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Cooler heads will prevail – Tribunal finds that direct notice of termination of a home building contract is not required

It is not uncommon in home building projects for disputes to occur at the end of the project in relation to the quality of the work carried out by the Builder and a claim for outstanding money by the Builder.  Inevitably, this can lead to the contract coming to end by way of abandonment, termination or repudiation.

If the matter proceeds to a Court or Tribunal, the first issue to be determined is:

  • whether the contract is still on foot;
  • whether the contract has been terminated; and
  • if the contract has been terminated, whether that termination was valid.

The answers to these questions will dictate the parties’ entitlement to claim damages (and the types of damages) and ultimately, the outcome of any legal proceedings.

In an ideal world, the terminating party would issue a notice of breach or default under the contract, which would result in a termination of the contract if the breaches are not remedied.

Building cases are never this clear cut and more often than not, the Courts and Tribunals have to delve into the conduct of the parties and what their intentions were in ascertaining whether the contract is still on foot, or whether it has been terminated validly or otherwise.

In the case of Rudas and Andrassy v Eid [2021] NSWCATAP 4 the Tribunal dealt with this very issue of termination of a home building contract by the Owners in the absence of any direct notice to the Builder and what circumstances or conduct would give rise to a finding that the contract was no longer on foot.

The first Tribunal determination

  1. The Owners entered into a home building contract with the Builder to carry out renovations at their property in Frenchs Forest (Site).
  2. In the first instance, the Tribunal found that the Builder abandoned the Site before completing the building works and thereby repudiated the building contract as the Builder ceased carrying out the building works at the Site and removed all of his tools and any materials that he felt he could use elsewhere.
  3. The Owners made a claim against the Builder under the Home Building Act 1989 (NSW) (HBA Act) for costs to complete the building works by another builder consequent upon their acceptance of the Builder’s repudiation of the building contract and its termination by them.
  4. The Tribunal held that even though the Builder had repudiated the contract, the contract still remained on-foot because the Tribunal was not satisfied that the Owners had terminated the contract by accepting the repudiation of the Builder. The Tribunal found that there was no evidence relied upon by the Owners that they accepted the Builder’s repudiation by their conduct of engaging another builder and further, there was no evidence that the Builder knew of this conduct.

The Appeal

5. The Owners appealed the determination principally on the basis that the Tribunal erred in failing to find that the contract had been terminated.

6. The appeal panel upheld the Owners’ appeal and determined that the Tribunal did determine this issue incorrectly for the following reasons:

(i)  there is no real issue as to the legal principles applicable to determine whether an innocent party to a contract has accepted the other party’s repudiation and thereby terminated the contract.  In other words, any communication or conduct which clearly conveys to the repudiating party that the aggrieved party is treating the contract as at an end is sufficient; and

(ii)  where the innocent party has by conduct elected to treat the contract as at an end, it is sufficient that the fact of election comes to the repudiating party’s attention.

Examples of conduct that would demonstrate that the contract has been terminated in the absence of any direct notice to the other party

In this case, the Tribunal said:

(i)   the commencement of the proceedings and/or the service of an appropriate pleading, claiming relief on the basis of termination for breach or otherwise clearly conveying in such pleading that the aggrieved party is treating the contract as at an end can be regarded as communication of the innocent party’s acceptance of repudiation and subsequent termination; and

(ii)    the commencement of the proceedings by the Owners claiming damages based upon the cost to complete the works will act as the communication of the prior election to treat the building contract as terminated, if this had not previously occurred. Indeed, the Owners in this case could have simply claimed damages on the basis of the contract coming to an end without more.

The Tribunal determination also contained a table of examples of cases where a termination has been held to have taken place, despite the absence of any direct notice to the relevant party, see below:

Case Paragraph
“The actual commencement of the hearing of lengthy and expensive litigation, directed to a final resolution of the parties’ rights, was conducted by both parties manifesting an intent ion wholly inconsistent with any continuing obligation of performance on either side Brewarrina Shire Council v Beckhaus Civil Pty Ltd (2005) NSWCA248 75
A maintenance provider was held to have accepted the  other party’s repudiation  by executing an agreement transferring  its  assets and employees to a third party although the transfer agreement did not purport to exercise any right to terminate WallaceSmith v Thiess Infraco (Swanston) Pty Ltd

(2005) FCAFC 49

103 and

152

Service of an appropriate pleading can be unequivocal election to terminate a contract. Janos v Chama Motors Pty Ltd (2011)NSWCA
na
23
The commencement of an action claiming relief on the basis of termination for breach normally amounts to an election to terminate the contract if such an election has not already been made. Perri v Coolangatta Investments Pty Ltd (1982) 149 CLR 537
A seller of land who on expiry of a notice to complete proceeded to advertise and sell the land was held to have manifested an election to t rea t the contract as terminated. Holland v Wiltshire

(1954)

HCA 42 ; (1954)

416 and

424

90 CLR409
The closing down of a business and vacating a premises
was held to be sufficient communication of the
termination of the lease.                                                         Karacominakis v Big 155                                                                                                       Country
Developments Pty Ltd
(2000)
NSWCA 313.

Quantum of damages

The Tribunal then went onto assess the quantum of damages.

To be consistent with the guiding principle of ensuring the just, quick and cheap resolution of the real issues in the proceedings, the Tribunal determined the question of damages, rather than remit the matter for further hearing.

The Tribunal then assessed the damages owing by the Builder to the Owner in the amount of $187,280.24 plus costs on the ordinary basis.

What does this mean for residential builders?

  • contracts need to be terminated carefully as the Court and Tribunal will consider the conduct of the parties if there is any argument that the contract was repudiated.
  • if the contract is not validly terminated it can affect the builder’s entitlements to damages.
  • if the homeowner terminates the contract, the builder would need to prove that the termination was wrongful in order to claim any loss of profits, demobilisation costs and loss of wages etc.
  • obtain legal advice before you terminate.

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].

Near enough is not good enough in contract drafting

We have been recently acting for a subcontractor negotiating departures to a design and construct for a high-rise office tower in the Sydney CBD.  Grappling with a confusing, inconsistent and untidy subcontract, one of our recommendations was that the contract defined terms should be updated to:

  • remove defined terms that were not used in the operative clauses;
  • define capitalised terms used in the subcontract, but for which no definition was provided;
  • make the defined terms consistent (sometimes two distinct defined terms were used but were intended to have the same meaning); and
  • check and update the contract definitions for changes in law.

The upstream contractor party’s counsel suggested that this work was unnecessary and would make no difference.  We strongly disagreed.

Why did these drafting issues matter?

A significant case for insurers and COVID-19 impacted businesses decided by the NSW Court of Appeal in October 2020 provides an example of how failures to update contracts for law and precisely draft terms (including updating definitions) can lead to real headaches down the line.  The decision has been widely reported in major media outlets due to the multi-billion dollar payouts that may result due to what appears to be a drafting oversight.

In HDI Global Specialty SE v Wonkana No. 3 Pty Ltd [2020] NSWCA 296 (Wonkana), a key test case funded by insurers, the NSWCA was required to decide whether a coverage exclusion applied to claims made by business owners under their insurance policies for interruption to their businesses due to COVID-19.

The exclusion was framed as follows:

‘The cover … does not apply to any circumstances involving ‘Highly Pathogenic Avian Influenza in Humans’ or other diseases declared to be quarantinable diseases under the Australian Quarantine Act 1908 and subsequent amendments.’

The problem for the insurers was that the Quarantine Act 1908 (Cth) (repealed Act) was repealed and replaced prior to COVID-19 by the Biosecurity Act 2015 (Cth) (current Act).  While COVID-19 had been determined a “listed human disease” under the current Act, it had not (and could not) been listed as a “quarantinable disease” under the repealed Act.  It appears that at the time of contract neither party knew about the change in law.

The insurer’s primary argument was that the exclusion clause should be construed as referring to ‘diseases determined to be listed human diseases under the Biosecurity Act 2015 (Cth)’ because:

  1. the current Act constituted a “subsequent amendment” (Subsequent Amendment Argument); or
  2. the references to the repealed Act were obvious mistakes which should be construed as if they were or included references to the current Act (Obvious Mistake Argument).

In summary, the NSWCA held that the exclusion clause could not be construed as referring to the current Act.  This meant that the insured businesses were prima facie entitled to a claim under their policies.

On the Subsequent Amendment Argument, the Court held that the words “and subsequent amendments”, given their natural and ordinary meaning, do not extend to an entirely new enactment[1].  The repealed Act was not a “subsequent amendment” of the current Act.

Looking at the matter objectively (as required by proper principles of contractual interpretation), if the parties intended that the clause capture an alteration to, or replacement of, the repealed Act, drafting to capture this intent would have been used[2].

On the Obvious Mistake Argument, the Court held that it was critical to apply the ordinary principles of construction to the drafting (and natural and ordinary meaning of words) to ascertain the parties’ objective intention[3].

There was no mistake by the parties in drafting which was objectively identifiable to be “corrected” or rectified.  It was not possible to correct the contract merely because the parties incorrectly assumed that the repealed Act was still in force[4].

Key Takeaways

Contracting parties sometimes rely on the words “and subsequent amendments” as an excuse not to update their contracts to deal with changes to law.  This is dangerous because if a law has been repealed and replaced prior to (or during the course of) the contract, there is clearly no guarantee that the replacement statute will apply.  These words are not a “get out of jail free card” to deal with legislative changes.

We caution against the assumption that in the event there is a later argument on interpretation, the departures table, correspondence or other extrinsic evidence will be relied upon to answer the question.  Firstly, this assumes that reliable records of the negotiation will be kept.  Disputes often arise years after the contract is executed and we all know of the knowledge and records vacuum when key personnel move on from a project or employer.  Secondly, the court will only consider extrinsic evidence if the drafting is ambiguous.  On pure questions of contractual interpretation, the court is not concerned with the subjective intentions of the contracting parties, but what the words say to the objective reader.

We strongly recommend:

  • regularly reviewing and updating your contracts for changes in law; and
  • ensuring that simple issues such as errors and inconsistencies in defined terms are taken seriously and corrected prior to execution.

[1] Per Meagher JA and Ball J at [44].

[2] Per Meagher JA and Ball J at [42].

[3] Per Meagher JA and Ball J at [64].

[4] Per Meagher JA and Ball J at [65].

Attention residential builders in NSW – big changes ahead from 1 March 2021 you will be able to use the Building and Construction Industry Security of Payment Act to recover money owed by homeowners

On 1 September 2020, the NSW Government released the Building and Construction Industry Security of Payment Regulation 2020 (2020 Regulation) which radically changes the way residential builders and homeowners resolve disputes in relation to outstanding progress claims after 1 March 2021.

Currently, section 7(5) of the Building and Construction Industry Security of Payment Act 1999 (NSW) (the Act) and section 4(1) of the Act provide that the Act does not apply to owner occupier construction contracts, that is, contracts where the homeowners intend to live in the premises.  In these instances, residential builders cannot use the Act to recover outstanding progress claims due from homeowners.

This will all change on 1 March 2021 when the 2020 Regulation commences which will remove owner occupier construction contracts as a prescribed class to which the Act does not apply.

This means come 1 March 2021, residential builders will have a statutory right to payment and be able to serve payment claims on homeowners under the Act and apply for adjudication in relation to any outstanding progress claims.

This is a big game changer for residential builders as it will improve cash flow and mean that residential builders will be able to claim outstanding progress claims from homeowners without having to get involved in expensive and lengthy Tribunal and Court proceedings in order to get paid.

Whilst homeowners will still be entitled to bring a building claim in the Tribunal or Court for defective work and the like, such a claim will not defeat or delay residential builder’s entitlements under the Act.  This means that homeowners will be required to pay any amount awarded pursuant to an Adjudication Determination prior to the determination of any Tribunal or Court proceedings which will (in most cases) reduce in the issues in dispute in any Tribunal or Court proceedings.

What residential builders need to know now

The NSW Government has given residential builders and homeowners a transition period to adjust to these major reforms.  We suggest during this period residential builders should familiarise themselves with the Act and their contracts in relation to:

  • the requirements of valid payment claims including serving supporting statements with all payment claims where builders contract directly with homeowners;
  • the dates from and methods of service of valid payment claims;
  • identification of a valid payment schedules by homeowners;
  • review of your standard contracts to ensure that they comply with the minimum contracting requirements and minimum variation requirements under the Home Building Act 1989 NSW (HBA), as this may effect how an adjudicator assesses amounts payable under the contract so your paperwork has to be in order;
  • review your practices and procedures to ensure that you have the necessary resources to utilise the adjudication process and respond within the strict time frames. The benefit of this is that it will reduce the time and cost (in most cases) of litigation as an Adjudication Determination will usually be received within 21 days of lodging the Adjudication Application; and
  • get legal advice to set yourself up so you can utilise the Act and put yourself in the best position to get paid.

CONTRACTOR STRIKES SECURITY OF PAYMENT GOLD BY SKIRTING THE MINING EXCEPTION

Mining owners and operators in most Australian States[1] will be aware of the “mining exception” in security of payment legislation.  The mining exception excludes ‘the extraction (whether by underground or surface working) of minerals, including tunnelling or boring, or constructing underground works for that purpose[2] (Mining Exception) from the definition of the term “construction work” and, consequently, the ambit of statutory interim progress payment mechanisms.

However, in a decision handed down on 11 November 2020, the NSW Supreme Court[3] followed the approach of the Queensland courts[4] by construing the Mining Exception narrowly in favour of contractors and subcontractors.  In short, the Mining Exception does not  extend generally to some broad category of mining industry operations.[5]

Facts

Downer EDI Mining Pty Ltd (Downer) was engaged by Cadia Holdings Pty Ltd (Cadia) the operator of the Cadia East underground panel cave mine south-west of Orange, under a “Works Contract” dated 16 November 2018 (Contract), to perform “development phase” works, being (for the most part) underground works to provide access to the proposed undercut and extraction levels for future extraction of minerals in the “production phase”[6]

Downer proceeded to adjudication on a payment claim served on Cadia.  An adjudicator appointed under the Building and Construction Industry Security of Payment Act 1999 (NSW) (SOPA) determined that Cadia pay Downer $1,017,741.72.[7]

Cadia challenged the determination on two grounds:

  1. the Mining Exception applied so the Contract was not a “construction contract” within the meaning of the SOPA; and
  2. there was no available reference date to support Downer’s payment claim.

Decision

Cadia’s challenge to the adjudication determination was unsuccessful on both grounds.

Stevenson J framed the effect of the Mining Exception as excluding ‘from the definition of “construction work”, the following works:

  • extraction (whether by underground or surface working) of minerals;
  • tunnelling or boring for the purpose of extraction (whether by underground or surface working of minerals; and
  • constructing underground works for the purpose of extraction (whether by underground or surface working) of minerals.[8]

His Honour held that the heart of the question of the application of the Mining Exception to a contract is what a contractor undertakes to do under the contract in question, not what work that contractor actually does[9] (which comes to be answered later).

The works under the Contract did include “tunnelling or boring” as well as “constructing underground works”.  However:

  1. these activities were not for the “purpose of” extraction of minerals; and
  2. the Contract required Downer to undertake work beyond these activities which fell within the meaning of “construction work” or the supply of “related goods and services”.

On considering generally whether activities performed by a contractor are for the “purpose of” extraction of minerals, His Honour:

  1. agreed with Fryberg J in Thiess that the relevant purpose should be decided ‘by reference to what a reasonable person in the position of the parties would conclude as to the object of what purpose of the contract[10];
  2. held that the Mining Exception is to be construed narrowly to benefit the subcontractor[11];
  3. held that a close “proximity” between the act of extraction and the tunnelling and boring or construction of underground works was required (and this was not so in this case, where the extraction phase would not begin until 2022 after subsequent works)[12];
  4. considered that “extraction” does not include work “associated with” or “preparatory to” extraction[13]; and
  5. noted that the SOPA expresses where there is an intention to bring in ancillary activities, which is not the case with the Mining Exception[14].

Further, in this case, His Honour considered that some works under the Contract required of Downer were “construction work” or supply of “related goods and services”, meaning the SOPA applied.  Relevantly, His Honour stated (accepting Downer’s counsel’s submission):

…if there is a contract which contains undertakings to carry out construction work and undertakings to carry out work that it not construction work, the contract remains a construction contract. If a payment claim includes a claim for work that is not construction work, the payment claim is valid, but the adjudicator should not award an amount for work that is not construction work. Thus, the Mining Exception has an important role to play in limiting the amount that the adjudicator should award.[15]

On the reference date point, His Honour determined that there was an available reference date under the Contract for the service of the payment claim.  Most of the points raised were of limited significance for general application.  One point of general interest was that a clause of the Contract required Downer to invoice ‘in respect of the Services performed’ of the proceeding month.[16]  Downer’s works were performed not in the preceding month, but at an earlier time.

His Honour relied on s.13(4) of the SOPA which allows a contractor to serve a payment claim within the period determined under the construction contract or 12 months after construction work to which the claim relates was last carried out.  The payment clause in the Contract attempted to restrict the operation of s.13(4) and was a void provision, by operation of s.34 of the SOPA.

Take Home Tips

Contractors who consider that they are not entitled to have recourse to security of payment legislation simply because they work on a mine site should re-examine closely the terms of their contract.  Can it really be said that the contract works are for the “purpose of” extraction?  Or is there some distance between the works to be performed and the eventual act of extraction?

Perhaps there are portions or stages of works under the contract to which the Mining Exception would apply, but this would not necessarily mean that the entire contract is not a “construction contract” within the meaning of the security of payment legislation.

 

 

[1] Queensland, Victoria, South Australia, Tasmania and the Australian Capital Territory.  However, Western Australia is likely to shortly follow suit once the Building and Construction Industry (Security of Payment) Bill 2020 (WA) passes through Parliament.

[2] Section 5(2) of the Building and Construction Industry (Security of Payment) Act 1999 (NSW).

[3] Cadia Holdings Pty Ltd v Downer EDI Mining Pty Ltd [2020] NSWSC 1588 per Stevenson J.

[4] HM Hire Pty Limited v National Plant and Equipment Pty Ltd [2012] QSC 4 and Thiess Pty Ltd v Warren Brothers Earthmoving Pty Ltd [2012] QCA 276 (Thiess)

[5] At [133].

[6] At [92] and [93].

[7] At [3].

[8] At [34].

[9] At [70].

[10] At [96], quoting Fryberg J in Thiess at [76].

[11] At [102]

[12] At [103] and [91].

[13] At [104].

[14] At [105].

[15] At [134].

[16] At [171].