In Merkon Constructions Pty Ltd v Residence Company Pty Ltd [2025] VSC 151, the Supreme Court of Victoria rejected arguments that a construction contract was illegal or unenforceable due to inconsistency with a related side deed, and found that the builder was not estopped from pursuing further payment claims following the superintendent’s final certificate.

The decision clarifies the limited circumstances in which a contract may be unenforceable due to inconsistency with another agreement, and how a final certificate will be treated when assessing estoppel.

Background

Merkon Constructions Pty Ltd (the Builder) entered into a lump-sum contract with Residence Company Pty Ltd (the Developer) for the construction of a multi-level residential apartment building.

In order to finance the project, the Developer entered into a number of finance agreements, including:

• a loan facility agreement with Monland Pty Ltd (the Lender), pursuant to which the Developer obtained access to a finance facility to facilitate payment of construction costs incurred during the course of the project; and
• a side deed with the Builder and the Lender which (among other things) required the Builder to, prior to making any progress claim against the Developer, provide evidence satisfactory to the Lender showing that all subcontractors and suppliers had been paid (the Side Deed). Notably, pursuant to clause 3.3(b) of the Side Deed, the Builder agreed not to take or maintain any security interest over the apartment building.

Upon project completion:

• the superintendent issued a certificate of practical completion on 8 October 2021 (the Final Certificate) which the Builder signed confirming the certified amounts had been paid; and
• the Builder and Developer executed a deed of variation (Variation Deed), which:
  • extended the date for practical completion;
  • increased the contract sum; and
  • granted the Builder with an executed (unregistered) mortgage over the apartment building as security against the Developer.

The Builder subsequently sought to recover outstanding amounts due under the Contract (as amended). The Developer rejected the Builder’s claim, asserting (amongst other things) that:

• the Variation Deed was entered into in breach of an undertaking given by the Builder under the Side Deed and as such, constitutes an illegal contract which is unenforceable against the Developer; and
• the Builder was estopped from claiming any further payment because it signed the Final Certificate which acknowledged that “…all certified money by the [superintendent] has been settled in full between both parties”.

Decision

Illegality and unenforceability: in considering the Builder’s claim, the Court made the following observations in relation to the status of the Variation Deed:

• Although the Variation Deed breached clause 3.3(b) of the Side Deed, the Court stated that this breach did not make the Variation Deed illegal and unenforceable, as entering one contract that breaches another does not necessarily imply an intention to commit a legal wrong.
• The Builder’s breach of the Side Deed by entering into the Variation Deed could have been actionable by the Lender had the Lender suffered loss and damage and chose to take action as a consequence. The increased Contract Price and grant of an unregistered mortgage could arguably have prejudiced the Lender, however, as the Lender chose not to take any such action, the breaches were inconsequential.

Estoppel: in relation to the Developer’s estoppel claim, the Court found that:

• The Builder’s signature on the Final Certificate was irrelevant as it did not confirm whether money was owed, but rather, confirmed that all money certified by the superintendent had been settled between the parties.
• There was no evidence that the Developer had suffered any detriment in connection with the alleged representation.

In light of the above, the Court ultimately held in the Builder’s favour.

The decision can be found here.