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Background
In 2015, Giorgio Armani Australia Pty Ltd (Armani) was offered larger premises at the Sydney Kingsford Smith Airport. Armani entered into a contract (Contract) with Valmont Interiors Pty Ltd (Valmont) on 8 January 2016 to undertake the construction and fit-out works. Although Valmont had originally provided a quotation which included the supply of the joinery for the Contract Works, Armani informed Valmont that the joinery in the quotation was too expensive and that Armani would arrange joinery itself, through Sun Bright Construction Co Ltd (Sun Bright).
As is typical, the Contract included a clause (Clause 15) in relation to variations, whereby Armani could direct Valmont to increase, decrease or change the Contract Works by issuing a written direction to perform the variation (a Variation Direction). The clause required that Valmont was not to perform the work until the price of the variation had been confirmed in writing. If no Variation Direction was given, Valmont was required to give notice to Armani that it considered an instruction constituted a variation. Failure to give such notice would result in Valmont waiving any entitlement to claim against Armani in relation to the purported variation.
On 1 February 2016, Sun Bright advised Armani that it was unable to supply all of the joinery. It sent a marked-up copy of its quotation to Armani, indicating which joinery it was able to supply. A representative from Armani forwarded the email and marked up quotation to Valmont, saying “please see the revised quotation and if it works with your summation. Let me know if you need anything from me”. Valmont relied on this email as Armani directing it to supply the remainder of the joinery. Although Armani denied this, the District Court found that this was a valid Variation Direction to Valmont and this was not challenged on the appeal.
Construction commenced on 24 February 2016 and the installation of the joinery commenced on 4 or 5 April 2016. On 11 April 2016, there was a Project Meeting held between Armani and Valmont. Later that day an email was sent from Valmont to Armani with a contract variation spreadsheet for Armani’s approval. None of the items in the spreadsheet referred to joinery. Armani replied shortly afterwards, asserting there were no variations on the project and that it was a lump sum contract.
Armani refused to pay Valmont for the costs of the joinery that Valmont had supplied. Valmont commenced proceedings in the District Court seeking damages for breach of contract or quantum meruit (payment of work done without a contract). Armani cross-claimed for certain allegedly defective work.
District Court Decision
The District Court found that Valmont was entitled to certain additional costs incurred prior to 11 April 2016, even though Valmont had not complied with the notice requirement in Clause 15. This was because Armani had approved and paid variations up until this date without insisting on compliance with Clause 15, resulting in it being estopped from relying on Clause 15 until that date. However, the District Court found that Armani’s email correspondence on 11 April indicated that it intended to enforce Clause 15 from that point onwards. In respect of the joinery, the Court found that the costs were almost all incurred after 11 April 2016, so Armani could therefore rely on Valmont’s failure to comply with Clause 15.
Appeal
Valmont appealed the District Court’s decision.
On appeal, the Court found that Armani had created an assumption which Valmont was entitled to rely on (through the email of 1 February 2016) that it would be paid for supplying the joinery now that Armani/Sun Bright was unable to do so.
The correspondence relied on by the District Court as the date when estoppel no longer applied (i.e. the email exchange of 11 April 2016) did not mention joinery at all. Accordingly, although Armani made it clear that it considered that the work claimed by Valmont in the variation spreadsheet on 11 April 2016 fell with the scope of the fixed price contract, this did not extend to the joinery. The Court of Appeal held that the 11 April email from Armani “implicitly conveyed” Armani’s understanding that its instruction of 1 February 2016 was not a variation, but a separate, extra-contractual request to Valmont. In support of this, the Court said that when Armani referred to the project and the Contract price being a “lump sum amount which covers the project”, the project was one where Armani would supply the joinery. Once Armani directed Valmont to supply the joinery, it was entitled to be paid for that supply, unless or until such time as Armani disabused Valmont of that understanding.
In the view of the Court, the email of 11 April 2016 did not make it clear, either expressly or by implication, that Armani no longer intended to pay for the joinery. Armani simply did not refer to the joinery. It was therefore not unreasonable for Valmont to continue to hold the assumption that it would be paid for the joinery. The Court confirmed that where a party is labouring under an assumption and the basis for that assumption has materially changed, the change must be clearly communicated, otherwise there may be an estoppel which allows that assumption to have a continuing effect (as was the case in this situation).
Although an email from Valmont on 14 April 2016 showed that it was aware of the notice requirement in Clause 15, the Court said that this did not demonstrate that Valmont knew that the direction on 1 February 2016 from Armani fell under the clause. Further, even if Valmont had been aware of that around 11 April 2016, this would not have enabled it to issue a written notice under Clause 15, as the clause required it to be issued within five days of the direction being issued by Armani. Finally, the fact that Valmont did not seek Armani’s written approval to supply the joinery was held to be consistent with Valmont assuming that Armani’s direction was implicit approval. This is also consistent with Valmont’s actions in respect of other work, such as on the facade, where Valmont did seek approval before proceeding.
Impacts on Construction Contracts
This case shows that reliance on assumptions can be dangerous and illustrates the importance of clear communication between parties. It is also an example of a court taking a pragmatic approach to the interpretation of hard notice requirements, which feature regularly in construction contracts.
Where there is ambiguity, as this case demonstrates it may not be open to parties to rely upon notice requirements in the contract. While it may be possible to correct an assumption, avoiding the need to do so by making intentions clear is preferable. If non-compliance with contractual requirements (particularly in relation to notices and time bars) has occurred on a project to date, subject to the particular contract terms, any intention to enforce strict compliance in the future ought to be clearly communicated to the other party.
If you have any questions about this case, please get in touch with our Construction Team or your usual contact at Hesketh Henry.
Disclaimer: The information contained in this article is current at the date of publishing and is of a general nature. It should be used as a guide only and not as a substitute for obtaining legal advice. Specific legal advice should be sought where required.
