What happened?
In Stephens v Cameron [2021] VSCA 208, the Owners contracted the Builder to manage and arrange the construction of two townhouses on a property in Mornington. By late 2012, the Owners had paid the Builder $567,000 in progress payments.
Work ceased on site in December 2012 as the relationship between the Owners and the Builder broke down. The contract ended in early January 2013.
Five years later, the Owners commenced proceedings in the County Court to recover amounts paid to the Builder said to exceed the maximum amount specified under section 40(2) of the Domestic Building Contracts Act 1995 (Vic) (the DBCA).
The legislation relied upon
Section 40(2) of the DBCA (where it applies, noting parties may contract out of its application) prevents a builder under a major domestic building contract from demanding, recovering or retaining more than the prescribed percentage of progress payments depending on the corresponding stage of completion. For a contract to build all stages, those prescribed percentages are as follows:
| Stage | % of contract price |
|---|---|
| Base stage | 10% |
| Frame stage | 15% |
| Lock-up stage | 35% |
| Fixing stage | 25% |
Section 40(5) of the DBCA provides that where a builder breaches section 40(2), a court may order the builder to refund to the building owner some or all of the amount the building owner has paid the builder under the relevant building contract.
The Owners sought recovery of overpaid amounts on the basis that, as the works had not reached completion for the ‘frame stage’ for the purposes of section 40 of the DBCA, the Builder was not entitled to payment of any more than 10% of the contract price.
The Builder denied that the DBCA applied and, in any event, claimed he was entitled to retain the amounts by way of restitution for the unjust enrichment of the Owners.
Decision of the Victorian Supreme Court of Appeal
Statutory right of recovery
The appellate judges found that section 40(2) of the DBCA did not create a statutory cause of action for an owner to recover amounts overpaid to a builder. The section is a penal provision concerned with prohibiting certain conduct and does not address the consequences for parties if those provisions are breached. In particular, the Court decided that the section does not create ‘a discrete obligation on [the] builder… to disgorge‘ such overpayments.
Other causes of action
The Court ruled that breaching section 40(2) of the DBCA may form the basis for a claim for restitution for unjust enrichment of a builder where the builder has retained money in circumstances where it was unlawful to do so.
As parties did not make detailed submissions as to whether any defences for restitution would be available, the Court did not rule on this point. However, the Court suggested that the Builder would be prevented from pursuing a defence that the Owners received reasonable value for services performed, as the amounts retained exceed the prescribed limits under section 40(2) of the DBCA.
Additionally, it was the view of the Court that the section would prevent the Builder from making a claim in quantum meruit to retain the progress payments. This is because such a claim would seek the very payment which section 40(2) of the DBCA forbids.
Remittance
The primary judgment in favour of the Owners, based on a statutory cause of action under section 40(2), was set aside. However, despite the Owners’ statutory claim failing, the Court decided not to dismiss their case. This is because, at first instance, the primary judge considered issues of restitution that went beyond the pleadings.
The Court decided to remit the matter to the County Court so that the Owners can restate their case under alternative causes of action, including but not limited to restitution for unjust enrichment. The Builder will have the opportunity to submit defences not yet considered by the Court.
Takeaways
Unless parties contract out of section 40(2) of the DBCA, the amount of progress payments at each stage of construction are restricted to prescribed limits. Owners and builders must ensure that they understand the definitions of each stage and when entitlements to payment arise.
This decision is a reminder that section 40(2) of the DBCA does not in itself create a statutory cause of action to recover excess progress payments. However, claims for repayment may be made on other grounds including restitution for unjust enrichment by retaining more than the statutory limit.
Given this case’s remittance to the County Court, the success of such an action will depend on the Owners’ restated claims and whether the Builder can successfully bring any defences.
How can HWL Ebsworth Lawyers help you?
HWL Ebsworth Lawyers has expertise in building and construction disputes. Please contact Paul Graham or Alan Chiang of our Construction and Infrastructure team with any enquiries.
This article was written by Paul Graham, Partner and Eleanor Ng, Solicitor.
