Sopov & Anor v Kane Constructions Pty Ltd [2008] HCATrans 209 (23 May 2008)

Last Updated: 27 May 2008

[2008] HCATrans 209

IN THE HIGH COURT OF AUSTRALIA

Office of the Registry
Melbourne No M162 of 2007

B e t w e e n -

COLE SOPOV AND NORMA WALKER

Applicants

and

KANE CONSTRUCTIONS PTY LTD

Respondent

Application for special leave to appeal

GLEESON CJ
HEYDON J

TRANSCRIPT OF PROCEEDINGS

AT MELBOURNE ON FRIDAY, 23 MAY 2008, AT 10.43 AM

Copyright in the High Court of Australia

MR R.J. MANLY, SC: If the Court pleases, I appear for my learned friend, MR C.P. YOUNG, on behalf of the applicants. (instructed by Pilley McKellar)

MR G.J. DIGBY, QC: If the Court pleases, I appear with MR M.J. STIRLING, for the respondent. (instructed by Deacons)

GLEESON CJ: Yes, Mr Manly.

MR MANLY: If the Court pleases, this proceeding gives rise to special leave points in respect of principles regarding the content, operation and construction of show cause notice provisions in a standard form construction contract in operation throughout Australia, in its current form and in its successor form. Ground 1 of the application for special leave raises the point as to whether a recipient of a show cause notice is required only to show cause to the breach or breaches set out in the notice or is the recipient of the notice required to show cause in respect of other breaches notified thereafter, but not in a fresh show cause notice.

The issue arrises from paragraph 131 of the reasons of Justice Whelan in the Court of Appeal at application book 694. The issue arrises at about line 24 and what his honour there does is accepts that reasonable cause had been shown by the recipient of the notice in respect of non-payment of claim 14, but goes on to say, “but the Principal was at that time still in breach of its obligations under clause 42.1 on any view” The clause 42.1 breach his Honour refers to is a wrongful deduction of liquidated damages.

he wrongful deduction of liquidated damages was never made the subject of a show cause notice. So, accordingly, when the server of the notice, namely, the builder, thereafter purported to suspend work under the contract, it did so on the basis of an allegation of a failure by the recipient of the notice to show cause. The failure to pay claim 14 was dismissed by the trial judge as being a valid show cause ground that was not challenged on appeal and so we have a position reflected in paragraph 131 where we have a show cause notice setting out a ground, that ground ultimately being found to be bad. The builder thereafter suspending work in reliance upon the show cause notice but the judge going on to find, “even though the ground relied upon the show cause notice was bad, there was another breach which I can rely upon to justify suspension”.

Now, at common law there cannot be a right of suspension and in our submissions we have referred your Honours to the positions of legal principle in respect of that in Keating on Building Contracts and Duncan Wallace, Hudson’s Building and Engineering Contracts. So therein lies the error which we say his Honour fell into. That gives rise to our submission that in a circumstance such as this clause 44 of the contract is a code. It sets out in clear language that if you wish to survey show cause notice in respect of a breach, then that breach must be enunciated, the provision of the contract upon which you rely must be enunciated and those matters were attended to by the builder.

However, the breach that his Honour relies upon to justify suspension was never made the subject of show cause notice and the fallacy of that position is that; by reason of it not being made the subject of a show cause notice, the person who had wrongfully deducted the liquidated damages was not contractually on notice that that was a breach that needed to be rectified. There was certainly correspondence passing between the parties about the point but because the contract is a code, we would submit that the builder in this case was required to do so, if it wished to make complaint contractually about the wrongful deduction of liquidated damages, by way of show cause notice.

HEYDON J: In the notice, which is 8 September 2000, the difference between the sum allegedly payable and the sum actually paid was attributable, was it not, to the deduction of liquidated damages? In other words, was it not the same breach referred to in that notice as was raised in the subsequent correspondence?

MR MANLY: No, your Honour. Under the scheme of the contract the builder lodged progress claim 14.in the order of $1.2 million. The contract required that the superintendent could request further information from the builder in support of that claim before he certified. The contract required that he was required to certify within 14 days. He did not so certify. The contract requires if he does not so certify within 14 days, the amount of the claim becomes deemed certified.

So what we had here was a claim for $1.2 million, not certified within time, out of time, certified at a figure in the order of $330,000 from which the proprietor improperly deducted liquidated damages of some $220,000. The deduction would not have been wrongful if it had been done by the superintendent in the certificate but the trial judge found that that series of events was not wrongful because of a train of authorities, the most recent of which was a decision of the Court of Appeal of the Victorian Supreme Court in matter of Aquatec which was reliant upon a decision of the Court of Appeal in New South Wales of Brewarrina; both of those cases to the effect that in circumstances where a claim is put forward and the superintendent seeks further information and the provision of that information then means that the 14 day certifying period is exceeded, then that does not necessarily lead to a deemed certification of the claimed amount.

So, if one then goes to the show cause notice with that background, the show cause notice is demanding payment of the claimed amount of $1.2 million. It is not demanding payment of the certified amount, the shortfall of which was liquidated damages. So there has never been a show cause notice delivered seeking payment of the liquidated damages sum. Does that answer your Honour’s question?

HEYDON J: It does, but is your point of any merit? I mean, the parties were at odds, were they not, on 8 September 2000 on the question of whether liquidated damages were deductible or not.

MR MANLY: Yes, they were, your Honour. They were at odds at that time on that point, but if the builder wanted to pursue the point, the contract sets out the mechanism by which that is to be done and that is the service of a show cause notice. That is the procedure the builder correctly adopted when it served its 8 September notice seeking to recover the progress claim 14 amount. It could also have thereafter served the show cause notice seeking recovery of the shortfall on the certified amount or, alternatively, repayment of the liquidated damages.

HEYDON J: Where did the Court of Appeal deal with this contention you are putting at the moment?

MR MANLY: It arrises, in my submission, in paragraph 131 of the Court of Appeal’s decision at page 694 of the application book. If I could take your Honours back to paragraph 98 on page 686, that is where the point about claim 14 and non-payment is dealt with. Where that takes us to, in my submission, is that Kane, the builder, suspends based upon a failure to show cause, the show cause issue being a failure to pay claim 14. The trial judge found there was no such breach, therefore we have a suspension based on a improper premise. On that basis, we would say the suspension and what flows from it is therefore wrongful, and this is particularly so given that there is no common law right to suspend.

We would submit that this analysis then gives rise to the consideration of the related issue which is raised in the extract from Carter on Contract, which is in the material, which is the question of, was Kane’s breach the wrongful suspension of work on 18 September so serious as to disentitle it from terminating the contract?

Now, clause 44 of the contract sets up the regime that must be followed and clauses 44.2 and 44.7 deal with the positions of default by contractor and default by principle and in each instance they are dealing with what the contract calls “substantial breaches”. In our submission, what we have is a wrongful suspension by the builder. That is a substantial breach because it is one of the substantial breaches picked up by clause 44.2 of the contract. It is a substantial breach if there is suspension of work or if there is a failure to proceed with due diligence and without delay and the suspension would fall within both of those issues.

If the Court of Appeal had not made, in our submission, the wrongful finding of an entitlement to suspend, then the contract would still be on foot. If the contract were on foot, then the rights of the parties are governed by clause 44.6. The clause 44 regime is a code, in our respectful submission, about how these matters need to be dealt with.

The question is raised at paragraph 117 of the Court of Appeal’s judgment by Mr Justice Whelan and that is at page 690 of the application book and that is very much picking up the point we raise here, was Kane’s breach so serious as to disentitle it from terminating? Justice Whelan said that to assess whether Kane was in breach of the contract by wrongfully suspending you needed to go back to its own show cause notice. We submit that his Honour applied the wrong test because when he looked at the factual scenario, he looked at what he regarded as being tenable and he looked at what could be justified by Kane’s conduct. That is the wrong test. The proper test is to ask the question, whether Kane acted wrongfully and in breach of contract by suspending in the manner that he did and we would submit that that is the case. The suspension was based purely on one matter and one matter alone and that is the failure to pay claim 14.

HEYDON J: The Court of Appeal seems to have assumed that a substantial breach was equivalent to a repudiatory breach. Do you challenge that?

MR MANLY: Yes, your Honour, I am going to come to that point. We submit that the notice that the proprietor served after the wrongful suspension notice, which was a contractual notice taking the work out of the builder’s hands, was proper course for him to adopt because the suspension was wrongful because it was based upon a failure to pay claim 14 which was found not to be sustainable. Kane’s remedy, under the contractual regime, was to serve a notice of dispute pursuant to clause 47.1 and that provides that, not withstanding the service of such a notice, both parties were to continue to perform the contract.

So Kane’s rights would have been protected by the arbitral process. The proprietor and Kane’s rights would have been protected by the contractual obligation for the work to continue, or Kane could have served a show cause notice for non-payment of certificate 14 or the wrongful deduction of liquidated damages or could have served a notice of dispute in respect of Sopov taking the work out the builder’s hands. There are a whole range of contractual steps that could have been taken.

Picking up Justice Heydon’s point takes you to the second ground. In our submission, the contract excluded Kane’s right to terminate a common law for substantial breaches of the contract by the proprietor. However, under this contract - - -

HEYDON J: What about clause 44.1?

MR MANLY: Yes, I am about to take your Honour to that. The position, however, would be different, we say, for what I will call “non-substantial breaches”. Clause 44.1 talks about breaches of contract. Clause 44.2 and following talk about a different beast, a substantial breach of contract. The draftsman of this contract has decided to delineate between two types of breach; a breach and a substantial breach and in respect of substantial breach, the draftsperson has set out in 44.2 and 44.7 what he says are inclusive but are not limited to the types of matters that amount to substantial breach.

Now, in this case we would concede that substantial breaches by Sopov amounted to the wrongful deduction of liquidated damages but never made the subject of a show cause notice, cashing the bank guarantees without notice but never made the subject of a show cause notice and on Kane’s side of the ledger, the substantial breach is wrongful suspension of work and a failure to complete by the contractual date which equates to a failure to proceed with due diligence.

Now, in our submission, clause 44.1 looks after the position that arises when there are non-substantial breaches and in that circumstance the party complaining has its common law rights protected. That is clear by reference to the concepts of repudiation or “exercise any other rights”, to pick up those words. That is because the language used in clause 44 delineates between these two types of breaches and so, if you have a non-substantial breach, then 44.1 says, yes, your common law rights are preserved. However, if you have a contractually defined substantial breach, then clause 44.2 through to clause 44.11 sets out the code that must be followed by the parties if they wish recompense in respect to those types of breaches.

Now, the matter has to be looked at as a question of construction. In Amann’s case at page 300, and it is in amongst your materials and your Honours are no doubt well familiar with it, it sets out five indicia that one could consider in determining an issue such as this and, in our submission, those indicia are met.

Our friends rely upon the Queensland Court of Appeal decision of Mazelow. We submit that that case has no application because there was no finding in that case that the engineer’s superintendent’s conduct was a
substantial breach. The case proceeded on the basis only that the conduct was repudiatory. Absent a finding of substantial breach, the case is not apposite to the question under consideration, in our submission, and also Mazelow’s Case does not deal with the distinction I have sought to discuss with your Honours about breach and substantial breach that clause 44 throws up.

In our submission, this case is a suitable vehicle for the grant of special leave. There are no disputed findings of fact, there are no faults and hypothetical issues, there are no predominantly idiosyncratic questions of fact and there are no particular facts or documents that dictate that this case is not a suitable vehicle for review by the Court. We rely upon an affidavit of John Pilley which is in our application book papers. He is on the drafting committee of the AS2124 suite of contracts and the suite of contracts that succeeded it. In each instance the clause 44 regime is repeated in the successor contracts and if your Honours are attracted to the questions we put before you, then, in our submission, these issues give rise to a matter of Australia-wide contractual significance, if the Court pleases.

GLEESON CJ: Thank you. Mr Digby.

MR DIGBY: If your Honours please. In relation to what is identified in the submissions as the first argument for special leave, that is, that there is an issue of principle about whether or not, under this sort of contract and generally, there should be an obligation on the part of a party responding to show cause notice to respond to subsequently raised breaches. That is as set out in my learned friend’s argument. We submit there are three reasons for special leave being refused.

Firstly, we make the point in our submissions that this issue was not directly raised or, we would submit, even indirectly raised with the intermediate court below. Secondly, the issue turns on the facts of the case and does not raise a matter of general importance because it has to do with the idiosyncratic way in which the parties dealt with the notice of dispute provisions of this particular contract. It is not a point of principle in reality. Lastly, it is not determinative in the way the case has been either run or determined in the intermediate court or the primary court in that your Honours will note – and we make this point in our submissions in various places – this case is not about, as it was determined, the contractual route to termination in face of a breach.

Although the parties exchanged notices, ultimately, your Honours will note, neither party contended that the contract had been brought to an end under the machinery of the contract and the argument was about whether the court could recognise, in the first instance and the intermediate court in the second instance, repudiatory conduct upon which the builder had relied to bring the contract to an end.

In relation to our learned friend’s point concerning paragraph 131, can we ask your Honours to go back to the application book at page 693. Note that at paragraph 128 his Honour Justice Whelan, Acting Judge of Appeal, refers to the facts that occurred subsequent to the show cause notice that his Honour Justice Heydon has asked about. In relation to that show cause notice which I will come back to – because we contest our learned friend’s submission that it does not raise the issue of short payment under progress claim 14 – his Honour says the following:

Kane Constructions’ response to the Principal’s letter of 11 September 2000 by its letter of 13 September 2000 identified the distinction between the issue of whether the obligation was to pay progress claim 14 and the issue of whether there was an entitlement to deduct liquidated damages from amounts payable under clause 42.1. The Principal’s response to this letter, by its letter of 15 September 2000, justifiably pointed to the sequence of events in relation to the provision of information so as to meet the allegation that the obligation was to pay progress claim 14 in full, but ignored the separate issue as to whether there was an entitlement to deduct liquidated damages from payment certificate 14.

Can I pause there and ask your Honours to look at the relevant show cause notice which has been the subject of Justice Heydon’s inquiry. It is at page 825. Your Honours will see that in the third paragraph it puts the proprietor on notice as follows:

The Principals have committed a substantial breach of contract in that, in breach of Clause 42.1 of the General Conditions of Contract, they have failed to make payment to the Contractor of the sum of $1,216,546.64 being the amount of the Contractor’s progress claim No. 14 dated 1 August 2000 –

The show cause notification has only been characterised so far in argument as a show cause notice seeking payment of the whole of the amount of the payment claim. Mr Manly has explained that there is an argument under this contract that if you do not respond by way of a certificate in a timely manner to the progress claim, then you are deemed to be obliged to pay the whole of that amount.

Your Honours should note that at the point in time when this show cause notice was issued, 8 September 2000, the independent certifier had already issued a certificate in connection with progress claim 14 and that certificate had liquidated damages applied to it by the proprietor. So the builder was ultimately only paid the figure which was then set out in the third paragraph of the show cause notice. Can I take your Honours to that third paragraph, the builder says also in the show cause notice:

and have made payment of the sum of $132,618.20 only.

The point we make about that is, the show cause notice is saying two things on a fair reading. It is saying that “you have not paid the whole amount of the progress claim and” – it uses the word “and” – “you have paid the amount of $132,618.20” which was the subject of a separate dispute between the parties because, as your Honours will have seen from the submissions and the judgments, there had been an unauthorised deduction of liquidated damages, so the amount certified by the independent certifier had been reduced by $220,000 to bring it to this amount of $132,000 approximately. So, we take issue with the suggestion that there was not a demand for payment in respect of the short paid certificate in the show cause notice and we also note that it had a second demand, a demand for whole of the amount payable in respect of the progress claim.

What is also, in our respectful submission, very important to note in relation to the short payment on the progress certificate 14 is that, it is conceded by the applicant before your Honours that the deduction of liquidated damages from progress payment 14 was plainly unauthorised and a substantial breach of the contract. Your Honour will see that concession, that appeal, reflected in the judgment of Justice Whelan at application book 694, paragraph 131 and also at 698 at paragraph 144. So, as to the merits, there was a concession that there had been a wrongful deduction of liquidated damages and there was also a concession in respect of the guarantee that your Honours have seen from the judgment and the submissions found that the termination of the contract by the applicant, that it was untenable to draw down on the guarantee and that is to be found in application book 666, paragraph 118.

Can we take your Honours back to the application book 693 and, bearing in mind the context that there is a dispute in relation to not only an entitlement that is deemed to pay the whole of progress claim 14 but also an assertion by the builder that there is a breach in connection with deducting liquidated damages in respect to progress certificate 14 which was conceded at appeal as a breach and a substantial breach, and in that context, and the context which we have emphasised to your Honours which is demonstrated by your Honour’s reference to paragraph 146 of Justice Whelan’s judgment where your Honours see his Honour confirming that no party was contending before the trial judge that the contract was terminated pursuant to the terms, his Honour is looking at not whether the series of show cause notices are valid for the purpose of bringing the contract to an end, but whether or not the conduct of the two parties, and particularly the appellant builder at this stage, is disentitling in terms of its termination or recision of the contract. That context is most important, in our submission, in understanding what is to follow. We take your Honours back to application book page 693 where his Honour says:

In my view it is not necessary to determine whether the Principal in fact failed to show reasonable cause or not.

So these show cause notices are not determinative. The important point is that the principal maintained its untenable position in relation to its deduction, that is the deduction of liquidated damages which we point out was conceded as a breach and a substantial breach at appeal by the applicant in this application. His Honour goes on:

If it were necessary to rule upon whether the Principal had shown reasonable cause, my conclusion would be that it had not. The reason is that its responses confirmed its refusal to comply with clause 42.1. Insofar as Kane Constructions was insisting upon the payment in full of progress claim 14, it did show reasonable cause by its letters of 11 September 2000 and 15 September 2000, but it also insisted upon its right to deduct, which meant it would not resile from an untenable position concerning its obligations under clause 42.1

So the context is looking at what the nature of the repudiatory conduct is on the part of the proprietor, not an analysis of the effect of the show cause notices, which your Honour says it is not necessary to make a decision about in the way the case is being put. We then come to the paragraph my learned friend relies upon, 131:

Kane Constructions’ notice suspending the work under clause 44.9 dated 18 September 2000 was a step taken by Kane Constructions which was a justifiable exercise of a contractual right, whether upon analysis the notice was valid or not. A notice had been given under clause 44.7 which had contained all of the required particulars, including the “alleged” substantial breach. The Principal had, assuming the correctness of the trial judge’s conclusion on this point, shown reasonable cause as to why the Principal was not obliged to pay the full amount of progress claim 14, but the Principal was at that time still in breach of its obligations under clause 42.1 on any view. As the Principal’s own submissions before us conceded, the deduction insisted upon was “plainly” unauthorised by the contract. Further, the Principal had confirmed that it intended to persist in this unjustifiable position and this it had no intention of remedying what the Principal now concedes to have been a clear breach.

That is part of the series of concessions that we outlined to your Honours a moment ago that were being made by this applicant at the intermediate stage of this proceeding. His Honour goes on:

In those circumstances Kane Constructions’ suspension of the work cannot be characterised as conveying a message that Kane Constructions would not comply with the contract.

That is the matter his Honour was considering. How this related to the substantial position as to whether or not there was repudiatory conduct on the part of the proprietor in deducting liquidated damages in a conceded unauthorised manner and later by having recourse to a guarantee in a way in which the applicant in this application also conceded before the intermediate court was in breach of the contract and unauthorised and whether or not Kane’s conduct in connection with the exchange of notices and other matters was a disentitling conduct in terms of bringing the contract to an end. It is all in the context and it is crucial, in our submission, of considering that neither party was contending that these notices were determinative of an end point where the contract was brought to an end. It is common law repudiation which his Honour was focusing on.

In our respectful submission, that reveals why it is not an appropriate vehicle for any argument about the show cause notice treatment by the parties or his Honour’s inconclusive findings, inconclusive in the sense that this aspect was characterised as not determinative and was not relied upon in any determinative way in the intermediate court, nor in the Chief Justice’s court at trial. We made the point in relation to this first issue that if your Honours were persuaded that there was some point of principle in respect of the show cause and notice provisions of this contract, it would, in our submission, in any event necessarily devolve to an idiosyncratic consideration of what the parties actually did in respect of these notices and would therefore not be an appropriate vehicle for special leave to be granted.

Your Honours, in relation to the second point concerning disentitling conduct, it is submitted that the respondent’s suspension of the works is a form of conduct in the nature of a breach disentitling the respondent from determining the contract as it did at common law. In our submission, your Honours will note, firstly, that both the trial judge and then the Court of Appeal found no repudiatory conduct, no substantial breach on the part of Kane and in a number of instances expressly concluded that Kane continued to be ready and willing to perform its contractual obligations. That finding is reflected in the primary judgment at – I will come back to that, your Honour. I ask my junior to locate those instances, but both
judgments reflected a confirmation that Kane was ready and willing to perform the contract.

There is, in relation to the second question, in our submission, no issue of general application or importance because the question of whether or not Kane’s breach, were there to be a relevant breach justifying the conclusion that Kane could not determine the contract, would be idiosyncratic by reference to this specific set of factual circumstances providing a second reason why special leave should not be granted in respect of the second aspect of our learned friend’s application. Thirdly, there is no error or prospect of success in our respectful submission on the law in any event.

We have sighted to your Honours the case of Roadshow Entertainment v CEL and Nina’s Bar Bistro which indicate that there has to be a connection between the breach that disentitles a party from accepting repudiation. We say that is not the case here. Justice Whelan at application book 702, paragraph 152 and the Chief Justice at application book 253, paragraphs 820 and 821 both reflected their analysis and conclusions as to there being no interconnection between the breaches relied upon by Kane to determine, namely, wrongful deduction of liquidated damages conceded by this applicant and recourse to the contractual guarantees unlawfully, also conceded by this applicant, and Kane’s exercise of its common law right to bring the contract to an end. We say that there was simply no necessary connection as required by Roadshow Entertainment and Nina’s Bar Bistro.

Finally, in relation to the third point, we emphasise, as we point out in our submissions, that the contract itself preserves in clause 44.1 the right to bring the contract to an end at common law and pursue any rights at common law that are available to a party. In our submission, there is no scope for the contention put by the applicant that on a proper construction of this contract there is an exhaustive code in respect of breaches or substantial breaches and the common law is foreclosed to a party that is wrong.

We point out to your Honours Progressive Mailing House which provides a statement of principle in support of that proposition via Justice Deane of this Court and we point out that in Mazelow v Herberton, the case that our learned friend says is not helpful, that it is precisely the same contract and the same clause preserving the common law rights as was accepted by the Queensland Court of Appeal in Mazelow which is said not to foreclose those common law rights. If your Honours please.

GLEESON CJ: Thank you, Mr Digby. Yes, Mr Manly.

MR MANLY: Your Honours, I just have a few points I wish to raise in reply. The first point is that in respect of our ground No 1, it was submitted by my learned friend that the issue was not raised below. We meet that in paragraph 6 of our reply submissions at page 881 of the application book and set out the references where it was dealt with.

The second point our learned friend raises is that the show cause notice upon its proper construction gives rise to a suggestion that a demand was there being made for repayment of the wrongfully deducted liquidated damages. In our submission, the reasonable recipient of that notice could in no way read that show cause notice as saying anything of the kind.

The concessions we made about substantial breach by our client we say were made in circumstances where clause 44 is a code, if our friends wish to do something about those breaches, they should have served a show cause notice. They have not done so and we were therefore not fearful of making the concessions that we made.

Mr Digby submits that what the parties did regarding the various flow of notices in the process of this contract are too complex, factual or idiosyncratic to give rise to a special leave question. In response to that we submit to your Honours that all of the material is in writing and available for construction.

The reference finally to the decisions of Roadshow Entertainment and Nina’s Bar Bistro we say miss the point. They rely upon Professor Carter’s second exception to the general rule which we point out in paragraph 8 of our reply submissions. They relate to causation. We did not put our position as one relating to causation, we put it as one that Kane’s breach was so serious as to give to Sopov the right to terminate the contract. They are our reply submission, if your Honours please.

GLEESON CJ: Thank you, Mr Manly.

Having regard to the issues presented at trial and on appeal and of the findings of fact made at first instance and in the Court of Appeal we think there are insufficient prospects of success of an appeal to warrant a grant of special leave. The application is dismissed with costs.

AT 11.26 AM THE MATTER WAS CONCLUDED