Be clear about which contract is on foot

Monday, 30 Jul 2018

Sometimes the parties to a contract (which has already been signed and dated) will, for whatever reason, enter into another contract later on for exactly the same subject matter, but perhaps with slightly different terms – the question then becomes whether or not they intend the subsequent contract to replace the earlier contract, whether entirely or only partly.

This was the issue considered by the Supreme Court in the recent decision of Stepanoski v Aslan [2018] NSWSC 1160.  The matter related to a building contract entered into the property owners (Stepanoski) and the builder (Aslan) in or about October 2014.  The contract was a “Cost Plus Contract” – that is, the amount to be paid to the builder would be the builder’s cost, plus an agreed margin.  The parties subsequently entered into a Lump Sum Contract in relation to the same building work under the Cost Plus Contract.  The property owners claim that it was entered into around the same time as the Cost Plus Contract, however the builder claims it was entered into in January 2015.

The issue to be considered by the Court was the extent to which the Lump Sum Contract was intended to replace the Cost Plus Contract.  The builder initially argued that the Lump Sum Contract was only signed as a “sham”, so that the property owners could obtain finance from Macquarie Bank – it was a requirement of their construction loan approval that the contract be for a fixed sum, not on a “cost plus” basis.  The builder later argued that the Lump Sum Contract was intended to replace the Cost Plus Contract, but that the work done between October 2014 and January 2015 was to be charged in accordance with the Cost Plus Contract – based on an “oral agreement” between the parties.

The Court held that it was not possible to find any agreement that the Cost Plus Contract was to remain binding on the parties in any way.

The Court also considered the documentation that was prepared in the lead-up to the Cost Plus Contract being signed in October 2014.  The documentation consistently referred to the fact that the building contract was proposed to be for a fixed price – even the builder’s quote from September 2014 was for a fixed price.  The quote from October 2014 was a “cost plus contract building quotation”.

Following the commencement of works and payment of the initial deposit in late October 2014, the builder claimed a progress payment for works completed up to the end of November 2014.  Interestingly, the progress payment referred to amounts payable under the Lump Sum Contract – despite the builder’s argument that the Lump Sum Contract was not entered into until January 2015.

The progress claims made by the builder around this time did not contain any detail regarding the amount being claimed, something that the Court pointed out you would expect under a Cost Plus Contract.

All subsequent progress claims referred to amounts that were due under the Lump Sum Contract.

Based on the evidence presented by both parties, the Court concluded that the parties regarded themselves as bound by the Lump Sum Contract.  Nothing turned on whether the Lump Sum Contract was signed in October 2014 or January 2015 –

“the effect of signing the Lump Sum Contract was that, notwithstanding that they had previously signed the Cost Plus Contract, the Lump Sum Contract was to be binding on them thereafter, with effect from 14 October 2014.  There is no basis for concluding that the parties were bound by any contractual obligation other than those contained in the Lump Sum Contract.”

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What can we learn from this case?

It is not uncommon for issues to arise with building contracts, particularly if the parties do not obtain legal advice when they are first entered into, or if they are modified (and even replaced) by subsequent agreements.  This dispute may well have been avoided if the parties had obtained legal advice at the time of contemplating the subsequent agreement to replace the contract as already signed.  Contact Shire Legal if you have a question about a contract that you are proposing to enter into, or a contract that modifies (or replaces) a contract that you have already entered into.



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