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$1 per day LD’s in residential building contracts no longer rules out claims by owners for general damages for delay

Facts

In Cappello v Hammond & Simonds NSW Pty Ltd [2020] NSWSC 1021, Hammond & Simonds NSW Pty Ltd (Builder) entered into a standard form Housing Industry Association NSW Residential Building Contract for Works on a Cost Plus Basis (Contract) with Mr and Mrs Cappello (Owners) to renovate the ground floor of their house in Haberfield.

The LD’s for late completion was $1 per working day which was consistent with the default position under the Contract.

The works under the Contract were completed approximately 7 months late and the Builder made no requests for any extensions of time.  The Owners made various claims against the Builder, among them, was a claim for general damages for delay in the sum of $30,000.

Builder’s case

The Builder claimed that the Owners were only entitled to recover $1 per working day for delay in accordance with the LD clause in the Contract and that by making provision for LD’s in the Contract, the parties were taken to have intended to exclude a right for the Owners to also claim general damages for delay against the Builder.

Owners’ case

The Owners’ claimed that the LD clause did not provide the only remedy for the Builder’s delay because if it did, it would be void due to section 18G of the Home Building Act 1989 (NSW) (HBA) as it would have the effect of restricting the Owners’ rights in relation to the benefit of the warranty under section 18B(1)(d) of the HBA (that the work will be done with due diligence and within the time stipulated in the Contract).

What did the Supreme Court decide?

The Court found that:

  • the LD clause should not be interpreted as providing the only remedy for delay. Rather, by specifying the amount of LD’s so low at $1 per working day, instead the parties intended for the Owners to also have a right to claim general damages for delay (although in this case general damages were ultimately not awarded as the Owners did not meet the test for general damages that applies to breach of contract);
  • that an LD clause which limits a party to claiming nominal damages for a breach of a warranty restricts the rights of that person in respect of the warranty and is therefore void under section 18G of the HBA (which says that any agreement that restricts or removes the right of a person in respect of any of the statutory warranties is void); and
  • the outcome may have been different if the LD clause provided for the payment of a substantial amount in LD’s.

What does this mean for residential builders?

  • builders will be exposed in relation to existing contracts that stipulate $1 per working day (or a nominal amount for LD’s) as owners would be entitled to LD’s of $1 per working day plus general damages for delay by the builder;
  • any attempt to limit the builder’s liability for delay (including inserting a nominal amount for LD’s) will be void under section 18G of the HBA;
  • if builders wish to exclude general damages for delay in new contracts, they should insert a rate for LD’s that offers the owner a “substantial right” to compensation not just a nominal amount for breach of the statutory warranty (that the work will be done with due diligence and within the time stipulated in the contract); and
  • in order to limit the builder’s exposure for not only LD’s but also general damages for delay, builders should ensure that they claim all available EOT’s in relation to extending the contract period

The West Gate Tunnel leads to arbitration

The D&C JV contractors on the West Gate Tunnel (Project), CPB Contractors and John Holland (Subcontractors), have won the first round in their dispute against Transurban (Project Co) over the presence of contaminated “PFAS” soil in the tunnel area and subsequent purported termination of their contract due to force majeure.

In Transurban WGT Co v CPB Contractors Pty Ltd [2020] VSC 476, Victorian Supreme Court (VSC) refused applications designed to prevent the disputes from proceeding through arbitration.

Facts

The Subcontractors purported to terminate their contract with Project Co on 28 January 2020 due to the discovery and persistence of “PFAS” contamination, which it claimed was a “Force Majeure Termination Event” under the contract.[1] Since this time, the Subcontractors and Project Co have been engaged in disputes on the validity of the termination and various related matters.

By notice dated 2 March 2020, the Subcontractors sought to initiate a “downstream” arbitration with Project Co in relation to various claims.[2] Some 3 months later, Project Co initiated its own “upstream” arbitration in relation to various claims which it had passed upstream via its head contract with the State of Victoria.[3]

Project Co claimed the disputes were “Linked Disputes” under the contract with the Subcontractors. Project Co argued that clause 44A.3(a)(ii) operated to suspend the downstream arbitration while the upstream arbitration progressed (suspension clause).[4]

The Subcontractors sought to refer their various disputes with Project Co to arbitration. Project Co made an application for:

  1. a declaration that the suspension clause was enforceable; and

 

  1. an interlocutory injunction to restrain the Subcontractors from taking steps to progress the downstream arbitration until such time as the upstream arbitration was determined.[5]

The Subcontractor argued that the arbitral tribunal should decide whether to grant such relief to Project Co, not the court. The Subcontractor pointed to ss 5, 8, 9 and 17J of the CAAs which provide only limited powers for court intervention.[6]

The Subcontractor made a referral application to the VSC relying on s 5 and / or 8 of the Commercial Arbitration Act 2011 (Vic) (CAA), requesting the court refer Project Co’s query in relation to the operation of the suspension clause to the arbitral tribunal.[7]

Decision

Lyons J:

  1. found that the court had no power to make a declaration of the kind sought by Project Co;

 

  1. refused Project Co’s application for interlocutory injunctions; and

 

  1. granted the Subcontractor’s application to refer to the arbitral tribunal the question of whether the suspension clause was inoperative.[8]

Lyons J considered in detail the relevant law on the nature of arbitration and the limited ambit given to the court under the CAA. Some of His Honour’s key conclusions included that:

  1. the question whether the suspension clause is valid and enforceable was a matter ‘arising in connection with’ the contract between the parties and, therefore, it was a type of dispute the parties had agreed under their contract would be arbitrable;[9]

 

  1. the arbitral tribunal had the power to make orders relating to the validity, enforceability and/or applicability of the suspension clause of the kind sought by Project Co in court;[10]

 

  1. under the CAA the court’s power to grant interlocutory relief to matters which the CAAs apply derives from s 17J[11]. Accordingly, the court’s power to intervene is limited; and

 

  1. Project Co had failed to establish that the circumstances of the case were exceptional or objectively urgent such that court intervention was required.[12]

As a result, the Subcontractor’s claims in relation to the contract will be heard and determined by an arbitrator. The arbitrator will need to determine whether the suspension clause is enforceable and, if so, operates in the circumstances to pause the downstream arbitration.

Take Home Tip

Parties who agree to arbitration as their preferred dispute resolution forum should note that the courts are increasingly minded to allow arbitral tribunals to rule on their own jurisdiction or “competence” under the CAA. A party should closely consider whether their set of circumstances are truly urgent or exceptional to warrant intervention by the court. If not, it would be better to apply its resources in ventilating preliminary issues in the arbitration first, then challenging the arbitrator’s determination on those issues if necessary and as permitted by the CAA.

Importantly, Lyons J considered that he was bound by Hancock v Rhodes[13], being ‘a decision of an intermediate appellate court in circumstances applying sections of a uniform commercial arbitration act in force in each state in Australia.[14] This reinforces the relevance of the current decision of the VSC to parties in all States and Territories in Australia.

[1] At [10(1)].

[2] At [12].

[3] At [12].

[4] At [14].

[5] At [23].

[6] At [115] and [128].

[7] At [20].

[8] At [208].

[9] At [170].

[10] At [174].

[11] At [147] and [191].

[12] At [192] to [203].

[13] Hancock Prospecting Pty Ltd v DFD Rhodes Pty Ltd [2020] WASCA 77.

[14] At [147].

Construction Industry Lockdown: Stage 4 Restrictions for Metro Melbourne

The second wave of COVID-19 has continued to spiral in Melbourne in recent weeks, causing the implementation of Stage 4 Restrictions in Metropolitan Melbourne. The Stage 4 Restrictions will be in force from 6:00PM on Sunday, 2 August 2020 for a period of 6 weeks until Sunday 13 September 2020.

Described by Victorian Premier Daniel Andrews as the ‘lifeblood’ of the Victorian economy, the building and construction industry has largely avoided previous restrictions. However, the Stage 4 Restrictions sees authorities issuing a specific directive to the industry to significantly reduce their operations.

We have compiled some relevant information detailing how the restrictions apply to the building and construction industry below.

Who is caught by the Stage 4 Restrictions?

The Stage 4 restrictions will apply to building and construction industry participants operating on construction projects located within the 31 local government areas that make up Metropolitan Melbourne.

For all businesses operating in these areas, the standard order is that any employee who can work from home is required to do so. This would likely apply to any employee who is providing an administrative or supportive function that can be performed remotely.

Building and construction industry workplaces, whilst permitted to continue operations, are deemed high risk, and are required to design and implement COVID-19 Safety Plans to ensure the prevention and management of COVID-19 transmission.

The level of restrictions that apply to a business will depend on the size of the project it is working on. Projects have been classified as either Small Scale, Large Scale or State and State Civil as follows:

  • Large Scale Construction: defined as any building or construction project of more than 3 storeys (excluding a basement level) and would typically include projects such as high rise apartment buildings or factories;
  • Small Scale Construction: defined as any building or construction project of 3 storeys or less (excluding basement level) and would typically include residential or domestic home building projects; and
  • State and State Civil Construction: defined as any large infrastructure project funded by the state, typically including projects such as trainlines, roads, schools and hospitals.

What are the Restrictions

Large Scale Projects

Businesses who are working on a large scale project are required to limit their operations on the project site to a maximum of 25% of the employees that would normally be on site, and to implement a High Risk COVID-Safe Plan.

Small Scale

Businesses operating on a small scale project are to limit the number of employees on site at any one time, inclusive of supervisors. Small scale projects also require employers to implement a COVID-Safe Plan.

State and State Civil

Whilst businesses who are currently working on state and state civil projects are exempt from the strict limitations above, they are required to implement a High-Risk COVID Safe Plan on their sites.

Employers who are operating on either large or small scale projects are required to be able to demonstrate that they are complying with the above limits, without blending shifts.

In addition, workers who would typically work across multiple worksites are permitted to work at just one worksite during the Stage 4 Restriction period.

Who is enforcing the lockdown and how?

Ultimately, the onus of ensuring compliance with the new restrictions, as well as the implementation of an appropriate COVID-Safe Plan will fall on the employer.

The Victorian Department of Health and Human Services has advised that it will work together with industry bodies, WorkSafe and Victoria Police to undertake the necessary enforcement and compliance activities.

The Department of Health and Human Services will also work together with WorkSafe to co-ordinate intelligence on potentially non-compliant businesses.

Businesses found to be non-compliant with their obligations under the Stage 4 Restrictions can be issued on the spot fines of up to $9,913, for:

  • refusing or failing to comply with the emergency directions;
  • refusing or failing to comply with a public health risk power direction; and
  • refusing or failing to comply with the Public Health Directions to provide information.

It is also possible for a business to be fined up to $100,000 through the courts for non-compliance.

Is there any assistance if my business is suffering?

The Victorian Government has announced an extension of its Business Support Fund scheme, offering grants to eligible businesses. Eligible businesses may be able to apply for a one-off grant of:

  • $10,000 if in Metro Melbourne and Mitchell Shire; or
  • $5,000 if in regional Victoria except Mitchell Shire.

Conclusion

The unprecedented stage 4 restrictions, whilst only applying to Metropolitan Melbourne, will likely see a significant slowdown of the building and construction industry in Victoria. Flow on effects are likely to be felt by suppliers, sub-contractors and services to the building and construction industry.

We previously published a short list of issuesshort list off issues to be mindful of when drafting and administering contracts during COVID-19. It is crucial for Victorian building industry participants to review their relief entitlements.

This article is based on current government recommendations and advice current as at the date of writing. It is intended to provide information and assistance to members of the building and construction industry who are affected by the Stage 4 Restrictions in Melbourne only. The above discussion is not intended to be legal advice, and readers should bear in mind that every case is different.

If you or someone you know wants more information or needs help or advice, please contact us on 02 9248 3450 or email info@bradburylegal.com.au.