Conditional contracts can bite

Introduction

Parties often sign contracts with conditions attached. These are properly called conditions subsequent if the parties have reached a concluded bargain but have also agreed the bargain will unravel unless specified events occur.  

A very common example is the purchase of a home, where the sale and purchase are made subject to a financier approving a loan to the purchaser.

In a recent Queensland Court of Appeal case, a developer (Principal) and a builder had agreed for the design and construction of a group of townhouses but had included a series of conditions that had to be finalised within 3 months.[1]  The contract allowed the parties to end the contract if one or more of the conditions were not fulfilled.

When the time arrived for work to commence on site, the builder did not want to continue with the contract and relied on the conditional clauses as a basis for walking away.  The developer wanted to continue with the contract.  The developer applied to the Court for a declaration the contract was binding on the builder.

The Contract

The contract was a modified form of AS4902-2000 and included the usual terms appointing a Superintendent with dual roles.  One of those roles is to act as agent of the principal in giving directions under the contract.  The other is to take the role of independent certifier of work performed by the builder.

The contract included a separate agreement for the builder to carry out some off site preliminary works during the conditional period.  The builder performed those works and the Superintendent certified progress payments for those works.

The Conditions

The 5 conditions specified in the contract can be summarised as:-

  1. Finance being approved.
  2. Builder to provide evidence of all insurance policies required.
  3. Builder’s director to provide a personal guarantee to the principal.
  4. Builder to provide security in the form specified in the contract.
  5. Builder to sign a side deed with the financier and principal within 14 days if required to do so by the principal. 


The contract provided for the principal to waive reliance on these conditions provided it did so in writing.

The facts

Before the three month period had expired, the parties signed a deed, extending the conditional period to 4 months.

One business day before the 4 month period expired, the financier sent an email to the Superintendent, copied to the principal’s sole director, confirming finance had been approved and attaching a side deed, “to be signed within 14 days”.

An hour later, the Superintendent responded by email copied to the principal’s director attaching a draft Notice to Proceed (Notice) with the contract works and the side deed.

6 minutes later, the principal’s director replied all, stating “Looks good to me guys”.

Two hours later, the Superintendent emailed the Notice with the attached side deed to the builder.

12 minutes after receipt of the Notice to Proceed, the builder responded by email to both Superintendent and principal thanking them and saying, “I reckon you just made [director of principal’s] year with that news”. The builder continued on in the email to say he “planned to catch up with the guys next week for an update on the frames and trusses package”.

10 minutes later, the principal’s director responded saying “you would be right mate!”.

The Notice to Proceed

The Notice, (described as a Notice to Proceed in the forwarding email) commenced with the words “I write in my capacity as Superintendent”. Attached to the email was a side deed which conformed with the requirements in the contract for such a deed. The side deed included a warranty by the principal and the builder that the contract was in full force and effect. 

Conditions not fulfilled

It was common ground the builder had not provided insurance documentation nor security as required by the conditions specified in the contract. Further, the side deed had not been executed before the four month period expired.

The builder said the non-fulfilment of these conditions meant the contract had been terminated by operation of the terms that required the conditions to be fulfilled.

The principal’s contentions

The principal said the Notice was a waiver of the conditions subsequent and secondly, the only conditions not satisfied were unsatisfied due to the builder’s failures, meaning the builder could not rely on its own defaults to avoid the contract.

First decision

When the matter came on before the Supreme Court of Queensland the builder said the Notice had been sent by the Superintendent and as such was not from the principal.

The Court agreed and said the Notice was not effective as a waiver of the conditions.  The Court did not consider the Superintendent was empowered under the contract to act as agent of the principal in this circumstance.

However, the Court agreed with the principal’s contention that the builder could not rely on its own failures to fulfil conditions as a means of terminating the contract and said the contract remained on foot.

The builder appealed to the Court of Appeal.

Analysis

The Court of Appeal considered whether the Notice was a written waiver of the unfulfilled conditions. 

The Court of Appeal said the sequence of emails showed the principal had approved the sending of the Notice and showed the principal had authorised the Superintendent to send the Notice on its behalf.  The Court of Appeal said the Notice could be sent by the principal or by an agent acting on its behalf.

In relation to the wording in the Notice that it was sent “in my capacity as Superintendent”, the Court said law generally favours a “commercially sensible construction” and “the standard of the reasonable person is hostile to technical interpretations and undue emphasis on niceties of language”.  The Court asked what a reasonable businessperson would have made of the Notice. The Court said such a person would have concluded the notice was intended to be sent on behalf of the principal. The  confirmation of the principal in the last email of the exchange made this certain.

In relation to the failure by the builder to provide the insurance documentation and the required security, the Court of Appeal agreed with the findings in the Court below.

The Court observed a contract does not automatically terminate if a condition is not satisfied or waived by the relevant date. Non fulfilment of a condition results in a contract being voidable rather than void to prevent a party relying on its own conduct to secure the end of the contract.

Conclusion

Parties should anticipate the possibility of all conditions being fulfilled when entering contracts including conditions.  The case shows a party cannot rely on their own failure to fulfil a condition to avoid a contract.

The case is Appeal Court precedent confirming the status of a Superintendent as agent of a principal in these circumstances. In this case, the agency extended to waiving conditions, but was supported by the email from the principal confirming agreement with the Superintendent’s Notice.

[1] Alliance Building and Construction Pty Ltd v Veesaunt Property Syndicate 1 Pty Ltd  [2024] QCA 75

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