Preventative measures – Contractor’s failure to satisfy conditions precedent enlivens the prevention principle
Executive Summary
This case confirms the prevention principle, with the Court rejecting a contractor’s attempt to take advantage of its own default in the context of conditions precedent in a construction contract.
In this case, the Court applied the prevention principle to prevent a contractor from asserting a construction contract was terminated where it was obliged, yet failed, to provide security and evidence of insurance as relevant conditions precedent. The contract provided that the parties would no longer be bound and the contract would be taken to have been terminated if the conditions precedent were not satisfied within 3 months.
Given the prevalence of conditions precedent in construction contracts and the likelihood of this situation occurring again, this case is instructive as to the approach the Courts may take in similar situations.
Background
The Supreme Court of Queensland recently handed down its decision in Veesaunt Property Syndicate 1 Pty Ltd v Alliance Building and Construction Pty Ltd (No 2) [2023] QSC 129. Veesaunt (Principal and Applicant) entered into a building contract with Alliance (Contractor and Respondent) for the design and construction of townhouses located on the Gold Coast. The contract included a number of conditions precedent, including requirements to be met by the Contractor, prior to the contract commencing.
What were the conditions precedent?
Clause 6.2(a) of the contract provided that the following conditions precedent were required to be satisfied prior to the commencement of the contract:
- finance being approved by the financier (at the Principal’s discretion);
- receipt by the Principal of evidence of all Contractor insurance required under the Contract;
- a single director of the Contractor executing a deed of guarantee and indemnity;
- the Contractor providing security in the required form; and
- the Contractor executing a financiers’ deed if required to do so by the Principal.
Clause 6.1(b) of the contract stated that the conditions precedent could only be waived by the Principal. Clause 6.1(c) provided that, unless each of the conditions precedent were satisfied or waived by the Principal within 3 months of the contract being executed, the parties will no longer be bound by the terms of the contract and the contract will be taken to have been terminated from that date.
It was accepted by both parties that within 3 months of the contract being executed, security was not provided by the Contractor (6.2 (a)(iv)). Further, it was determined that Contractor had not provided evidence of all required insurance (6.2(a)(ii)).
Key issues
The Court held three main questions must be determined to decide whether the contract was terminated pursuant to clause 6.1(c) due to the conditions precedent not being satisfied;
- whether a notice provided by the superintendent on 29 July 2022 (the 29 July Notice) effectively waived those conditions precedent that had not been satisfied by the due date on behalf of the Contractor;
- if the Conditions Precedent were not waived or satisfied by the nominated date agreed between the parties under cl 6.1(c), namely 31 July 2022 (the Nominated Date), did the contract automatically terminate on the nominated date or was the contract voidable by election of the Principal; and
- whether the Principal subsequently affirmed the contract and it remained on foot.
Q1 – The effect of the 29 July Notice
The Court considered whether the 29 July Notice was an effective form of waiver of the conditions precedent which resulted in the contract becoming unconditional. The Court held that as the 29 July Notice was authored by the superintendent, and the notice expressly stated that the superintendent was acting in his capacity as superintendent and not as agent of the Principal, the notice failed to waive the conditions precedent that had not been met by the Contractor. There was no express right in the contract for the superintendent to waive the conditions precedent and therefore as the notice was not sent on behalf of the Principal, it did not amount to a waiver of those conditions.
Q2 – Did the Principal have a right to give notice of the termination of the contract or was the contract automatically terminated?
The Court determined that the proper construction of clause 6.1(c) of the contract was that a reasonable businessperson would construe the clause as providing that the contract terminated on the Nominated Date without either party having to elect to terminate unless the conditions precedent in clause 6.2 had been waived or satisfied.
However, the Court decided that, notwithstanding an interpretation that a contract automatically terminates on an event, a party whose default caused the event can be prevented from taking advantage of that automatic termination by application of the principle that a party cannot take advantage of its own wrong.
The Court held that the Contractor could not rely upon its own failure to provide a bank guarantee and evidence of insurances to assert that the contract automatically terminated.
Q3 – The decision – Principal has the right to subsequently affirm the contract?
The Court found that after the Nominated Date, it was a matter for the Principal whether it treated the contract as terminated or affirmed the contract, notwithstanding that the conditions precedent had not been satisfied.
The Principal notified the Contractor that it was going to proceed with the contract and made clear that it waived any of the outstanding conditions precedent. This satisfied the Court that the Principal had elected to proceed with the contract and it remained on foot.
Key Takeaways
This case is a useful example of how the prevention principle may prevent a party from relying on the automatic termination of a contract due to conditions precedent that the party has failed to satisfy.
It is also a reminder that the conduct of the parties is an important consideration when interpreting contractual rights.
If you would like any further information about this case or have any other query, please don’t hesitate to contact us.
This article was written by Matthew Bliem, Partner, Kevin Lock, Special Counsel, and Oliver Keats, Solicitor.
