Tag Archive for: building and construction industry

Building professionals beware – statutory duty under the DBP Act is not limited to class 2 buildings or the contracting builder

The recent decision of the NSW Supreme Court in Goodwin Street Developments Pty Ltd atf Jesmond Unit Trust v DSD Builders Pty Ltd (in liq) clarifies the scope of the statutory duty found in Part 4 of the Design and Building Practitioner’s Act 2020 (NSW) (DBP Act). Section 37(1) of the DBP Act provides that a person who carries out construction work has a duty to exercise reasonable care to avoid economic loss caused by defects–

  • in or related to a building for which the work is done, and
  • arising from construction work.

Justice Stevenson explains that the duty extends not only to class 2 and mixed-use buildings (typically multi-story residential/mixed-use apartment buildings) but to all building types.

Facts & issues

The plaintiff, Goodwin Street Developments Pty Ltd (Goodwin), was the owner of land located close to the University of Newcastle. In July 2017, Goodwin entered a building contract with the first defendant, DSD Builders Pty Ltd (DSD), for the construction of three residential boarding houses on the land. Goodwin contended that the second defendant, Mr Roberts, negotiated and administered the building contract and controlled the carrying out of construction work on the site on behalf of DSD.[1]

In early 2018, disputes arose between Goodwin and DSD in relation to defects and delays in the building works. In March 2018, Goodwin discovered that someone (found by Justice Stevenson to be Mr Roberts) had maliciously damaged the buildings and works at the site – including by removing materials, fittings and fixtures.[2]

Goodwin terminated the building contract and commenced proceedings against DSD and Mr Roberts. DSD became insolvent in 2021. Justice Stevenson’s judgment concerns claims brought by Goodwin against Mr Roberts for:

  • trespass, in respect of the malicious damage to the site, and
  • breach of the statutory duty owed under section 37 of the DBP Act, in respect of the pre-existing defects in the works.

In relation to Goodwin’s claim for breach of the statutory duty, Justice Stevenson considered whether:

  • the statutory duty of care could arise in relation to the construction of a boarding house;
  • Mr Roberts did “construction work” for the purpose of section 36(1) of the DBP Act; and
  • Mr Roberts breached the requisite standard of care.

Does the statutory duty of care arise in relation to a boarding house?

Mr Roberts argued that he did not owe a duty of care to Goodwin under section 37 because the construction of a boarding house did not fall within the definition of “construction work” in the DBP Act.

The definition of “construction work” at section 36(1) of the DBP Act includes (a) building work, […] and (d) supervising, coordinating, project managing or otherwise having substantive control over the carrying out of building work. There is a tension between the definitions of building work under section 4 and 36 of the DBP Act.

On the one hand, section 4(1) provides that “for the purposes of this Act” building work only includes buildings of a class or type prescribed by the regulations – that is, class 2 and mixed-use buildings.[3] On the other hand, section 36(1) provides that in Part 4, “building” has the same meaning as it has in the Environmental Planning and Assessment Act 1979 (NSW) (EPAA). The EPPA of “building” is much broader and extends to any structure or part of a structure (with certain exceptions such as manufactured homes and moveable dwellings).[4] It is worth noting that section 36(5) of the DBP Act states that the regulations may exclude work from being construction work for the purposes of Part 4.

Justice Stevenson resolved this tension by finding that the definition of “building work” in section 4 of the DBP Act (and in the regulations) has no application to the statutory duty at Part 4 of the DBP Act.[5] His Honour reached this conclusion for two main reasons:

  • It appears from parliamentary transcripts that the legislature intended for the duty of care to provide “broad coverage” for “all buildings”.[6]
  • Part 4 of the DBP Act commenced in June 2020 with retrospective operation, but the regulations, along with Parts 2, 3 and 5 to 9 of the DBP Act, only commenced in July 2021 and have no retrospective operation. Justice Stevenson therefore held that the statutory regime could only operate coherently if the section 4 definition of “building work” is limited to the parts of the DBP Act commencing in July 2021 and does not apply to Part 4.[7]

Following this reasoning, the boarding house is a “building” on which “construction work” was done under section 36(1). The boarding house therefore fell within the scope of the statutory duty in section 37(1).[8]

Did Mr Roberts do “construction work” on the boarding house?

Justice Stevenson held that Mr Roberts had clearly done “construction work” because he had been engaged in project management and supervision of DSD’s works within the meaning of section 36(1)(d) of the DBP Act. Mr Roberts’ supervision of the works included introducing himself as the builder and repeatedly assuring Goodwin of the progress of the works and status of defects.[9]

Did Mr Roberts breach the requisite standard of care?

There were 38 defects in the construction of the boarding house. Mr Roberts gave repeated written assurances that defects would be “all fixed” and that Goodwin should not worry.[10] Justice Stevenson held that breach of the statutory duty was established because Mr Roberts was the project manager and supervisor of the construction works, gave these repeated assurances, but failed to correct the defects.[11]

Given that Goodwin had successfully established the existence of duty, breach and causation, Mr Roberts was liable for damages reflecting the cost of rectifying the defects.[12]

Justice Stevenson’s explicit discussion of breach is consistent with his Honour’s previous remarks in The Owners – Strata Plan No. 87060 v Loulach Developments Pty Ltd (No 2).[13] In that case, his Honour explained that although claimants can rely on section 37 of the DBP Act as a shortcut to establishing duty, they are still required to adequately establish that the duty has been breached. Our previous article, available here, discusses this case in further detail.

Key takeaways

Building professionals beware: the decision in Goodwin Street Developments Pty Ltd atf Jesmond Unit Trust v DSD Builders Pty Ltd (in liq) means that you may be liable in negligence for a failure to exercise reasonable care in construction works on virtually all buildings – not just class 2 or mixed-use buildings.  Further, that liability is not necessarily limited to the contracting entity (usually a company) that is engaged as the builder.

Bradbury Legal is experienced both in assisting owners with potential claims under the DBP Act, and in acting on behalf of building professionals to defend these claims. For specialist and tailored advice, please contact a member of our team by phone on (02) 9030 7400 or by email at info@bradburylegal.com.au.

 

 

 

 

[1] Goodwin Street Developments Pty Ltd atf Jesmond Unit Trust v DSD Builders Pty Ltd (in liq) [2022] NSWSC 624, [1]–[5].

[2] Goodwin Street Developments Pty Ltd atf Jesmond Unit Trust v DSD Builders Pty Ltd (in liq) [2022] NSWSC 624, [6]–[10].

[3] Design and Building Practitioner’s Regulation 2021 (NSW) s 12.

[4] Environmental Planning and Assessment Act 1979 (NSW) s 1.4.

[5] Goodwin Street Developments Pty Ltd atf Jesmond Unit Trust v DSD Builders Pty Ltd (in liq) [2022] NSWSC 624, [11].

[6] Goodwin Street Developments Pty Ltd atf Jesmond Unit Trust v DSD Builders Pty Ltd (in liq) [2022] NSWSC 624, [106].

[7] Goodwin Street Developments Pty Ltd atf Jesmond Unit Trust v DSD Builders Pty Ltd (in liq) [2022] NSWSC 624, [113].

[8] Goodwin Street Developments Pty Ltd atf Jesmond Unit Trust v DSD Builders Pty Ltd (in liq) [2022] NSWSC 624, [118]–[120].

[9] Goodwin Street Developments Pty Ltd atf Jesmond Unit Trust v DSD Builders Pty Ltd (in liq) [2022] NSWSC 624, [133]–[138].

[10] Goodwin Street Developments Pty Ltd atf Jesmond Unit Trust v DSD Builders Pty Ltd (in liq) [2022] NSWSC 624, [142]–[144].

[11] Goodwin Street Developments Pty Ltd atf Jesmond Unit Trust v DSD Builders Pty Ltd (in liq) [2022] NSWSC 624, [145].

[12] Goodwin Street Developments Pty Ltd atf Jesmond Unit Trust v DSD Builders Pty Ltd (in liq) [2022] NSWSC 624, [148].

[13] The Owners – Strata Plan No. 87060 v Loulach Developments Pty Ltd (No 2) [2021] NSWSC 1068, [35]–[36].

How security of payment mistakes can turn the tables in a negotiation

We recently assisted a contractor client on a major infrastructure project in Queensland who was engaged in the early stages of dispute with the principal.  The contractor claimed to be entitled to significant additional time and costs under the contract, yet was facing a principal who:

  1. was generally unwilling to engage and properly consider the contractor’s claims; and
  2. had routinely failed to correctly apply contractual provisions.

Some of our client’s claims had been under consideration or assessment for several months and when decisions were ultimately made, reasons for those decisions were scarce or demonstrated the principal’s failure to properly consider the claims and apply the contract.

Strategy

We developed a without prejudice paper for the contractor to submit to the principal.  This paper set out in detail the contractual and evidentiary basis for the contractor’s claims and included the provision of expert reports where necessary.  The claims were ultimately put to the principal by contractual notices and open letters, which were then being discussed and negotiated between the parties.

One of the strategies we recommended was submitting these claims for assessment as part of a payment claim made under the Building Industry Fairness (Security of Payment) Act 2017 (Qld) (BIFA).  On previous occasions, the principal had failed to state or properly explain why the amount proposed to be paid in relation to certain claims was less, including their reasons for withholding any payment, as required by section 69(c) of the BIFA.

Accordingly, our view was that the principal may again slip-up by giving inadequate reasons in respect of certain claims, meaning that the contractor would be in a good position to run an adjudication.  This is because section 82(4) of the BIFA would operate to prohibit the principal from including reasons for withholding in any adjudication response that were not included in the payment schedule.

We assisted the contractor in formulating and submitting the payment claim, which claimed the significant additional costs that had been put to the principal via the without prejudice paper and contractual notices.

The principal’s mistake

As it transpired, the principal failed to serve a payment schedule within the time required under the BIFA.  The principal was only one business day late.  Nevertheless, this meant that the principal would become liable to pay the full claimed amount on the due date for payment under the BIFA[1].

The scheduled amount given by the principal was markedly less than the claimed amount.  While the principal had given some reasons in respect of some additional costs claims, the payment schedule ultimately served (and the arguments made within it) could not be relied upon by the principal for the purposes of the BIFA.

Our client was free to recover the full claimed amount as a debt due and owing in the Supreme Court of Queensland[2].  The principal would not be entitled to bring any counterclaim in those proceedings, nor raise any contractual defence to the action[3].

Letter of demand and engaging with the principal

We drafted an open letter of demand from the contractor to the principal, highlighting the mistake and advising that if payment of the full claimed amount was not received on or before the due date for payment under the BIFA, the contractor would take necessary steps to recover[4].

The next letter we assisted with was a without prejudice letter which set out why the principal’s position as put in the payment schedule was incorrect and demonstrated a failure to properly apply the contract.  This is important because the principal would be liable to pay the full claimed amount under the BIFA, however the BIFA provides the parties with interim rights only.  It would be open to the principal in future to exercise contractual rights to engage in dispute resolution and ultimately litigation.

Progress of negotiation

The principal’s level of engagement with the contractor increased noticeably once there was recognition that they were now liable to the contractor for the full amount claimed and could soon be the listed defendant in judgment debt proceedings for the full amount.  It was now in the principal’s best interests to try to cut a deal with the contractor to avoid the embarrassment and adverse financial impact of court proceedings.

The contractor was now in a position where it all but literally had the disputed sums in its pocket in the ensuing negotiations and discussions.  It was now up to the principal to work through the various claims and supporting documentation that the contractor had provided and come to the contractor with a reasonable settlement offer to avoid proceedings.

Furthermore, the principal was effectively forced to step into the shoes of a plaintiff should it wish to commence a contractual dispute that the contractor had been overpaid to overturn or circumvent the outcome of the BIFA.  Running this dispute would take a great deal of time and effort for the principal.

The contractor advised that the principal’s engagement on the issues had drastically increased in without prejudice discussions.  The principal had now given indications when it would revert to the contractor with assessments and offers on claims.

We recommended that any agreement reached in discussions be formally documented by a succinctly drafted deed of settlement and release.

We regularly assist construction industry participants Australia-wide in contractual disputes and security of payment processes.  Please feel free to get in touch if you would like assistance with these issues.

[1] Section 77(2) of the BIFA.

[2] Section 78(1) of the BIFA.

[3] Section 100(3) of the BIFA.

[4] The first step would be serving of a “warning notice” as required by section 99 of the BIFA.

Statutory duty of care – don’t get caught out by a poorly drafted claim.

The Supreme Court’s decision in The Owners – Strata Plan No. 87060 v Loulach Developments Pty Ltd (No.2) provides useful insights into the newly created statutory duty of care by section 37 of the Design and Building Practitioners Act 2020 (NSW) (Act).

Recap of the Duty of Care

The Act was enacted in 2020 and introduced significant legislative changes to the building industry. One such change was the creation of a statutory duty of care owed by any person who carries out construction work to exercise reasonable care to avoid economic loss caused by defects:

  • in or related to a building for which the work is done; and
  • arising from the construction work.

The Act states that this duty of care is owed to each owner of the land on which the construction is carried out. The duty of care extends to all subsequent owners of that land.

The duty of care operates retrospectively in that it applies to economic loss caused by a breach of duty of care if the loss first became apparent within the 10 years immediately before the commencement of the duty of care.

How to correctly plead a claim for a breach of the duty of care?

When the statutory duty of care was first enacted, there was uncertainty among the legal profession on how a claim for a breach of the statutory duty of care should be pleaded, and what elements and evidence will be required to successfully prove economic loss arising from a breach.

The Supreme Court in The Owners – Strata Plan No. 87060 v Loulach Developments Pty Ltd (No.2) has provided clarification on this matter.

Facts & Issues

In this case, the Owners alleged that there were a number of large defects in the works performed by the developer and builder, Loulach. The Owners claim was based on the alleged breaches of statutory warranties implied by the Home Building Act 1989 (NSW).

The Owners subsequently sought leave to amend their claim to also include a claim for an alleged breach of the statutory duty of care.

The Owners argued that the mere fact that there was a defect in the building, established that the defect was a result of the breach of the statutory duty of care, and had Loulach not been negligent, there wouldn’t be defects.[1]

Loulach opposed leave being granted to the Owners to plead its case in this way and contended that whilst there was no dispute that a duty of care existed, the proposed pleading did not properly articulate the breach of that duty.[2]

The Court agreed with Loulach and rejected the Owners’ position.[3]  The Court noted that the Owners’ argument posed difficulty as it was unclear what breach the Owners were alleging in relation to each item of the Scott Schedule.[4]

For instance, one of the defects in the Scott Schedule was identified as “Unit 5- Bathroom: Corrosion affecting the door jambs”. But what was the breach of duty alleged to have caused the corrosion? Was it:

  • installing the wrong PC item; or
  • installing the wrong lining; or
  • something else?

A similar difficulty was present in most of the 451 defects identified in the Scott Schedule.

Decision

The Court held that Act is designed to remove the hurdle for the Owners to establish that a duty of care is owed, and it is not intended to provide a shortcut manner in which a  breach of that duty might be established.[5]

In that sense, a party looking to claim a breach of the statutory duty, must also prove the other elements of a negligence claim in order to show a breach and then losses from that breach.

A claim for negligence, must satisfy the following elements:

  1. That a duty of care existed between the parties; and
  2. That the duty of care was breached; and 
  3. That the breach caused loss.

Section 37 of the Act simply answers the first element; however a party must also answer the balance of the elements in order to succeed on their claim for a breach of the statutory duty of care. There is no provision in the Act to suggest that a mere fact of a defect establishes breach.[6]

Furthermore, a claim for negligence also requires a party to identify the “risk of harm” and show that the person who owed the duty of care knew, or ought to have known of the risk of harm and failed to take precautions against a risk of harm that a reasonable person would have.

In this case, the Court was not satisfied that the Owners’ proposed pleading:

  • showed that the statutory duty of care was breached;
  • identified the specific risks that Loulach was required to manage; and
  • the precautions that should have been taken to manage those risks.

It was not sufficient for the Owners to simply assert a defect and allege that Loulach was required to take whatever precautions were needed to ensure that the defect not be present.

Therefore, the Court refused the Owners’ application for leave to amend their claim to include a claim for a breach of the statutory duty of care. It was also noted that the required degree of specificity may have been achieved if the Owner’s List Statement referred to the Scott Schedule and the Scott Schedule was revised to include further information regarding each defect, the relevant risk and what the Owners contend Loulach should have done in relation to that risk.[7]

Key Takeaways

The statutory duty of care established by the Act can provide an extremely useful remedy for parties such as the Owners, however, such a claim should be carefully drafted to avoid the risk of missing out because of a poorly drafted claim.

All three elements must be established for a party to succeed in a claim for a breach of statutory duty:

  • that a duty of care exists (this is automatically proven by existence of section 37 of the Act); and
  • that the duty was breached; and
  • that the breach caused harm (loss or damage).

We regularly assist parties which may find themselves either in the position of the Owners or Loulach. We can assist you with preparing your claim for a breach of the statutory duty of care, or help you defend a such a claim brought by an owner. For specialist and tailored advice, please contact a member of our team by phone on (02) 9030 7400 or by email at info@bradburylegal.com.au.

 

 

[1] [20] – [22] The Owners – Strata Plan No 87060 v Loulach Developments Pty Ltd (No 2) [2021] NSWSC 1068.

[2] [19] The Owners – Strata Plan No 87060 v Loulach Developments Pty Ltd (No 2) [2021] NSWSC 1068.

[3] [23] The Owners – Strata Plan No 87060 v Loulach Developments Pty Ltd (No 2) [2021] NSWSC 1068.

[4] [24] – [34] The Owners – Strata Plan No 87060 v Loulach Developments Pty Ltd (No 2) [2021] NSWSC 1068.

[5] [35] – [36] The Owners – Strata Plan No 87060 v Loulach Developments Pty Ltd (No 2) [2021] NSWSC 1068.

[6] [38] The Owners – Strata Plan No 87060 v Loulach Developments Pty Ltd (No 2) [2021] NSWSC 1068

[7] [44] The Owners – Strata Plan No 87060 v Loulach Developments Pty Ltd (No 2) [2021] NSWSC 1068.

Security Of Payment Reminder: Christmas Is Coming, But Adjudicator Shopping Is Not Permitted

The Building and Construction Industry Security of Payment Act (NSW) (‘SOPA’) is touted as establishing a scheme of “pay now, argue later” which promotes the speedy payment of progress claims and resolution of disputes. While these objects do not prevent parties from serving multiple payment claims in respect of the same amount,[1] they do dictate that parties will not be permitted to reagitate the same issues at multiple adjudications. It is necessary to examine the circumstances in which a previous adjudicator’s finding will be binding in a subsequent adjudication.

 

Section 22(4) of SOPA

Section 22(4) of the SOPA provides a helpful starting point for this analysis. This section provides that where one adjudicator has determined the value of any construction work or of any related goods or services under a construction contract, an adjudicator in a subsequent adjudication must give the work (or goods or services) the same value as previously determined, unless satisfied that the value has since changed.

 

Back in 2009, the New South Wales Court of Appeal considered the effect of section 22(4) of the SOPA in the decision of Dualcorp Pty Ltd v Remo Constructions Pty Ltd.[2] Macfarlan JA held that section 22(4) is not an exhaustive statement of the matters determined by an earlier adjudication which are binding on a subsequent adjudicator. His Honour held that the Act as a whole “manifests an intention to preclude reagitation of the same issues”.[3]

 

Objects of SOPA

Section 3 of the SOPA sets out the objects of the Act: promoting the prompt making and payment of progress claims and speedy resolution of disputes. In Dualcorp, the court held that it would be inconsistent with this objective to allow a claimant who was dissatisfied with the outcome of an adjudication to obtain a fresh reconsideration of its claim by simply serving an identical payment claim. If this were possible, there would be no limit to the number of times a claimant could seek to reagitate the same issues at adjudication.[4] Clearly, such abuse would be inconsistent with the object of the legislation.

 

Did the previous adjudicator determine the merits of the issue?

A claimant will only be barred from reagitating an issue addressed in a previous adjudication where the adjudicator decided the merits of the issue. This point was emphasised by the New South Wales Supreme Court in Arconic Australia Rolled Products Pty Ltd v McMahon Services Australia Pty Ltd.[5] In that case, McMahon made three contentious payment claims describing costs for delay and variations. In a fourth adjudication between the parties, Arconic argued that McMahon was not entitled to reagitate its claim since it had been determined by the previous adjudicator.[6]

 

The Court followed the approach in Dualcorp[7] but clarified that the objects of the SOPA would only be frustrated where the first adjudicator had heard and decided the merits of the claim.[8] Here, the adjudicator had rejected the relevant payment claim as it was made prematurely by McMahon. Given that the adjudicator did not consider the merits of the claim, McMahon was entitled to reagitate the issues raised in that payment claim in a subsequent adjudication.[9]

 

Take home tips

Parties should be wary that they are not entitled to raise the same issues at multiple adjudications.

If you are claimant considering whether to proceed with a second adjudication application, you should carefully consider whether the merits of your claim has been determined by a previous adjudicator.

We can assist with advice regarding a previous adjudication determination and the prospects of seeking a further determination.

[1] SOPA s 13(6).

[2] [2009] NSWCA 69 (‘Dualcorp’).

[3] At [67].

[4] At [52].

[5] [2017] NSWSC 1114.

[6] At [3]–[9].

[7] At [13]–[15].

[8] At [29].

[9] At [31]–[32].

“Heads of Agreement” – binding contract or merely an agreement to agree?

A document expressed as “subject to contract” will in some circumstances be binding on parties.

The 1954 High Court decision of Masters v Cameron[1] continues to offer guidance when determining whether a document that is stated to be “subject to contract” is in itself a binding contract, or is merely an agreement to agree which is not binding on the parties. The judgment sets out three categories of cases:

  1. where the parties intend to be bound immediately but propose to restate their terms in a form which is more precise or full but is not different in effect;
  2. where the parties intend to be bound immediately but have made performance of one or more terms conditional upon the execution of a formal document; and
  3. where the parties do not intend to be bound unless and until they execute a formal contract.[2]

In Nergl Developments Pty Ltd v Vella [2021] NSWCA 131, the New South Wales Court of Appeal considered whether a heads of agreement concluded following mediation was binding on the parties.

Facts

Nergl Developments and Mrs Vella entered into two agreements to develop adjoining properties. Nergl Developments was to undertake the major parts of the works and lodged caveats over its lots to secure performance of its payment obligations under the agreements. In 2018, Mrs Vella commenced proceedings in the Supreme Court to have the caveats withdrawn.[3]

Following mediation, Mrs Vella and Nergl Developments concluded a heads of agreement which intended to settle all disputes arising from the agreements between the parties and to terminate those agreements. However, the parties did not agree on whether the heads of agreement:

  1. required immediate entry into a formal deed of settlement; or
  2. set out preconditions for subsequent steps to be taken by the parties, upon the successful completion of which they would enter into a formal deed of settlement.[4]

Both Mrs Vella and Nergl Developments sought specific performance of the heads of agreement by the execution of various documents; each could not agree on the particular steps required to give effect to the heads of agreement.

The trial judge adopted the second construction of the heads of agreement.[5] Nergl Developments appealed this outcome to the New South Wales Court of Appeal.

Decision

Basten JA (Meagher JA and Leeming JA agreeing) rejected the appeal and held that the document fell within the second category of cases set out in Masters v Cameron. This meant that Mrs Vella and Nergl Developments were bound by the heads of agreement even though it required them to take further steps.

In reaching this conclusion, his Honour warned against “treating such descriptive language in a judgment as if it were a provision of a statute”.[6] Instead, the appropriate approach is to consider evidence of the objective intention of the parties in the terms of the document itself, as well as their surrounding conduct.

The title “Heads of Agreement” did not, in itself, indicate that the document was merely an agreement to agree. Viewed in light of the document as a whole, it was clear that the parties had paid careful attention to the terms of the existing planning consent and had provided the steps required by to terminate the existing agreement.[7] For these reasons, Basten JA held that the heads of agreement was intended as binding.

Basten JA also discussed the second category of cases in Masters v Cameron. His Honour explained that cases falling within this category need not necessarily contemplate the preparation of one single subsequent document which further elaborated the terms of the heads of agreement. Instead, as was the case here, parties may stipulate a range of further obligations and steps to be taken.[8]

Take home tips

If you are preparing a document such as a settlement agreement, you should consider whether you intend for it to be immediately binding and enforceable. Whether yes or no, this intent should be clear in the language and terms of the document.

If you contemplate the future preparation of a more formal document, it is even more important that it is clear whether the initial document is binding in its present form.

We can assist with the preparation of settlement agreements and enquiries as to whether they will be enforceable.

[1] (1954) 91 CLR 353.

[2] At 360 (Dixon CJ, McTiernan & Kitto JJ).

[3] Nergl Developments Pty Ltd v Vella [2021] NSWCA 131, [2]–[9] (Basten JA).

[4] At [11].

[5] At [11]–[12].

[6] At [22].

[7] At [23]–[29].

[8] At [22], [25].

Valmont Estopped In Its Tracks by Armani

The issue of estoppel in the context of a rejected variation claim was recently considered by the NSW Court of Appeal in Valmont Interiors Pty Ltd v Giorgio Armani Australia Pty Ltd (No 2) [2021] NSWCA 93.

In this case, Valmont Interiors Pty Ltd (Valmont) was led to assume that it would be paid for additional joinery works that were directed by Giorgio Armani Australia Pty Ltd (Armani) as a purported variation.  However, as the procedure for claiming and approving variations under the contract was not adhered to, Armani sought to rely on the time bar in the variation provision to reject the claim.

Facts

In early 2016, Valmont entered into a contract with Armani to provide fit-out works for the new Emporio Armani store at Sydney Airport. The scope of works originally excluded certain joinery items, which were to be sourced by Armani from a third party supplier. However, shortly after the works commenced, the third party supplier was not able to meet the tight schedule for delivery and Armani directed Valmont to supply the joinery items.

Valmont supplied the joinery items but Armani refused to pay for them on the basis that Valmont did not follow the procedure set out in clause 15 of the contract for claiming a variation and waived its claim.  Relevantly, this clause provided that if Valmont considered that a direction of Armani constituted a variation it was required to give notice of the purported variation within five business days.  This clause also provided that failure to provide notice within the specified time period resulted in Valmont releasing and waiving any entitlement to a claim.

Valmont’s position was that Armani should be estopped from relying on the time bar in clause 15 to reject the claim because Armani did also not follow the procedure in clause 15 for instructing the supply of the additional joinery items (as well as for previous other variations).  As a result of this, Valmont argued that Armani led it to assume that strict compliance with the procedure in clause 15 was not required in order to claim payment for the additional joinery work.

The First Decision

The primary judge held that, although Valmont did not strictly comply with the procedure set out in clause 15 of the contract for claiming a variation, Armani was estopped from relying on the time bar in that clause and that the costs of certain variation were recoverable by Valmont.

However, the primary judge also found that at a certain point in time (being 11 April 2016), email correspondence between the parties corrected Valmont’s assumption that it could claim payment for variations without complying with the procedure set out in clause 15 of the contract and that Armani would rely on strict compliance with that procedure for future variations.  Accordingly, it was held that the estoppel ceased on that date and the costs of purposed variations after that date (including the additional joinery works) were not recoverable.

The Appeal

On appeal the Court disagreed with the primary judge and found that the estoppel continued to operate after the 11 April 2016 email because:

  1. the email did not displace Valmont’s assumption that was induced by Armani that it would be paid for supplying the additional joinery works. This was partly because Armani’s email was not sufficiently clear to correct Valmont’s assumption (ie. that strict compliance with clause 15 of the contract was not required in order to be paid for additional joinery works);
  2. the email conveyed that the supply of the joinery was not a variation but additional works outside of the contract;
  3. Valmont was entitled to expect to be paid for the additional joinery works that were directed by Armani. The fact that it continued to incur liabilities after receiving the email from Armani demonstrated that the email did not correct Valmont’s understanding of the situation.  Further, Valmont relied on that understanding to its detriment, and as it was no longer possible for Valmont to comply with clause 15 of the contract it could not overcome the detriment already suffered; and
  4. in the circumstances, it was unconscionable for Armani to refuse to pay Valmont for the additional joinery works.

Take home tips

We understand that in administering contracts parties do not always strictly comply with the procedures and timing set out in the contract for claims, especially if the parties consider they have a good relationship or believe that strict compliance is too formal.  This case highlights the potential serious consequences of taking that approach.

Parties to a contract should be aware of the risks of acting inconsistently with their rights under the contract (ie. in Armani’s case, not requiring compliance with the terms of the contract for claiming variations and also not formally directing variations), as this could lead to those rights being lost and there not being a basis to reject claims.

If a principal or head contractor (or other party in a similar position) is concerned that a particular state of affairs exists between them and the downstream party that is inconsistent with the contract, it is crucial that the principal or head contractor:

  1. corrects that understanding by stating in clear and precise terms that the current understanding must be departed from and that strict compliance with the contract is required;
  2. provides sufficient notice of this so that the downstream party has time to comply with the procedure in the contract for claims and can attempt to overcome any detriment; and
  3. then strictly requires and enforces the procedure in the contract for claims so as to avoid any doubt that another state of affairs exists between the parties.

 

Is a progress certificate issued by the Superintendent (or Architect) a payment schedule for the purposes of security of payment?

It is trite that the “East Coast model” security of payment legislation provides that a respondent in receipt of a payment claim may provide a payment schedule in response[1].  If a respondent fails to provide a payment schedule within the relevant statutory timeframe, generally, the respondent becomes liable to pay the claimed amount[2].

What happens in a case where the contract is administered by a third party – e.g. a project manager, superintendent, architect or quantity surveyor – who provides a progress certificate to one or both parties?  E.g. the superintendent’s certificate under clause 37.2 of an AS4902-2000 or the architect’s certificate under clause N5.1 of the ABIC MW 2018?

Is this certification a payment schedule for the purposes of security of payment?

In our view, the answer will generally be yes.  Below is a summary of some case law in support of our view.

RHG Construction Fitout and Maintenance Pty Ltd v Kangaroo Point Developments MP Property Pty Ltd & Ors [2021] QCA 117 (RHG Constructions)

In RHG Construction, the Queensland Court of Appeal considered an amended AS4902-2000 contract and whether or not the provision of a payment certificate by the superintendent was a payment schedule under the Building Industry Fairness (Security of Payment) Act 2017 (BIFA).

Clause 37.2 of that contract was in generally standard form terms, requiring the superintendent to receive payment claims and issue to the principal and contractor:

“a certificate evidencing the Superintendent’s assessment of retention moneys and moneys due from the Contractor to the Principal pursuant to the Contract.”

Clause 37.2 of the contract contained the following paragraphs included by way of amendment to the AS4902-2000 standard drafting (Deeming Clause):

“In so far as necessary to ensure compliance with the Security of Payment Act, the Superintendent is deemed to issue any payment schedule under clause 37.2 or final payment schedule under clause 37.4 as the agent of the Principal and each such schedule shall constitute a payment schedule for the purposes of the Security of Payment Act.

For the purposes of and where permitted by the Security of Payment Act, each of the dates for delivery of a payment claim in subclause 37.1 constitutes a reference date.”

The contractor issued a payment claim and the superintendent issued an assessment within the relevant statutory timeframe[3].  The assessment stated (relevantly):

“This Payment Schedule has been produced pursuant to the Works Contract for the residential flat being constructed at 98 River Terrace, Kangaroo Point, between the Principal ‘Kangaroo Point Developments MP Property Pty Ltd’ and the Contractor ‘RHG Contractors Pty Ltd’. This Payment Schedule confirms that the Superintendent has assessed, calculated and certified the proper value of Work Under the Contract.”[4]

A week later, the principal’s solicitors issued correspondence enclosing a further purported “payment schedule” to the contractor denying the validity of the payment claim and stressing that if it was incorrect on that point, the document under the correspondence was to be taken to be the principal’s payment schedule for the purposes of the BIFA[5].

The contractor proceeded to adjudication citing the superintendent’s assessment as the principal’s payment schedule under the BIFA and the adjudicator agreed[6].  The principal applied to court for an order declaring the adjudicator’s determination void.

At first instance, Dalton J agreed with the principal that (notwithstanding the Deeming Clause) the superintendent’s assessment was not a payment schedule and ordered the adjudicator’s determination void.  Her Honour considered that the assessment did not comply with s 69(b) of the BIFA because it was a recommendation only as to payment and the document failed to state “the amount of the payment, if any, the respondent proposes to make”, as required by the BIFA[7].

The Queensland appellate court (Sofronoff P, wth McMurdo and Mullins JJA agreeing) overturned the trial judge’s order.  Sofronoff P said the following as to the standard form clause 37.2:

“For many years now, those engaged in construction have employed the standard form contracts drafted by a committee of Standards Australia, a not-for-profit company which, among other things, prepares draft general conditions of contract for various kinds of commercial transactions… Clause 37, which deals with progress claims, as been in its current form since 2004 when the Act of that year was passed.  It has been the subject of much academic analysis and has doubtless been relied upon by commercial parties thousands of times since then.  The effectiveness of clause 37.2 to engage the adjudication provisions of the 2004 Act, and now the current Act, has never been called into question.[8] (emphasis added)

The effect of the issue of the certificate by the superintendent was the triggering of the principal’s obligation to pay.  Accordingly, the certificate does meet the requirement of s 69(b) of the BIFA[9].

The Deeming Clause was, therefore, “neither artificial nor contrived” [10].  The court considered it relevant that there was no other contractual mechanism whereby a payment schedule would be provided[11].  It would be commercially unworkable for the principal and the superintendent to each issue payment schedules (i.e. one for the purposes of statute and one for the purposes of the contract) because they may differ materially (e.g. provide a vastly differing scheduled amount) [12].

Bucklands Convalescent Hospital v Taylor Projects Group [2007] NSWSC 1514 (Bucklands)

We are not sure whether Sofronoff P’s comment that the effectiveness of clause 37.2 of the Australian Standard contract had never been called into question considered authorities from other east coast jurisdictions.

For example, in Bucklands, Hammerschlag J considered the effectiveness under the NSW statute of clause 37.2 of the AS4000-1997, which provides for the same mechanism of superintendent assessment as the AS4902-2000.

While His Honour considered that the question of jurisdiction should be determined by the adjudicator at first instance[13], His Honour[14], noted that a principal may clothe an agent with authority to provide a payment schedule on their behalf for the purposes of the Building and Construction Industry Security of Payment Act 1999 (NSW) (NSW Act).  The requirement for the superintendent to act honestly and impartially in performing certain functions under the contract, including assessing payment claims, is not the issue at hand[15].  The question:

“…is whether in the circumstances Simmat was exercising function under the contract. Whether it was or was not is a matter of fact. As a matter of law it does not seem to me that a person who is a Superintendent under a contract and who has certifying functions under it is incapable of being appointed as agent to respond to a payment claim under the Act.”[16]

The question was not answered in Bucklands as this was the job of the adjudicator.

However, His Honour’s comments suggest that the use of the standard-form contractual mechanism by the superintendent when progress certificates is likely to give rise to an implication that the superintendent had authority to issue a statutory payment schedule and that the payment certificate was indeed to be interpreted as such.  We consider it likely that the courts would continue to take positions on these issues which is facilitates the objects of the legislation, rather than unduly technical interpretations which themselves would prejudice a party.

Take away tips

As:

  1. the agent (e.g. superintendent, architect, quantity surveyor, etc) will usually act as agent of the respondent under the contract for the purposes of issuing progress certificates (even if they must assess payment claims honestly, reasonably, fairly or the like); and
  2. judicial interpretation of the interplay between widely-used standard form contractual mechanisms tends to favour and facilitate commercial workability,

we are of the view that additional drafting of the kind of the “Deeming Clause” in the RHG Constructions case may not necessarily be required to ensure compliance with the legislation and ensure that the respondent’s interests will not be prejudiced[17].  However, if it is omitted, ensuring that the agent’s payment certificate:

  1. states that it is a payment schedule under the relevant legislation; or
  2. annexes a further document provided by the respondent confirming that the superintendent’s assessment of the amount payable should be taken to be the scheduled amount under the legislation,

are prudent steps to take.  It would also be beneficial for the contract or terms of engagement between the agent and the respondent to expressly state that part of the agent’s engagement is to issue payment schedules under the legislation on behalf of the respondent, having regard to Bucklands and the classic agency case Baulderstone Hornibrook Pty Ltd v Queensland Investment Corporation [2007] NSWCA 9.

What to do if you are the respondent party (e.g. the principal or owner) and you disagree with your agent’s assessment of the payment claim?  That will be the subject of one of our next articles!

[1] E.g. see s 14(1) of the NSW Act.

[2] E.g. see s 14(4) of the NSW Act (subject to s 17(2)).

[3] Kangaroo Point Developments MP Property Pty Ltd v RHG Construction Fitout and Maintenance Pty Ltd & Ors [2021] QSC 30 at [5].

[4] Ibid at [13].

[5] Ibid at [6].

[6] Ibid at [19].

[7] Ibid at [14].

[8] RHG Construction Fitout and Maintenance Pty Ltd v Kangaroo Point Developments MP Property Pty Ltd & Ors [2021] QCA 117 at [23].

[9] Ibid at [27].

[10] Ibid.

[11] Ibid at [28].

[12] Ibid.

[13] Bucklands Convalescent Hospital v Taylor Projects Group [2007] NSWSC 1514 at [26].

[14] At [33] referring to Baulderstone Hornibrook Pty Ltd v Queensland Investment Corporation [2007] NSWCA 9.

[15] Ibid at [34].

[16] Ibid at [35].

[17] Assuming the respondent agrees with the superintendent’s assessment.

You win sum, you lose sum (but it’s still a sum)

Some construction contracts provide that expert determinations (or other alternative dispute processes) will be considered “final and binding” unless the claim or determination is excluded or carved-out.

In the matter of CPB Contractors Pty Ltd v Transport for NSW [2021] NSWSC 537, the New South Wales Supreme Court considered an expert determination clause which precluded litigation in respect of the determination, unless it:

  1. Did not involve a sum of money; or
  2. Required one party to pay the other an amount in excess of $500,000.[i]

The decision in this case was that one party was not entitled to any further payment for the Works.  Did the determination “involve” paying a sum of money?

Facts

Transport for NSW (“Transport”) engaged CPB Contractors (“CPB”) to carry out road widening works. Transport issued CPB instructions to remove excess spoil from one location to another (“Works”).

The determination concerned CPB’s entitlement to payment for the Works. Transport contended (and paid CPB) on a “Dayworks” basis which equated to $1.4 million. CPB contended that it was entitled to be paid for the Works in accordance with a schedule of rates (“Rates”) which equated to $11.4 million.

The Honourable Robert McDougall QC (“Expert”) determined that CPB was not entitled to any further payment for the Works (“Determination”).

CPB sought to litigate its claims, seeking payment in accordance with the Rates. Transport sought a stay. Transport pointed to clause 71 of the relevant GC21 Contract, arguing that the Determination was final and binding.

CPB contended that it was free to litigate the claims for the Works for two reasons.

The first was that the Expert made no determination for the purposes of the Contract.  CPB submitted there is a “deficiency or error” in the Determination, meaning it was not “a determination in accordance with the contract”.  These errors were said to include a “plainly incorrect” answer to a question referred to determination[ii], a failure to give reasons as required by the contract[iii] and a failure to answer a question at all[iv].  The first ground was specific to the facts of the case.

The second reason was that the Determination (to the extent it was a valid determination under the contract) did not “involve paying a sum of money”.

On this issue, CPB submitted that the question is what the Determination itself is and not the “matters for determination” involve.  It was argued that a determination that no money is payable is in effect a dismissal or rejection of that claim.  CPB submitted that such a decision does not and cannot involve “paying” a sum of money.

Decision

Transport’s application for a stay was granted.  CPB was precluded from litigating on the claims.

On the first ground, Stevenson J found that the Determination did not contain a deficiency or error.  The Expert’s Determination complied with the contractual requirements.

On the second ground, Stevenson J concluded that a determination dismissing a claim for money does “involve” “paying a sum of money” in the sense that it deals with the claim that, if successful, would have resulted in the paying of a sum of money; and rejects that claim.[v] The focus is not on the amount to be paid pursuant to the determination, but on the nature of the determination – i.e. whether it “involves”, in the sense of “concern” paying a sum of money.[vi] This is distinguished from a distinct category of determinations that are not in respect of money claims, such as a dispute about the construction of the contractual terms.[vii]

Therefore, in finding that the Determination did “involve the paying of sum of money”, the exception to the preclusion of litigation did not apply.

Take home tips

Dispute resolution clauses are often overlooked by parties in a contract negotiation. This case highlights that parties should carefully consider the types of disputes or claims that may be captured by a binding alternative dispute resolution process.  Parties should draft clear carve-outs from an otherwise final and binding dispute resolution clause if they wish to have recourse to the courts.

For carve-outs involving sums, consider whether the monetary thresholds are arbitrary or considered by reference to the whole of the contract sum.  Also consider whether it is the value of the claim that is of importance, or the value of the determination.

If parties wish to preserve the right to apply to the courts concerning the interpretation of a contractual term, for example, it would be prudent for the dispute resolution clause to reserve the right for an application for declaratory relief or contain a carve-out in relation to claims or disputes not involving or concerning payment of a sum.

[i] At [26] – [27].

[ii] At [47].

[iii] At [58].

[iv] At [66].

[v] At [91].

[vi] At [92].

[vii] At [94].

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.