Executive Summary

In Merkon Constructions Pty Ltd v Residence Co Pty Ltd (Merkon)¹, which involved a dispute relating to the construction of an apartment building, the Supreme Court of Victoria decided that:

• the existence of a builder side deed prohibiting the builder from maintaining or taking security interests over the relevant property did not render a subsequent deed of variation to the construction contract illegal or unenforceable merely because it commissioned a breach of the side deed; and
• the builder was not estopped from pursuing further payment claims following its signature of a final certificate under the construction contract.

Relevant facts

On 8 July 2019, Merkon Constructions Pty Ltd (Builder) and Residence Co Pty Ltd (Developer) entered into a contract for the construction of a multi-level residential apartment building in Melbourne.

To fund the construction costs (including payments to the Builder), the Developer entered into a loan facility agreement with Monland Pty Ltd (Lender) and contemporaneously the Lender, Developer and Builder entered into a builder’s side deed (Side Deed), under which the Builder:

• was required to provide the Financier with evidence that the Builder’s subcontractors and suppliers were being paid as a condition of the funding of progress claims under the construction contract; and
• relevantly, undertook to the Lender that it would not take or maintain any security interest over the relevant property or lodge a caveat over the property without the Lender’s consent.

A deed of variation to the construction contract (Variation Deed) provided for an increase in the contract sum, an extension of the date for practical completion and provision that the Developer would provide the Builder with an executed (but unregistered) mortgage over the property as security. On the same day, the superintendent under the construction contract issued a certificate of practical completion, which also included an acknowledgement, which the Builder signed, that “all certified money by the [superintendent] has been settled in full between both parties”² (Final Certificate).

Subsequently to the issue of the Final Certificate, the Builder claimed an additional $2,448,869 under the amended construction contract. The Developer rejected the Builder’s claim on the basis that:

• the Deed of Variation was entered into in breach of the Builder’s undertaking under the Side Deed to not take or maintain any security interest over the property and was therefore illegal and unenforceable; and
• the Builder was estopped from claiming any further payment on account of its signature of the Final Certificate.³

The Builder subsequently initiated proceedings in the Supreme Court of Victoria.

Decision

As to the legality of the Variation Deed, Osborne J held that a contract which involves the commission of a legal wrong (in this case, breach of another contract) is illegal if it is entered into with the intent to commit the legal wrong; however, the mere entry into the contract that involves the commission of a legal wrong does not in of itself amount to an intention to commit a legal wrong. Evidence that the Variation Deed was entered into with the intention of commissioning a breach of the Side Deed would have been required and was found to have not existed in this case – therefore the illegality defence by the Developer failed.⁴

As to estoppel, Osborne J also held that the Builder was not estopped by its signature of the Final Certificate from claiming additional payment under the amended construction contract, because:

• the Builder’s signature on the Final Certificate did not acknowledge that no further moneys were owed – it only acknowledged that all moneys certified to date by the superintendent had been settled in full, and the Variation Deed signed on the same day acknowledged that more moneys were owed;⁵ and
• there was no plea from the Developer, let alone any evidence, of any detriment on the part of the Developer consequent upon the alleged representation. The court acknowledged that the provision of the Final Certificate resulted in the Developer releasing the Builder’s bank guarantee, however, the court held that such detriment was not properly argued, let alone evidenced, and in any event the Developer had no entitlement to retain the bank guarantee or its proceeds for any pending claim following the issue of the Final Certificate.⁶

Key takeaways

Two well-worn principles arise from this case:

• The entry into one contract may give rise to a breach of another contract, but that does not – of itself – amount to an intention to commit a legal wrong, and therefore the contract commissioning the breach of the other contract is not, without evidence of the intention to commit that legal wrong, illegal and unenforceable; and
• An estoppel claim requires (in addition to satisfaction of the other elements of the cause of action) evidence of clear detriment, and in the case of estoppel by representation, a clear understanding of what the relevant representation actually is.

This article was written by Marko Misko, Partner, Konrad Anderson, Special Counsel and Miranda Eglezos, Law Graduate.

¹ [2025] VSC 151.

² Ibid, [19].

³ Ibid, [19].

⁴ Ibid, [20].

⁵ Ibid, [26].

⁶ Ibid, [27].