of the work [865]. That amount was to take account of delays, rectification and any liquidated damages [877]. She refused the claimed margin for overheads and profit [878]. The owners also relied on the Domestic Building Contracts Act 1995 [883]. That Act did not apply to this mixed use project by a developer [892], [893]. Recovery was subject to the Scott Schedule adjustments and to the builder formally making its election [906].
Why it matters
In Sopov v Kane Constructions Pty Ltd (2007) VSCA 257 the Court of Appeal upheld the finding that the owners repudiated the contract and the builder validly terminated. The finding on the late certificate favoured the owners and was not challenged, and the owners conceded that the deduction was "unauthorised". Maxwell P and Kellam JA agreed with the conclusions of Whelan AJA and, subject to their additions, his reasons. Whelan AJA held that the builder's suspension was a justifiable exercise of a contractual right "whether upon analysis the notice was valid or not". He found it unnecessary to decide whether the notice and the suspension were valid, though he would have held them valid. Maxwell P and Kellam JA added that the repudiating party's honest belief or legal advice is irrelevant and the character of its conduct is what matters, which goes further than her Honour, who treated bona fide belief as making repudiation less likely. The High Court dismissed an application for special leave on 23 May 2008, as recorded in (2009) VSCA 216.
In Sopov v Kane Constructions Pty Ltd (No 2) (2009) 24 VR 510 the Court of Appeal upheld the quantum meruit remedy because it was constrained by authority and because the owners raised the point too late, while calling the criticisms "very powerful" and leaving any change to the High Court (at paragraphs 11, 12 and 15 to 18). It held that the contract price was no ceiling, rejected the continuing influence of the contract on which her Honour had relied in her later reasons on quantum, allowed the margin and reversed deductions (at paragraphs 20, 21, 24, 40, 44, 65 and 78).
In Mann v Paterson Constructions Pty Ltd (2019) HCA 32 a majority held that a builder accepting repudiation may still recover restitution, at its option, for work on an uncompleted stage, capped by the contract price; Gageler J treated the cap as fixed while Nettle, Gordon and Edelman JJ applied it prima facie by the contract rates, allowing departure where confining the builder to them would be unconscionable (at paragraphs 61, 102, 105, 110 and 215 to 217). For completed stages with accrued rights the contract governs (at paragraphs 27, 62 to 64 and 110). Gageler J said that Sopov (No 2) was wrongly decided so far as it allowed recovery above the contract price (at paragraph 103). Kiefel CJ, Bell and Keane JJ, in the minority on this point, would no longer allow the election, while allowing that justice may sometimes require a restitutionary claim (at paragraphs 50 and 53). Her Honour's fair and reasonable value approach across all the work, and the no ceiling and no continuing influence holdings in Sopov (No 2), should not be relied on after Mann.
Numbers in square brackets are paragraph numbers of the judgment. This note summarises a decided case for education and is not legal advice. See how the notes are written.