Bona Fide Reliance on Mistaken Contractual Interpretation Does Not Constitute Repudiation
April 7, 2022
A recent decision of the New South Wales Court of Appeal in Aslan v Stepanoski  NSWCA 24 considered the scope of repudiatory conduct.
The parties entered into a cost plus contract, later superseded by a lump sum contract, for Mr Aslan (Builder) to construct two residences on Mr and Mrs Stepanoski’s (Owners) land.
Under the contract, progress payments were to be made to the Builder upon completion of six identified stages of work. Clause 24 of the contract provided that where the Owners failed to make a progress payment (or other amount due) within the time allowed, the Builder may give written notice to the Owners and suspend the works after a further five business days had passed.
The Owners disputed and refused to pay one of the Builder’s progress claims and locked the Builder out of the construction site. When payment was not made by the Owners by the due date, the Builder immediately ceased work and notified the Owners of his intention to do so until the progress payment was made. The Builder was mistaken in ceasing work (and issuing the Notice of Ceasing Building Works) at this time because clause 24 of the contract arguably entitled the Owners to an additional five business days to make payment before the Builder was entitled to cease work. The Owners terminated the contract accepting the Builder’s purported repudiation of it.
The primary judge found the Builder’s conduct in issuing the payment claim and ceasing (and not resuming) the works, on the basis the Owners failed to pay the amounts claimed by the Builder, constituted a repudiation of the lump sum contract. Fundamental to this conclusion was the primary judge’s view that the Builder claimed payment of sums to which he had no entitlement, because the value of the work done by the Builder up to the date of the suspension of the works was less than the amount the Owners had already paid. The Builder appealed the decision.
The Court of Appeal took a different view, finding that the Owners had not established the Builder had claimed an amount to which he was not entitled and further, that the Builder’s conduct was not repudiatory as it was an attempt to hold the Owners to the terms of the contract. In relation to the Builder’s early suspension of the works, Macfarlan JA considered that a bona fide insistence on a mistaken interpretation of a contract will not, without more, constitute a repudiation.
The Court considered that a significant factor in determining whether conduct constitutes a repudiation is if the other party attempts to persuade the allegedly repudiating party that their position is mistaken. Without this, the Court considered it would be difficult to find that the alleged repudiating party was persisting in an interpretation of the contract despite a clear articulation of the true agreement. The Owners here made no such attempt.
Further, the Court observed that, in the context of a lump sum contract, there were reasons why the Builder’s entitlement did not necessarily accord with the value of the work he undertook to perform (or did in fact perform) as at the date of the progress claim: the Owners may have struck a “bad bargain” (and agreed to pay more for the contract work than its actual value) or the instalment payments may have been disproportionate to stages of the project.
The decision indicates that a party’s bona fide reliance on a mistaken contractual interpretation will not itself be sufficient to constitute repudiatory conduct.
The full decision can be found here.