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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

A tale of two Acts

Last week the NSW Parliament passed two significant pieces of legislation for the construction industry. The first, passed on Tuesday 3 June 2020, was the Design and Building Practitioners Bill 2019 (at the time of writing, awaiting assent). The second, passed on 4 June 2020, was the Residential Apartment Buildings (Compliance and Enforcement Powers) Bill 2020 (which will commence on 1 September 2020).

Design and Building Practitioners Act 2020 (the DBP Act)

The DBP Act sets up a legislative regime which regulates design practitioners who provide designs for certain types of building works.

The DBP Act introduces a number of new regulatory provisions in relation to:

  • obligations of design practitioners, principal design practitioners and building practitioners;
  • restrictions on carrying out of professional engineering work and specialist work;
  • introduction of a statutory duty of care in favour of owners corporations and associations; and
  • registration, disciplinary action, investigations and enforcement decisions in relation to design practitioners

Important definitions:

The Act introduces several new terms into the law in order to set up the regulatory framework. The most notable definitions are set out below:

Building element means:

  • fire safety systems for a building within the meaning of the Building Code of Australia;
  • waterproofing;
  • an internal or external load-bearing component of a building that is essential to the stability of the building or a part of it;
  • a component of a building that is part of the building enclosure;
  • those aspects of the mechanical, plumbing and electrical services for a building that are required to achieve compliance with the Building Code of Australia;
  • other things prescribed by the regulations.

Design compliance declaration means a declaration as to whether or not:

  • a regulated design prepared for building work complies with the requirements of the Building Code of Australia;
  • the design complies with other applicable requirements prescribed by the regulations;
  • other standards, codes or requirements have been applied in preparing the design.

Essentially, the design compliance declaration confirms that the design practitioner has complied their obligations at law and under contract.

Regulated designs means:

  • a design that is prepared for a building element for building work;
  • a design that is prepared for a performance solution for building work (including a building element); or
  • any other design of a class prescribed by the regulations that is prepared for building work.

Being an incredibly broad definition means that anyone that provides design services, such as engineers, architects and other design consultants, will likely be covered by the DBP Act and therefore subject to its requirements.

Compliance declarations

The DBP Act requires a registered design practitioner and principal design practitioners to provide a compliance declaration to a person if:

  • the practitioner provides the person with a regulated design prepared by the practitioner; and
  • the design is in a form suitable for use by that person or another person in connection with building work.

Failure to comply with the compliance declaration provisions by registered design practitioners can result in fines of up to $165,000 for corporations and $55,000 for other persons. However, if a person makes a design compliance declaration that the person knows to be false or misleading, they could face a fine of up to $220,000, two years imprisonment, or both.

Duty of Care

The DBP Act imposes a duty of care on persons who carry 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 legislation states that this duty of care is owed to each owner of the land that the construction work is carried out. The duty of care also owed to all subsequent owners of the land.

The consequence of this provision is that builders and developers may end up having a duty of care in respect of defects for up to 6 years from the date that the loss was suffered. Builders will also want to consider these potential liabilities in conjunction with the 10 year limitation period for defective building work under the Environmental Protection and Assessment Act. The 10 year period for defective building work commences from the date of completion.

Other things to note with the statutory duty of care:

  • it cannot be delegated;
  • it cannot be contracted out of;
  • it operates in addition to the statutory warranties in the Home Building Act.

Practical considerations:

  • Like the Environmental Protection and Assessment Act, the DBP Act relies on the Regulations to give form and substance to many of the operative provisions of the DBP Act. At the time of writing, the Regulations for the DBP Act were not available for review.
  • Design professionals and head contractors will need to update their insurances to ensure they are compliant with the new provisions and duties of design professionals.
  • Builders and others that engage in construction work will now have a much greater duty of care to the land owners.

Residential Apartment Buildings (Compliance and Enforcement Powers) Act 2020 (the RAB Act)

The RAB Act is more restricted in its application, applying only to residential apartment buildings. The purpose of this legislation is to prevent developers from carrying out building work that might result in serious defects to building work or result in significant harm or loss to the public, current occupiers and future occupiers of the building.

Notification for intended completion

From 1 September 2020, developers will be required to provide the Secretary of the Department of Customer Service a notification that they expect completion to occur and an occupation certificate issued within 6 – 12 months from the application. The Secretary is given the ability to make orders prohibiting the issue of an occupation certificate in relation to residential apartment buildings and may prevent the registration of a strata plan for a strata scheme in certain circumstances.

Investigations

The RAB Act authorises the following people to carry out investigations:

  • Building Commission;
  • an employee of the Department of Customer Service;
  • investigators under the Fair Trading Act 1979;
  • a council investigation officer under the Environmental Planning and Assessment Act 1979; and
  • a person set out in the regulations of the RAB Act.

These authorised officers are given various information gathering powers including being able to request information or records from persons where it is connected with an authorised purpose. Further, an authorised officer is able to enter premises without the need for a search warrant and will be able to undertake actions including:

  • examine and inspect any thing;
  • take and remove samples of a thing;
  • take photographs or other recordings that the authorised officer considers necessary;
  • copy of any records; and
  • seize a thing that the authorised officer has reasonable grounds for believing is connected with an offence against the RAB Act or its regulations or a serious defect in a building.

These powers are extensive and serious. Builders and developers should be seek legal advice. The Secretary for Customer Service is also empowered to issue stop work orders and rectification orders. Failure to comply with these orders may result the Secretary taking any action necessary or convenient to ensure the order is complied with. The cost of these actions are then able to be recovered by the Secretary.

Practical considerations:

  • Developers are required to give at least 6 months’ notice (but no more than 12 months) before an application is made for an occupation certificate.
  • Developers and builders should seek legal advice as to their rights in respect of the RAB Act. The powers of the authorised officers are extensive and the consequences for breach are serious.

Summary

The DBP Act and the RAB Act represent a major regulatory change from the NSW Parliament which will have serious consequences for building professionals. While these legislative reforms are aimed at promoting confidence in the building industry in light of developments such as Mascot Towers and Opal Tower, they radically shift the current status quo for building professionals. Those who carry out building work, from consultants and designers to builders and developers should seek specific legal advice as to where they stand in respect to these new legislative regimes.