No statutory right to recover overpayments under DBC Act

Stephens v Cameron [2021] VSCA 208

Section 40(2) of the Domestic Building Contracts Act 1995 (Vic) (the DBC Act) prescribes limits on staged progress payments made under a major domestic building contract. The recent decision of the Victorian Court of Appeal in Stephens v Cameron [2021] VSCA 208 (Stephens v Cameron) has held that a breach of section 40(2) of the DBC Act does not create a statutory right to recover overpayments from a builder. The decision also provides guidance in relation to (amongst other matters) the circumstances in which a “Construction Management Contract” will be deemed a “domestic building contract” under the DBC Act.

BACKGROUND

In February 2012, the owners of a property in Mornington, Cameron and Alesci (collectively the Owners) and a registered builder, Stephens executed a contract entitled “Construction Management Contract” (the Contract). The Contract defined Stephens as the “Construction Manager” but also separately described him as the “builder/construction manager”.

The Contract specified that Stephens would act as agent for the Owners in providing construction management services in respect of the construction of two townhouses (the Works) and obliged him (amongst other things) to engage trade contractors on behalf of the Owners and coordinate their work. The Contract also specified that the Owners would pay trade contractors directly and that Stephens was required to provide regular statements setting out the costs and expenses incurred in connection with the Works, which the Owners were required to pay.

The building permit for the Works specified that Stephens’ company was the “builder”, identified him personally as one of the building practitioners involved in the Works and cited his registration number under the Building Act 1993 (Vic) (the Building Act). Further, the building permit also referred to and had annexed the domestic building work insurance policy for the Works, which identified Stephens’ company as the “builder”.

The Works progressed, and the Owners paid Stephens $567,000 for his scope of work. However, the relationship between the parties soured and the Owners terminated the Contract by notice in January 2013. In 2018, the Owners commenced proceedings against Stephens in the County Court claiming (amongst other things) recovery of amounts paid in excess of the limits on progress payments set out in section 40(2) of the DBC Act.

At first instance, the trial judge upheld the Owners’ claim.

THE COURT OF APPEAL DECISION

On appeal, Stephens contended that the trial judge erred by:

• finding that the DBC Act applied to the Contract (the first ground);
• identifying Stephens as the “builder” rather than deciding that the Owners were
  “owner builders” (the second ground);
• holding that the Owners had a right of recovery under section 40(2) of the DBC Act
  (the third ground); and
• awarding interest on the basis that a general law right to interest on restitutionary claims exists (the fourth ground).

The First Ground 

In respect of the first ground, Stephens submitted that the trial judge erred in finding that the Contract was a “domestic building contract” within the meaning of section 3 of the DBC Act because the scope of that defined term should be limited by section 5 of the DBC Act. Section 5 of the DBC Act identifies the type of work to which the DBC Act applies, Stephens contended that this section also implicitly limited the application of the DBC Act to those “responsible” for particular work and that his role did not satisfy this implied criterion. Stephens claimed that his role was to “manage” trade contractors as agent for the Owners, who maintained “responsibility” for the project and also identified that the Contract lacked plans, specifications, and a price.

The Court rejected the first ground and stated that the proposed interpretation of section 5 of the DBC Act was, in fact, a rewriting of that section. The Court observed that the notion of “responsibility” relied upon by Stephens did not have any textual support in the DBC Act and that the in passing use of the word “responsible” in Shaw v Yarranova Pty Ltd (2006) 15 VR 289, which Stephens sought to rely upon, did not provide a basis for importing that word into the DBC Act. Further, the Court observed that the purposes and objects of the DBC Act would be undermined by limiting the application of the DBC Act to those who had “responsibility” for performing work.

The Second Ground

In respect of the second ground, Stephens submitted that the trial judge should not have found that he was a “builder” but rather that the Owners were “owner builders” which he contended meant that the Contract was not subject to the DBC Act. Stephens claimed that the Owners ought to be characterised as “owner builders” because they:

• owned land, which they wished to develop for sale;
• engaged Stephens as their agent under the Contract;
• empowered Stephens to enter into contracts with suppliers and trade contractors on their behalf; and
• took contractual responsibility for defects, time overruns and costs of construction.

The Court rejected the second ground because the Owners were not “owner builders” under the Building Act. The Court observed that the question of whether the Owners were “owner builders” was entirely irrelevant to the issue of whether the Contract was a “domestic building contract” under the DBC Act (which it was) and that characterising the Owners as “owner builders” would not alter their legal relationship with Stephens. The Court also observed that the argument advanced by Stephens was inconsistent with him having put forward his company as the “builder” to obtain the building permit and domestic building work insurance.

The Third Ground

In respect of the third ground Stephens submitted that the trial judge erred in holding that section 40(2) of the DBC Act created a statutory cause of action which entitled the Owners to recover amounts paid in excess of the limits on progress payments contained in section 40(2) of the DBC Act. Stephens contended that as section 40(5) of the DBC Act states that a court may order a refund of amounts paid in contravention of sections 40(2) or 40(3), that should be the only avenue for recovery under section 40 of the DBC Act. Further, that a party which alleges a breach of section 40(2) of the DBC Act ought to plead an action in restitution, which the Owners did not.

The Court upheld the third ground and found that section 40(2) of the DBC Act did not “create an independent right to recovery of any amount retained contrary to its terms…”. The Court observed that the trial judge erred in relying on the decision in Imerva Corporation Pty Ltd v Kuna [2017] VSCA 168, which did not confirm that section 40(2) of the DBC Act creates a statutory right of recovery and the decision in Cook’s Construction Pty Ltd v SFS 007.298.633 Pty Ltd [2009] QCA 75, which concerned a comparable but different provision in the Queensland Building Services Authority Act 1991 (Qld).

The Fourth Ground

As Stephens had been successful on the third ground, the Court granted leave in respect of the fourth ground and did not need to make a decision in respect of whether a general law right to interest on restitutionary claims exists. However, the Court did briefly consider the authorities on the matter and observed that they are unsettled.

On appeal, the Owners had also claimed an entitlement to interest under section 58 of the Supreme Court Act 1986 (Vic) (SC Act) on the basis that the DBC Act constituted a “written instrument” or alternatively, under section 60 of the SC Act, on the basis that the proceeding was for recovery of a debt. This claim was rejected because the decision of the Court in respect of the third ground meant that there was no amount liable to be paid. The Court also observed that the argument advanced by the Owners in respect of section 58 of the SC Act would have the surprising effect of reading an entitlement to interest into every statutory right to payment.

The appeal has been allowed in respect of the third and fourth grounds and the proceeding remitted to the County Court for further hearing.

IMPACT OF THE DECISION IN STEPHENS V CAMERON

The main impact of the decision in Stephens v Cameron is that it is now clear that an owner cannot rely upon an alleged breach of section 40(2) of the DBC Act to recover amounts paid to a builder in contravention of that provision. Instead, an owner may need to bring a claim in restitution, to which a builder could raise an equitable defence such as change in position where money paid has been dispensed.

More broadly, the decision also provides guidance in respect of the breadth of circumstances in which a contract may be a “domestic building contract” under the DBC Act.

If you have any questions about the implications of this case, please contact a member of our Construction & Engineering team.