10 things that residential builders need to get right

1. Contracts – make sure they comply with the requirements under the Home Building Act (HBA)

The contracts should:

• comply with the contract requirements under the HBA if the builder is carrying out work with a value of $5,000 (including GST) and above, for example the contracts should be in writing, provide a sufficient description of the work etc. Its best to use the standard forms as they contain all of the required information;

• not just be a quote or a purchase order as they do not comply with the HBA requirements and the builder will be in breach of the HBA and unable to rely on the quote or purchase order to get paid when contracting directly with a homeowner. Of course, there are exceptions to these requirements in the case of any emergency work concerning a hazard or a safety issue;

• ensure that builders don’t exceed the maximum deposits and maximum progress payments;

• ensure that the works are clearly defined in terms of scope and price and that any ambiguity is resolved before the contract is signed; and

• make it clear that the contract price can change for variations, PC and provisional sums etc.

2. Licencing – don’t carry out any residential building work that the builder is not licenced to do

Builders must ensure:

• that all of its sub-contractors that carry out specialist work (and any sub-contractors that are required to be licenced) such as its water proofers, plumbers and electricians are appropriately licenced;

• that the entity which has entered into the contract with the homeowner is licenced to carry out the work. It is not good enough for a builder to engage a licenced sub-contractor to carry out the work, the entity entering into the contract has to be licenced to carry out the work; and

• that there are no restrictions on the licence if the builder is contracting directly with homeowners. We have seen too many times to count, instances where the entity in the contract does not hold an open licence to carry out the work and has a condition on the licence which says that the entity is not licenced to carry out works for which HBCF insurance is required, that is, work with a value of over $20,000.

3. Insurance – no insurance = big problems

Remember that:

• the entity which is entering into the contract must have its insurance in place including insurance under the Home Building Compensation Fund (HBCF) if the value of the work is $20,000 or over;

• it is a breach of the HBA to take any money from a homeowner (including a deposit) when a certificate of HBCF has not been provided to the homeowner; and

• if HBCF insurance is not in place, the builder is not entitled to make any claims for payment even on a quantum meruit basis, unless the Court or Tribunal considers it “just and equitable” for the builder to recover money in the absence of insurance. Also, if there are defects in the work carried out, it would be much harder to satisfy a Court or Tribunal that the builder should be paid and also, harder to obtain retrospective insurance.

4. Increases in the contract price/variations/PC and provisional sums

• ensure that the builder complies with the variation procedure in the contract.

All variations should be approved in writing by the homeowner including not only the approval to carry out the variation itself but also approval of the cost of the variation. No variations should commence until written approval has been obtained from the homeowner. By taking this simple step will avoid a lot of headaches down the track in terms of getting paid; and

• All PC and provisional sums should be based on firm estimates or quotations to limit any surprise and of course disputes.

5. Quality of sub-contractors – find the good ones

• find good quality sub-contractors and pay them well.

Most defect claims will come down to the quality of the work carried out by the builder’s sub-contractors and so it’s a worthwhile investment to have quality trades carrying out the works.

• good quality water proofers are in hot demand carrying out rectification work and it’s easy to see why given that most defect claims include water ingress issues caused by failed waterproofing in wet areas, balconies and planter boxes [we could have a whole section dedicated to why planter boxes may look good but are a nightmare for builders in terms of defect claims but that’s for another day].

6. Practical Completion – what does it mean?

• clearly define what practical completion is as this can be a point of contention between builders and homeowners as homeowners may be under a misapprehension of what practical completion actually means; and

• as a practical suggestion, ensure that the works are practically complete and all minor defects are rectified before the homeowner inspects as this will help to avoid the common dispute about when PC has been reached and the homeowner withholding the final progress claim because they are unhappy with the works. Remember the homeowner is buying “the dream” and expects that the house will be ready to occupy. It is better in the long run, in terms of cost and time, to try and meet that expectation if possible.

7. OC – clearly specify the builder’s obligations in relation to obtaining the OC?

• clearly specify in the contract what the builder’s obligations are in relation to providing the certificates and documents required in order to obtain the OC (which is usually the homeowner’s responsibility to obtain from Council or a private certifier) and also stipulate whether the builder has an ongoing obligation to assist the homeowner in obtaining the OC.

8. Claims by the builder – have the paperwork in order

• if the builder is making claims for the payment of money due under the contract, ensure that the contractual provisions are complied with concerning the builder’s entitlement to those moneys and that all supporting documentation is provided; and

• ensure that progress claims are not issued prematurely when the work the subject of the claim has not been completed (as this could be deemed to be a breach of the contract and a breach of the HBA).

9. Claims by homeowner – defects/incomplete work/negligence

• use the defences available under the HBA if the builder has been instructed to carry out works by the homeowner or a professional such as an architect or engineer, contrary to the builder’s advice. The builder must put any objection to carrying out any such works in writing to the homeowner;

• use every opportunity to rectify defects to limit the issues in dispute. There is no strategic advantage in delaying rectification in exchange for the payment of money as this will only end up in litigation as builders are liable to fix defects regardless of whether payment has been made; and

• any items not agreed can be resolved with the assistance of NSW Fair Trading, mediation or proceeding to a Court of Tribunal to determine as a last resort.

10. Keep up to date with the changes in legislation

By way of example, some of the recent changes (some of which apply to class 2 buildings only) include:

• From 10 June 2020, owners with defects will benefit from the statutory duty of care that applies to new buildings, and existing buildings where an economic loss first became apparent in the previous 10 years;

• From 1 September 2020, the NSW Building Commissioner will be able to stop an occupation certificate from being issued, order developers to rectify defective buildings, and issue stop work orders;

• From 1 March 2021, residential builders can rely upon the Building and Construction Industry Security of Payment Act (SOPA) and issue payment claims against homeowners. See our attached article here; and
• From 1 July 2021, there will be compulsory registration for practitioners involved in design and building work, including professional engineers

If you would like to discuss any of the above, please contact us.

One small stroke of a pen, one giant leap for legal procedure

On 22 April 2020, the NSW government enacted the Electronic Transactions Amendment (COVID-19 Witnessing of Documents) Regulation 2020 (COVID-19 Regulation), which can found here.

Anyone who under NSW law must witness signatures for the documents below, take note: the signature may now be witnessed by audio visual link.

The COVID-19 Regulation affects witnesses of those signing documents, including:

  • a will;
  • a power of attorney or an enduring power of attorney;
  • a deed or agreement;
  • an enduring guardianship appointment;
  • an affidavit including annexures or exhibits; and
  • statutory declarations.

The regulations commenced on 22 April 2020, and this brave new world is expected to last for a minimum of six months.

The essential steps are as follows:

  1. The witness and the person making the statement must have a real time “audio visual link”; and
  2. The witness must observe the person signing the document in real time; and
  3. The witness must themselves sign the document as soon as practicable after the link; and
  4. The witness must endorse the document with a statement about the method of witnessing the signature, and state that it was witnessed in accordance with the Electronic Transactions Amendment (COVID-19 Witnessing of Documents) Regulation 2020.

The link must be audio and visual, and it must be “continuous and contemporaneous”. Video conferencing is the prime example.

A witness does not need to sign the same hard copy document. They can either (a) sign a separate counterpart, or (b) sign a scanned version of the document that they witnessed being signed. Whatever they choose, they would do well to carefully store all original copies of signed documents, and prepare a file note of the experience.

Readers should be aware that the COVID-19 Regulation does not change what actually needs to be signed and how it is to be signed. Certain documents, such as wills, have very particular requirements that still must be followed.

Nevertheless, another face-to-face process has been put on pause to keep society safe.

 

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.

Construction Disputes: What’s Really in Your Best Interest?

Late last month, the Court of Appeal, in the case of Duffy Kennedy Pty Ltd v Galileo Miranda Nominee Pty Ltd [2020] NSWCA 25 reminded parties that when it comes to building and construction project disputes, it is imperative that parties take a commercial approach to dispute resolution. Parties should ensure their actions are proportionate to the circumstances at hand and that emotions are, as much as possible, checked at the door.

This case effectively, revolved around the decision of a party to suspend works which were almost complete, over a $177.40 unpaid interest claim. We take a look below at the circumstances, which are not themselves exceptionally uncommon, and how it resulted in almost 18 months of dispute resolution and litigation.

The Parties and the Project

On 18 April 2017, Duffy Kennedy Pty Ltd (Duffy Kennedy) entered into a Contract with Galileo Miranda Nominee Pty Ltd (Galileo) to Design and Construct, the Palisade, a residential apartment block in Sydney’s Sutherland Shire effectively consisting of two unit blocks, a car park and a pool.

The Contract was for a lump sum of just under $66 million and specified the date for Practical Completion as 18 February 2019.

The project was administered by Resource Co-Ordination Partnership Pty Ltd (RCP), being the Principal’s Representative. In the usual way, RCP’s role in the project was to decide upon, and certify contract elements such as extensions of time and relevantly, progress payment entitlements in accordance with the Building and Construction Industry Security of Payments Act 199 (NSW) (SoPA).

The Principal Certifying Authority, responsible for issuing certificates under the Environmental Planning and Assessment Act 1979 (NSW) was McKenzie Group Consulting (NSW) Pty Ltd (McKenzie).

The Facts

As is the case in many projects, the Practical Completion date was not met. Duffy Kennedy alleged that, as at the end of February 2019, about ‘99.9%’ of the works, by reference to the Contract sum, were complete, with the value of the remaining works to be about $56,000. In order to obtain the Occupation Certificate, McKenzie required:

  • a ‘Penetration Schedule’ identifying each location within the project where pipes, wires or other services ‘penetrated’ structural walls, ceilings or floors of the building (of which there were hundreds); and
  • The increase in the heights of the balustrades on four balconies to meet safety requirements of the Building Code of Australia.

Progress Claim

In this context, on 26 February 2019 Duffy Kennedy issued a Progress Claim to Galileo, claiming $1,010,161.72.

RCP issued a Payment Certificate and Payment Schedule in response on 12 March 2019, assessing the sum due was $293,984.42 (plus GST).

The parties did not dispute that payment was due on 19 March 2019. Galileo initiated an electronic payment on 22 March 2019, for the certified amount, which was received on 25 March 2019.

Despite s11(2) of the SoPA, there was no provision within the amount paid for interest. The outstanding interest, had any been owed, was $177.40.

Duffy Kennedy Notices to Suspend Works

On the basis that Galileo failed to include interest accounting for the late payment, Duffy Kennedy issued two notices to Galileo on 25 March 2019. Effectively, both sought to provide notice of Duffy Kennedy’s intention to suspend works.

The first notice was issued pursuant to s16(2)(b) of the SoPA. The second notice was issued under the terms of the Contract, which purportedly gave Duffy Kennedy the right to suspend works if the Principal defaulted in making any payment under the Contract.

Show Cause and Take-Out Notices

In response, on 29 March 2019, Galileo issued a Show Cause notice requiring Duffy Kennedy to show reasonable cause why Galileo should not exercise their contractual rights to terminate the contract or take the works out of the Contractor’s hands. Relevantly, the Show Cause notice was issued on Galileo letterhead and signed by both a representative of Galileo and of RCP.

Galileo and Duffy Kennedy held ‘without prejudice’ discussions to attempt to resolve the issues disputed between them, but were unable to reach an agreement.

The response to the Show Cause notice issued by Duffy Kennedy was deemed unsatisfactory by Galileo. A Take Out Notice was issued to Duffy Kennedy on 29 April 2019 by Galileo.

The Take Out Notice, pursuant to the Contract, required Duffy Kennedy to leave the site. The key contention in this respect was the completion of the ‘Penetration Schedule’ described above.

Return of Security

In response to the Take Out notices, Duffy Kennedy disputed the validity of the Take Out Notice, asserted the Take Out Notice was a repudiation of the Contract.

Duffy Kennedy argued that, as Galileo had repudiated the Contract, Galileo were required to return the bonds which has been provided as security for Duffy Kennedy’s obligations under the Contract.

The Supreme Court Proceedings

The Supreme Court Proceedings were initially commenced by Galileo, who sought to affirm the Contract and compel Duffy Kennedy to perform their obligations under the Contract following the Take Out Notice’. Duffy Kennedy Cross-Claimed and sought orders that Duffy Kennedy return the Security Bonds.

Decision

The first issue in dispute between was whether or not Duffy Kennedy had been entitled to suspend the works, for the failure of Galileo to pay $177.40 in interest on the ‘Certified Amount’ in the Payment Schedule. Failing this, did Duffy Kennedy have ‘reasonable cause’ to suspend works, acting in good faith on the basis that payment of the interest was not forthcoming.

The answer in the first instance was, put simply, no.

The decision highlighted that, in circumstances where a payment schedule has been issued, the SoPA requires payment of the ‘scheduled amount’. The Scheduled amount, in the absence of an adjudication determination or Court order, does not automatically include interest which is payable under s11(2) of the SoPA.

The Court went on to establish that in commercial contracts between parties, a business-like approach must be taken to the behaviour of the parties and to the construction of the parties’ rights and obligations. The Court made specific reference to the fact that the decision to suspend the works on the basis of a failure to pay $177.40 was, on an objective assessment of the circumstances disproportionate and therefore unreasonable.

The second issue was whether the Take Out Notice had been validly issued by RCP and whether Galileo had been entitled to retain the security to satisfy any costs incurred by Galileo in engaging other Contractors to Complete the works.

Among other considerations, the Court determined the Notices on Galileo letterhead could be validly issued by “RCP’. By way of the relevant RCP representative having reviewed and signed the documents, RCP had indicated their consent to the document’s contents, and have discharged their duties to act in good faith when making determinations on contractual issues.

The Court further found that parties conducting settlement discussions on a ‘without prejudice’ basis, are not precluded from using information disclosed within these meetings to inform commercial and contractual decisions.

The Appeal

Duffy Kennedy challenged the above decision, on the grounds that Judge in the first instance erred on the following issues:

  • Duffy Kennedy were entitled to suspend the works pursuant to the SoPA;
  • Duffy Kennedy had reasonable cause to suspend the works under the Contract;
  • Galileo had been too involved in the issue of the Show Cause Notice, and the Show Cause Notice was not valid; and
  • Galileo had been too involved in the issue of the Take Out Notice; and the Take Out Notice was not valid.

By way of a unanimous decision of the Court of Appeal, Duffy Kennedy failed on all grounds and the reasoning of the Supreme Court in the first instance was largely affirmed.

How Does this Affect Building and Construction Contracts?

Whilst it is not uncommon for building and construction projects to go awry, and for parties to get upset with one another, it is imperative that parties act with a level head and with commerciality, as opposed to emotions, in mind. Where possible, legal advice should be obtained early on, which can add a level of impartiality to dispute resolution discussions.

Parties should also take extra care to bear in mind that, when undertaking “without prejudice” settlement discussions, the other party may still able to use what you have said to inform their opinion or their next steps.

In this case, the decision to suspend works over unpaid interest claimed in the sum of $177.40, ultimately gave rise to the retention of security and a right to terminate the Contract.

The case highlights the fact that parties should take extra care when negotiating their rights in the Contract and should always ensure that the actions taken when exercising rights under contracts are proportionate and reasonable to the circumstances.

The above discussion is not intended to be legal advice, and readers should bear in mind that every case is different. If you or someone you know wants more information or needs help or advice, please contact us on 02 9248 3450 or email info@bradburylegal.com.au.