Implied Contractual Terms for Payment

You hire a builder to demolish and rebuild your house under a “cost plus” contract, meaning you are obligated to pay the builder’s costs plus a 10% margin. To make sure you know what you are paying for, you ensure the contract requires detailed and itemised invoices with every progress payment claim raised by the builder. The builder has one year to complete the house. What would you do when the builder goes over $1 million and 3 years past budget? Would you decline to pay progress payments which did not comply with the contract, because they lacked the itemised costing?

 

This was the case in Renbar Constructions Pty Ltd v Sader [2022] NSWSC 172. The Court considered whether the builder, Renbar Constructions, was entitled to recover the balance of the building costs incurred in performance of the contract. The Court also considered how much in damages the owner, Dr Sader, would be entitled to for defects, and the significant delay to the completion of construction.

In total the builder raised sixteen progress claims, a dozen of which were paid by the owner despite the progress payment claims being non-compliant with the contract, which required detailed costing. Later, a dispute arose about the true cost and value of the building works, the lengthy delay, and defects with the building works.

The Court found a gap in the contract. On one hand, the contract required the owner to pay the “price of the building works in the manner and at the times stated in the contract”. On the other hand, it required the owner to pay “progressively as claimed” by the builder; claims which needed to be accompanied by invoices for building materials and other documents to entitle the builder to payment. The gap in the contract was found in the circumstances of the case— the owner was obligated to pay for the building works, but the builder was not entitled to payment until a progress claim was issued. Did the contract entitle the builder to payment when the payment claims did not comply with the contract requirements?

The Court found that the contract must have had an implied term that required the owner to pay the price for the building work done within a reasonable time, even though no valid progress payment claims were issued by the builder. The Court may infer that an implied contractual term exists if it is fair, obvious, clear, necessary to give business efficacy to the contract, and not in contradiction with other terms of the contract.

Consequently, Dr Sader could not rely on the lack of a valid progress payment claim as a defence against payment of the balance of the price for the building works. Sader could (and did) claim damages for the building defects and delay as a breach of contract.

Litigation for construction matters can be costly and unpredictable. But this risk can be minimised with the clear and careful drafting of contracts although, as this case shows, even standard form contracts can result in disputes. If it seems a project is becoming contentious, it may be worthwhile to engage legal assistance sooner rather than later to understand your rights and obligations, and before a costly dispute arises.

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.

“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].

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.

Long-Stop Action: Deadlines for Bringing Building Claims

The New South Wales Court of Appeal has recently given guidance to difficult questions about time limits for bringing claims for defective building work. It has confirmed the brutal reality that building claims must be brought within 10 years of completion of the work (and in most cases, much sooner).

The case centred around the all-important ‘long-stop’ limitation period for making building claims for defective works, which is 10 years from the date that the works were completed. It was a case of fine distinctions, and heavy on statutory interpretation.

The argument centred around Environmental Planning and Assessment Act 1979 (NSW) (Act).

No doubt the parties involved could never have imagined that so much ink would be spilled because of the simple fact that the development consent concerned was issued before 1998. The three-member Court split 2-1 on whether the current version of the long-stop limitation period applied to building work completed under development consents issued before 1998.

However as always, there are broader and more universal lessons that can be taken from the case.

In this article, we dive into the current section 6.20 of the Act (Current Long-Stop), and its similar predecessor, section 109ZK of the Act (Previous Long-Stop). We then consider the facts of the case, the points on which all judges agreed, and the majority decision where there was disagreement. We conclude with what we can take from this case going forward.

Long-Stop Limitation Period

All people involved in building need to be aware of limitation periods. These are time limits for bringing claims. If an otherwise meritorious claim is brought outside the limitation period, then a court will not consider it, no matter how well-supported it is or how “unjust” it may seem.

For this reason, anyone who believes that they have a claim, or will face a claim, needs to seek legal advice as soon as possible. This is especially true for building cases. Very often the clock will have started ticking as soon as the work was finished, regardless of when the problems first appeared. A few days can very well be the difference.

It is also important to bear in mind that multiple limitation periods may apply for a particular case. This article discusses the ‘long-stop’ limitation period, but there are other limitation periods that may take priority. For example, for residential building jobs, the Home Building Act has a very complicated regime for limitation periods, which range from two years to six years depending on the type of claim brought. These limitation periods apply notwithstanding anything in this article. Again, legal advice must be sought for the individual case.

The “long-stop limitation period” in broad terms is a 10-year limit from the date of completion of the work on when building claims can be brought to a Court. In most cases, this will be the date when the final occupation certificate was issued.

The Case

The case concerned works of a subcontractor for a main contractor completed in 1997 for a shopping centre and hotel on George Street, Sydney. The subcontractor had constructed an exhaust duct system that serviced the shops and restaurants in the shopping centre.

After the works were complete, Sydney Capitol Hotels Pty Ltd (Sydney Capitol) occupied the building. Meanwhile, Bandelle Pty Ltd (Bandelle) assumed the liabilities of the subcontractor under a scheme of arrangement sanctioned by the Federal Court of Australia in 2014.

In 2017, fire and smoke from kitchen exhaust at the bottom of a building spread to the hotel in the upper levels of the building. This caused the sprinkler system to activate. Sydney Capitol alleged that the subcontractor had breached its duty of care, as the shaft for the exhaust duct system was not constructed in accordance with the certified plans. The shaft did not extend beyond the roof sheeting, and so it was alleged that it was not properly fire-rated in accordance with the Building Code of Australia.

Bandelle denied that the subcontractor’s construction was defective. However, it also claimed that Sydney Capitol’s claim was a “civil action for loss and damage arising out of or in connection with defective building work within the meaning of s 6.20 of the Planning Act”, which was required to have been brought within 10 years of the completion of the building works.

If true, Sydney Capitol would be prevented from making the claim at all.

The Laws

The Current Long-Stop (s 6.20), commencing in 2018, provides:

“(1) A civil action for loss or damage arising out of or in connection with defective building work or defective subdivision work cannot be brought more than 10 years after the date of completion of the work.”

The Previous Long-Stop (s 109ZK of Part 4C) provided:

“(1) Despite any Act or law to the contrary, a building action may not be brought in relation to any building work:

(a) more than 10 years after the date on which the relevant final occupation certificate is issued, or …”

Clause 34 of the Environmental Planning and Assessment (Savings and Transitional) Regulation 1998 (NSW), applied to the Previous Long-Stop until 2012. Clause 34 provided:

“Part 4C of the amended EP&A Act 1979 does not apply to or in respect of any development carried out under the authority of:

(a) a development consent granted under the unamended EP&A Act 1979 …”

The upshot was that because of Clause 34, the limitation period in the Previous Long-Stop did not apply to a development carried out under the authority of a development consent that was issued before 1998.

The Issues

The big issue for the Court of Appeal was: whether the Current Long-Stop was affected by the Clause 34. The answer may have seemed like an obvious “no”, as Clause 34 had been repealed in 2012. However, Parliament had confusingly stated its intention that the Current Long-Stop was to carry on the effect of the Previous Long-Stop. The two laws had very similar drafting. Moreover, there was an argument that the rules of statutory interpretation required that the effect of Clause 34 continue after its repeal for some cases.

If the Current Long-Stop was affected by Clause 34, then there was a good chance that Sydney Capitol could bring its claim, unrestrained by the limitation period. However, if the Current Long-Stop was not affected, then Sydney Capitol’s claim could be dismissed.

There was a second issue: essentially, if it applied to a case, how wide should the Current Long-Stop be interpreted? Should it prevent all types of claims that result from building work, even if the building work was not completed by the other party, as was the case here?

Does the Current Long-Stop Apply to pre-1998 Developments?

The casenote for this issue appears simple, but in the words of White JA: “Even the experienced lawyers engaged in the litigation did not come to grips with the intricacies of the legislation and regulations at the hearing before the primary judge, and in some respects, not even on appeal.” Showing that laws are complex even for the best legal minds in NSW, the Court of Appeal was required to undertake a lengthy process of statutory interpretation, and it arrived at a 2-1 split on the main issues of the case. At the end of His Honour’s judgment, White JA called for Parliament to make the intention of the Acts and their amending Acts clear for those who are not minded to read the judgment.

The 2-1 majority found that the Current Long-Stop applied to the construction completed under a development consent issued before 1998.

The majority also found that the Current Long-Stop was not affected by Clause 34. Building carried out pursuant to development consents issued before 1998 (or any time) were covered by the Current Long-Stop.

Unfortunately for Sydney Capitol, this meant that the very wide phrasing of the Current Long-Stop applied to its own case. A different majority found that had the Previous Long-Stop still applied today, Sydney Capitol could have brought its claim.

The Operation of the Current Long-Stop

Accepting that the Current Long-Stop applied, what was the effect of this?

Essentially, claims for economic loss from defective building work must be brought at a maximum within 10 years of the completion of the work, irrespective of when the defects become manifest.

As the judges observed, the Current Long-Stop is designed to create some certainty for parties in the case of latent defects, which may only become known after some time and in piecemeal way. Other limitation periods (contract law or negligence) that also apply will often kick in only when damage becomes manifest.

In contrast, the long-stop limitation period applies notwithstanding any timing of defects becoming visible. The only relevant date is when the building work is completed, which is usually defined to be when the final occupation certificate is issued. From this time, there is a 10-year period during which a claim for economic loss must be brought. This provides builders with some degree of protection.

The Current Long-Stop has very wide phrasing. It applies to all who seek to bring claims for property or economic loss that arise from defective building work, including for negligent design and certification. The only apparent exceptions are for claims brought for death or personal injury.

Unfortunately for Sydney Capitol, the majority found that the damage that it suffered arose out of or was in connection with defective building work. The smoke damage from the fire was caused by the allegedly defective building work (or so the claim ran). Even though the building work failed to prevent the damage, rather than causing it directly, it was still caught by the Current Long-Stop.

More brutal for Sydney Capitol was that the company was not even the original owner of the property or the successor in title. Further, its opponent Bandelle had not completed the work but (in effect) guaranteed the work. Essentially, both parties had taken over the pre-existing rights and obligations of the owner and the builder. Yet the Court was unanimous in finding that these facts did not matter. All that mattered was that the claim concerned defective building work.

Consequently, even though the damage only became apparent to it in 2017, almost twenty years later, Sydney Capitol was barred from bringing a claim.

One final note, once again: very often, claims must be brought even sooner than 10 years. Depending on the type of building and the type of claim brought, another limitation period may make this period even shorter.

The Implications

Much will be written about this case, and a lot of it will be relevant to lawyers rather than builders.

Nevertheless, the case demonstrates the brutal reality of limitation periods. Sydney Capitol was not even a successor in title, and it occupied a commercial premises in 1998. It only became aware of a defect in 2017. Nevertheless, it was prevented from claiming damages against anyone involved in the defect.

The case also shows the need for rigorous inspections prior to occupying or owning an older property. Sometimes, the only protection that incoming purchasers will have is prevention rather than the cure, if problems take years to become obvious.

However, the Current Long-Stop gives little comfort for those whose property suffers from latent defects, that only make themselves known long after building work is completed. Parliament has decided that after 10 years of completing a job, builders can live with relative certainty that they can be free of claims.

The case does not settle the question of whether parties can contract out of the long-stop limitation period, or similarly enter into a deed to that effect. The courts in NSW have not yet been required to resolve this question definitively.

Fitz Jersey under fire: Building Commissioner issues Prohibition Order under new powers

Whilst the Residential Apartment Building (Compliance and Enforcement Powers) Act 2020 (NSW) (RAB Act) was only enacted 6 months ago, the Building Commissioner has shown his commitment to exercising the new powers conferred on his Department to regulate non-compliant developers and protect the interests of buyers in new residential developments.

The RAB Act commenced on 1 September 2020 and introduced a range of measures to regulate the carrying out of residential building work by developers, including:

  1. a new occupation certificate notification scheme; and
  2. the conferral of broad investigatory and enforcement power on the Building Commissioner.

(For more information on the RAB Act generally, please see our article from last year.)

As part of the Building Commissioner’s enforcement powers, on 21 December 2020, a Prohibition Order was issued to property developer, Fitz Jersey Pty Ltd (Fitz Jersey), preventing the issue of an occupation certificate and the registration of a strata plan in relation to its development at 563 Gardeners Road, Mascot NSW 2020.

Pursuant to section 9(1)(c) of the RAB Act, the Building Commissioner can make an order prohibiting the issue of an occupation certificate and/or the registration of a strata plan for a strata scheme in relation to a residential apartment building, if it is satisfied that a serious defect exists in the building. On two separate occasions last year, compliance officers from the Department of Customer Services conducted inspections of the building at Gardeners Road. During these inspections it was observed that building work carried out in relation to the fire safety systems was non-compliant with the performance requirements in the Building Code of Australia, which could result in serious defects.

The issue of a Prohibition Order has serious implications on a developer. Not only does it reflect poorly on their reputation in the industry (a register of Prohibition Orders issued is published publicly on the Fair Trading website), but it also has serious financial consequences as a developer cannot settle on contracts for sale and purchasers cannot lawfully occupy a building without an occupation certificate.

In November 2020, the Building Commissioner issued a Building Work Rectification Order pursuant to section 33 of the RAB Act also in relation to the building’s inadequate and non-compliant fire safety systems.

Residential developers should take heed of this as an example of the Building Commissioner’s willingness to exercise the new powers conferred by the RAB Act.

If you have questions about how the RAB Act may affect your project or would like further information on any of the above, please contact us at info@bradburylegal.com.au or (02) 9248 3450.

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.

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 9030 7400 or email info@bradburylegal.com.au.

NCC 2019 Amendment 1: Changes starting on 1 July 2020

In response to the recommendations of the Shergold Wier Building Confidence Report, the Australian Building Codes Board (ABCB) and the Building Ministers’ Forum have undertaken an out of cycle amendment to the National Construction Code (NCC). While the NCC was not due for review until 2022, the amendment known as “NCC 2019 Amendment 1” will be adopted by all Australian jurisdictions on 1 July 2020.

The NCC is a performance-based code containing technical standards for the design, construction and performance of buildings as well as for plumbing work and drainage systems. It is published and maintained by the ABCB and adopted by each Australian jurisdiction through its own legislation. For example, in NSW the NCC is given effect by the Environmental Planning and Assessment Act 1979 (NSW), the Plumbing and Drainage Act 2011 (NSW) and subordinate legislation.

The aim of the NCC is to create a uniform set of technical standards that apply to all Australian jurisdictions. However, as identified in the Shergold Wier Building Confidence Report, there have been a number of systematic issues with the implementation and enforcement of the NCC which has prompted NCC 2019 Amendment 1.

What will change?

Following a period of key stakeholder consultation last year, NCC 2019 Amendment 1 will introduce the following changes:

  • a new provision regarding egress from early childhood centres (NCC Volume One);
  • clarification of the concession that permits the use of timber framing for low-rise Class 2 and 3 buildings (NCC Volume One);
  • clarification that anti-ponding board requirements only apply to roofs where sarking is installed (NCC Volume Two);
  • an update to the Governing Requirements for all Volumes to require labelling of aluminium composite panels in accordance with SA Technical Specification 5344; and
  • correction of minor errors, including the correction of typographical errors and errors in diagrams.

In addition to the above, the ABCB announced last month that NCC 2019 Amendment 1 will also include a provision mandating the process for developing Performance Solutions. This process is based on the ABCB’s existing Development of Performance Solution Guideline and requires that the process for documenting Performance Solutions be commensurate with the complexity and risk of the design.

Unlike the other amendments, this amendment will not commence until 1 July 2021. However, as the process is included in NCC 2019 Amendment 1 there is plenty of time for industry participants to prepare necessary documentation to encompass the process for Performance Solutions prior to the amendment taking effect next year.

Other changes expected

It was also proposed that NCC 2019 Amendment 1 would include the new defined term of “building complexity”. The draft definition proposes a risk-based system from levels 0 to 5 for classifying complex buildings, which assists to identify buildings where additional regulatory oversight is needed during the design, construction and certification processes.

 

The ABCB announced last month that this new definition would not be included in NCC 2019 Amendment 1, however it has been published on their website with a six month consultation period for comments and feedback.

A copy of the preview of NCC 2019 Amendment 1 is available on the ABCB website via the NCC Suite.

If you or someone you may know is in need of advice regarding NCC 2019 Amendment 1 or the NCC generally, please contact our office by phoning (02) 9248 3450 or by email at info@bradburylegal.com.au.