In Aslan v Stepanoski [2022] NSWCA 24 the NSW Court of Appeal emphasised that the courts will not lightly determine that a party has repudiated a contract. Repudiation of the contract requires something more than one party’s bona fide reliance on a mistaken interpretation of the contract.
The NSW Court of Appeal also relevantly held that:
- when considering a restitution claim, the court will respect contractual regimes and the parties’ agreed allocation of risk; and
- in determining whether a contractor has been overpaid for work performed under a lump sum contract, the contractor’s entitlement under the contract should be determined on the contract itself, and not through a simple comparison of the works performed as against amounts paid.
What Happened?
In October 2014, Mr and Mrs Stepanoski (Owners) signed a cost plus contract (Cost Plus Contract) with Mr Aslan (Builder) for the construction of two residences. Between October 2014 and January 2015, the Owners and the Builder signed a standard form contract for a lump sum of $1,080,000 (Contract). The Contract set out stages for construction and provided for progress payments when each stage of the work was completed. The Contract was intended to apply retrospectively and replace the Cost Plus Contract.
The Owners refused to pay the Builders fourth progress claim until the Builder provided all quotes from subcontractors and suppliers and receipts for all expenses to justify the progress claims to date. The Builder refused to provide these documents on the basis that he was not required to do so under the lump sum Contract.
In or around September 2015, the Builder suspended the works following the Owners’ refusal to pay the fourth progress claim. The Builder issued the notice to suspend after works were already suspended (contrary to the Contract), and in response, the Owners’ prevented him from returning to site by changing the site locks.
In or around October 2015 the Owners paid the fourth payment claim and, on 1 May 2016, purported to terminate the Contract on the basis that the Builder had repudiated the Contract by wrongfully suspending the works and then not returning to site to complete the works once paid. The Builder denied any repudiation.
What did the NSW Supreme Court Say?
The Owners’ brought proceedings in the NSW Supreme Court seeking damages for the unfinished and defective works. The Owners also sought restitution for amounts they alleged that they had overpaid the Builder and were entitled to recover because they had made the payments in the mistaken belief that they represented the Builder’s true contractual entitlement.
In support of this claim, the Owners had an expert report certifying that only 52.26% of the work under the Contract had been completed yet the Builder had been paid 98.8% of the lump sum amount 1.
The primary judge found that:
- the Builder did not have a contractual right to payment or a contractual right to suspend the works;
- the Builder’s conduct in suspending the works and failing to resume the works on the basis that the Owners had failed to pay amounts where there was no entitlement to payment was a repudiation of the Contract; and
- the Builder had been overpaid, which the Owners were entitled to have refunded, on the basis that the value of the work completed by the Builder was less than what he had been paid.
What did the NSW Court of Appeal Say?
The Court of Appeal overturned the decision of the primary judge, relevantly finding as follows:
Repudiation
A bona fide insistence on a mistaken interpretation of the contract is not alone repudiation. A significant factor that the courts will consider in determining repudiation of a contract is whether the other party has attempted to persuade the allegedly repudiating party, i.e. the Builder, that it is taking an erroneous position.
In this case, the Builder had a genuine belief that he was entitled to suspend the works and the Owners did not sufficiently challenge that interpretation. Accordingly it could not be said that the Builder was unwilling to perform his obligations under the Contract.
The Owners had in fact acted contrary to the Contract by attempting to disentitle the Builder to the fourth progress claim based on, among other things, a demand for a review by an independent costs estimator and requests for receipts, which was inconsistent with the lump sum contract.
Restitution
When considering a restitution claim, the court will respect contractual regimes and the parties’ agreed allocation of risk. In the context of a lump sum contract, the contract price “may be very different from the value of the work promised” and a “deficiency in value” may be attributable to many different things, such as a simple bad bargain or front-loaded payment, making earlier payment instalments disproportionately high.
In this case, front-ended payments had been made when the parties operated under the Cost Plus Contract and one payment was on account of the deposit. This resulted in the Builder being paid in excess of the value of the works completed but not in excess of what he was contractually entitled to.
Why is this case important?
Parties seeking to terminate for repudiation should take care that the other party’s conduct is not based on bona fide reliance on a mistaken contractual interpretation (of their rights). Where this does occur, the party seeking to terminate should make sufficient efforts to persuade the other party that they have relied on an erroneous interpretation and are potentially repudiating the contract.
The decision also highlights the importance of choosing the correct contract and pricing model as a ‘bad bargain’ will not necessarily disentitle a builder to perceived ‘overpayments’. Owners bear a price risk in lump sum contracts with staged progress payments where the amounts they are required to pay may not reflect the value of work that is completed at each stage.
Owners will be held to the terms of the contract and cannot simply depart from the agreed payment regime in the contract and seek to value the works on another basis.
HWL Ebsworth has expertise in advising on construction contracts, pricing structures and payment disputes. Please contact Alan Chiang of our Construction and Infrastructure team to discuss any aspects of the above.
This article was written by Alan Chiang, Partner, Con Koutsantony, Senior Associate and Rob Gilchrist, Solicitor.
[2022] NSWCA 24, [40], [74].
