Quantum meruit claims and wrongful termination of a building contract

A building contractor may make a quantum meruit claim seeking payment of a fair and reasonable sum for work carried out and materials supplied in circumstances where the amount is not set out in contract. The expression quantum meruit literally means “the amount he or she deserves” or “what the job is worth”.

These type of claims generally arise when a builder carries out variations to the original scope of works, or a building contract has been frustrated, void or terminated.

In the recent judgement Mann v Paterson Constructions Pty Ltd, the Victorian Court of Appeal confirmed that a claim for quantum meruit is available to a builder, after the builder accepts the wrongful repudiation of a domestic building contract by an owner.

Further, s 38 of the Domestic Building Contracts Act 1995 (Vic) (the Act) does not apply to quantum meruit claims, at least where an owner has repudiated the contract. This was a good outcome for the builder, as the Act might otherwise have precluded or limited recovery by the builder.

This decision is especially important for builders based in Victoria and the particular statutory regime there, but as an appellate court decision it will be influential in jurisdictions across Australia.

Summary of facts

Peter and Angela Mann (the Manns) entered into a major domestic building contract with Paterson Constructions Pty Ltd (Paterson) for construction of two town houses with a completion date of 17 December 2014.

Disputes arose during construction, generally concerning delays, variations alleged to have been requested by the owners, and the payment of money. There were also issues concerning site access.

The first unit was constructed and handed over after the contract completion date. In April 2015, before the second unit was completed, the Manns terminated the contract, claiming that Paterson had wrongfully repudiated it.

As often happens in contract disputes, Paterson responded that it had not repudiated the contract. As such, by terminating without any basis, the Manns had wrongfully repudiated the contract. Patterson purported to accept this repudiation by the Manns, and sought recovery on a quantum meruit basis through the Victorian Civil and Administrative Tribunal (VCAT).

The claim included amounts for several variations carried out by Paterson.

The tribunal agreed with Patterson, and found that it was the Manns that had wrongfully repudiated the contract. They were ordered to pay Paterson $660,526.41 assessed by Paterson’s quantity surveyor to be the value of work performed, less the monies already paid by the Manns and the cost of some rectification work that they had to have completed.

The Manns appealed the decision, first in the Supreme Court of Victoria and when that failed, to the Victorian Court of Appeal.

Key issues

Essentially, the issues to be determined were:

  1. whether assessment of the amount recoverable should be limited to the builder’s actual costs rather than its fair and reasonable value;
  2. whether a quantum meruit award is available to a builder who accepts an owner’s repudiation of a building contract;
  3. whether s 38 of the Domestic Building Contracts Act 1995 (Vic) prevented a builder from recovering on a non-contractual quantum meruit basis.

The decision

The Manns were unsuccessful on all grounds. The Court of Appeal upheld the decisions of VCAT and the Supreme Court.

Assessment of amount recoverable

Relying on several authorities, the Court confirmed that “a builder seeking a quantum meruit amount following acceptance of an owner’s repudiation of a building contract is entitled to recover the fair and reasonable value of the benefit conferred on the owner by the work that the builder performed”.

A fair and reasonable value is not limited by the contract price, nor the actual costs incurred by the builder. In fact, where the scope of works that was in fact performed is significantly different to that set out in the original contract, little weight will be given to the original contract price.

Further, the actual costs incurred by the builder are not determinative and are not a cap on the amount of damages that a builder can recover on a quantum meruit basis.

The assessment of a fair and reasonable value of the benefit conferred on the owner depends on the circumstances and the availability and reliability of the evidence. In this case, evidence provided by Paterson’s quantity surveyor was considered comprehensive and was not sufficiently challenged. There was no evidence produced by another quantity surveyor contesting the assessment. Conversely, the Manns’ evidence constituted an incomplete spreadsheet which did not cover all of the work performed by the builder.

Overall, the tribunal member found Paterson to be a “truthful witness” whilst the Manns were considered unreliable. Although the Manns alleged that the variations were “suggested” by Paterson and not “requested” by them, the Tribunal did not accept this. It followed that, as the variations were requested by the Manns, they formed part of the quantum meruit claim.

Availability of quantum meruit claim

The Court confirmed that a quantum meruit claim (which is different to damages in contract) was available in circumstances where a builder accepts the repudiation of a building contract by an owner.

Several cases have recognised this principle and, despite controversy over these decisions, and the Manns’ suggestion to revisit this precedent, the Court considered it was not in a position to do so, concluding that only the High Court of Australia could do this.

Application of s 38 of the Domestic Building Contracts Act 1995 (Vic)

Section 38 of the Act deals with variations requested by an owner under a major domestic building contract. Unless a variation is minor and will not significantly affect the contract price, a builder must provide notice stating:

  • the effect the variation will have on the work as a whole;
  • a reasonable estimate of the length of the delay due to the variations;
  • the cost of the variation and its effect on the contract price.

If a builder does not comply with this section, no money is recoverable in respect of the variation unless VCAT is satisfied there are exceptional circumstances, that the builder would suffer hardship, and it would not be unfair to the owner if the builder was to recover the money.

The Court provided a lengthy analysis of the provision which it considered was “not clearly drafted”. Overall, however, the Court held that s 38 applied to claims in contract only and therefore did not impede the builder’s claim on a quantum meruit basis.

The Court also noted that, s 38 was essentially enacted to protect consumers from builders who might engage in the unscrupulous practice of underquoting projects to secure a contract and then recover the difference through subsequent unrecorded variations.

Consequently, there would be no loss of this consumer protection objective if the provision did not extend to claims in quantum meruit whereby an owner has wrongfully repudiated a building contract and might otherwise unfairly benefit from the builder’s work.

Conclusion

The legal principle of a quantum meruit claim is based on restitution and unjust enrichment; a party should not unfairly benefit at the expense of another when it would be unjust to allow the profiting party to retain that benefit.

The case is important for builders especially based in Victoria, in that it confirms that recovery on a quantum meruit basis rather than a contractual basis, may be available following the wrongful repudiation of a domestic building contract by an owner. In such circumstances, and where the claim is substantiated by the expert evidence of a quantity surveyor, a significantly better outcome might be achieved for the builder.

Additionally, the case confirms that the notice requirements for variations under s 38 of the Act may not apply where a building contract has been wrongfully terminated by the owners and a claim made by a builder on a quantum meruit basis.

Readers must, however, be aware that building disputes and quantum meruit claims can be complex and each case must be considered in light of the applicable state’s law and the circumstances of the case.

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

What are defects and how does a defects liability period work?

Every builder dreams of the perfect build without so much as a single fault being found with their work. However, the reality of most construction projects is that at some stage issue will be taken with some or all of the work, and a complaint of a defect will arise.

It is therefore important to understand exactly what is meant by the term ‘defect’, how a contractual ‘defects liability period’ works in practical terms, and whether there is any right to claim damages for covering the costs of rectifying a defect.

What exactly is a ‘defect’?

Ordinarily where the term ‘defect’ is used in a construction contract, it refers to work that has not been performed in accordance with the standards and requirements of the particular contract.

Matters to take into consideration in determining if there is a defect may include:

  • the quality of any work and the standard of workmanship;
  • whether design directives have been followed and correct materials have been used; and
  • whether the works have been performed in accordance with contractual specifications and drawings.

The ‘defects liability period’ and how it works

Most experienced builders and contractors would be familiar with the term ‘defects liability period’, as the term commonly appears in construction contracts including contracts based on pro forma Australian Standards building and construction contracts.

A defects liability period is the time period specified in the contract during which a contractor is legally required to return to a construction site to repair any defects which have appeared in that contractor’s work since the date of construction. Usually a defects liability period will start either at practical completion or upon reaching standard completion.

Even if you are familiar with the term it is important to check each new contract carefully to ensure you understand how long the defects liability period is and what is expected of you during that period.

A contract will specify the length of any defects liability period. Anywhere from 12 to 24 months is a fairly common period, although longer or shorter periods are also possible.

The length of any defects liability period will depend on the nature of the build, the type of work a particular contractor carries out and whether it is likely that any inherent defects may take time to be detected. For example, it is not uncommon for contracts involving complex builds and large government contracts to specify longer defects liability periods than a simple domestic building contract.

Why specify a defects liability period in a contract?

A defects liability period gives both a principal and contractor a degree of certainty as to the process that will be followed for making good any defects which may not be apparent at the date of practical completion.

In addition, a defects liability period can also be useful in providing a means of making good any defects that are apparent at the time of practical completion but which either do not need to be rectified prior to practical completion or perhaps cannot be easily rectified due to the presence of other contractors and trades still working on the build.

Wherever possible, it also makes practical sense to have a contractor who carried out the original work return to fix any defect as this contractor will be familiar with the site and the work in question. This should mean that rectification by this contractor is likely to be the most cost-effective approach to any rectification work. Also, a contractor may prefer to be the sole party authorised to carry out rectification work within a given period as the quality of the work and any subsequent repairs will potentially affect their reputation.

Once a defect is fixed does a new defects liability period commence?

Whether a new defects liability period applies to rectified work will depend on what the parties agreed, as reflected in the terms of each particular construction contract. It is important that both the principal and contractor are clear on this point prior to entering into a contract.

What right to damages exists for covering the costs of rectifying a defect?

Ordinarily any defect would be a breach of contract.

There have been several cases where the courts have considered whether the existence of a defects liability period in a contract alters or removes the need for a common law right to damages, with individual cases appearing to turn on their particular facts and the behaviour of the parties to the contract.

Generally, damages for any defects will cover the amount needed to ensure that the work is brought up to the standard that a contractor was initially required to provide under the contract.

Depending on the particular circumstances of a build, damages could include:

  • Recovery by the principal of any reasonable costs of demolition and rebuilding work; and
  • Any secondary or incidental costs, for example loss of income if the property is unable to be rented out due to the rectification works, or ancillary costs such as relocation expenses (such as where tenants are involved) or additional consultant’s fees directly related to the rectification works.

If circumstances dictate that carrying out rectification work in respect of the defects is not reasonable, for example if a building is so damaged or defective as to make the work needed impossible or impractical to carry out, a principal may be able to recover damages for any loss in the value of the building. In very limited circumstances, they may also claim for loss of enjoyment or inconvenience suffered, if there is no actual loss in value of the subject property but the principal, for whatever reason, is unable to use and enjoy the building as previously planned.

Help is available

It is always prudent to seek advice prior to entering into any contract to ensure that you fully understand your rights and responsibilities.

If you have already entered into a contract or carried out work and a complaint has now been made that your work is defective, you may be concerned about both your professional reputation and any potential financial implications for your business.

If you find yourself in a situation where this could be an issue, we recommend you seek legal advice as soon as possible.

If you or someone you know wants more information or needs help or advice, please contact us on +61 (0)2 9248 3450 or email info@bradburylegal.com.au.

The devil with no detail: rectification of mistakes in contracts

In contract law, words used in a written instrument are powerful, but they are not invincible. One of the first major judgements of 2019 in New South Wales has reminded us all of one way to defeat even very clear wording of a contract.

This is the process called rectification, and it came up as part of a number of issues that the highest court in NSW had to consider. The case was Seymour Whyte Pty Ltd v Ostwald Bros Pty Ltd.

It has been said that rectification arguments are on the rise, as commercial contracts become more complex, records of contractual negotiation and correspondence are now electronic-based, and Ctrl+C and Ctrl+V have become prolific contract drafters.

Whether this is true or not, the case Seymour Whyte v Ostwald Bros and its lessons of rectification serve as a code red for everyone doing business with written contracts.

The case

The NSW Roads and Maritime Services was the head contractor for a roads project. The parties to this dispute were a contractor Seymour Whyte Constructions Pty Ltd (Seymour Whyte) and its subcontractor Ostwald Bros Pty Ltd (Ostwald Bros).

The parties had either through neglect or confusion inserted in their written contract two deadlines for Seymour Whyte to issue a payment schedule:

  • The box for Item 21 was ticked, which required payment within 30 days of a payment claim (which was to be made at the end of the month);

and

  • Special Condition 9.1 was inserted, requiring the payment to be made within 15 business days of receiving a payment claim.

On 28 July 2017, Ostwald Bros issued a payment claim for over $6.35 million.

Seymour Whyte replied with a payment schedule on 11 August 2017, in which it admitted it owed $2.50 million.

In a move that it will be regretting, Ostwald Bros delayed serving the Adjudication Application until 27 September 2017. Depending on which of the (1) or (2) due dates above applied, it was potentially going to be made out of time. The NSW Security of Payment Act s 17(3)(d) requires adjudication applications to be served within 20 days of a due date for payment, or they are invalid.

The arguments of the parties

Seymour Whyte argued that the Special Condition should apply (option (1) above). This deadline would have made the adjudication application invalid for being out of time. Option (1) would mean 18 August 2017 was the due date for payment, and therefore the adjudication application deadline was 15 September 2017.

Unsurprisingly, Ostwald Bros argued that option (2) above should apply, which would make the due date for payment 30 August 2017, and so the adjudication application was due on 27 September 2017. Its adjudication application would be valid.

This was a tricky argument to make by Ostwald Bros, as Special Conditions to a contract will usually take priority over General Conditions. Ostwald Bros argued that the courts should “rectify” the contract by deleting Special Condition 9.1. If there was no Special Condition, then the General Condition would apply.

The primary judge agreed with Ostwald Bros, and ordered rectification. Seymour Whyte appealed to the NSW Court of Appeal.

Common law rectification

Common law rectification was discussed but not argued in this case. However, it is useful to know that if an error in a written instrument is clear, and it is clear what a reasonable person would have understood the parties to have meant, then a court will correct the error. An example is where “lessor” is used in the contract, but it is clear that the parties meant “lessee”.

The law sometimes gets a bad reputation for rigidly following the literal meaning of words. However, courts will not do this if this literal meaning is absurd, and the intention of the parties is self-evident.

As Leeming JA pointed out in the case, “even in a formal legal document, the parties will make mistakes which are nonetheless readily identified and corrected.”

Equitable rectification

Courts in some cases recognise the separate process of equitable rectification. Equitable rectification is a process whereby a court will make a written instrument “conform to the true agreement of the parties where the writing by common mistake fails to express that agreement accurately”.

When argued successfully, it results in the actual intention of the parties overriding the “objective” intention of the parties (what is written in the instrument), a rare thing in contract law.

The Court of Appeal in Seymour Whyte v Ostwald Bros neatly spelled out what a court will (and will not) do when a party argues something went wrong in the contract negotiation and drafting.

A party arguing for rectification must prove three things:

  1. That at the time of executing the written instrument, the parties to the instrument had an “agreement” in the sense of a common intention; and
  2. That the parties intended that the written instrument was to conform to this common intention; and
  3. That the written instrument does not in fact reflect this common intention because of a common mistake.

The parties need not have actually communicated to each other this common intention; courts will look to words or actions.

As will become clear, equitable rectification is a very difficult argument to make. Courts have said that they are wary of rectifying an agreement, based on the logic that if the parties make the effort to write up their agreement, this should end the debate. Courts are also wary about aggrieved parties later claiming that an agreement it signed is inaccurate, to serve its purpose.

To be clear, this is not an argument of miscommunication. To convince a court to rectify a mistake, a party must successfully argue that a common intention was held by all the parties up until execution of the instrument. This common intention must be precise and not general.

Rectification in the case

The director of Ostwald Bros was an important source of evidence of Ostwald Bros’ subjective intention, as he had signed the instrument with the company secretary. However, he was not available to give evidence in court. This may have been fatal to the argument.

The Court considered the negotiating process of the parties. As usually happens in contract negotiation, both parties in their Departures Tables had argued back-and-forth about what the due date for payment should be. Ostwald Bros had initially pressed for “within 10 business days of the end of the month”. Seymour had rejected this, and it pushed for “within 30 business days” as being “Non-negotiable”.

Ironically, in the court proceedings the parties completely reversed their previous positions.

It was almost Seymour Whyte’s undoing that it had written “Non-negotiable” in pushing for 30 days. However, the NSW Court of Appeal was persuaded that in other provisions being negotiated, Seymour Whyte had also written this, and had later agreed to compromise on them. Nevertheless, it was a warning about what parties write during negotiations and how this can come back to haunt them.

Even though Seymour Whyte had sometimes paid Ostwald Bros 30 days from the end of the month, there was no evidence of this being an “invariable practice” or a misapprehension about the terms of the instrument.

Finally, the Court considered that as Items at the end had been ticked in a way that was internally inconsistent, it appeared that the Item 21 deadline of 30 days had been ticked in error.

The Court concluded that there was no case for rectification. Special Condition 9.1 remained in the subcontract, it prevailed over Item 21 and so the adjudication application was made out of time.

Takeaways

Extraordinarily, throughout the three hearings of Seymour Whyte v Ostwald Bros, no party could show the court direct evidence about how the Special Condition 9.1 came to sneak into the contract in the first place. The likeliest explanation was that a Commercial Manager of Seymour Group had instructed the lawyers to prepare a pro forma subcontract, compliant with a NSW government head contract in force at the time of negotiations.

Regardless of what happened, this is the first lesson: stray contractual provisions and special conditions slip through the cracks all the time, especially in the age of “copy and paste”. Lawyers and businesspeople need to be on high alert for this, it can save a lot of anxiety and legal fees.

Clearly the important takeaway is that parties cannot rely on courts fixing what may seem like obvious errors in drafting. Although it can happen, it is difficult and not to mention costly to persuade a court to do this. If there is an error, no matter how small it may seem, it is essential to negotiate a solution with the other party before a dispute arises. Once this happens, parties typically grab at every advantage they can and dig their heels in.

Parties must also be careful about how they talk about the written instruments that they sign. Courts will scrutinise all kinds of behaviour, including negotiating documents and correspondence between the parties, for evidence of intention or for evidence that a mistake has been made in drafting. Parties should negotiate believing that anything they say might later be important in a dispute.

Seymour Whyte may have won, but it was not at all a comfortable victory and slight differences in the negotiations may have changed the outcome of the case.

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.

Giving Security in Construction Contracts

It is not uncommon in construction contracts for a principal or even a head contractor to insist on security from a contractor or subcontractor. We discuss below the purpose of the security, the different types of security commonly given and what happens when a call on a security is made.

Why is ‘security’ given in a construction contract?

The purpose of security is to provide the principal or head contractor with protection if the contractor or subcontractor fails to fulfil its obligations or defaults in some way on the contract. The principal or head contractor can recoup losses that arise because of the default.

The requirement for security to be provided may also be a sensible precaution for a principal, if a contractor or subcontractor is seeking pre-payment for building materials or goods (such as bathroom or kitchen fittings) that are yet to be used in the construction project.

Similarly, a contractor may be wise to insist that a principal (or head contractor in the case of a subcontractor) provides security for any payment obligations that may be owed to them. This way, the contractor can still obtain payment if the principal fails to pay what is owed. This is especially important if the principal or head contractor is what is commonly referred to as a ‘$2 company’, that is a company without any substantial assets.

Types of security

Depending on the size and scope of the contract there are a number of options that are commonly available for providing security. These include cash, bank guarantees and insurance bonds.

The simplest type of security is ‘retention money’ or a cash security. This is when a party who is paying another party under a construction contract holds a specified sum of money back from progress payment. This is usually a percentage of the amount payable, and is eventually released at practical completion of the contract or at the end of the defects liability period.

Alternatively, bank guarantees and insurance bonds may be used instead of cash. These forms of security essentially amount to types of promises by a third party to pay an amount of money when a specified event occurs. A ‘specified event’ may include such things as a default by the contractor to complete work on time, a default in payments by the principal (if the security is in favour of the contractor) or even something as simple as a demand for payment.

The advantage of bank guarantees and insurance bonds is that they do not impact as significantly on cash flow, for the party giving the guarantee, as a cash security will. However, in order to obtain a bank guarantee or bond the party providing the security is required to pay a fee to the bank or insurer and is likely, in the case of a bank guarantee, to be required to provide some kind of cash deposit or mortgage over real property or some other security.

Insurance bonds operate in a similar manner to a bank guarantee but generally only a fee for the bond is required, and there is no further security such a mortgage. The cost of the fee for an insurance bond will be determined by both the size of the security and the risk (as assessed by the insurer) of the contractor defaulting and the insurance bond being called upon by the principal.

In addition to the guarantees discussed above, a ‘parent company guarantee’ may be required by a principal if a contractor or sub-contractor is part of a wider organisation. The effect of this type of guarantee is that the parent company becomes responsible for any default by the contractor. This can include stepping in and taking over any of the contractor’s obligations in the event of a default. Ordinarily, whichever approach is adopted the liability of the parent company will be subject to an agreed cap.

Another security option is what is colloquially referred to as a ‘letter of comfort’. This type of security is less common and is generally only used when a contractor is not an Australian company or individual and may be offered as evidence of financial standing. However, it is important to realise that letters of comfort are not the same as a bank guarantee or an insurance bond. A letter of comfort may not necessarily give rise to an immediately enforceable legal right on the part of the recipient of the letter and should be treated with considerable caution and care.

What happens when a call on security is made?

Even if unconditional security is given, it is likely that a contract will stipulate restrictions on when the security is able to be called on. Often a contract will be drafted in such a way that calling on a security involves multiple steps. For example, it is usual that the principal will firstly need to show that they have an entitlement to call on the security. Secondly any required notice of the intention to call on the security will need to be given. Finally, any obligation to give notice within a certain period of time needs to be met.

Can a contractor stop a principal from calling on a security?

It is possible to commence court proceedings seeking an order for injunction, to prevent a principal from calling on a security. However, it can often be difficult to obtain orders granting such an injunction unless certain pre-existing conditions are satisfied. These conditions may include that the contract provides for a restriction on the right to call on the security and that there is a genuine dispute between the parties as to whether the principal has an entitlement to claim payment or money from the contractor or subcontractor.

In addition, whether an injunction is granted or not may ultimately turn on the question of where the ‘balance of convenience’ lies. This will be decided by whether or not convenience dictates that the security should not be disturbed until the dispute between contractor and principal is resolved.

Conclusion

The giving and receiving of security is an important part of construction contracts. However, it is important that all parties to the contract understand the scope of the security and any limitations that are imposed on the parties by the contract in relation to both providing, and calling on a security. This understanding is vital for avoiding costly misunderstandings and potential litigation.

If you are considering entering into a contract that provides for security we recommend you seek legal advice before agreeing to any security provisions. We would be happy to discuss the implications of providing or receiving a security with you.

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.

Liquidated damages in construction contracts and the dangers of penalty

The inclusion of a liquidated damages clause in construction contracts is a common way of addressing what consequences will flow from a breach of contract during the life of the contract and when a build is ongoing. However, to be effective they must be well-drafted.

It is therefore important to understand exactly what is meant by this term, particularly if you find yourself in the unfortunate position of being the party in breach under the contract.

What are liquidated damages?

In their simplest form liquidated damages are fixed damages. They are a way of calculating what compensation a party will pay to another party to that contract, if it is in breach of its obligations. The party in breach is known as the defaulting party, and the party not in breach is the non-defaulting party.

A common example of liquidated damages clause is for delay of the contractor. This might be that the contractor will owe the principal $3000 in damages for each day of delay in achieving practical completion.

The exact amount of damages for a breach of contract can often be difficult to calculate at any given moment. Rather than a contract providing for an unquantified amount of damages, a liquidated damages clause fixes the sum of any damages in advance and includes details of the sum to be paid should a breach occur in the contract.

Are liquidated damages the same as agreed damages?

The short answer is ‘yes’. Other terms you may come across, which effectively mean the same thing as ‘liquidated damages’ include ‘pre-estimated damages’, ‘stipulated damages’, ‘liquidated and ascertained damages’ and ‘adjustment of time costs’.

Liquidated damages clauses in construction contracts

Liquidated damages clauses are useful in construction and other commercial contracts because they provide a degree of certainty for all parties as to what will happen should a breach of contract occur. A valid liquidation damages clause will fix the amount recoverable under the contract without the need for costly litigation.

It can sometimes be difficult to quantify the extent of any damage suffered when a build is ongoing. However, a liquidated damages clause will mean that here is no need for the non-defaulting party to undertake the time-consuming and complex process of proving their loss or damage with evidence. The clause also allows both parties to decide in advance exactly what their respective rights and liabilities will be in the event that a breach occurs.

Liquidated damages clauses are particularly relevant for construction contracts because they:

  • Allow the parties to quantify and be clear about risk allocation and their intentions should a breach of contract arise and also allow parties to clearly understand in advance how loss will be calculated should a breach occur;
  • Encourage all parties to comply with their respective contractual obligations in the knowledge that if a breach occurs the clause can be enforced without the need to resort to litigation;
  • Allow a contractor, at the time they are tendering, to factor the price of their exposure (the amount specified for liquidated damages it there is a breach) into their contract price;
  • Allow a contractor to compare the cost of accelerating works in order to achieve practical completion by a required date versus the amount of any liquidated damages sum that becomes due and payable if the date for practical completion is not achieved;
  • Provide a ceiling or cap on a contractor’s liability for damages for specified breaches of contract;
  • Provide a principal with a means to recover damages regardless of the amount of any actual loss; and
  • Do not require the non-defaulting party to mitigate their losses, in contrast to other forms of damages.

What if I want to claim non-liquidated damages?

In rare cases, a liquidated damages clause will mean the right to damages under general law, calculated in court, will be lost. If clear and unambiguous words indicate to a court that the party wanted the liquidated damages to be the entirety of their damages for an event such as delay, then that party will lose their entitlement to general damages. Regardless of actual losses, it will be capped.

As determined early last year in the Victorian tribunal case Leeda Projects Pty Ltd v Zeng, courts will assume that general damages are not excluded by a liquidated damages clause, but they can be persuaded otherwise. In one disastrous example in England, the parties had entered ‘£ nil’ in the liquidated damages clause for delay, and the court found that the surrounding circumstances showed that the parties intended to exclude all damages for delay when using this clause.

Liquidated damages vs. penalties

Understanding the difference between liquidated damages and penalties is vital for any contracting parties. This is because courts will enforce liquidated damages clauses, but they have also made it clear that they will not enforce a clause if it amounts to a penalty clause.

In the eyes of a court, a clause will be a penalty clause where the amount of fixed damages in the contract is not a genuine pre-estimate of loss or damage sustained by the non-defaulting party, or where it does not protect the legitimate commercial interests of the non-defaulting party. Rather, where a provision is a kind of punishment for non-observance of the contract, it will be a penalty.

It is not enough for parties to label a clause ‘liquidated damages’ in the contract, or to state that ‘the parties agree that this is not a penalty clause’. Courts will consider whether in substance it is a penalty.

The factors that determine whether a liquidated damages clause is a de facto penalty clause will vary from build to build and contract to contract. However, the courts have traditionally applied some key tests when considering whether a contractual provision goes beyond liquidated damages and is in fact a penalty.

The first key questions to consider are:

  • Is the amount provided for in the clause ‘extravagant and unconscionable’ when compared with the greatest possible loss that could possibly be shown to result from the particular breach of contract?
  • Does the breach consist solely of non-payment of money which results in a larger sum for damages being required?
  • Does the clause stipulate the same amount is to be paid for different breaches, even if the breaches vary in terms of seriousness?

If the answer to any of these questions is ‘yes’ then it is likely the clause will be a penalty and will not be enforceable.

What if actual loss can’t be quantified?

A clause may be a valid liquidated damages clause even if it is not possible to estimate in advance the actual or true loss that may be suffered. The main consideration is whether the liquidated sum is extravagant. Therefore, it is important to consider carefully the tests above when determining the size and scope of any liquidated damages clauses.

Conclusion

The difference between a reasonable liquidated damages clause and an unenforceable penalty clause can be a difficult line to draw, even when all parties to a contract enter into negotiations with the best of intentions.

Before entering into a contract or agreeing to a liquidated damages clause it is always advisable to seek legal advice to ensure that you understand the full ramifications of the agreement and to check that, if needed, the terms of the contract will be enforceable by you or the other party.

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.

Employees, independent contractors and ‘shams’ in the construction industry

It is common for builders and operators in the construction industry to utilise contractors to carry out specific trade skills such as concreting, plastering, bricklaying and plumbing.

Business operators however, need to be cautious when ‘hiring’ skilled or other labour to ensure that they are not in breach of provisions of the Fair Work Act 2009 (Cth) (the ‘Act’). The Act prohibits a person from misrepresenting ‘employment’ as ‘independent contracting’, otherwise known as ‘sham arrangements’.

These sham arrangements have been predominant in the construction industry and are illegal.

It is important for business operators to understand the difference between an independent contractor and employee.

Example of a sham arrangement

Sham contracting came back to haunt Royans Wagga Pty Ltd in the 2017 case, Putland v Royans Wagga [2017] FCA 910. Royans Wagga was a business primarily running truck repairs. Linda and Shane Putland performed work for Royans Wagga over many years in a call centre, obtaining and passing on information about vehicle accidents to Royans Wagga sales representatives so that repair work could be secured.

If the Putlands could prove that they were employees and not independent contractors, they stood to gain significant back pay and payment in lieu of reasonable notice of termination. Meanwhile Royans Wagga stood down the barrel of a long list of contraventions of the Act and pecuniary penalties. It therefore denied the employer-employee relationship, arguing that the Putlands were independent contractors.

As is often the case, a number of factors pointed towards either relationship. Bromwich J had to balance these factors against each other and arrive at a conclusion.

Is someone an employee or an independent contractor?

The distinction between an employee and independent contractor is not always easy to determine. Generally, the Fair Work Commission or a Court will look behind the label given to the arrangement by the parties to identify the factual substance of the relationship. How one party or both parties view the relationship is not determinative of the issue.

Primarily, an employment relationship is an exchange of labour (time, skill and effort) for remuneration – the employee serves the employer as opposed to carrying on a business in his or her own right.

If the worker is acting as an entrepreneur who owns and operates an enterprise and as a representative of its own business, then it is more likely that the worker is an independent contractor.

The entirety of the relationship is analysed which might consider the following factors:

  • the degree of control that a business operator can exercise over a worker engaged to perform work (whether the control is actually exercised or whether just the potential exists);
  • whether the worker works exclusively for the business operator;
  • the provision of a uniform, business cards, tools etc. from the business operator;
  • whether the worker undertakes work personally or is free to delegate to others;
  • the location of the work;
  • the method of payment for the work performed – whether at an hourly rate or on completion of a specific project, whether wages are paid or there is a commission;
  • the responsibility for acquisition and maintenance of equipment;
  • the creation of goodwill of saleable assets through the work performed;
  • the allocation of risk and profit associated with the work;
  • the degree of integration the worker has with the entity for which it works;
  • the existence of leave, taxation, superannuation payments, etc;
  • how ‘business-like’ is the business of the business operator – are there systems, manuals, invoices etc;
  • the right of the business operator to dictate the place of work, hours of work etc. of the worker

This list is not exhaustive.

In the case above, Royans Wagga required the Putlands to obtain ANBs, it issued tax invoices in lump-sum amounts, it did not deduct income tax, it did not require uniforms to be worn, and it paid others to do work.

On the other side of the scales, the Putlands only worked for Royans Wigans, their telephone and internet accounts were paid by Royans Wigan, they had their office equipment supplied, they did not advertise any business run by themselves, their work led to Royans Wigans accruing goodwill, and they lacked ‘true autonomy’ in their work. Evidence also indicated the managing director of Royans Wigans had authority to control and issued directions and approvals to the Putlands.

Bromwich J decided it was an employee-employer relationship, to Royans Wagga’s significant detriment.

Misrepresenting employment as independent contracting

A business operator is prohibited from offering a person a role as an independent contractor when the relationship between the parties is really one of employer-employee.

Section 357 of the Act states: ‘A person (the employer) that employs, or proposes to employ, an individual must not represent to the individual that the contract of employment under which the individual is, or would be, employed by the employer is a contract for services under which the individual performs, or would perform, work as an independent contractor.’

To take advantage of a sham arrangement, the employer would insist that the ‘contractor’ obtain an Australian Business Number (ABN) and create his or her own business before commencing work. The worker is generally responsible for paying his or her own taxes and insurances.

The worker is treated as an independent contractor and the employer circumvents the obligations that would normally arise from an employer-employee relationship. Consequently, by signing up as an independent contractor, the worker foregoes access to employment entitlements such as payment for annual and sick leave, long service leave, compulsory superannuation contributions and protection from unfair dismissal or termination of employment.

For contractors who are genuinely running a business as a profit-making enterprise this is not problematic. However, in the case of a sham arrangement, the workers may earn a higher hourly rate, but perhaps not conducive to a profit-making enterprise, from which they must pay their own tax, insurance and superannuation. In such circumstances, the sham arrangement results in the employer ‘getting its cake and eating it too’.

Sham arrangements are illegal

It is illegal to inform a someone that he or she is an independent contractor if they are actually an employee. It is also illegal to dismiss an employee or threaten to dismiss an employee for the purpose of ‘re-engaging’ them in predominantly the same work as they performed whilst they were employed.

Similarly, a person must not induce a former employee to carry out the same type of work as when they were employed under the guise of an independent contractor arrangement. Where an employer employs or has at any time employed an individual to perform particular work, the Act also makes it illegal for the employer to make a statement that they know is false in order to persuade the individual to perform substantially the same work as an independent contractor.

Businesses entering sham arrangements risk significant civil penalties and potential claims for back-pay of employee entitlements such as annual leave payments, sick leave and superannuation contributions.

Why do businesses use sham arrangements?

A sham arrangement may result from simple ignorance on the part of the business owner or a desire to minimise costs. A worker may even indicate that he or she is ‘happy’ with the arrangement.

Sham arrangements may be prevalent during the start-up phase of a new business where cashflow is limited and the future success of the enterprise unknown. Conversely, businesses may have been running sham arrangements for some time.

The temptation to use ‘contractors’ instead of employing staff usually flows from a desire to circumvent the financial and other responsibilities that arise from an employment relationship. If the business takes on workers as independent contractors rather than as employees, the business need not comply with nationally-recognised employment conditions, annual leave, sick leave, workers’ compensation or termination processes.

Conclusion

If you are considering engaging workers for your building projects, you should think carefully about the arrangements to determine whether your workers are truly independent contractors or employees. If you are unsure, obtain legal advice.

Failing to do so could lead to significant costs down the line.

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

Deal or no deal: electronic signatures and contract law

Of the many changes brought by the digital age to the commercial landscape, one that is overlooked is the act of executing a contract. The days of wet-ink signing ceremonies in boardrooms are on the way out, while clicking a computer mouse a few times is fast becoming the norm. This can lead to situations that will make any company director uneasy.

Williams Group Australia v Crocker

A software system HelloFax enables users to upload their digital signatures to a document if the correct password and username are entered. Director A of a building company sets up usernames and passwords for Directors B and C. The passwords are not changed. Down the track, Director A uses these passwords to execute an application for credit not only in their name but also in the names of Directors B and C. Director A also executes personal guarantees bearing the digital signatures of all the directors. A lending company approves this credit application, and over time a $889,534.35 debt is accrued.

Eventually, the lending company claims the debt from the building company, and from the directors personally. Director C learns that they are being personally sued for hundreds of thousands of dollars.

Of course this was a real case: Williams Group Australia v Crocker [2016] NSWCA 265. One of the parties was going to be left up the proverbial creek without a paddle. If the contract was void then Williams Group Australia’s debts were lost. If the contract was valid, then the innocent director Mr Crocker was going to foot the substantial bill for a contract he didn’t sign.

Digital signatures made basic questions difficult. As Crocker said in evidence: “Well it’s difficult when you’re presented with … your signature that’s electronic to know whether you did or didn’t [sign it]”.

Ultimately Crocker won, as he had not represented that his co-director had authority to sign on his own behalf. Had it been he who set up the signature software, however, it might have been different. And the substantial legal bills undoubtedly soured the victory. A warning shot was fired for all users of digital signatures.

Digital signatures and electronic signatures: some basics

Some quick definitions:

  • Electronic signatures are essentially like traditional handwritten signatures but in electronic form: typing a name into an email, or pasting an image of a signature.
  • Digital signatures use a code attached to an electronic document that identifies and authenticates the signatory. Adobe Sign for PDF files is one example. One party has a ‘private key’, which enables them (and only them) to sign a document. The other another party has a ‘public key’ enabling them to see the signature, but which does not let them edit the signature.

In both types of signature, if a witness is required, they must be present to witness the authentication.

What risks do electronic executions open a company up to?

Of course, there are enormous benefits brought by the rise of digital and electronic signatures. The software keeps a record of who signs and when. They are efficient: signatories don’t need to leave their office, and can almost instantaneously do business with parties on the other side of the globe. However, this rise also brings added complexities.

Two of these must be considered by businesspeople:

  1. Unauthorised use of the signature, or forgery, is now quite easy. Directors must beware of colleagues or fraudulent third parties taking their signature or the digital key. Even though forgery is illegal and renders a contract void, it creates huge problems, especially if the fraudulent party has disappeared with the money. Also, it won’t be forgery where a superior has given a subordinate authority to use the digital signature software; working out whether this has happened is not always easy.
  2. On the other side of the coin, a person may intend to sign a contract, but if the electronic execution is not done according to law, a contract may be deemed unenforceable and the other party can escape its obligations.

The law tries to find a line between a desire for commercial convenience and the desire to prevent forgery. It pays, sometimes in the hundreds of thousands, for signatories to be aware of the law around electronic execution.

A contract is void if the signature is forged, so that it is as if the contract never existed. However, this is no consolation if the forger has disappeared.

So how do I digitally execute my contract properly?

Very generally, the law’s position is not totally different for digital execution as for physical wet-ink execution. Contract law remains the same at its core: there must be an intention shown to make an offer and to accept that offer.

Having said this, there is no short answer to this question. Certain types of contracts, such as for sale of land or for giving someone else your right to sue, have particular requirements and electronic execution might not suffice. Statutes will have different definitions of signature.

Australian governments foresaw the issue of electronic execution at the turn of the century. They enacted the Electronic Transactions Act 1999 (Cth) and the Electronic Transactions Act 2000 (NSW).

These Acts make it clear a transaction, including a contract, is not invalid just because a signature was made electronically. Additionally, if an Act requires someone to give information in writing, this is satisfied by electronic communication so long as this communication is readily accessible and the other person consents to electronic communication.

To meet the requirements of signature by electronic means:

(1) A method must be used to identify the signing party and to indicate the person’s intention;

(2) This method must be as reliable as appropriate for the purpose for which the electronic communication was generated; and

(3) The other party must consent to the use of electronic means to sign a document.

Where the signatory is someone acting on behalf of someone else, e.g. an employee for a corporation:

(4) The signing person must have authority to bind the principal.

The cases confirm this story. Generally, a person must put their name or mark to a document, and the important part is that they must do this “for the purpose of adopting or authenticating the document”. In some contexts, a typed first name at the end of an email suffices to create legal relations between the receiver and the sender.

Businesspeople should be very cautious in relation to witnesses to signatures, as attestation is not apparently protected under these Acts. It is assumed electronic attestation is permitted under law, but this has not been demonstrated yet.

The fourth element: binding a principal

As (4) indicates above, the situation is further complicated for companies or other principals and their agents. The person signing a document must have some form of authority to do sign on the principal’s behalf.

This authority must come from the company. Always the safest form of authority is express actual authority: the company should inform the other party in writing that the agent has the authority to use the electronic signature.

A company may also give the person ostensible authority, such as by providing them a certain title, status and facilities. Common practice is for businesses to put in place an organisational structure that gives the appearance to outsiders that an officer has the authority to bind the principal. For example:

  • Giving an officer the title ‘Manager’ and providing letterheads and business cards gives ostensible authority to the officer.
  • Significant prior dealings in which a person acted on behalf of the company, to its apparent acceptance

Conclusion

In Williams Group Australia v Crocker, if the director Crocker had made some representation that his co-director had authority to sign on his behalf, then he could well have been bound. This ostensible authority might have arisen if Crocker had set up the electronic signature system himself. He was saved by the fact that his co-director had set up the system.

Crocker was also saved by the fact that email notifications that came with use of his digital signature were not detailed enough to inform him of the full circumstances of his signature being used by his co-director. Had they fully informed him of the circumstances and had he done nothing, he may have ‘ratified’ the signature and beared the costs.

The court did not resolve the question of whether a ‘genuine’ electronic signature made without authority is forgery, but hinted that it might be.

The story is not happy for any of the parties. Crocker was still put through the ordeal of expensive legal proceedings. Williams Group Australia faced huge losses.

The case shows that in the digital age, training and rigorous checks and balances are more important than ever in ensuring that employees understand how their signatures are used and who has authority to use them.

And there is no substitute for open communication between the two parties about who has authority and how they will exercise it.

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

Dealing with variations in building contracts

Variations to the scope of works, or variations to the services to be provided, under a construction project are common in the building industry.

A variation may be requested by either party or arise out of necessity, for example, due to changes required in legislation or because of a latent condition.

When negotiating a variation, it is important to follow the process required under the contract and to ensure that the variation is clearly documented.

What is a variation?

The scope of works to be provided under a building contract will generally be set out in attached specifications, plans, or a service brief, which together form the whole contract.

The scope of works is an integral part of the contract. It identifies those works for which the contractor will ultimately be liable and is the basis from which alterations or additions will be classified a variation. The categorisation of a variation is important as it affects a contractor’s right to claim additional costs and a principal’s obligation to pay them.

The following concepts are relevant in determining what constitutes a variation:

  • The variation must be requested and be something that is not already covered in the scope of works. If there is no request by a principal to vary the scope of works, a contractor will have difficulties in claiming additional costs.
  • Similarly, if higher quality materials are provided than what is specified in the scope of works, a contractor will not have a right to charge for the upgrade unless this was specifically requested.
  • Work that is indispensably necessary to complete the job, although not spelt out in the contract or scope of works, is not a variation. An example of work that is intrinsic to the job is the installation of hinges when hanging doors – although the specifications may not refer to ‘hinges’ per se, it is obvious that the provision and installation of doors cannot be completed without this component.
  • A complete change to the scope of works by the principal is not a variation and may give a contractor a right to terminate the contract.

Dealing with variations

Variations to the scope of works often lead to disputes in the construction industry. It is therefore important that both parties understand the significance of a variation and the processes required for requesting and claiming them.

A principal may require that the contractor undertake more or less work than that provided in the scope of works. Issues can arise where a contractor is not qualified for, or does not have sufficient resources to, undertake the additional work. Similarly, if work falling within the scope of works of a contract with one contractor is given to another contractor, this will be problematic for both parties and may result in a breach of the contract by the principal.

To avoid a potential breach which could allow a contractor to terminate the agreement, principals should ensure that their contracts contain provisions that enable them to request variations to the original scope of works. The contract should identify the circumstances under which a variation might be requested and set out clear processes for varying the scope of works or services.

Principals should also be aware of the difference between a variation and a complete overhaul of the scope of works which may entitle the contractor to terminate the contract.

Contractors should ensure that they will be adequately paid for works additional to the original scope and follow the processes outlined in the contract for applying for modifications.

A variation may be requested by a contractor who needs to carry out additional work to fulfil the scope of works. This may occur where latent conditions arise. Latent conditions are physical conditions on the development site that are materially different to those that would reasonably have been contemplated, notwithstanding a contractor having made all due inspections and investigations of the site.

The contract will generally provide a timeframe during which a contractor may notify the principal of a pending variation. The contractor will typically be required to set out reasons why the variation is required and the costs in carrying out the additional work. The contractor should always obtain approval before undertaking any variations.

Quantum meruit claims

In some circumstances, strict compliance with the variation procedures set out in the contract will not be commercially efficient. The need to make a variation may arise without adequate time to follow due process, particularly when it is necessary to avoid delays or wastage.

Even if they are refused payment for the variation on the basis that the correct process was not followed, a contractor may still have a quantum meruit claim. In this case, the amount of the claim will be a reasonable price for the work carried out by the contractor, often based on industry standards.

A principal that requests and supervises a variation, despite the fact that the formal process was not followed, will be prevented from benefiting from the additional or modified works.

To succeed in a claim, it must be shown that the principal received a benefit, the contractor incurred expenses in doing the work, and that it would be unfair for the principal to retain the benefit without paying for it.

A contractor who refuses to undertake work requested by a principal that falls well outside of the scope of works provided in the contract, may also have a quantum meruit claim. One example of this is work that is unexpected and that does not ordinarily fall within the principal’s area of construction. In this case, if the contract is terminated, the contractor may be paid for the work completed to date.

Conclusion

A clearly defined scope of works and detailed process for dealing with variations must be included in all construction projects.

The scope of works should be sufficiently detailed and cover additional matters that may arise during construction of the project. The clearer the scope of works, the easier it will be for both parties to recognise and deal with a variation.

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.

The cost of poorly-drafted building contracts

The importance of having in place a written contract is widely accepted in the construction (or any) industry. But are you putting in the time necessary to understand and document your negotiations, so that your rights are properly secured by your building contracts?

An unresolved contractual dispute depletes time and resources and has potential to damage the parties’ reputation and relationship. Disputes have a devastating effect on a building project and if they are not resolved by negotiation between the parties, they will likely escalate to dispute resolution processes, or even to a hearing before a Court.

In many cases, determination of the dispute will turn on the contract between the parties and what it does, or does not, contain. The words of the contract will be scrutinised, and poorly-drafted terms that are unclear or ambiguous can be the undoing of an otherwise valid agreement.

Case study

Incomplete contract terms that lack explanation or process lead to uncertainty. This was the case in Port Macquarie-Hastings Council v Diveva Pty Limited [2017] NSWCA 97.

In 2011, Diveva Pty Limited trading as Mid Coast Road Services entered into a contract for asphalt works with the council, having successfully tendered in 2005 and 2008. The contract contained an ‘option clause’ which merely stated, ‘with a future twelve (12) month option available’.

There were issues regarding one of the projects undertaken by Diveva, with the council claiming that Diveva had failed to comply with certain specifications under the contract. This matter appeared to remain unresolved both at the time when the council notified Diveva that it would not be exercising the option, and when the council advertised for tenders for future works.

In reliance of the contract, Diveva notified the Council that it was exercising the option. It did not take part in any tendering process. No further contract was offered, and Diveva sued the council for breach of contract.

Original proceedings

In the original Supreme Court proceedings, the Council claimed that the option could only be exercised unilaterally by the Council. The Supreme Court disagreed.

The task of the Supreme Court was to determine in whose favour the option worked. In the absence of a clear term in the contract, the Supreme Court was required to look at the overall language used throughout the entire agreement and found that repeated use of the term ‘option’ was a commercial inducement to tenderers.

The Supreme Court determined that, upon its construction, the 2011 agreement ‘conferred an option upon [Diveva] to extend the Agreement for a further 12 month period’. This conclusion was based on the words ‘with a further 12 month option available’ and the meaning of these words determined objectively and within the context of the Agreement.

Hall J considered that the Council could have protected its interests with clear drafting: ‘It would have been open to the Council to simply have said expressly that the option could only be exercised by Council. However, it did not. The Council could have, but did not use the same formulation, as discussed above, “Council reserves the right…” (employed in other sub-clauses in the Agreement) had it wished to make clear that the Council had the right to renew the Agreement for a further 12 month period.’

Diveva was successful and was awarded damages for loss of profits and opportunity.

Appeal

The council appealed to the NSW Court of Appeal, asserting again that the option clause could only be exercised by the Council alone, or at the very least by mutual agreement.

The Court of Appeal arrived at the same conclusion, and the appeal was dismissed. In its judgment, the Court considered that interpretation of the real meaning in the contract relied on the words used and the intent and purpose of the parties.

The Court found that there was an inference throughout the agreement that the council would offer further work to successful tenderers. The words ‘option’ and ‘available’ were used repeatedly in both the agreement and tender request which, according to the Court, deemed the option capable of being exercised by Diveva unilaterally.

The Court also noted that the option clause provided no qualifying matters, hence council’s allegations of the non-complying work would not preclude Diveva from validly exercising the option. But for the disputed works, the Court considered there was a strong likelihood that the council would have entered into a further contract with Diveva, given its track record, previous dealings and knowledge of council works.

Key points

As the option clause referred to in the above case was silent as to the time, method and respective rights of the parties to exercise, the Court was required to determine its true meaning by looking at the intent of the parties and the language used elsewhere in the agreement.

This may have been avoided if the option clause was drafted to provide how and when the option could be exercised, in what circumstances, and by whom. As stated by the Court, had the council required that the option was to be exercised only unilaterally then it was open for it to have included this in the terms.

Keep in mind the following points to ensure that your building contracts can, under tight scrutiny, protect your rights and interests:

  • Your construction contracts should be negotiated, prepared and reviewed with assistance of an experienced construction lawyer. Money spent now can protect your business against loss down the track.
  • Read your construction contracts, highlight the terms that you don’t understand and ask for them to be explained. Ask, ‘what if’, ‘what happens when’, ‘how should’, ‘who might’.
  • Construction projects often comprise several contracts – these need to align and, where relevant, reflect reciprocal obligations and rights. Pay attention to timelines, completion dates, extension and delay clauses and, of course, options.
  • Use precedent contracts carefully – ensure the fields that are likely to vary from build to build are highlighted so that important information can be populated. Don’t rely on the precedent alone – read the entire contract for each project for relevance and completeness.
  • It is easy for important terms to be overlooked or formatting errors to occur when using precedent contracts, particularly if prepared by staff who are unfamiliar with their contents. Appointing a precedent custodian to supervise access to precedent contracts will help minimise some of these issues.

Conclusion

Poorly-drafted contracts can have unforgiving results, and roll-on effects to subsequent building projects.

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.

Implied conditions & warranties for home building contracts

Following changes to the Home Building Act 1989 (NSW) in early 2015, the statutory insurance scheme that was established to provide compensation for certain defined losses if a builder dies, becomes insolvent, disappears during a build or fails to comply with a money order from a Court or Tribunal was re-named and is now referred to as the Home Building Compensation Fund.

Along with the re-naming of the scheme a number of other changes were made in respect of warranty insurance and implied warranties and conditions in building contracts entered into in NSW. These changes and the issue of implied conditions are discussed in further detail below.

What is covered by warranty insurance under a building insurance contract?

From 15 January 2016 an insurance contract issued in respect of building work in NSW must provide coverage and indemnity for losses or damage sustained by a beneficiary in respect of residential building work which has arisen because of the suspension of a contractor’s licence as a result of non-compliance by the contractor with an order.

Contracts entered into after 15 January 2016 in NSW only cover residential building work that is required under the Act to be covered by a certificate of insurance. This means that work such as built-in furniture and cabinetry which is done as standalone work and not part of a broader residential building contract is now exempt from the mandatory insurance scheme. For many would be renovators and home owners it is relevant to note that this category of work includes kitchen cabinets.

Statutory warranties

Builders must now provide a 2 year post completion warranty for their work. This period rises to 6 years in the case of ‘major defects’. Major defects are defined as being something that is a major element in a building AND which prevents all or part of the building form being either lived in or used for its intended purpose OR which threaten the collapse or destruction of the building as a whole of part of it. The concept of ‘major defects’ replaces the previous 6 year statutory warranty for ‘structural defects’.

Rectification orders may be issued by NSW Fair Trading Inspectors which require completion of rectification work in specified stages and by certain dates. These orders can also include an order for the payment of any money that is due under the contract.

Under the current legislation rectification work is specified as the preferred outcome of any proceedings before a Court or Tribunal for building claims.

Implied conditions and warranties

Section 18B of the Home Building Act 1989 (NSW) provides that all contracts for residential building work in NSW entered into by the holder of a contractor licence or a person required to hold a contractor licence before entering into a contract, will contain the following implied conditions and warranties:

  • All work will be done with due care and skill and in accordance with plans and specifications as set out in the contract;
  • All materials supplied will be good and suitable for the purpose for which they are being used and, unless otherwise specified in the contract, those goods will be new;
  • Work will be done in accordance with the legislation or any other law;
  • Work will be done with due diligence and within the time specified in the contract. If no time period is specified then work will be done ‘within a reasonable time’ ;
  • Where the work under the contract relates to the construction, alteration or additions to a dwelling the work will result in a dwelling that is reasonably fit for occupation as a dwelling (to the extent of the work conducted);
  • Materials used in doing the work will be reasonably fit for the specified purpose or the result being sought, provided the owner for whom the work is done expressly makes known the particular purpose for which the work is required or the result that the owner desires the work to achieve, so as to show that the owner relies on the holder’s or person’s skill and judgment.

These statutory warranties cover both a principal contractor in respect of their relationship with the owner of land on which work is being carried out and are also implied into contracts where the principal contractor has contracted any part of the work to a subcontractor.

What if there has been a breach of a statutory warranty?

Previously the defence available to a builder or contractor to a claim of breach of statutory warranty was that any defective work was carried out on the instructions of the consumer and was done so contrary to the builder or tradesperson’s written advice.

Post 15 January 2016, a builder or tradesperson can also defend this type of claim on the basis that any defective work was carried out as a result of the builder or tradesperson acting on written instructions from a professional engaged by the consumer before the builder or tradesperson commenced work.

The professional in question can be an engineer, surveyor or architect or some other person with appropriate specialist or expert knowledge that was relevant to the building work in question. Critically that expert must be someone who is independent from the builder or tradesperson about whom the claim has been made.

In an ideal world construction projects would progress smoothly and the need to consider issues of insurance and implied conditions would not arise. Unfortunately this is not always the case and knowing where you stand with respect to warranty insurance as well as implied contractual conditions is likely to be an important part of successfully managing any build. It is always a good idea to seek legal advice before a situation becomes problematic as this can avoid costly unpleasant surprises down the track.

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.