Whose right to payment? ACT Building Contract protects homeowners from claims for payment by a subcontractor

Is a homeowner legally required to pay a subcontractor a fair and reasonable sum for work performed and materials supplied when the building contract exists with the head contractor only?  The ACT Court of Appeal recently considered this question in its decision of Liu v A&A Martins Pty Limited [2019] ACTCA 8.

The purchasers of an ACT block of land (“the Owners”) entered into a written contract with a head contractor, Maples Winterview Pty Ltd (“the Builder”) to build their family home.  A dispute arose when the Owners alleged defects in the building works of the Builder.  A separate dispute also arise where a sub-contractor to the Builder, A&A Martins Pty Limited (“the Subcontractor”), claimed monies from the Owners for work completed and materials supplied by the Subcontractor to the Owners’ benefit.  The Subcontractor ultimately brought an action against the Owners in the ACT Supreme Court, seeking restitution for unjust enrichment enjoyed by the Owners in receiving the benefit of the Subcontractor’s works.  Notably, the Subcontractor and Builder were related companies with common directors.  In the primary proceedings, the Supreme Court found in favour of the Subcontractor, and ordered a six figure judgment in its favour against the Owners.

This decision was appealed on the basis that the Owner’s contract was with the Builder, such that the Subcontractor was not entitled to recover against the Owners in the absence of a request by them for the Subcontractor to have provided the services which it did (whether to the Builder, or otherwise).

Background

The building contract in question was a staged building contract whereby payment was due at the completion of each stage.  The Owners paid the Builder for stage 1, but argued the Builder failed to install insulation, being a requirement under stage 2.  The Owners withheld payment on the basis that the Builder had no entitlement to its progress payments for stage 2 until its requirements were met.  The Builder, by its Subcontractor, nevertheless continued work on the house until around 6 March 2012 when building work was suspended – leaving the house unfinished.

The Maples Proceedings

On 10 October 2012, the Builder purported to terminate the contract and commenced proceedings in the ACT Supreme Court to recover the cost of the building works.

The Owners defended the claim on the basis that stage 2 was defective, such that the trigger for payment for subsequent stages never arose and the house was incomplete.

The Owners were self-represented in these proceedings, though their defence in this regard was entirely successful.

In obiter, the presiding judge (Mossop J) said that it would have been open to the Builder to complete the contract without insisting on the making of progress payments and then claim payment for the entire cost of the works at the conclusion of the project, at which point it could claim for practical completion once the certificate of occupancy could be obtained.  However, the contract was never completed by the Builder, which left the Owners to complete the works themselves.

The A & A Martins Proceedings

Following the decision in Maples, the Subcontractor, who was not a party in the Maples proceedings, brought separate proceedings against the Owners seeking quantum meruit or restitution based on unjust enrichment.

Unjust enrichment is an equitable claim that arises where three circumstances are satisfied:

  • A party is enriched or benefited;
  • The enrichment has come at the expense of another party; and
  • The enrichment, or its retention, is unjust.

‘Unjustness’ is determined with regard to, amongst other things, lack of consideration and unconscionability.

In these circumstances the Subcontractor argued the Owners had received a benefit at the Subcontractor’s expense which was unconscionable for them to accept without payment.  The Owners, meanwhile, denied receiving a benefit at all; having been left, they said, with defective building work that they had to complete without the Builder.

McWilliam AJ recognised that there were intercompany arrangements between the Builder and Subcontractor which made them difficult, at times, to distinguish and further found that:

In the absence of a contract it is clear enough that the work was carried out by A & A Martins at the request of the plaintiff and that there would be an entitlement to reasonable remuneration. That remuneration would be assessed on the basis of the market value of the services provided.

On that basis, Her Honour entered judgment in favour of the Subcontractor in the sum of $198,484.20 plus interest.  The Owners were again self-represented during these proceedings.

The Appeal

The Owners appealed the judgment against them, this time represented by Bradley Allen Love Lawyers.  The judgment against the Owners was appealed on the basis that the Owners had entered into a written contract expressly with the Builder (that is, not the Subcontractor).  Any work done by the Subcontractor thus was not done “at the request of [the Owners].”  Rather, to the extent the Subcontractor did work, it must have done so as the request of the Builder – being the party who engaged the Subcontractor.

The Court of Appeal found that it was not open to the primary judge to resolve the proceeding on the basis that the Owners knew, or ought to have known, that the Subcontractor was undertaking the works in some capacity other than as a subcontractor.  In the appeal, Justice Elkaim drew an analogy to a subcontracted painter asking a homeowner (whose arrangements are with their builder) what colour they wanted their walls painted.  If a homeowner, in that example, were to answer ‘blue’, that would not constitute a direction to undertake the work by the homeowner.  Rather, the painter would nevertheless still be on the site at the request of the builder.

It followed that the Court of Appeal found that an essential step in considering a claim in quantum meruit is to ask whether, and how, that claim fits within a particular contract the parties have made. Here, the Owners contracted with the Builder who then chose to undertake the works as a separate corporate entity.  Where a company is afforded the advantage of arranging its business in a certain way, they will also bear the risk of the structure and the allocation of resources and risk under the arrangement.  Where the Builder was then disentitled to any monies under its contract with the Owners, the Subcontractor was not entitled to claim the same monies, in a roundabout fashion, by arguing quantum meruit principles.

If you are involved in a building dispute, and if you are unsure of your legal rights and obligations under such agreements, this decision highlights the utility of  seeking early legal advice.  A failure to do so may be complicated and costly.

If you have any questions about a potential breach in your building contract or guidance on entitlements to payment under a contract generally, please get in touch with Laura McGee and Ian Meagher.