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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.

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.

Injunctions and bank guarantees: When can a contractor prevent a developer having recourse to bank guarantees or performance bonds?

Case: Uber Builders and Developers Pty Ltd v MIFA Pty Ltd [2020] VSC 596

One feature of construction contracts which is distinctive and unique from other types of contracts is the provision of security from the contractor to the principal. Commonly, security takes the form of retention monies or bank guarantees. The consequences of having recourse to bank guarantees can be serious for the party providing the security (the security provider). In September 2020, the Supreme Court of Victoria handed down a decision in relation to bank guarantees. The decision Uber Builders and Developers Pty Ltd v MIFA Pty Ltd [2020] VSC 596 (Uber), sets out a helpful summary of the principles in respect of bank guarantees, interlocutory hearings and recourse to bank guarantees.

The Facts

Uber Builders and Developers (Uber) sought an injunction preventing MIFA from calling on its bank guarantees. MIFA asserted that it was entitled to have recourse to the bank guarantee as the Superintendent had certified amounts as payable by Uber in respect of rectification costs for defective and incomplete work, liquidated damages, credit allowances and purported variations. As a result of non-payment by Uber of these amounts, MIFA sought to have recourse to the bank guarantees to recover the amounts certified against Uber. To prevent MIFA from having recourse to the bank guarantee, Uber sought interlocutory relief (lawyer jargon for an interim/immediate court order) that MIFA was not allowed to have recourse to the bank guarantee.

The Principles

Nichols J summarised the governing principles in respect of where interlocutory relief is sought to restrain the calling of a performance bond/bank guarantee that has been given under a contract. There principles are:

  1. The applicant for interlocutory relief must show there is a serious question to be tried. The applicant, in this case Uber, must show that there is sufficient reason to think that the applicant would be successful if the matter were to progress to a final hearing;

 

  1. The applicant must show that the ‘balance of convenience’ favours the granting of the injunction. This means that the court should take whichever course appears to carry the lowest risk of injustice should it be wrong in either granting pr not granting the injunction;

 

  1. The court must consider whether damages would be an inadequate remedy. This means that the court has to consider whether the applicant would suffer irreparable injury for which monetary compensation would not be an adequate option; and

 

  1. These questions and factors to consider must be considered together and not as isolated issues.

 

In the context of setting out these guiding principles, Nichols J set out some drafting considerations for security clauses in construction contracts. These are summarised below:

  • Purpose: Bank guarantee or performance bonds may be stipulated for two reasons.
    • The first is to provide security against the risk that the security holder will not recover a sum owing by the defaulting party. In this way, the security acts as a means of ensuring the principal or security holder can recover some money if an amount is payable to the principal/security holder.

 

  • The second is to allocate risk as to who will be out of pocket while a resolution of a dispute is pending. If the security is to allocate risk, then the party holding the security may have recourse, even if it turns out that the other party was not actually in default.

 

  • Conditions of Recourse: If the purpose of the security is to act as an interim allocation of risk, then it is important to consider in what circumstances the principal/security holder will be entitled to have recourse to the security. The parties may agree to allow the security holder to have recourse to the security pending a final determination, but this right should be limited to certain circumstances. For instance, the parties may agree that recourse to the security can only occur if notice is given and/or where the dispute relates to damage caused by the security provider to the works/the project and/or adjoining properties.

 

  • Conditions imposed by the Courts: Where there are no contractual conditions under the contract, the Courts will prevent a party from calling on security where the security holder acts fraudulently or unconscionably in calling on the security.

 

  • Interim Risk Allocation: If the security is intended to be an interim risk allocation tool, the security holder will be entitled to have recourse to the security even if it turns out that the other party was not in default, notwithstanding the existence of a genuine dispute and a serious issue to be tried as to underlying entitlements.

 

Interim Risks

So far, this article has discussed a lot about ‘interim risk allocation’ but what does this actually mean and when is it relevant? Throughout the projects, various issues (such as the valuation of variations and defective work) may arise and payments are generally made on account only. At the end of the contract, the Superintendent will generally issue the final certificate. The final certificate will determine if there has been any over or underpayment by the principal to the contractor, whether there are any liquidated damages, and any other interim issue (such as the valuation of defective work and variations). If a party does not agree with payments to be made under the final certificate, they are generally able to issue a notice of dispute under the contractual provisions or can commence proceedings in relation to the contract. In these circumstances, the interim risk is the amount certified under the final certificate and a final determination of the issue made pursuant to a Court or the dispute resolution process set out in the contract. As the dispute resolution process (whether it be Court, expert determination, arbitration, or another dispute resolution forum under the contract) can take substantial time to finally determine the issues, if the security is an interim risk allocation tool, the principal will be able to have recourse to the security until the matter is finally determined. If it turns out the final certificate was incorrect, this will not prevent the principal from having recourse to security. It will mean that the decision maker will generally order for the principal to make payment of however much they have been overpaid so that the parties’ entitlements are finalised and concluded.

Bringing it back to the case study, Uber, the Superintendent certified that an amount was payable by the contractor to the principal. The contractor disputed the amount that was payable and did not make payment as and when required by the final certificate. As a result, the principal was entitled to have recourse to the security once it had complied with the conditions of recourse under the contract. As these conditions were predominantly notice requirements, the principal was not prevented from having recourse to the security. If Uber had made payment of the final certificate amount and issued the notice of demand, it is arguable that MIFA would not have been able to have recourse to the security. This is because MIFA would not be able to claim that the amount in the final certificate remained unpaid. As a result, contractors are put in the difficult position of paying a disputed amount or the principal may have recourse to the security.

The Takeaways

Intention of the Security

Parties need to be clear about the intentions behind providing security. This can be achieved by drafting the purpose of the security into the security clause of the contract. If there is an intention for the security to be an interim risk allocation tool, it will be much easier for the security holder/principal to have recourse to the security. If the security is only to protect against the failure to pay a sum owing by a party, then the security holder will be able to have recourse to the security if the amount is not paid as and when required under the contract.

Conditions of Recourse

Conditions of recourse essentially mean the security holder promises that they will not have recourse to the security unless those conditions are met. If the parties agree on the circumstances where the security holder can or cannot have recourse to the security, this will bind the security holder irrespective of the terms of the bank guarantee. Typical conditions include where the principal is entitled to payment under the contract.

If the security provider seeks to prevent the security holder from having recourse to the security, the security holder (generally the principal) will be required to show that it has met and/or followed the contractual process.

It is important to note that some jurisdictions, such as Queensland, may impose restrictions on when a party can have recourse to security. For example, under the Queensland Building and Construction Commission Act 1991 (QLD) section 67J(1)-(2), a principal may use a security or retention amount only if they have given 28 days’ notice in writing to the contractor advising of the proposed use and the amount owed. In these jurisdictions, the additional conditions will be imposed in addition to with the conditions of recourse under the contract.

Interim amounts owed

The crux of the purpose of security comes to a head in circumstances where a party disputes the amount owed. For instance, when the Superintended issues that final certificate (as was the case in Uber). If the security clause is drafted to allow for the security to be an interim risk allocation tool, the principal will be entitled to have recourse to the security. This will mean that contractor holds the risk of being out of pocket until the matter is finally determined.

If you are a developer, a contractor or a subcontractor and you or someone you know needs advice in respect of whether it is possible to have recourse to security, please get in touch with the staff at Bradbury Legal. Alternatively, if you are in the process of drafting and negotiating a contract, including the clauses relating to security, Bradbury Legal is able to assist and help you know exactly what you are signing up to.