- If a party intends to withhold retention monies on trust, it must actually appropriate and set aside an amount in a separate trust fund, otherwise, there is no trust.
- Variations that have been approved and paid cannot later be challenged on the grounds that such approval was ‘on account’.
- A legislative requirement comes into effect when it imposes an obligation on a party; whether or not the party is immediately required to comply.
The plaintiff, Calibre Construction Group Pty Ltd (builder) entered into a contract with the defendant, Kaloriziko Pty Ltd as trustee for Ryde Combined Unit Trust (developer) to design and construct a mixed-use development called Sky Gardens.
The contract provided that:
- the developer would retain 5% of the contract sum as security (retention) to be paid to the builder 12 months after practical completion; and
- such retention would be ‘held in trust’ by the developer for the builder.
In these proceedings, the builder claimed from the developer, amongst other amounts:
- the retention; and
- unpaid variations.
The builder also brought claims against the directors and shareholders of the developer with respect to an alleged breach of trust relating to the retention.
The developer disputed the builder’s entitlement to variations and sought to recover amounts already paid for variations, as well as damages for delay and defective work.
Whilst there had been no retention trust constituted, the builder was entitled to recover the amount of the retention from the developer, as well as unpaid variations.
The developer was entitled to liquidated damages for a defined period and was allowed to claim for agreed defects.
The retention
Clause 5.5 of the contract provided that the retention ‘shall be held in trust’ by the developer for the builder.
The developer was contractually obligated to appropriate and set aside an amount equal to the retention in a separate trust fund, without which, no trust would be constituted.
The developer paid the builder 95% of its progress claims and in that sense ‘retained’ the balance of 5%. But the developer had not received any cash retention, did not actually retain any cash, and did not set any such amount aside. Therefore, whilst the developer breached its obligation to create a trust, no trust had been constituted and the builder’s claims relating to breach of trust failed.
However, the developer was still liable to pay the retention amount to the builder, subject to set-offs for defects.
Variations
The developer disputed its obligation to pay for variations which had been previously directed and approved by the developer’s representative and paid to the builder. The developer sought to recover those sums from the builder as they were allegedly paid ‘on account’.
The court found that under the contract’s variation mechanism, once a variation had been directed and priced, the developer could not later dispute its validity or pricing. The builder was therefore entitled to payment for all disputed variations and the developer could not challenge them by contending that its approval was ‘on account’ only.
When a legislative requirement comes into effect
Under clause 11.2 of the contract, the builder could be entitled to costs for changes necessitated by a legislative requirement which came into effect ‘after execution of the contract’.
The court held that a legislative requirement came into effect when it became operative, in the sense of imposing an obligation on the builder. The question of whether or not the builder was immediately required to comply with that obligation was irrelevant.
For example, one of the legislative requirements was a development consent which was, from its terms, operative from the time it was given (ie before the contract). This was despite some aspects of the development consent not requiring action by the builder until after the contract.
