How A “Mates’ Rates” Contract Can Come Back To Haunt You

by Greg Carter, Commercial Litigation Lawyer in Perth

A dispute arose between the owner of land and a builder regarding the price for constructing a building on the land:

  • the owner argued that the contract was a fixed price contract to do the work for $100,000
  • the builder argued that the contract was a “do and charge” contract under which the rates to be charged would be calculated at “mates’ rates”.

Facts

The following facts were not disputed:

  • the building was constructed at the owner’s request
  • the actual costs incurred by the builder were $203,354
  • the unpaid amount was $92,142
  • there was no dispute regarding the quality of the materials or workmanship.

Although the parties made a written contract under the Home Building Act 1989 (NSW), neither party complied with the terms of that contract.

The decision by the trial judge

The trial judge rejected the builder’s argument that the contract was a “do and charge” contract, and said that the parties “were happy dealing with each other on an informal and trusting basis”, and on the basis that “one would do the right thing by the other”.

But the trial judge held that it was unlikely that the builder, who was an experienced master builder of 35 years standing, would have given a fixed price quotation, to be accepted orally.

This was particularly so because:

  • at the time the owner said a fixed price contract had been made, it was uncertain whether the work would proceed at all (because a development consent had not been obtained)
  • no specifications had been made for a large number of variables which would affect the price of the contract
  • part of the arrangement was that the owner would contribute as much work as he could, which would affect the builder’s costs (up or down). For example, the owner subcontracted the rendering works, thus reducing the builder’s costs.

The trial judge found that it was “possible, indeed probable” that the owner was given a price of $100,000 by the builder, but that there was a difference between giving an estimate of cost and giving a quotation that is capable of acceptance so as to constitute a binding contract.

The trial judge held that it was likely that a price had been sought by the owner and given by the builder, but that it was an estimate, and not a quotation capable of acceptance as a binding contract.  The trial judge preferred the evidence of the builder, rather than the owner, on this point.

The trial judge held that the builder was entitled to $122,335 (the unpaid amount of $92,142 in actual costs, plus interest).

The owner appealed to the NSW Court of Appeal.

Court of Appeal

In the Court of Appeal the owner argued that the trial judge had erred in his reasons for decision by referring to a “mates’ rates” term in the contract.

The Court of Appeal rejected this argument and said:

  • the reference to “mates’ rates”, and the implication of a term to that effect in the contract, had no bearing on the fundamental dispute
  • firstly such a term would have no legal effect
  • secondly, if parties make a contract for the supply of goods and services, by which they intend to be bound, but do not specify the price to be paid, the law implies a term that there will be a reasonable price paid
  • so, here, if the contract was a “do and charge” contract, it would be necessary to inquire whether the rates in fact charged were, objectively, reasonable;
  • “If (which is doubtful) the “mates’ rates” term means anything, it could indicate no more than that, in charging for the work, the builder would keep its prices as low as possible consistent with breaking even on the job. Whether that means the builder would charge only actual costs, or whether it means the builder might recover some small amount of profit in addition, does not arise for decision, because no one has suggested that the rates charged were, objectively, unreasonable. That is to say, no one has suggested that the rates actually charged were not rates that could be charged by one mate to another.” (my emphasis)

The appeal was dismissed, meaning that the builder was entitled to his actual unpaid costs (with no allowance for profit).

The case citation is Krahe v Manfate Pty Ltd [2016] NSWCA 363, per Justice McDougall (Justices Gleeson and Simpson agreeing).

Comment

This case is a reminder that a “mates’ rates” deal is dangerous because mates can fall apart, especially over money.  It’s always best to put the deal in writing.  The worst case scenario is that a Court will have to decide what “mates’ rates” means in the particular circumstances.

 

Greg Carter is a freelance litigation lawyer based in Perth, specialising in fixed-fee commercial dispute resolution.

Greg offers a FREE consultation and a ‘no obligation’ quotation.

For more information please call Greg on 0422 406 929 or email gc@gregcarter.com.au.

Or see his website www.gregcarter.com.au.



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