In Dura (Aust) Constructions Pty Ltd v Hue Boutique Living Pty Ltd (No 3) [2012] VSC 99 the Victorian Supreme Court has recently provided guidance on both the required content of show cause notices under construction contracts and what a Principal must consider when evaluating whether cause has been shown by a Contractor responding to such a notice.

Facts

Hue Boutique Living Pty Ltd (Hue), the Principal, engaged Dura (Aust) Constructions Pty Ltd (Dura), the Contractor, under an AS 2124 - 1992 (the Contract), to build an apartment block in Richmond, Melbourne. Hue served 4 show cause notices on Dura under clause 44.2 of the Contract, alleging that Dura was in default by separate substantial breaches of the Contract and requiring Dura to show cause in writing why Hue should not exercise a right under the Contract to either take the works out of the hands of the Contractor or terminate the contract (if the Contractor fails to show reasonable cause by the time specified in the notice).

The allegations of substantial breach made against Dura were that, among other things, it had failed to:

  1. proceed with the works with due expedition and without delay;
  2. comply with directions of the superintendent; and
  3. use the standard of materials or provide the standards of workmanship required by the Contract.

After evaluating Dura’s response, Hue did not accept that Dura had shown cause and served Dura with a notice under clause 44.4 of the Contract taking the whole of the remaining works out of Dura’s hands.

Arguments

Before Justice Dixon, Dura’s key argument was that the show cause notices were invalid on the basis that they were confusing and did not identify with sufficient detail the substantial breaches alleged. Dura contended that it was unreasonable of Hue to serve a notice that was “confusing, prolix and obtuse” and that, as a result, Hue had breached an implied term to act reasonably when giving notice to show cause under the Contract.

Decision

The Court found in favour of Hue and held that Dura had been in substantial breach of the Contract and that the show cause notices served by Hue were valid. Justice Dixon also found that when Hue gave notice to Dura taking the remaining works out of its hands, it had acted properly in accordance with the rights and obligations arising under the Contract.

Requirements of a valid Show Cause Notice

The Court found that the Contract required the Principal to name expressly the alleged substantial breach. It did not require the Principal to detail or particularise each matter constituting the default. His Honour referred with approval to an English case where it was held that a show cause notice must “direct the contractor’s mind to what is amiss”1. The Court emphasised that the process of showing cause under clause 44 requires communication as opposed to rectification. In contrast, a notice to remedy default, which requires, for example, a contractor to rectify certain defects, would require a default notice to specify the precise details of each defect alleged. Justice Dixon drew a distinction between the level of detail required for “self-executing” default notices and show cause notices.2

Ultimately, His Honour held that imposing a requirement that Hue particularise each specific item in respect of which Dura failed to comply with directions of the Superintendent “put too highly the requirement, under clause 44.3(b), that the notice specify the alleged substantial breach”.3

Was there an implied term that Hue act reasonably in issuing a show cause notice?

The Court found it was unnecessary to imply the term to give business efficacy to the Contract. Instead, Hue was required to determine honestly whether the Contractor had committed a substantial breach of contract.

The approach taken by the Victorian Supreme Court differs to that of the New South Wales Supreme Court where an implied term of reasonableness has been found when the Principal is issuing a show cause notice.4

Evaluating the response

In assessing a Contractor’s response to a show cause notice, the Principal must make its decision honestly and in good faith but the decision cannot be set aside because it might be unreasonable or one which serves only the interests of the Principal.5

Here, there was no evidence to suggest that Hue had acted with improper purpose. The Court found that Hue had made an honest and careful determination that Dura had failed to show reasonable cause.

Conclusion

Following this decision, a show cause notice must comply with the requirements of the contract under which it is issued and convey to the reader what is amiss. An issuer does not need to provide detailed particulars of each matter constituting default. Importantly, the type of breach of contract and response to be given by the Contractor (including whether it is a notice to show cause, as opposed to a notice to rectify) will inform the level of the detail that is required.

Unlike New South Wales, in Victoria, AS2124-1992 contains no implied term of reasonableness when issuing a show cause notice or evaluating whether cause has been shown. Something principals and contractors with projects in each jurisdiction should bear in mind when issuing or responding to a show cause notice.