- Supreme Court of New South Wales - Court of Appeal
- Tan Hung Nguyen v Luxury Design Homes
LONG-TERM CONTRACTS - CONSTRUCTION CONTRACT - BETWEEN TWO AUSTRALIAN PARTIES - SUBJECT TO AUSTRALIAN LAW - CONTRACT PROVIDES FOR PAYMENTS TO BE MADE IN AGREED INSTALMENTS THROUGHOUT THE DURATION OF THE WORK - INSTALMENTS NOT CONDITIONAL ON COMPLETION OF WORK - REFERENCE BY COURT TO ART. 6.1.4, COMMENT 2, OF UNIDROIT PRINCIPLES.
A building contract entered into by the two parties allowed for payment by progress installments at the completion of specified stages of work. The appellant refused to make the second installment due to defective and unfinished work by the respondent.
The appellant commenced proceedings in the District Court for damages, claiming that the respondent was in breach and/or had terminated the building contract. The appellant also claimed that the respondent was not entitled to any claim in contract for the value of the work it had performed, and that it was liable to repay the sums already paid to it. The judge found that the respondent had terminated the contract, the appellant had accepted the termination, but nevertheless the respondent was entitled to be paid for the work it had performed up until the date of the termination.
The court dismissed the appeal. Einstein J delivered the leading judgment with McColl JA and Hodgson JA agreeing. He found the general issue was one of construction and that, in this contract, entire performance was clearly not a condition for payment.
McColl JA made some additional comments, which included inter alia that the District Court judge erred in finding that the contract’s provision for progress payments meant that entire performance on the part of the builder was a condition for payment . He cited with approval the recent analysis of the principles relating to contracts in which the entire performance by one party is a condition for payment by the other, carried out by Finn J of the Federal Court of Australia in GEC Marconi Systems Pty Ltd v BHP Information Technology Pty Ltd, in which express reference was made to Comment 2 to Article 6.1.4 of the UNIDROIT Principles.
 In Gilbert-Ash (Northern) Ltd v Modern Engineering (Bristol) Ltd  AC 689 at 717 Lord Diplock described a building contract as an entire contract for the sale of goods and work and labour for a lump sum price payable by instalments as the goods are delivered and the work is done.
 Hudson’s Building & Engineering Contracts (Sweet & Maxwell 1995, 11th Edition at p 475, 4.006, p 476, 4.008) elaborates upon this proposition stating that “[t]he essence of a building contract is a promise by the contractor to carry out work and supply materials in consideration of a promise by the building owner to pay for it … [t]he great majority of building contracts in the traditional form consist of an undertaking to complete the work for a contract price either ascertained (in the case of a specification form of contract without quantities) or ascertainable (in the case of a measurement contract with quantities or schedules of rates) and are therefore ‘lump sum’ or entire contracts, in the legal sense”.
 Hudson’s also expresses the view (at p 475, 4.006) that “[i]n most contracts for major works the contractor is given an express right to payment by instalments on account of the contract price as the works proceed, and so to that extent no question of an entire contract arises. But the rules as to entire contracts will still apply to the last instalment, or to any general balance due, or to any individual instalment if the work is abandoned or brought to an end before the instalment is completely earned.”
 The entire contract principle is “an essential and necessary sanction to discourage the deliberate breaking or abandonment of contracts, which would be absent if in such cases the builder was entitled to demand partial payment notwithstanding his own breach”: see Hudson’s Building & Engineering Contracts (Sweet & Maxwell 1995, 11th Edition at p 476, 4.007). Thus, according to Hudson (at pp 476–477, 4.008):
[th]e vast majority of priced building contracts, sophisticated or simple, for the construction of a block of flats or a garden shed, will be construed as being entire, even where there is no express undertaking to complete, or whether the job is to be cost-based. Only contracts of a day-to-day jobbing character are likely to escape such an interpretation, which in the absence of express provision will depend on examination of the ‘matrix’ or ‘genesis and aim’ of the transaction between the parties.
 The principles to be applied in relation to entire contracts and entire obligations were discussed recently in GEC Marconi Systems Pty Ltd v BHP Information Technology Pty Ltd  FCA 50 ; (2003) 128 FCR 1 at 164–165 by Finn J at  –  in the following terms:
702 (i) An entire contract, or an entire obligation, is one in which, or in relation to which, the consideration for the payment of money or the rendering of some other counter performance is entire, indivisible and not severable: Baltic Shipping Co v Dillon, [(1993) 176 CLR 344] at 350; Steele v Tardiani (1946) 72 CLR 386 at 401; Phillips v Ellinson Brothers Pty Ltd (1941) 65 CLR 221 at 233ff.703 (ii) If a contract or an obligation is entire its complete performance is a condition precedent to payment or counter performance: Phillips v Ellinson Brothers Pty Ltd, above; Hoenig v Isaacs  2 All ER 176 at 181; see Cheshire and Fifoot, Law of Contract, para 26.13 (8th Aust ed). The court has no power to apportion the consideration which, in the case of money, is thus regarded as a "lump sum": see generally Chitty on Contracts, vol 1, para 22–030 (28th ed).704 (iii) The question whether a contract or an obligation is entire or is, in contrast, divisible, is a question of construction: Ownit Homes Pty Ltd v Batchelor  2 Qd R 124Hoenig v Isaacs, above. While building contracts … have commonly been regarded, prima facie, as entire or "lump sum" contracts: see Gilbert-Ash (Northern) Ltd v Modern Engineering (Bristol) Ltd  AC 689 at 717; Chitty on Contracts, vol 2, para 37–139 (28th ed); and see Halsbury's Laws of Australia, vol 3(2) "Building and Construction", 65–1255; such contracts commonly provide to the contrary by, for example, apportioning the consideration: eg Walsh v Kinnear (1876) 14 SCR(NSW) 434; but cf Hyundai Heavy Industries Co Ltd v Papadopoulos  1 WLR 1129 where the contract provided both for the payment of instalments and for their refund if the contract was cancelled in specified circumstances. As was said in the first edition of Halsbury's Laws of England, vol 3, §458–459:
458. The large expenditure which builders and contractors have to incur in carrying out the works which they have undertaken to construct renders it usual for the contract to provide for payments on account of the price during the construction of the works. The manner in which these payments on account are regulated varies according to the terms of the contract. Sometimes the several instalments become due on the completion of particular stages of the work … ; sometimes the interim payments are to be not less than a fixed sum … ; or, again, at fixed periods, irrespective of amount … .
…459. Whichever method is agreed upon as that in accordance with which payment is to be made, nothing becomes due to the contractor until he has done everything to entitle him to receive payment. Each certificate for an instalment creates a debt due, and the contractor is entitled to immediate payment thereof subject to the terms of the contract and any right of the employer to any set-off or counterclaim damages.
705 (iv) The usual rule in relation to instalment payments is as stated above: see also Brooking on Building Contracts, [4–16] (3rd ed); Keating on Building Contracts, 4–06, 4–17 (7th ed); Unidroit, Principles of International Commercial Contracts, Art 6.1.4, Comment 2; Farnsworth, Contracts, 564 (3rd ed). Once the right to payment has accrued it is enforceable as a debt: Pickering v Ilfracombe Railway Co (1868) LR3CP 235; and that right is not lost notwithstanding that the contract is subsequently terminated because of the default of the party possessing the right to payment: McLachlan v Nourse  SASR 230 at 233–234; see also Markham v Bernales (1906) 8 WALR 208 (a quantum meruit case). Again as was stated in the first edition of Halsbury (above, at §460):
Where, after the payment of money to the contractor on account, he fails to complete owing to his own default or abandons the contract without good cause, the employer may be entitled to recover back the instalments paid on the ground that the consideration has wholly failed; but at all events the employer would have a ground of action for a breach of the contract to complete, in which the damages recovered might equal or exceed the amount paid on account.
706 (v) If a contract or obligation is to be found to be entire notwithstanding that the contract or obligation provides for payment by instalments, the contract on its proper construction must indicate that the instalments are nonetheless conditional upon complete performance of the contract or obligation, ie. that they are refundable if this does not occur because of the default of the party that is to render the performance: cf Hyundai Heavy Industries Co Ltd v Papadopoulous, above, at 1131.
 It is true that in Hoenig v Isaacs  2 All ER 176 at 180 Denning LJ observed:
When a contract provides for a specific sum to be paid on completion of specified work, the courts lean against a construction of the contract which would deprive the contractor of any payment at all simply because there are some defects or omissions.
 The contract Denning LJ was considering in Hoenig v Isaacs was, as Hudson’s points out (above, at p 484, 4.019), one to “make and supply furniture” for a flat. It was not a building contract. This meant that the fact that the owner entered into possession of the flat and used the furniture as his own, including defective items, had the consequence that even if entire performance was a condition precedent, the condition was waived: Denning LJ at 181. The fact that Denning LJ did not regard the contract with which he was dealing as falling within the principles relating to building contracts can be seen from the fact that shortly after the observation I have set out, he referred (at 181–182) to the principles in Sumpter v Hedges (including the proposition that the contractor can only be paid if there is “something to justify the conclusion that the parties have entered into a fresh contract” — as opposed to any waiver) without demur.
 The reason building contracts are construed as being entire, even where there is no express undertaking to that effect, is plain. It is of the essence of such a contract that the consideration for the payment of the contract sum is “entire and indivisible”. A partially completed building is of little use to the owner of the land upon which it is to be constructed.
 Baltic Shipping Co v Dillon, above, usefully illustrates the proposition. In that case the contract was held not to be an entire obligation because the respondent (the passenger) had “enjoyed” 8 days of the cruise before the cruise vessel sank: see Mason CJ (with whom Toohey J agreed) at 353, Gaudron J at 386 — 387 and McHugh J at 392 — 393.
 In contrast, an owner of land will gain little “enjoyment” from a partially completed building. Thus, even though the price may be payable as the work progresses, that fact will not militate against the construction for which the appellants contend. ...}}
Tan Hung Nguyen Anor v Luxury Design Homes Pty Limited 2 Ors
 NSWCA 178 (11 June 2004)