Estoppel: Can the bell be unrung?

19 May 2021

As the presence of harsh time bars in contracts for major projects becomes increasingly common, so too does the reliance by counterparties on estoppel (and the related doctrine of waiver) to avoid the consequences of contractual non-compliance.

But when a party engages in conduct which could give rise to an estoppel, such as approving claims despite non-compliance with contractual notice requirements, is it possible to unring the bell?

Christopher Rowden considers the decision of the New South Wales Court of Appeal in Valmont Interiors Pty Ltd v Giorgio Armani Australia Pty Ltd (No 2) [2021] NSWCA 93.

Despite an increasing interest in modern collaborative contracting models, the prevailing philosophies on contract structure and risk allocation in contracts on major Australian construction projects ensure that harsh and impractical notice requirements and time bars remain ubiquitous.

It is common for a contractor in the current climate to face a burden of submitting no less than 3 to 4 notices to be entitled to a single variation or extension of time claim.  In some instances, the first of these notices is due only 1 or 2 business days after the occurrence of the event giving rise to the claim.

Thus, it is perhaps unsurprising that the sheer volume of paperwork generated on a major project in pursuit of contractual compliance can be astounding.  It is impossible to gaze upon bookshelves filled with folders of initial notices of delay, many of which will never be read after the day they were submitted, and not sympathise with junior contract administrators throughout the country.

Needless to say, it is exceedingly rare for contractors and subcontractors to achieve strict compliance with contractual notice regimes under contracts on major projects.

However, the imposition of overly harsh notice regimes by up the chain parties can be a double edged sword.

The rejection of claims at an early stage of a project based on technical non-compliance rarely provides a strong foundation for a cooperative and non-adversarial relationship between contractual parties.  As such, it is common in early stages of major projects for up the chain parties to overlook technical non-compliance and grant variation, extension of time and other claims the subject of out of time notices, or no notices at all.

By later stages of the project, cost overruns and delays are more likely to have taken their toll. Often it is not until then that up the chain parties will seek to rely upon notice requirements and time bars to defeat claims.  However, by that time, the conduct and positions adopted by the parties may have caused the contractual relationship to evolve. The result may be that it is no longer open to the up the chain party to rely upon the notice requirements, due to principles of estoppel and waiver.

Whilst there are multiple forms of estoppel which can variously give rise to causes of action or defences (it is often said that estoppel can be used as both a shield and a sword), the most relevant form of estoppel in this context is estoppel by conduct considered by the High Court in Commonwealth v Verwayen [1990] HCA 39, Craine v Colonial Mutual Fire Insurance Co Ltd (1920) 28 CLR 305 and Walton Stores (Interstate) Ltd v Maher (1988) 164 CLR 387.

An estoppel by conduct will arise where one party induces a second party to assume that a certain legal relationship existed or would exist between them, and the second party acted or abstained from acting in reliance on the assumption.  The application in the context of time bars is immediately apparent – a contractor carries out variation works based on an assumption induced by the principal that the principal would not enforce time bars and that it would be paid for the works.

Waiver is a distinct doctrine, but is closely related to estoppel. Waiver is not concerned with issues of reliance or detriment which are relevant to estoppel, but is instead concerned with an unequivocal act, with knowledge of the relevant facts, whereby a party abandons a right by acting inconsistently with that right. It is not necessary that there be an intention to bring about a waiver; rather, it is sufficient that the conduct from which the waiver is inferred is deliberate (per Toohey J in Verwayen at [24]).

The question is, where an estoppel has arisen, is it possible for the up the chain party to take steps to displace the assumption and unring the bell?

Judgement in Valmont Interiors Pty Ltd v Giorgio Armani Australia Pty Ltd (No 2)

The New South Wales Court of Appeal was required to consider the issue in Valmont Interiors v Giorgio Armani Australia (No 2) [2021] NSWCA 93.

Valmont Interiors was engaged by Giorgio Armani Australia to carry out construction and fit-out works for the Emporio Armani store at the Sydney Kingsford Smith Airport in Mascot. Works were to be carried out between 11 January 2016 and 5 March 2016.

The contract originally contemplated that certain joinery works would be supplied by a third party, Sun Bright Construction (China), who were to be engaged by Armani. In February 2016, Sun Bright advised Armani that it could not meet the scheduled delivery dates for all joinery. In response, Armani instructed Valmont to supply the items of joinery that could not be supplied by Sun Bright.

Valmont supplied the balance of the joinery, but Armani later refused to pay for it due to clause 15 of the contract. Clause 15 relevantly provided that:

  1. If Valmont considered a direction of Armani was a variation, but Armani had not issued a variation direction, Valmont was required to give notice within 5 business days after the direction;
  2. If Valmont failed to provide that notice within the stipulated period, Valmont released and waived any entitlement to a claim it may have against Armani in connection with, or arising from, the variation.

Valmont argued that Armani was estopped from relying on clause 15, on the basis that:

  1. The procedure in clause 15 was not followed, including because Armani’s representative approved additional works by informal email without reference to the clause;
  2. Representatives had indicated by email that Armani was “happy to agree” upon further payment for additional works or variations, and there was no stipulation for strict compliance with clause 15;
  3. Armani indicating that “extra moneys” would be available for additional works or variations.

By way of reply, Armani asserted that certain emails, including an email of 11 April 2016, displaced any alleged estoppel. The emails contained exchanges between representatives of Armani and Valmont, including in relation to express written approvals for variation work involving the façade of the premises.

At first instance, the primary judge held that Armani was estopped from denying Valmont’s entitlement to payment for variation costs incurred prior to 11 April 2016. The primary judge held that the estoppel came to an “abrupt halt” after 11 April 2016, as a result of the email exchanges and from 11 April 2016, Armani had made it clear that it would rely on the clause 15 procedure.

On appeal, Bell P (with whom Macfarlan JA and Leeming JA agreed) disagreed with the primary judge and found that the email of 11 April 2016 was not sufficiently clear to have had the effect that it was no longer reasonable for Valmont to assume that Armani would pay for the additional joinery works.  This was in part because the emails expressly dealt with the issue of the façade variations, and did not purport to deal with the issue of joinery. The 11 April 2016 email from Armani was understood by Valmont as relating only to façade works. The email said: “We require approval of the remaining variations for the façade design prior to these works being completed”.

Bell P said at [90]:

The email correspondence of 11 April 2016 did not make it clear to Valmont expressly or by necessary implication that Armani, having instructed Valmont to supply the balance of the joinery which it was Armani’s contractual obligation to supply, no longer intended to pay for that joinery, either because of non-compliance by Valmont with cl 15.2 or for any other reason. It was incumbent on it to do so had this been its intention.

His Honour emphasised the need for clarity if an assumption as to a state of affairs is to be departed from, as well as the need for reasonable notice to be given of the intended departure.  Where that departure is not communicated in sufficiently clear terms, the risk remains that the other party will continue to rely on the assumed states of affairs, to its detriment. The Court said the evidence of Valmont seeking Armani’s written approval to undertake the façade variations but not the joinery works was only consistent with Valmont proceeding on the assumption that Armani’s approval was not required.

As to the issue of reasonable notice of the intended departure, that notice cannot be effective if it is given after the time at which the contractor or subcontractor would have been required to provide written notice under the relevant contractual provision.  By that time, the party who has refrained from providing written notice in reliance on the assumption induced by the counterparty that the written notice requirements will not be enforced will already suffer detriment.  As such, written notice of a departure from an assumed state of affairs will be adequate where it is given in sufficient time for the counterparty to comply with the relevant notice requirements.  From a practical perspective, this means that an effective departure from an assumption as to a state of affairs will generally apply to future claims, rather than claims in respect of which contractual notices were already required to be given.

Conclusion

Principals and contractors should be alert to the risk of losing the ability to rely upon notice requirements and time bars.  This can arise by acting inconsistently with those rights, including by approving variation or extension of time claims despite non-compliance with notice requirements.

Where a principal or contractor considers that it has caused a down the chain party to adopt an assumption that time bars and other technical requirements will not be enforced, it remains open to the principal or contractor to disabuse that understanding. A principal or contractor should:

  1. Attempt to undo that understanding in writing, in clear terms which are directed to the specific category of claims in question (with as much specificity as possible); and
  2. provide reasonable notice of the departure, so it is still possible for the downstream party to comply.

Additionally, having issued such correspondence, the principal or contractor should thereafter strictly enforce the notice requirements.  Suppose it later becomes necessary to approve a claim despite non-compliance. In that case, the principal or contractor can protect themselves with careful drafting as follows:

  1. Explain why the claim fails to comply with the contract referring to specific clauses;
  2. State notwithstanding the contractor’s failure to comply, the principal approves the claim referencing any discretionary power that might exist in the contract;
  3. State that this approval shall not constitute a waiver of your rights or variation to the terms of the contract and shall not adversely affect those rights in any way;
  4. Expressly reserve your rights, powers, remedies and entitlements under the contract and at law as a consequence of the contractor’s non-compliance with the contract;
  5. Insist that the contractor strictly complies with the terms of the contract.


KEY CONTACT

Christopher Rowden
Principal

T: +61 7 3518 5410
M: 
+61  404 096 234
E: 
crowden@cdilawyers.com.au

This publication does not deal with every important topic or change in law and is not intended to be relied upon as a substitute for legal or other advice that may be relevant to the reader’s specific circumstances. If you have found this publication of interest and would like to know more or wish to obtain legal advice relevant to your circumstances please contact one of the named individuals listed.

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