COVID Update – Environmental Planning and Assessment (COVID-19 Development – Construction Work Days) Order 2020

Yesterday (April 2,2020), the Environment Planning and Assessment (COVID-19 Development – Construction Work Days) Order 2020 came into effect. The Order allows for building work and demolition work to be carried out on Saturdays, Sundays and public holidays, provided that the development is approved through development consent and continues to comply with all other conditions of the development consent. Further any work that is performed on a Saturday, Sunday or public holiday must:

  1. comply with the conditions of consent that restrict hours of work on any other day as if the condition applied to work on a Saturday, Sunday or public holiday;

 

  1. not involve the carrying out of rock breaking, rock hammering, sheet piling or similar activities during the weekend and public holiday work hours; and

 

  1. all feasible and reasonable measures are taken to minimise noise.

 

So what does this mean for the construction industry? Where a project is subject to development consent conditions that restrict the days of working to Monday to Friday, the Order allows for the approved working hours in the development consent to apply to weekends and public holidays. The purpose of this Order is to allow for construction sites to implement social distancing measures which may require smaller workforces on site but prevent or minimise loss of productivity by allowing works to be carried out on more days.

As a result, construction programs may need to be reconfigured to balance the slower rate of progressing the works due to social distancing and/or team splitting, any EOTs claimed and the greater number of days that can be worked.

The Order may also result in contractors and subcontractors being able to make a claim in relation to a change in legislative requirements under their contracts. This may result in entitlements for time or cost relief arising from complying with the Order and other government orders made in response to the COVID-19 outbreak.

If you need advice as to how this order affects your contractual obligations or are negotiating a contract, please contact us. We are committed to providing the highest quality of legal services at competitive prices to help you and your business get through these challenging times.

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

 

 

Corona virus and force majeure in construction contracts: Has your contract been immunised

While many were recovering from New Years’ celebrations, corona virus was starting to make its way into the headlines. For the last 2 months, corona virus has dominated the news with many people and businesses starting to feel its impact as borders are shut down and quarantines are imposed. At the time of writing, the World Health Organisation has reported that corona virus has spread to many parts of the world including Australia, North America and parts of Europe. With much of the corona outbreak concentrated to China, several businesses are starting to feel the economic impact. As the manufacturing hub of the world, China is responsible for much of the world’s imports. Further, as the corona virus spreads and causes further border shutdowns, it becomes harder for businesses to have certainty in knowing when they will be able to import or export their goods. With businesses having to meet their contractual deadlines, the uncertainty can create a real issue for some. Consequently, many businesses may be put into a position where they are unable perform their contractual obligations. This article focuses on the different ways a construction contract may deal with situations such as corona virus.

The clause typically suited to situations or events like the outbreak of corona virus is a force majeure clause. Force majeure means ‘superior force’ and commonly covers natural events such as earthquakes or unforeseeable and disruptive manmade events such as war and industrial strikes. In the Australian context, force majeure clauses are creatures of the contract. This means that they only exist by virtue of a contractual provision which allocates the risk between the parties. Further, Australian courts will interpret these clauses strictly, giving the clauses the minimum application available within the ordinary meaning of the provision. In the construction contract context, it is unusual to see a specific force majeure clause. By way of illustration, the Australian Standard contracts do not contain a standard force majeure clause. Therefore, it is up to the parties to amend and insert a specific force majeure provision into the contract if they wish to have a specific mechanism dealing with the risk arising from these types of events.

As many readers may be aware, at the core of construction contracts is the allocation of risk through program. Therefore, construction contracts may, by their very essence, be differentiated from non—construction contracts. For example, extension of time (EOT), delay costs and liquidated damages clauses assign time related risks between the parties. The definitions of qualifying causes of delay and compensable causes in the Australian Standard provide a mechanism to pass time and cost related risks from contractors or subcontractors to the developer or head contractor. Amending the definition of qualifying causes of delay to extend to force majeure events is one way a construction contract can account for circumstances such as the corona virus. The key difference between allowing relief through a force majeure clause and allowing an EOT for force majeure events is that an EOT provides a contractor or subcontractor protection against liquidated damages. This is differentiated from a force majeure clause which may generally limit a party’s liability under the contract.

Irrespective of the way force majeure events are incorporated into construction contracts, care must be taken in drafting these clauses. When getting into the force majeure territory, contractors and subcontractors need to make sure that the definition of ‘force majeure’ or ‘force majeure event’ is drafted clearly, but not too broadly. For example, stating that a subcontractor is entitled to an EOT for anything outside of their control may be clear, but too broad to specifically cover corona virus. However, stating that the subcontractor is entitled to an EOT for delays related to the corona virus may be clearly drafted, but it does not provide much further scope. The clause would not protect from outbreaks or re-emergence of SARS or other endemics, epidemics or pandemics. A balance must be reached between these two extremes and will depend on the specific project.

When drafting a force majeure clause, it is important to consider some broad points. Firstly, force majeure clauses are usually exhaustive in nature, meaning that only what is in the contract is covered. Secondly, the party affected by the force majeure event must not have caused or contributed to the event and will required to take all steps to overcome or mitigate its effects. There also needs to be a connection between the force majeure event and the performance of the contractual obligations. For instance, the mere occurrence of the corona virus is not sufficient to justify an EOT in all cases. It will only entitle relief from liquidated damages when the event has caused a delay. By including these conditions, a force majeure clause (whether in EOT form or specific clause form) will generally entitle a party to relief or suspension of their obligations under the contract.

A significant problem with force majeure events is that it can be difficult for parties to establish that they should be entitled to relief under the clause. For example, in relation to the mitigation element discussed above, a party is often required to show that it cannot fulfil its supply obligations. While a party may have its preferred third party supplier, the mere fact that supply is not available from this supplier will not justify force majeure relief. The parties are bound by their contractual deal and this remains the case even if the obligations become significantly more onerous or expensive to complete. However, if all of the supply of product X is unavailable, then a party should be entitled to relief under the relevant clause until the supply becomes available again.

If you or someone you may know is in need of advice on existing contracts or advice regarding the force majeure clause, please contact our office by phoning (02) 9248 3450 or by email at info@bradburylegal.com.au.

Contractual interpretation: What did we even agree upon?

It is the question as old as human trade and commerce: when we made that agreement, what did we mean?

This is a deceptively simple question. It may appear to parties with amicable relations that the meaning of a document is clear, but when a dispute opens up, what tends to happen is that each party will stretch every definition to suit its purposes.
As will become clear, courts are still grappling with difficult questions about how an agreement should be interpreted, and what evidence put forward by the parties can be considered to discern its meaning.
We consider some basic principles to do with contractual interpretation, and look at a recent example of the circumstances in which courts will look at negotiations between the parties and the effect this has on the meaning of the agreement.

Basic principles

Where there is a written contract between two parties that are legally represented and commercially experienced, the law will likely consider this contract to be the complete statement of their legal rights and obligations. In some cases, a contract may be both oral and in writing, but proving this is onerous.
As a result, where there is a dispute, the contract is the first thing that the lawyers and judges will consider. The contract is considered to reflect how the parties intended to allocate risk.
When looking at a contract, the court will assess and interpret the contract to give effect to what is called the objective intention of the parties. This is not what was actually in the minds of the parties. Rather, it is what a reasonable person, a third-party bystander, would understand the words or actions of the parties to show about the parties’ intention.
In the commercial context, this means the court will look at the words used in drafting the contract and determine what they mean to a reasonable businessperson informed about the circumstances of the case.

But wait there’s more

What is said above does not mean that the actions of the parties are irrelevant. Far from it.
In fact, it is sometimes necessary for courts to consider the surrounding circumstances of an agreement, so that they can determine what the intentions of the parties are with respect to what exactly constitutes the agreement and what its terms mean.
This might seem contrary to the court’s tradition of only looking at the contract. However, it will generally only be done when there is ambiguity in the words of the contract.
For example, in Toll (FGCT) Pty Ltd v Alphapharm Pty Ltd (2004) 219 CLR 165, the High Court stated that it is not what the parties think about their rights and obligations that govern contractual relations. Rather, it is the words and conduct of each party that would lead a reasonable person in the position of the other party to believe.
Ten years later, the High Court again commented on the use of evidence outside the contract in Electricity Generation Corporation v Woodside Energy Ltd (2014) 251 CLR 640. In this case, the High Court said that evidence of the parties’ actual (subjective) intentions is not relevant to construction. What is relevant is the evidence of surrounding circumstances known the parties.
External circumstances can be considered by the courts when interpreting contracts between disputing parties.

So how does this all work?

If courts are supposed to consider the contract as the full statement of the parties’ rights and obligations, but they are able to look at circumstances beyond the contract, how does a judge determine what is the agreement?
Firstly, the contract is still the primary document that is interpreted. The evidence considered by a court of what has been said or what has happened outside of the contract cannot be used to give the contract a meaning that is contrary to what the contract clearly states.
Put another way, evidence outside of the contract cannot be used to add to, vary or contradict the language of the written contract. This is the case no matter how unjust or inconvenient the written terms are. This makes sense, as effective relations depend on the meaning of an agreement being fixed and clear.
Permitting outside factors to change the meaning of a contract introduces significant uncertainty. As any businessperson will know, where there is uncertainty there is conflict. A party could for example attempt to impose its own view on the meaning of the document. External conduct is used to make the meaning of the contract clearer, not to change it. In practice, however, the line between these two can be very difficult to draw.
Secondly, matters outside of the contract become relevant only where there is ambiguity or more than one meaning in what is inside the contract. Words may have different meanings in different contexts, so the context is important in choosing the right interpretation.
To this end, courts may consider the commercial purpose of the contract, the market and industry in which it arose, and the factual background of the agreement. All of this can shed light onto what the parties “must have” intended when they drafted the contract.
It is important to note that courts will only consider outside circumstances that are known to both parties.
However, courts will only consider these factors if the meaning of the written document is not clear. Negotiations that occurred prior to the signing of the agreement are also rarely considered, for the simple reason that they do not often show what was agreed.

For example …

Cherry v Steele-Park [2017] NSWCA 295 was a case that turned on the meaning of a deed of guarantee. Specifically, whether this deed of guarantee required the guarantor to pay the damages that resulted from the failure of their company to complete a contract for sale of land. The guarantor argued that the deed only covered the amounts promised for extending the contract’s completion date. The difference was around $145,750.
The case appeared to challenge the principles talked about above.
The argument was around whether the meaning of term had to be ambiguous before a court would admit evidence outside of the contract to explain its meaning. What happens when a term that appears to have a plain meaning “becomes” ambiguous only when outside material is introduced?
The answer is that as long as the evidence is relevant as information about the genesis or purpose of the transaction, it can bear on the contractual language and can be considered. Then the court will make a conclusion about whether the written terms are clear or ambiguous.
In Cherry v Steele-Park, Cherry wanted to include in evidence emails exchanged between the parties, that represented negotiating positions that were communicated between the parties. (As a side note, it was important that both parties knew about these emails when entering the contract.)
The Court considered the emails. However, the case ultimately reinforces not challenges the conclusions talked about above. The interpretation of the clause given by the court ultimately did not bend to what was said in these emails.
Rather, the Court considered as primary the terms and the structure of the contract, including the definitions and the generality of their language. The interpretation put forward by Cherry was some but clearly not all of the guarantee.
The Court concluded that the emails did not defeat “the wide words in the Guarantee”. The emails showed that there may have been a commercial purpose to make a limited guarantee. However, this context could not overcome the content of the Guarantee. Or, as Leeming JA stated, “such context – even relatively powerful evidence of context such as the present – does not warrant doing the violence to the general language of the document executed by them that they require.”
It was in effect a warning, that regardless of how persuasive evidence of negotiations is, it will not limit or take away from what is stated in a contractual document.

Conclusion

Prevention is always better than the cure. In the early stages of a commercial agreement, a little expense given to ensuring a contract tabled between the parties truly expresses your intentions goes a long way to preventing protracted disputes.
Problems can arise even between parties with a great relationship, and as discussed, once a problem does arise courts will be very reluctant to look beyond the written document that was exchanged. What this written document says will be of paramount importance, so it is worth the extra attention.
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

The Parties’ Minds over Matter: terminated contract versus quantum meruit

The High Court of Australia has recently handed down a rare and significant judgment in the area of building and construction law.
A story that began with the construction of two townhouses in Victoria has led to the shaking of the foundations of the law around contract, repudiation and claiming a quantum meruit.
This decision affects the common situation in which a builder and a developer have a torn-up contract, and the builder is claiming payment for the work they started but were not able to finish.
We explore Mann v Paterson Constructions Pty Ltd [2019] HCA 32 below and provide an overview of the key takeaways from this ruling in relation to quantum meruit.
The High Court also considered some interpretation issues in relation to the Victorian Domestic Building Contract Act 1995. These are not considered here.

Quantum meruit

Before analysing the case, it is useful to outline what is a claim for quantum meruit.
A claim for quantum meruit, is a claim for a fair and reasonable sum for services rendered, where a developer requests and receives a benefit from a builder.
This is not a claim in contract, which is a claim by Party A to be given that which Party B promised or agreed to give.

Where a contract is still alive between the parties, a claim for quantum meruit is not permitted. Some of the situations in which a claim in quantum meruit may be brought include:
(a) a contract never existed between the parties;
(b) statute prevents a claim in contract, because for example the agreement was for residential building work but it was not in writing; or
(c) a contract was in existence but was void or unenforceable.

Case (c) above was the subject of Mann v Paterson Constructions. In this case, the contract was terminated, so it no longer applied between the parties.
An issue that has been plaguing courts for some time is the following: in a claim for quantum meruit, what if a “fair and reasonable sum” for services performed is greater than what the parties agreed to under the contract? Should the claim be limited to what was agreed to by the parties, even if that agreement was ripped up?
It was an inevitable prize fight between contract and quantum meruit, with a purse of several hundred thousand dollars at stake.

The facts

On 4 March 2014, Peter and Angela Mann (the Manns) entered into a Masters Builders Association domestic building contract (Contract) with Paterson Constructions Pty Ltd (Paterson). Under the Contract, Paterson was to build two double-storey townhouses in Blackburn, Victoria. The Manns were to pay Paterson the amount of $970,000 (incl. GST). During the performance of the Contract, the Manns requested 42 variations without giving the required written notice. Paterson performed these variations.
On 16 April 2015, a little over one year into the project, the relationship between the parties had deteriorated, primarily over claims that variations had been completed and had to be paid.
The Manns through their solicitors wrote to Paterson, stating that they considered the contract to have been repudiated by Paterson. Repudiation occurs where a party demonstrates that it is unwilling or unable to perform important parts of the contract. The Manns “accepted” this repudiation and said that they terminated the Contract.
Paterson denied that its conduct had been repudiatory. After some correspondence, Paterson claimed that the Manns’ purported termination was in fact repudiation by the Manns. Paterson said that as a result, it terminated the Contract.

The case history: from VCAT to the High Court
Paterson commenced proceedings in the Victorian Civil and Administrative Tribunal, seeking damages.
Senior Member Walker of VCAT found that the Manns had wrongfully repudiated the contract. Paterson was awarded damages on a quantum meruit. Once rectification of defects was considered, damages were $660,526.41.
The remarkable aspect of the ruling was that the damages awarded to Patterson for quantum meruit were much higher than the contract price that Paterson would have been entitled to had the Contract remained alive. Senior Member Walker was acutely aware of this, but considered the damages to be a fair and reasonable sum.
The Manns appealed first to the Supreme Court of Victoria, however Cavanough J dismissed the appeal. The Manns then appealed to the Court of Appeal.
The Manns argued that the decision-makers had made an error. They argued that the error was that the decision-makers had decided that where a contract is terminated, it is as though it never existed and, as a result, they did not have to consider the costs actually incurred by the builder carrying out the work or the discrepancy between the amount awarded and the contract price.
The Court of Appeal also dismissed this appeal, ruling that only the High Court could overturn a principle that was said to be well-established. Not to be swayed, the Manns embarked on this challenged and took their case to the High Court.

The High Court judgment

All seven judges allowed the appeal. After two unsuccessful appeals, the third and last appeal by the Manns was a success.
The seven judges accepted that the law as currently interpreted had to be corrected.
Three judges refused to allow a claim on a quantum meruit where a contract between the parties had been terminated.
The four other judges accepted that a claim for quantum meruit could be made in limited circumstances: where work was commenced but not completed at the time of termination. However, any claim for quantum meruit was limited by the contract price that was agreed to by the parties.
Where the contract required the principal to pay only once for the “entire” work and labour performed by the contractor, and the contract is terminated before completion, then the contractor will be able to claim for all of the work it completed on a quantum meruit. This is because at the time of termination, the contractor had not yet accrued the contractual “right” to be paid – it had not completed all of the work.
However, the situation was different for the case of the Manns. Under their Contract, the principal was required to pay separate sums upon completion of certain stages of the work and labour. Paterson had fully completed some of these stages, while there was at least one stage which remained incomplete at the time of termination.
The majority decided that for completed stages, these could only be claimed under the contract, and damages would be assessed by reference to the contract price. It was only the incomplete stage that could be claimed on a quantum meruit.
The other important finding by the majority was that the amount to be claimed on a quantum meruit should not in the ordinary case exceed a fair value calculated in accordance with the contract price. This judgment left open the possibility of exceptions, including for example where constant breaches by a principal resulted in a huge cost overrun by the builder.
The Court was at pains to point out that, where a contract is still alive between the parties, parties cannot claim on a quantum meruit for a reasonable sum for the services rendered. The parties made an agreement that is still enforceable. That is all that courts will enforce.
What the decision did not resolve was the common case where a contract provides for progress payments, which are made on account only and are not final entitlements. This issue might be before the superior courts before long.
Conclusion

In some very complicated and differing judgments, the High Court has given a lot of clarity to an issue that has clouded the minds of lawyers, tribunal members and judges alike.
Builders and developers should be aware that even if there is no contract, where work is requested by developer and completed by a contractor, there will be a good case for a claim for damages.
Where a contract existed between parties at some point, this will be a significant factor in calculating the amount of damages, even where it is terminated.
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

Expertly building evidence: Lessons learned from White Constructions

Case note: White Constructions Pty Ltd v PBS Holdings Pty Ltd [2019] NSWSC 1166

In White Constructions, Hammerschlag J considered the issue of delay damages. White Constructions was the property developer of a site in Kiama NSW. The development involved the development and subdivision of 100 lots and required design and installation of sewer infrastructure. These works required a s 73 Certificate issued by Sydney Water before subdivision could occur. White Constructions appointed the Defendants to assist with the design and approval works needed as part of the development and resulting subdivision. A substantial part of the judgment was devoted to the preparing and designing of the sewer designs and the approval of Sydney Water, including the different types of sewage systems, Sydney Water’s preference in relation to these systems, preparation of option reports and correspondence between the Superintendent, the Defendants and Sydney Water.

The discussions between Sydney Water, the Superintendent and the Defendants took considerable time. As a result, White Constructions alleged that the delay in coming to the approved sewage design caused White Constructions to be liable to their building contractor for delay damages. In arguing the substance of the dispute, the parties tendered complex expert evidence. As a result, the Court appointed an expert to assist in interpreting and assessing the expert evidence presented.

With the expert’s assistance, Hammerschlag J criticised the experts’ approach to determining the delays attributable to the sewage works. Both experts used methods derived from the United Kingdom Society of Construction Law, the Delay and Disruption Protocol (the Protocol) in analysing the delay. The Protocol identifies six different methods of delay analysis, but Hammerschlag J held that the inclusion of a delay analysis method in the Protocol does not necessarily mean it should be used. While the Protocol methods have been endorsed in other cases, the analysis of delay must pay close attention to the actual evidence of what was happening on the ground of the project. The delay analysis must show and prove that, on the balance of probabilities, the delay:
• played a role in delaying the project;
• how it delayed the project; and
• how much it delayed the project.

This approach is in line with the common law common-sense approach to causation which the High Court referred to in March v E&MH Stramare Pty Ltd (1991) 171 CLR 506.

A lot of value in White Constructions comes from Hammerschlag J’s analysis of what evidence is needed in cases where delay is alleged in construction matters. Firstly, the Court stated that close attention must be paid to the facts of the matter, rather than the opinion of experts. This evidence should not be general in nature, but specific in that it is able to precisely identify delays in the project. This evidence should be a contemporaneous record of the project. A classic example of this kind of evidence is a site diary which records the day to day of the project, as well as specific cause and effect of each delay.
• what works were undertaken/completed;
• the instructions received from the client;
• the delays/any complaints of delays and how they have affected other activities;
• which personnel were onsite; and
• any other relevant details

The Court found that it was important that the contemporaneous record identified which activities were adversely affected by the delays. For example, if the works of one contractor were delayed and, as a result, caused delay for another contractor, the site diary should record these details. Failing to record these details means that it is harder, if not near impossible, for parties to establish that there was in fact a causal link and adverse effect.

How does White Constructions impact a project?

White Constructions shows the importance of proper project documentation. Most importantly, the site diary, or similar contemporaneous document, should be the primary record of the specific of what is happening on site and how specific events affect different contractors. Proper record keeping, while it may be administratively burdensome, allows the Court to analyse and determine the proper entitlements of the parties if the project ever comes into dispute. While other evidence can be adduced in pursuit of proving delay, it runs the risk of being generalist in nature and not enough to prove the causal link of the delays.

The lessons learned in White Constructions may also have some application in respect of other delay related mechanisms under construction contracts. For example, a comprehensive site diary would also be useful in determining any claim for an EOT claim. However, it is important to note that these types of claims are largely determined by the contract and its processes for determining what is in fact an EOT. Nevertheless, contemporaneous records of what has happened and how this has affected the project is useful in establishing a claim by a party as to their entitlements.
Another important point that comes from White Constructions is ensuring experts are given the proper lay evidence to ensure that they can properly opine on the project. While it does not displace the role of lay evidence such as site diaries, it can assist in assisting the Court in considering and making appropriate decisions on what the parties are entitled to.

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’s in a name?: The Supreme Court Reviews ambiguity in SoPA Payment Claims

Those who are familiar with the Building and Construction Industry Security of Payment Act 1999 (‘the Act’) will likely be aware that the provisions it contains are quite strict, and can leave parties out in the cold when they fail to comply with what are seemingly administrative oversights.

However, the overarching purpose of the Act is ultimately to keep money flowing through the construction system, aimed at ensuring those who perform building and construction works, or supply goods and services to construction projects are able to be paid.

The Supreme Court of New South Wales, in the recent decision of decision Modog Pty Ltd v ZS Constructions (Queenscliff) Pty Ltd [2019] NSWSC 1743 reminded parties of this fact when asked to turn its mind to issues of ambiguity in payment claims and whether a party could be allowed to have an adjudication determination quashed on the basis of technicalities.

The Facts

The facts of the case were reasonably clear and did not form a substantial component of the dispute between the parties. In September 2016, Modog Pty Ltd (‘Modog’) entered into a design and construct head contract with Wyndora 36 Pty Ltd (‘Wyndora’) for the development of senior living apartments at a property located along Wyndora Avenue in Freshwater. Modog then entered a sub-contract with ZS Constructions (Queenscliff) Pty Limited (ZS Queenscliff) for the demolition of the existing structure and the construction of the new seniors living complex, including apartments, basement parking and associated site works (‘the Sub-Contract’).

In March 2018, the Sub-contract was varied to engage ZS Queenscliff to provide Construction Management and procurement services, for which ZS Queenscliff would receive a project manager’s allowance, a contract administrator’s allowance and payments for subcontractors and suppliers to be made at the end of each month.

ZS Queenscliff was part of a wider group of entities, which also included ZS Constructions (Australia) Pty Ltd (‘ZS Australia’) and Zaarour Investments Pty Ltd had been engaged as the project manager for the project. Mr Christopher Zaarour was employed by ZS Queenscliff, was the director of ZS Constructions Pty Ltd and was the primary contact with Modog for the duration of the project.

The further sub-contracts on the project were administered by ZS Queenscliff, however invoices from sub-contractors had historically been issued to a mixture of Modog, Wyndora and ZS Australia, as opposed to ZS Queenscliff. During the course of the project, ZS Queenscliff and Modog adopted a progress payments process in which Mr Zaarour would, on behalf of ZS Queenscliff, prepare and email a payment summary sheet listing all amounts due for procurement and management services, as well as materials acquired, and work completed by trade contractors.

On 29 August 2019, Modog issued a Show Cause Notice to ZS Queenscliff and terminated the Sub-contract on 13 September 2019.

The Payment Claim and Adjudication

On 11 September 2019, ZS Queenscliff served a payment claim on Modog which was comprised of seven emails, from Mr Zaarour using an email signature from Zaarour Sleiman and containing a reference to ZS Australia in fine print at the bottom of the email.

The emails attached supporting invoices from suppliers, and followed the process adopted in earlier progress payments, where sub-contractors and suppliers had addressed their invoices to a mixture of the entities involved with the project, and not to ZS Queenscliff, who were issuing the payment claim.

The payment claim served on Modog was, as highlighted by the Court, unclear in the following respects:

  • It did not specifically assert that it was a progress payment claim under the Act;
  • It did not specify the reference date or refer to the clause within the contract upon which the progress payment was based;
  • It failed to ask Modog to pay ZS Queenscliff;
  • It did not include a total for the sum claimed, only determinable by a thorough review of the claims

Modog, in turn responded to the payment claim with payment schedules which certified the amount payable in respect of the Claim was nil.

The matter proceeded to an adjudication, where, on 23 October 2019, the adjudicator found in favour of ZS Queenscliff in the sum of $89,111.89 (GST incl.).

Modog challenged the decision of the adjudicator before the Supreme Court of Sydney, seeking orders that the Adjudication Determination of be deemed void, that the determination be quashed, and ancillary relief.

The Disputed Issues

At the hearing, Modog challenged the decision of the adjudicator on 3 primary grounds:

  • Whether the 11 September 2019 emails constituted a payment claim within the meaning of s13(1) of the Act;
  • If the emails did constitute a payment claim, whether the claim was sent by ZS Queenscliff as a person who was entitled to seek a determination for the purposes of s17 of the Act; and
  • Whether the Adjudicator has committed a jurisdictional error by allowing multiple payment claims in respect of a single reference date?

The Arguments, Decision and Reasoning

Issue 1: Was there a Payment Claim:

The argument advanced by Modog was effectively, ZS Queenscliff had not submitted a valid payment claim as they did not specifically demand payment from Modog (i.e.: did not say, Modog must pay ZS Queenscliff the sum of $X.). Modog relied on the fact that the invoices provided in support of the payment claim, were addressed to various entities, not ZS Queenscliff, and that ZS Queenscliff could not establish they were actually entitled to the money claimed for.

Modog argued that ZS Queenscliff had indicated invoices would be sent at a later time, which Modog was to pay as directed and that, pursuant to the Court’s decision in Quickway Constructions Pty Ltd v Electrical Energy Pty Ltd, ZS Queenscliff had not served a payment claim pursuant to clause 13(1) of the Act.

The counter argument raised by ZS Queenscliff relied upon the case of Icon Co NSW Pty Ltd v Australia Avenue Developments Pty Ltd [2018] to support their position that Modog had simply misunderstood the payment claim, and that this could not be a basis for quashing the adjudicator’s decision. ZS Queenscliff argued the fact that the invoices were addressed to other parties did not invalidate the payment claim as they were simply disbursements to be paid to suppliers.

Ultimately, the Court favoured the position raised by ZS Queenscliff, noting there is nothing within the Act that requires a payment claim to state the total of the sum claimed. The Court stated and that even if the invoices in support of the payment did require Modog to direct payment elsewhere, as long as ZS Queenscliff had an entitlement to the sum under the contract, this did not invalidate the payment claim itself.

Issue 2: Was the Payment Claim Sent by ZS Queenscliff?

Modog then raised the issue that, as the 11 September 2019 email enclosing the payment claim was sent by Mr. Zaarour, using an email signature that did not belong to ZS Queenscliff, and the only legal entity named in the email was ZS Australia, the payment claim had not been served by the appropriate entity for the purposes of s17 of the Act.

The counter argument raised by ZS Queenscliff was that these errors were irrelevant in light of the fact that the previous correspondence between the parties had been exchanged in much the same way, including when detailing the terms of the caries contract agreements, and the point was not taken at the contract negotiation stage.

The Court ultimately agreed again with ZS Queenscliff, making the point that not was not actually disputed that ZS Queenscliff was entitled to make the payment claim and made the determination that the email payment claim had simply been sent by Mr Zaarrour in his capacity as the project manager, on behalf of ZS Queenscliff.

Issue 3: Was there an issue with multiple emails being used to comprise the payment claim?

Finally, Modog sought to raise the point that multiple invoices had been served on them in the emails from ZS Queenscliff and that it was not open for ZS Queenscliff to seek to have all invoices adjudicated.

Relying on the decision of the court in Rail Corporations of NSW v Nebax Constructions [2012] NSWSC6, this point ultimately failed as well, on the basis that, when viewed in the context of the previous conduct between the parties, and the nature of the invoices supplied, Modog had been more accurately provided with one payment claim, and a number of invoices in support of the claim.

What does this decision mean?

This decision serves as a timely reminder to parties that the Building and Construction Industry Security of Payment Act 1999 (‘the Act’) is intended to allow money to flow through to sub-contractors. Parties should be mindful of this purpose when considering whether to attempt to argue a payment claim on the basis of a minor technicality or ambiguity.

If you or someone you know wants more information or needs help or advice in relation to NSW’s security of payment legislation (or any other state’s or territory’s equivalent), please contact us on (02) 9248 3450 or email info@bradburylegal.com.au.

See more! The superintendent and the principal

To those working at building sites, the term “superintendent” may seem as familiar and self-explanatory as “extension of time” or “practical completion”.

However, when disputes arise fine distinctions become important. Even experienced builders, just like experienced judges, have trouble working out what the superintendent is required to do in contentious times.

This is because the superintendent has multiple duties to different parties. They have the difficult job of navigating conflicting interests, and this becomes much harder when the relationship between the principal and contractor has deteriorated.

Although the precise duties of a superintendent will always depend on the terms of the contract, we will describe in general terms some obligations that participants in a building project must be aware of. We will also take a real-life case study to illustrate some of these points.

The role

Sometimes called “contract administrator” or “architect”, the superintendent’s precise role will vary as it is largely determined by the terms of the contract between the principal and the contractor. The parties may agree by contract to restrict or widen the superintendent’s functions, and courts will generally allow this.

However, there are a number of general commonalities to this role across different projects. In most cases, the superintendent has a dual role or function:

  1. On the one hand, the superintendent will often be the agent of the principal, and will perform functions on behalf of the principal such as issuing directions to the contractor, varying the scope, of works, making approvals, or receiving notices;
  2. On the other hand, the superintendent will often be responsible for certifying, assessing and valuing items under the contract, including progress claims, extension of time claims, liquidated damages, and practical completion.

The principal is required to ensure that for the second set of functions above, the superintendent act “honestly and fairly” (or otherwise, “reasonably and in good faith”).

Often this is an obligation to exercise impartial and independent judgment, and to reach a decision without taking improper considerations into account. They should afford procedural fairness to both parties, giving notice of the issues it is considering and allowing both parties to communicate to them their submissions.

In general, for these second set of functions, the interests of not only the Principal, but also those of the Contractor, must be considered. All too often, superintendents fail to understand their obligations of independence and this triggers court proceedings.

In practice, this dual role can be complicated. Superintendents are generally appointed by the principal. They are very often either a part of a firm consulting to the principal, or they are an employee of the principal. Even if there is no pressure exerted by the principal, they are paid by the principal. Exercising their judgment impartially in this context can be very challenging.

A superintendent is not a party to the contract. It is unlikely that they will themselves be the subject of court proceedings. However, their decisions may give rise to disputes as between the principal and contractor.

Case Study

The New South Wales Court of Appeal has given some guidance for what is considered appropriate action by a superintendent under a construction contract, in the case Peninsula Balmain Pty Ltd v Abigroup Contractors Pty Ltd [2002] NSWCA 211.

Peninsula and Abigroup entered into an AS2124 building contract. Abigroup sought payment of a progress claim. The following month, Peninsula issued a notice to Abigroup requiring Abigroup to show cause that a contractual right to terminate should not be exercised, and cross-claimed for liquidated damages under the contract.

In response, Abigroup moved to terminate the contract, claiming that Peninsula had breached the then Trade Practices Act (which has since integrated into the broader Australian Consumer Law), for failing to disclose an agency agreement for design and construction projects between Peninsula and the superintendent.

The Court considered the whether Peninsula contravened the Trade Practices Act for failing to disclose to Abigroup the agency agreement with the superintendent?

On appeal, Hodgson JA held:

“the superintendent is the owner’s agent in all matters only in a very loose sense, and that, when exercising certifying functions in respect of which the superintendent must act honestly and impartially, the superintendent is not acting as the owner’s agent, in the strict legal sense.”

The Court concluded that the superintendent is to exercise their power in the interests of both parties and, is to act honestly and impartially and not as an agent of the owner in undertaking certifying functions such as assessments of variations, delays and progress claims.

There was also an argument that the superintendent should have but failed to exercise its power to award an extension of time. It was common ground that Peninsula Balmain had caused delay, but that Abigroup had not applied for the extension of time or followed the proper procedure. However, the extension of time clause included a paragraph that read: “Notwithstanding that the Contractor is not entitled to an extension of time the Superintendent may at any time and from time to time before the issue of the Final Certificate by notice in writing to the Contractor extend the time for Practical Completion for any reason.”

Hodgson JA found that, even though Abigroup had not applied for the extension of time, “this power is one capable of being exercised in the interests both of the owner and the builder, and in my opinion the Superintendent is obliged to act honestly and impartially in deciding whether to exercise this power”. In the facts of the case, the finding was that if the superintendent had acted fairly and impartially, they would have awarded the extension of time. The date for practical completion was extended, and liquidated damages were reduced.

This ruling was dependent on the particular extension of time clause of the case, and the facts of the dispute. However, it powerfully reinforces the point that even though the superintendent is the agent of the principal, they are obliged to act honestly and fairly in discharging certain functions, unless the contract says otherwise.

Conclusion:

In conclusion, the role of a superintendent is very demanding and requires a high level of understanding of contract law, the responsibilities, the specifics of the project, and a high skill of identifying and managing conflicts. If you have any queries about your obligations under a construction contract, please contact us on +61 2 9248 3450 or email info@bradburylegal.com.au

 

 

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.