Coronavirus (COVID-19) and Construction Contracts: What are your options?

Coronavirus (COVID19) and the construction industry: What are your options?

We recently published an article about how construction contracts can incorporate concepts of force majeure events. A copy of our article can be found here.

As the disruptions of corona virus begin to become more extensive with government mandates coming into effect, we believe it’s important for those in the construction industry to have a quick reference guide as to their options or important things to think about.

 

Pre-contract: Tendering, negotiating and drafting of contract
Force Majeure clause ·         Manages the relationship between the parties where there has been an ‘Act of God’ or other similar severely disrupting event

·         Depends on the contractual definition of the term

·         Generally, suspends the obligations until the force majeure event has concludes

·         Important to consider when the parties’ obligations will resume – what will indicate the end of the force majeure event

Scope of Works and mitigation of supply chain risk ·         Where possible, alternative supply or materials should be specified in the scope of works with pre-agreed variation prices
Extensions of Time ·         Can include force majeure event as a qualifying cause of delay

·         What circumstances can the contractor or subcontractor seek an EOT?

·         Generally appropriate for an EOT to be granted where there is suspension of works, variation, act, omission or breach of the other party, force majeure events and/or industrial action occurring across the relevant state or territory

·         Are there any duties to mitigate the delay which are a precondition to receiving an EOT

Delay Costs and/or damages ·         Does the contract provide for any delay costs or damages?

·         What are the circumstances that the contractor or subcontractor is entitled to costs and are there any relevant caps?

Legislative Provisions ·         How are the change in legislative requirement provisions worded?

·         Consider the definition of legislative requirement (and/or equivalent and related definitions)

·         Consider whether legislative provisions should include a carve out for where there is a change in the legislative requirements in relation to COVID19. Given the uncertainty around how the government will proceed, it is difficult to predict how the legislative regimes or executive orders will change as the response to COVID changes and adapts

Labour and Key Personnel ·         Are there any key personnel of the contractor or the subcontractor that should be specifically identified?

·         Are there specific measures the Principal/Contractor want to specifically implement? Examples may include split teams

Security ·         Consider what types of security will protect against insolvency risk of contractors or subcontractors – Parent guarantee, retention monies, material security and/or bank guarantees

·         Consider circumstances where there may be recourse to the security such as where a party becomes insolvent or there are defective works that require rectification

·         Consider Principal security for payment if there are any solvency concerns

Insurance ·         Principals should consider whether there are suitable insurance policies to protect from any delays to the works or any consequences that the delays may have at the end of the project

·         For example, Principals may wish to discuss delay in start-up insurance with their insurance broker

Warranty deeds and defects ·         Principals may wish to require warranty deeds from the subcontractors to insure against any insolvency risk from contractors and to allow for any defects to be rectified independent of the contractor
Financial capacity of the tenders ·         When assessing potential contractors, Principals should consider the financial capacity of contractors and whether there are any solvency concerns and if there are any parent companies that can provide guarantees
Project deadlines ·         What deadlines are imposed by related contracts such as sale of land for off the plan properties

·         How long are the deadlines and timeframes of the project? Can they be extended to account for coronavirus

Contract structures ·         Profit/cost-saving sharing models of contract or guaranteed maximum price may be considered by Principals to minimise cost exposure of contracts that may be affected by coronavirus (such as supply chain risk)
Contract administration
Extension of time ·         Principals and Superintendents generally have the power to issue an EOT even when a claim may not be made by the Contractor. While they are not obliged to use this power for the benefit of the contractor, there may be practical and goodwill benefits in using these powers

·         Contractors should seek legal advice in terms of the relevant EOT clause and whether they have a right to seek an EOT or what other options are available to them under the contract

Suspension ·         Suspension is generally a grounds for an EOT

·         Consider who bears the cost of suspension under the contract

·         Is there a right for the contractor to claim any suspension costs or costs associated

Change to legislative requirements ·         In the event of government mandated shutdown, there is likely going to be claims for legislative changes. These will largely depend on the wording of the clauses, who bears the risk on legislative changes and the form of the government shut down

·         Other considerations include whether construction work is considered an essential service and to what extent

Variations ·         Where there is a supply chain breakdown due to closed borders, there may be claims for variations being made by Principals or Contractors to allow the project to continue

·         Variations will be linked to the scope of work and whether there are alternatives that can be sourced

Payments ·         Principals may wish to change payment terms to accommodate contractors or subcontractors

·         As the effects of coronavirus move throughout the economy, there will undoubtedly be businesses that struggle and become insolvent. Where possible, Principals may want to consider changing milestone payments or frequency of payment claims to assist contractors’ cashflows

·         Any agreement between the Principal and relevant contractor should be evidenced in writing

Acceleration ·         If there is relatively small amount of work left, Principals may consider giving directions to accelerate

·         While this may increase the cost of the project, the Principal may be able to ensure the project is completed before shutdowns come into effect

Employment ·         Employment law advice should be sought about how to manage employee relationships while projects are on hold by reason of coronavirus
Teams and social distancing ·         Head contractors may wish to implement policies that flow down the contracting chain in relation to splitting teams and social distancing where possible
Other arrangements agreed between the parties ·         Sometimes the best changes are those made between the parties and not from the lawyers

·         However, even where this is the case, ensure that such agreements are evidenced in writing and you seek legal advice on the impacts of the agreement and whether there are any potential consequences that you may not have considered

Other issues
Financiers ·         In many developments, there may be a financier involved and different obligations that arise under these loans and security documents

·         Principals should consider their obligations to notify their financier(s) where appropriate

Other stakeholders ·         There may be a range of other stakeholders that may have an interest in the construction contracts

·         It is important to manage these aspects of the development to reduce or eliminate any potential problems later on

Dispute resolution
SOPA claims ·         At the time of writing, there have been no changes to the strict deadlines imposed on submitting and responding to payment claims under the NSW Security of Payment legislation

·         SOPA is a contractor friendly forum, allowing for money to flow down the contracting chain

·         SOPA claims can be challenged on jurisdictional grounds or can be settled at the end of the contract if there has been an overpayment

Alternative dispute resolutions ·         Many alternative dispute resolution professionals are not taking new appointments. This can create a delay in parties complying with the relevant dispute resolution clauses

·         Parties may consider teleconferences or videoconferences to resolve disputes, rather than physically meeting

Courts ·         Many courts are operating via videoconferencing, with physical appearances limited

·         The court process may have more delays than usual as judges and parties adjust to the temporary measures of case management

·         Where a party is seeking urgent injunctive or other relief, it is important to seek legal advice as soon as possible to ensure that an application can be made efficiently and protect your interests

Contract termination ·         If you are seeking to terminate the contract it is important to terminate in accordance with the contractual provisions and to consider any common law rights or duties in relation to termination

·         Those seeking to terminate where the counterparty has become insolvent will also need to be aware of the recent insolvency changes and the restrictions on terminating pursuant to insolvency

 

 

Regulatory Overhaul and Reform Pillars: building confidence and stronger foundations for the NSW building and construction industry

Transparency, accountability and quality of work are always issues at the forefront of the building and construction industry. In the wake of many high profile instances of defects in newly built developments, these are also the big issues that the NSW Government is tackling in 2020.

Where it began: the Shergold Weir Building Confidence Report

Back tracking to early 2018, the Shergold Weir Building Confidence Report recommended the implementation of a national best practice model. The purpose of this was to enhance public trust in the building and construction industry and strengthen the effective implementation of the National Construction Code. The best practice model comprises 24 recommendations relating to:

  • registration and training of practitioners;
  • roles and responsibilities of regulators;
  • the role of fire authorities;
  • integrity of private building surveyors;
  • collecting and sharing building information and intelligence;
  • adequacy of documentation and record keeping;
  • inspection regimes;
  • post-construction information management;
  • building product safety; and
  • how the above recommendations will be implemented.

The NSW Government’s Response: Building Stronger Foundations Discussion Paper

The NSW Government welcomed the Shergold Weir Report and announced that it is committed to improving the building and construction industry through a number of new reforms. In June 2019, the NSW Government presented its Building Stronger Foundations Discussion Paper seeking input from stakeholders on its four key reforms. These reforms are:

  1. requiring practitioners defined as ‘building designers’ (e.g. architects, engineers) to declare that their building plans/specifications/solutions are compliant with building regulations, including the Building Code of Australia;
  2. introducing a registration scheme for ‘building designers’ who will be making declarations;
  3. ensuring that building practitioners owe a duty of care to owners’ corporations and subsequent residential homeowners; and
  4. appointing a Building Commissioner who is a consolidated regulator for the whole of the NSW building and construction industry.

What to expect in 2020 and beyond

It has been just over a year since the NSW Government committed to implementing regulatory reform and six months since it consulted with stakeholders to shape the direction of these reforms. So what progress has been made in that time?

In October 2019, the first tranche of reforms was introduced with the Design and Building Practitioners Bill 2019 (the “Bill”). The Bill seeks to deliver the NSW Government’s first, second and third key reforms by imposing new obligations on design and building practitioners. The Bill is currently before the NSW Upper House. Make sure to read our next newsletter as we will be providing a detailed explanation of the substance of the Bill.

In relation to fourth key reform, the NSW Government has appointed David Chandler OAM as the NSW Building Commissioner. In January 2020, Mr Chandler announced the Six Reform Pillars, which is the public’s first insight into his plans and implementation strategies for the reforms. The Six Reform Pillars are:

Pillar Actions Outcomes
Building a better regulatory framework

 

Implementing legislation and regulation and transforming the focus of the regulator

 

Ensure that NSW has a strong customer focused regulatory framework
Building rating systems

 

Work with ratings agencies, insurers and financiers to assist in better selection of industry participants

 

Move away from one-size-fits-all participant recognition and better identify risky players

 

Building skills and capabilities

 

Improve accreditation of construction related programs through improved standard modules

 

Shared minimum learning content and open source resources for all institutions

 

Building better procurement methods

 

Establish clear standards for engagement and outputs

 

Viable risk allocation and performance accountability

 

Building a digital future

 

Digitise the NSW Building Industry and move away from analogue record keeping

 

Shared industry wide platforms that build confidence

 

Building the reputation for quality research

 

Evidence based approach to accessing and closing the gap via case studies and other research

 

Baseline and measurement against our ability to improve confidence in the industry

 

 

This article provides a snapshot of the NSW Government’s plans to implement effective and wide ranging regulatory reforms of building and construction industry. This summary demonstrates that there is a significant task ahead in implementing these reforms, so watch this space for future updates.

If you or someone you know wants more information or needs help or advice in relation to this article, please contact us on (02) 9248 3450 or email info@bradburylegal.com.au.

Prevailing in a “Battle of the Forms”

Late last year Bradbury Legal was successful in representing its client in the case of Samios Plumbing Pty Ltd v John R Keith (QLD) Pty Ltd [2019] QDC 237 (29 November 2019). The case related to a “Battle of the Forms” where the Court found that our client’s terms and conditions governed the relationship between the parties for the supply of goods, rather than the purported terms and conditions of the other party.

The Facts

Samios Plumbing Pty Ltd (Samios) sent John R Keith (QLD) Pty Ltd (JRK) their standard credit application form used to establish a credit facility. This was not an offer capable of acceptance but an invitation to treat. In February 2010, JRK sent a facsimile to Samios enclosing a cover letter, Samios’ completed credit application form as amended by JRK’s financial controller and JRK’s standard terms and conditions.

Samios’ credit application included the sentence “All goods shall be sold in accordance with the “STANDARD TERMS AND CONDITIONS” as outlined on the purchase Invoice”. This sentence was struck out and initialled by JRK’s financial controller.

Later that month, JRK received a letter from Samios stating that its credit application had been approved and JRK subsequently placed orders.

JRK contended that the credit application (accompanied by JRK’s standard terms and conditions) was an offer to enter into an agreement for the future supply of goods on credit. The amendment to Samios’ credit application meant that JRK’s offer excluded Samios’ standard terms and conditions and substituted them with JRK’s standard terms and conditions. As such, JRK argued that Samios’ letter accepted that offer and all goods supplied by Samios were subject to JRK’s standard terms and conditions.

Samios denied that the credit application was an offer to enter into such an agreement. It contended that the credit application was a request that Samios extend credit to JRK for future orders and that each purchase order from JRK was a separate offer to purchase goods. For this reason, Samios contended that all goods were supplied with a delivery docket that referred to its standard terms and conditions available on its website and that JRK accepted each offer by taking delivery of the goods.

Decision

Barlow QC of the District Court of Queensland found that:

  • it was clear from JRK sending the credit application to Samios with its standard terms and conditions that it was an offer by JRK to enter into a contract for the provision of credit for the purchase of goods in the future;
  • by striking out Samios’ term that all purchases be made on Samios’ terms and conditions and including a copy of JRK’s own terms and conditions, JRK was offering to enter into a credit agreement on its own terms and conditions;
  • Samios’ letter approving JRK’s credit application, clearly conveyed to any reasonable business person, that Samios was accepting JRK’s offer to contract on the terms stated (i.e. JRK’s standard terms and conditions); and
  • thus, the credit agreement between JRK and Samios governed the terms of all subsequent orders and supplies of goods between the parties.

His Honour also considered Samios’ submission that the provision of a delivery docket with each order which made reference to Samios’ terms and conditions constituted an offer to supply goods on those terms. His Honour determined that the delivery dockets were not an offer to enter into a contract on Samios’ terms and conditions. Rather, as JRK’s orders were made using its own purchase order form and included a copy of JRK’s standard terms and conditions, by Samios’ conduct in delivering the goods in accordance with the purchase orders, Samios’ accepted JRK’s standard terms and conditions as governing the purchase order.

Key Takeaways

The scenario described above is not uncommon. Another example of where a ‘Battle of the Forms’ can arise is where a party provides a quotation that is subject to its standard terms and conditions and then the other party provides a purchase order stating that its own standard terms and conditions apply.

To avoid the ambiguity that these scenarios create and to minimise the chances of being involved in a costly dispute, it is important that it is clear which terms and conditions govern the relationship between the parties. The case law demonstrates that if parties proceed without agreeing on which terms and conditions apply, usually it will be determined that the last terms and conditions to be exchanged govern the relationship. While in these circumstances there is no express acceptance by a party of the offer of the terms provided by the other party, the court can find that there has been acceptance by conduct.

A worthwhile consideration if you are entering into an ongoing relationship that will involve multiple transactions is an “umbrella” or “master” agreement that sets out the terms and conditions that will apply to the future orders and supplies.

If you or someone you know wants more information or needs help or advice about avoiding a “Battle of the Forms”, please contact us on +61 2 9248 3450 or email info@bradburylegal.com.au

A copy of the case can be found here:

http://www.austlii.edu.au/cgi-bin/viewdoc/au/cases/qld/QDC/2019/237.html?context=1;query=john%20r%20keith;mask_path=

 

 

Builders licensing requirements – who is a “fit and proper person”?

Entry into various professions usually requires that a person be ‘fit and proper’, and that they be granted and continue to hold a licence or registration relevant to that profession.

An authority charged with the administration of a registration scheme or licensing scheme must be satisfied that an applicant is ‘fit and proper’ before granting the licence or registration.

Entering the building profession

The relevant certification authority will depend on the location of the builder’s work. Some examples are:

  • NSW Fair Trading, for licensing of builders and tradespersons in New South Wales;
  • Victorian Building Authority, for registration and licensing requirements for building and plumbing practitioners in Victoria; and
  • Queensland Building and Construction Commission, for  licensing in Queensland.

Although each jurisdiction has its own specific requirements, usually applicants must demonstrate that they firstly have the necessary qualifications, skills, knowledge and experience applicable for the registration or licence sought, and secondly that they satisfy certain probity conditions.

The requirement to be a fit and proper person not only applies to new applicants. It also extends to those wishing to maintain and renew their registration or licence.

How does an authority determine if an applicant is ‘fit and proper’?

The term ‘fit and proper’ is rarely defined in legislation. Rather, there are criteria and certain matters that an authority will consider, many of which relate to a person’s honesty, good character and integrity in commercial and other dealings. It is related to, but not the same as, being a person of good character.

In addition to providing evidence of relevant insurances, qualifications and experience, applicants are requested to disclose details of certain adverse or relevant matters. These are matters that may indicate that he or she is not a fit and proper to practise as a building practitioner. The disclosure of an adverse or relevant matter may trigger a request for further information or investigation.

Details of prescribed offences, convictions, licence or registration suspensions or disqualifications, and court or tribunal orders are amongst those matters investigated by an authority, as is the solvency of an individual or corporate entity.

Also relevant will be any examples of dishonesty or carelessness by the builder when dealing with the regulatory body itself. Even where there is no actual intention to deceive the authorities, failure to declare relevant information can lead to the regulatory body refusing the application. The authorities take a very dim view of builders who do not understand the regulatory regime and the importance of accuracy when dealing with it.

A failure to deal promptly with, or take seriously, customer complaints can also be relevant.

The fit and proper person requirement applies to individuals as well as directors of company entities seeking registration or licensing.

What is a relevant or adverse matter?

The following are common matters that must be disclosed, and will be considered, by an authority when determining if a person is fit and proper to enter (and remain in) the building profession:

  • the applicant’s criminal history and whether he or she has been convicted of an offence that involves fraud or dishonesty;
  • whether the applicant has had a licence or registration cancelled or suspended;
  • whether the applicant has been disqualified from managing a corporation;
  • whether the applicant is or has previously been bankrupt;
  • whether the applicant is or has previously been involved in the control of a corporate entity under administration or liquidation;
  • any previous breaches of the consumer law or contraventions of relevant building legislation and regulations;
  • the failure to disclose an adverse matter or the making of false or misleading representations in an application, which subsequently becomes known to the authority;
  • whether any court or tribunal orders have been made against the applicant;
  • whether the applicant has had an unreasonable number of complaints, penalty notices or cautions issued against him or her;
  • any disciplinary or legal action previously taken against the applicant by a regulatory body, authority or person; and
  • whether the applicant has previously been refused relevant insurance as a building practitioner.

Disclosure of an adverse or relevant matter does not necessarily mean that registration or licensing will not be granted. The authority will consider all matters, in all circumstances, and whether they establish a pattern of conduct that might deem the applicant does not have the appropriate standards to be considered a fit and proper person. The authority may also consider how recently the conduct took place as well as any relevant or mitigating circumstances. Further, it will assess whether the matters show that improper conduct in the future is likely.

The importance of disclosure – case study

It is important to disclose all information concerning a relevant or adverse matter when seeking registration with a building authority. Failing to do so can seriously jeopardise the application. Such was the case in Taouk v Director General, NSW Fair Trading [2016] NSWCATOD 41.

In this case the applicant was refused a contractor’s licence by NSW Fair Trading on the grounds that he did not meet the relevant industry experience required for the licence sought, and that he was not a ‘fit and proper person’ as required by the relevant legislation.

The applicant sought review by the NSW Civil and Administrative Tribunal.

There were various irregularities and omissions of relevant matters in the application, including a failure to disclose the applicant’s previous directorship of a liquidated company.

While satisfied that the applicant had ‘probably’ met the requirement of relevant experience for the licence sought, and that there was insufficient evidence showing that he was deceptive, the Tribunal nevertheless considered he was:

…careless in his response to the application form questions that related to previous business difficulties and in regard to the accuracy of the information that he provided…

[The] discrepancies and irregularities and the applicant’s failure to declare his directorship of [the liquidated company] are consistent with the approach that he took in regard to his application. It is apparent from his evidence that he held the view that in order to obtain the licence he just needed to establish that he had two years’ building experience and that any other considerations were secondary … They show a cavalier attitude to the regulatory regime.

The Tribunal pointed out the consumer protection purpose of the legislation, stating that being fit and proper “involves more than honesty and integrity, it involves knowledge and ability.”

The issues raised regarding the applicant’s honesty and his attitude to the regulatory requirements of the scheme led the Tribunal to believe that he did not demonstrate such knowledge and ability. The Tribunal confirmed that the licence should not be granted until such time as the applicant could satisfy the authority otherwise.

Conclusion

In addition to holding the relevant qualifications and experience, an applicant must be a fit and proper person to be granted registration or a licence in the building industry.

When seeking or renewing registration, applicants must ensure they provide full disclosure of any relevant or adverse matters, have a sound understanding of the regulations, and demonstrate the ability to properly deal with a regulator. Honesty and accuracy when dealing with the regulator are essential.

Applicants who are refused registration and licensing, or have their registration or a licence suspended or cancelled, for failure to meet the fit and proper person test may have a right to an internal review or appeal through the Tribunal of their state.

If you or someone you know wants more information or needs help or advice, please contact us on +61 (2) 9248 3450 or email info@bradburylegal.com.au.

Fire in the sky: Lacrosse building consultants found liable for cladding

A Frenchman lights a midnight cigarette on his balcony in Melbourne. In less than three hours, most of the 23-storey high rise building catches fire. The Docklands area narrowly avoids burning to the ground.

Thanks to the incredible work of the fire brigade, the occupants and the sprinkler system, not a single one of the tower’s 400 occupants or anyone in the Docklands was hurt by the towering inferno.

Like Deep Purple’s rock classic, this is a true story, the butterfly effect of nightmares for three consultants to a building project. They were found, in what was crucially a breach of their consultancy agreements, to have contributed in various ways to the installation of combustible cladding on the building. This was against the regulations that applied to the high-rise.

They have been ordered by the Victorian Civil and Administrative Tribunal per His Honour Judge Woodward to foot a $5.75 million bill. More damages may follow. A further $6.8 million in claims is still being heard by the judge, mostly for removal and replacement of the unburnt cladding.

It was a landmark decision, one of the first in Australia on liability in relation to combustible cladding. It will not be the last. High rise building owners and building consultants must carefully examine their properties (and their contracts), or they could be next.

To see the full 227-page judgment, follow this link.

For the key details and what builders, consultants and residents need to know moving forward, keep reading.

The events

At about midnight on 24 November 2014, one of the Lacrosse residents returned from work and had a cigarette on a level 8 balcony. Leaving the almost-extinguished cigarette butt in a plastic tray, he went to bed.

Unfortunately, the tray contained aluminium foil, a plant and a packet of seeds. After two hours, everything combustible on the balcony caught alight, including the timber table, some clothes and an air conditioning unit. High-rise balcony areas are high-risk fire hazards.

The building was clad in aluminium composite panels (otherwise known as ACPs) which had a core containing the highly combustible material, polyethylene. Polyethylene has a combustibility similar to petrol and diesel. In the space of twelve minutes the fire spread from floor eight to floor twenty-one.

The use of an ACP with a 100 percent polyethylene core as part of the external wall of the building was found to be “primarily responsible” for spreading the fire.

The applicants

The 211 owners of the various floors and individual apartments brought the case. This included three owners corporations.

The respondents

The case was brought against eight respondents:

  • L U Simon Pty Ltd was the builder;
  • Stasi Galanos and his employer Gardner Group Pty Ltd, who was the building surveyor;
  • Elenberg Fraser Pty Ltd was the architect;
  • Tanah Merah Pty Ltd trading as Thomas Nicholas was the fire engineer;
  • the resident who lit the cigarette;
  • the primary occupier of the smoker’s apartment unit; and
  • the superintendent of the build, Property Development Solutions.

This was the cast of characters in Owners Corporation No.1 of PS613436T v LU Simon Builders Pty Ltd [2019] VCAT 286.

Liability of the builder

The builder’s warranties (promises) stated in the Victorian Domestic Building Contracts Act 1995 were the basis for its overall liability. It was alleged that the builder:

  • Had failed to provide materials good and suitable for the purpose for which they were used;
  • Had not carried out work in compliance with the Building Act 1993 (Victoria) and the Building Code of Australia (BCA), and
  • Had not used materials reasonably fit for a particular purpose which was stated in the contract, in circumstances where the building owner clearly relied on the builder’s skill and judgment.

Such warranties are a part of every domestic building contract, and very similar warranties are implied into many home building contracts in NSW law.

In this Victorian case, combustible panels were found to be not good or suitable for the purpose of being used as external walls of a high-rise residential building. The cladding did not avoid the spread of fire in the building so as to prevent injury and property damage. The builder had made an error in selecting these materials.

However this was not the end of the story, as “not every error is negligent” at law.

To be found negligent, the builder had to have failed to take reasonable care in selecting the ACPs. Judge Woodward found that the builder had not failed, for three reasons:

  1. The builder had not known that ACPs were highly combustible and was not expected (at least in 2011) to know this;
  2. The installation of ACPs was a part of the building contract itself, forming the annexed performance requirements; and
  3. The builder had signed consultancy agreements with “highly skilled professionals” (consultants) to supervise and ensure that the complex project was compliant with the BCA. By engaging them, the builder had relied on their expertise.

Liability of the consultants

Point (3) just above meant that there was a possibility that the consultants (the fire engineer, the building surveyor, and the architect) were responsible for the damage. It was alleged that these were the parties who had failed to exercise due care and skill in relation to the installation of the ACPs.

Judge Woodward agreed. Courtesy of the consultancy agreements, the builder was able to pass almost all of the risk in relation to the BCA compliance of the cladding down to the consultants. The consultants were ultimately at fault, and apportioned the $5.7 million in damages as follows:

  • The fire engineer was found liable for 39 percent of the damages;
  • The building surveyor was found 33 percent liable; and
  • The architect was found 25 percent liable.

The French smoker was found 3 percent liable, but given he did not appear in the proceedings and his responsibility was found to be “minimal’ by the judge, the builder copped this amount instead.

Each judgment was made considering the particular consultancy agreement between the consultant and the builder.

The fire engineer: 39 percent liable

As the “primary consultant responsible for fire safety compliance”, the fire engineer was always going to be in trouble.

It had failed to conduct a full fire engineering assessment that would inquire into and assess the range of construction materials. The purpose of this assessment was to identify potential fire hazards of the building.

The fire engineer made the almost-deadly error of assuming that it was not required to conduct an assessment under the consultancy agreement that it had signed. This was incorrect. It was in fact required to conduct some proactive investigation and assessment of the building materials, which it did not do.

It had also failed to warn the builder (and also the other consultants) that the ACPs used for the high-rise residential building did not comply with the Building Code of Australia. Finally, it had also failed to advise about a solution to the non-compliance.

The fire engineer was found the most liable out of everyone, for the simple reason that it was the only professional on the project who actually knew that ACPs were not compliant and were fire risks. A simple email or comment at a meeting may have got it out of trouble. Its inaction was costly.

The building surveyor: 33 percent liable

The builder surveyor was in the firing line primarily because it had decided to issue a Stage 7 Building Permit. Through this, ACPs were approved for use on the façade of the building despite not being in compliance with the BCA. This was allegedly a breach of its consultancy agreement.

However, it was also alleged that the building surveyor’ failed to query the incomplete description of the cladding systems in the fire engineering report, and also that it failed to properly inspect the work during construction for compliance with the BCA.

Judge Woodward found that, notwithstanding some expert evidence to the contrary, the building surveyor’s had failed to give adequate consideration to whether the ACP was compliant with the BCA before issuing the permit.

The building surveyors might have had a defence if the builder did not give them insufficient information about the materials used in construction. Unfortunately for the Lacrosse tower building surveyors, this was not the case.

The architect: 25 percent liable

The other consultant in hot water was the architect.

The allegation was that the architect had made an agreement to prepare architectural drawings of the external cladding that satisfied legislative requirements, and it had breached this agreement. The allegation was also that it had failed to check whether the sample of the ACP provided to it complied with the BCA and was fit for purpose.

Both allegations were proven. The design specified ACPs for the external walls of the tower, including one with 100% polyethylene core, which was a breach of the BCA. Secondly, as head design consultant, it was also responsible for ensuring that the ACP sample it provided was compliant with its design intent and the BCA. In approving of a sample of the ACP, it had failed to exercise due care and skill.

Overall

In summary, the consultancy agreements between the builder and the consultants existed for the commercial purpose of ensuring ongoing involvement from consultants in the project, and therefore ongoing responsibility for the work.

Judge Woodward found that the involvement of the consultants, on terms that they would advise on non-compliance of building materials, meant that they and not the builder were liable for the fire damage.

The lesson for consultants: know exactly your obligations under a contract, whether they are immediate or over a longer period of time, and warn of non-compliances with the law consistent with your knowledge.

Whose line is it anyway?

The line between what is the builder’s responsibility and what is a consultant’s responsibility is a difficult one for the law to trace. There are no hard and fast rules, especially as much will depend on the particular builder-consultant contract.

There will be cases where a commercial builder, given its expertise and experience, will be expected to identify and correct errors by another building professional.

However, in this case Judge Woodward ruled that “where (as here) the skill involved is beyond that which can be expected of a reasonably competent builder and there is no actual relevant knowledge”, the liability of a skilled consultant will be possible.

Knowledge of consultants

The lack of knowledge about the combustibility of ACPs, and the failure of the few who had this knowledge to pass it around, proved very costly and almost deadly.

In another important lesson for consultants, the building surveyor tried to argue that because its peers held similar (incorrect) assumptions about ACPs and their compliance with the BCA, it should not be liable. However, Judge Woodward was unimpressed, as these incorrect assumptions formed “organically and apparently without any practitioner seeking any kind of assessment or endorsement from a professional body or regulatory authority”.

Uncritically adopting a practice perceived to be widespread will not save a consultant. He or she must logically consider each issue they come across, and seek professional advice such as that of a fire engineer.

Conclusion

The judge emphasised that this decision was based on the specific facts of the case. If the building contract and the building had been different, or if ACPs had been used on buildings without obvious ignition sources like barbeques and air conditioning units, then the outcome of the case may have been different.

Nevertheless, building owners and consultants, especially those who have been involved in installing combustible cladding, should be on high alert.

They will need to review their building and consulting contracts immediately, not to mention their professional indemnity insurance. This applies not just for current projects, but for previous ones too. The Lacrosse fire happened in 2014 and the companies are paying dearly for it today.

Building owners will also need to go about registering their buildings on the NSW Cladding Registration portal (see link for more).

If you or someone you know wants more information or needs help or advice, please contact us on +612 9248 3450 or email info@bradburylegal.com.au.

New laws in relation to multi-storey residential strata schemes

On 27 September 2018, the NSW government enacted amendments in relation to residential strata schemes. In introducing the bill, Minister for Innovation and Better Regulation Matt Kean MP said: “Currently more than two million New South Wales residents are working as strata industry professionals or strata owners, or are living in strata-titled townhouses or units.”

The amendments are aimed at reducing defects arising from defective construction of residential strata schemes. The Amending Act is called the Strata Schemes Management Amendment (Building Defects Scheme) Act 2018. It makes changes to Part 11 of the Strata Schemes Management Act 2015 (the Act) and will take effect when the government announces so in the NSW Government Gazette. The Legislation Review Committee indicates this will happen ‘once the regulations are operational’.

Who is affected by this amendment?

Firstly, Part 11 only applies to contracts entered into on or after 1 January 2018.

Secondly, Part 11 only applies to ‘residential building work’ carried out on any part of a multi-unit dwelling strata scheme of at least four storeys.

Thirdly, Developers cannot contract out of these provisions.

The Act

At its core, Part 11 was intended to ‘streamline the identification and rectification of defects for the benefit of strata residents, builders and developers’. The Act contains the following provisions:

  • A developer must arrange for an inspection report. This means they must appoint a qualified, impartial and independent person as a building inspector, generally within 12 months of completion of the building works;
  • This building inspector must carry out an inspection of the building work and provide an interim report between 15 months and 18 months after the completion of the building work. This interim report must identify any defective building work and attempt to identify the causes of the defective work;
  • Within 18 months of the completion of the building, the developer must then arrange for the same building inspector to provide a final report on the building work;
  • The building inspector must carry out a final inspection and provide the final report to all parties between 21 months and 2 years after the completion of the building work. This report is to identify both defects not rectified, and defects arising from attempts to rectify defects. The report also must specify how defects should be rectified;
  • All costs of inspection and reporting are borne by the developer;
  • Before commencing a development, a developer must also lodge a building bond which is worth 2 percent of the total development contract price, it is to be given to the Secretary of the Department of Finance, Services and Innovation (the Secretary);
  • The 2 percent bond will be used by the owners corporation of a building as security for funding to rectify any defects in the building that arise. It can be claimed up to 2 years after the date of completion of the building work, or within 60 days after the building inspector’s final report – whichever is later; and
  • The Secretary,  owners corporation or the developer can apply to the NSW Civil and Administrative Tribunal to have the contract price determined by the Tribunal..

Some of the decisions made by the Secretary are reviewable, but such an application for review must be made within 14 days after notice of the decision is given.

The amendments

Developers of strata schemes need to be aware that there are now new requirements in relation to lodging a bond and providing information to authorities in relation to the contract price. Additionally, the Secretary has been given increased investigative powers in relation to the contract price, building bonds and building defects.

The amendments are as follows:

  • The Amending Act now makes it mandatory, before an application can even be made for an occupation certificate, for the developer to give the 2 percent building bond to the Secretary. Failing to do this will attract a significantly increased penalty: originally $22,000, the maximum penalty is now $1.1 million and an additional $22,000 for each day the offence continues;
  • There is also a new penalty where a developer provides the Secretary with false or misleading information about the contract price or amount required to be secured by the bond (maximum penalty: $1.1 million for corporations, $22,000 for any other case);
  • A requirement that the developer and owners corporation agree on the amount required to rectify any building defects identified by the inspector. They may use a wide range of methods to determine the cost. If they cannot agree, the Secretary may appoint a quantity surveyor to determine this amount;
  • The deadline for an owners corporation to claim the secured amount to rectify defects has been extended, from 60 days after the building inspector’s final report is issued to 90 days;
  • The Secretary may consider it appropriate to release the developer from the bond, if the interim report does not identify any defects, or if some of the amount has been claimed and both the owners corporation and developers agree to cancel the remaining amount;
  • Where the building bond given by a developer is insufficient to cover the amount required to be secured, the Secretary may recover the required amount in court as a debt from a developer. The owners corporation may then claim from the Secretary;
  • The Amending Act grants new powers of investigation and enforcement of Part 11 to any officer authorised by the Secretary. These powers are for the purposes of investigation, monitoring and enforcing compliance with Part 11, and/or for obtaining information and records to be used in administering Part 11. For these purposes:
    1. An authorised officer may by notice in writing to a person require them to provide information or records;
    2. An authorised officer may require a person or the director of a corporation to answer their questions, if they suspect this person has knowledge about Part 11 matters;
    3. An authorised officer may enter premises at any reasonable time, with or without a search warrant, and do certain activities: make examinations and inquiries, direct a person to produce records, examine and inspect records, copy records, and seize anything suspected of being connected with an offence. Where the premises are predominantly residential, a warrant or the consent of the occupier is required for entry;
    4. An authorised officer may obtain a warrant to enter and search premises for evidence of contravention of Part 11;
    5. Penalties for refusing to comply with these requirements, or obstructing an authorised officer, gives rise to penalties up to $4400 for a corporation, or $2200 for any other case. This is unless reasonable excuse can be shown, such as client legal privilege or a privilege against self-incrimination; and
  • A building inspector is protected from action, liability or claim where they act in good faith and for the purposes of their Part 11 functions. Professional associations will however have powers to impose conditions on the functions of building inspectors. A person authorised by the Secretary is also protected from liability, however the Crown may be sued.

Conclusion

The NSW government is taking a keen interest in the processes of identification and rectification of defective building works in strata schemes. It is also clamping down on attempts to circumvent the Act.

In this changing legal environment, it is essential that parties involved in constructing residential strata developments, including developers and owners corporations, understand these changes to their rights and obligations. For developers affected by these provisions, the first deadline to be met could be as soon as 1 January 2019 for the appointment of a building inspector.

Please contact us, should you require any further information, on +612 9248 3450 or email info@bradburylegal.com.au.

Greater regulation of buildings using external combustible cladding

Recent disasters befalling high-rise buildings locally and overseas have intensified calls for owners and developers to take greater steps to prevent such tragedies. The Grenfell Tower tragedy in June 2017 was one of the worst modern disasters in the United Kingdom, as 72 Londoners died as a direct result of a 60-hour fire that caught the side of the residence and enveloped the entire outer building.

The cladding was an exacerbating factor in the disaster. The University of Leeds found that the burning of the combustible material would have released the same energy as if 51 tonnes of pinewood were wrapped around the building. The UK has since banned combustible cladding on external walls of high-rise residential buildings.

NSW government getting tougher on unsafe cladding

Australian states and territories are also attempting to limit the use of dangerous cladding on such buildings. This year the NSW government put into effect a ban on unsafe use of building products, which now includes some types of external combustible cladding, in the Building Products (Safety) Act 2017 (NSW). This Act also authorises councils or other government authorities to order unsafe products to be removed.

The NSW government is now also imposing greater obligations on owners to register their buildings if they use unsafe cladding, and is making development consent harder to obtain where combustible cladding is proposed, in two pieces of legislation:

  • Environmental Planning and Assessment Amendment (Identification of Buildings with External Combustible Cladding) Regulation 2018  (the Identification Amendment)
  • State Environmental Planning Policy Amendment (Exempt Development – Cladding and Decorative Work) 2018  (the SEPP Amendment)

These amendments will take effect from 22 October 2018.

Identification Amendment: who is affected?

These changes affect owners of both new and already existing buildings, so it doesn’t matter if a building was constructed before the amendments take effect.

The Identification Amendment applies to any building that (1) is in a prescribed class, (2) has two or more stories, and (3) has external combustible cladding.

For point (1), a building is in a prescribed class if it is at least one of the following:

  • A building containing two or more sole-occupancy units each being a separate dwelling (class 2);
  • A building that is residential, and a common place for long term or transient living for a number of people unrelated to each other (e.g. a boarding house, guest house, hotel, residential part of a health-care building or detention centre, or accommodation for the aged, children or people with disabilities) (class 3)
  • A building of a public nature (including a health-care building, an aged care building, or an assembly building such as a trade workshop or a laboratory) (class 9)
  • A dwelling in a building of a public nature, if it is the only dwelling in the building (class 4)

For point (3), a building is considered to have ‘external combustible cladding’ if it has either of the following:

  • Any cladding or cladding system comprising metal composite panels, including aluminium, zinc and copper, that is applied to any of the building’s external walls or to any other external area of the building; or
  • Any insulated cladding system, including a system comprising polystyrene, polyurethane or polyisocyanurate, that is applied to any of the building’s external walls or to any other external area of the building.

Identification Amendment: what do building owners have to do?

The Identification Amendment amends the Environmental Planning and Assessment Regulation 2000 (NSW).

It makes the following changes:

  • Any owner of a building above with external combustible cladding must now provide the Secretary of the Department of Planning and Environment (the Planning Secretary) with a number of details about:
    • The building itself (including the name and address of the owners corporation representative, and number of storeys); and
    • The building’s cladding (including a description of the external combustible cladding, any materials comprising the cladding, and a description of the extent of the application of external combustible cladding to the building).
  • The details of the buildings will have to be provided to the government through an online portal. Emails will not be accepted. This portal will soon be up and running, and building owners are encouraged to register to receive an alert for when this happens at: https://www.planning.nsw.gov.au/Policy-and-Legislation/Buildings/Combustible-cladding.
  • Once the portal is running, the deadlines for owners to register are as follows:
    • For buildings that were occupied before 22 October 2018, the deadline for registration is 22 February 2019.
    • For buildings first occupied on or after 22 October 2018, owners must register their building within four months of the building first being occupied.
  • Failing to register a building to which the Act applies attracts a penalty of $1500 for individuals and $3000 for corporations.
  • Owners are also now obligated to provide details about a building and any external combustible cladding if the Planning Secretary, an authorised fire officer or the council of the area directs them to do so in writing. Failure to provide these details within 14 days of the written request attracts a penalty of $3000 for individuals and $6000 for corporations.

The NSW government hopes to use this information to enable Fire and Rescue NSW to educate occupants about fire prevention and to improve its response to fires. It will also assist councils with determining whether further action is necessary.

The SEPP Amendment: greater oversight for combustible cladding

The SEPP Amendment amends eight NSW government planning policies:

  • State Environmental Planning Policy (Affordable Rental Housing) 2009
  • State Environmental Planning Policy (Educational Establishments and Child Care Facilities) 2017
  • State Environmental Planning Policy (Exempt and Complying Development Codes) 2008
  • State Environmental Planning Policy (Infrastructure) 2007
  • State Environmental Planning Policy (Kosciuszko National Park – Alpine Resorts) 2007
  • State Environmental Planning Policy (Mining, Petroleum Production and Extractive Industries) 2007
  • State Environmental Planning Policy (Three Ports) 2013
  • State Environmental Planning Policy (Western Sydney Parklands) 2009

Each amendment is aimed at increasing developmental consent requirements for works that involve external combustible cladding. Certain developers proposing to use combustible cladding will no longer be exempt from requirements to obtain developmental consent.

For example, the State Environmental Planning Policy (Exempt and Complying Development Codes) 2008 has been changed. This Policy provides streamlined assessment processes by listing certain developments that do not need to secure development consent. It is now a requirement for some developments, such as the maintenance of buildings in draft heritage conservation areas, that if the development involves cladding and developers do not want to be burdened by consent processes, the work must not be carried out on any building more than two storeys high, and the work must not involve the use of external combustible cladding.

Conclusion

In 2017, the NSW Shadow Minister for Innovation and Better Regulation Yasmin Catley said that as many as 2500 buildings in NSW could be clad in material that did not comply with regulations. The changes aim to clarify the numbers.

Whether these changes in NSW will work to protect residents remains to be seen. A number of parties had expressed concerns about the Grenfell Tower fire safety and emergency infrastructure, but tragically this was not enough to avert the disaster.

Nevertheless, many of those working with combustible cladding are now subject to greater oversight and must carefully review these new regulations and seek advice about them if necessary. The obligations to report could kick in for some owners as early as February 2019. Failure to do so may mean financial penalty.

Please contact us should you require any further information, on +612 9248 3450 or email info@bradburylegal.com.au.