Building Defects – Damage to Balconies

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Due to the widespread construction of high density apartments and townhouses there has also been an increase in the construction of balconies. Balconies are susceptible to water damage which can lead to damage to the internal elements of the building.

The defective construction of balconies has become an increasingly common dispute affecting owners’ corporations.

In this article we look at some common defects and a case that illustrates the issues facing owners and builders if a dispute arises.

Causes

Defects with balconies can arise as a result of poor architectural design, defective construction by builders or maintenance issues.

For example, an inadequate slope that does not drain water properly, or drains it toward the building can lead to water ponding on the balcony.

When water ponds on a balcony it might bring to light issues with the waterproofing membrane at the door threshold or on the balcony itself. For example, waterproof flashing may have been omitted or damaged during the construction of the balconies.

Finally, balcony leaks might be caused by issues such as render cracking caused by foundation movement as a result of lack of property maintenance.

Disputes in relation to balcony defects can be complicated due to the technical nature of the disputes and often cannot be satisfactorily resolved without expert evidence as to the cause of the defects.

Case Study

The case of Guney & Ors v CFM Property Group Pty Ltd (Domestic Building) [2013] VCAT 514, involved a dispute between 4 owners of townhouse units and the builder of those units, regarding the alleged defective construction of the balconies. The owners alleged that water leaks in the balconies and exterior cladding had occurred.

The parties reached a settlement of the dispute at mediation whereby it was agreed that the builder would rectify the defective balconies within a certain timeframe. The builder failed to undertake the rectification works, stating that he was unable to complete those works due to inclement weather.

The owners pursued their claim before the Victorian Civil and Administrative Tribunal. And each party retained a building consultant who provided expert evidence before the Tribunal.

The Tribunal found that the owners had given the builder ample opportunity to rectify the defective balconies and that it would be unreasonable to require the owners to give the builder a further opportunity. Instead, the Tribunal assessed the owners’ damages as the costs they would incur in engaging an alternative builder to attend to the rectifications.

Conclusion

Building defects can have serious detrimental effects on the use, enjoyment and value a property. It can often be difficult to identify the party responsible for rectifying balcony defects. Without expert legal advice, it is possible that the costs of the defect will be unfairly borne by an incorrect party.

If you or someone you know wants more information or needs help or advice, please contact us on +612 9248 3450 or email info@bradburylegal.com.au.

No Builder’s Licence was no barrier to Work Order! What?

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An appeal in the New South Wales Civil and Administrative Tribunal has confirmed the limited circumstances in which the Tribunal will make a money order rather than a work order for rectification of defective building works.

In Precise Builders (NSW) Pty Ltd v Jones & Krel [2018] NSWCATAP 112 the Tribunal Appeal Panel, having regard to s 48MA of the Home Building Act 1989 (NSW), determined that defective building work should be remedied by way of a work order, as opposed to a money order, even though the contracting builder did not hold a licence to complete such works.

The relevant provision of the Act reads:

A court or tribunal determining a building claim involving an allegation of defective residential building work or specialist work by a party to the proceedings (the ‘responsible party’ ) is to have regard to the principle that rectification of the defective work by the responsible party is the preferred outcome.

Background

The owners (Jones and Krel) contracted the builder (Precise Builders Pty Ltd) to carry out residential building work. The owners subsequently applied to the Tribunal seeking a money order for $28,000 against the builder as damages for cracking to a brick parapet wall above the garage. The cracking was caused by a defective steel beam which supported the wall – the beam was neither designed or manufactured by the builder.

The Tribunal ordered rectification works to the owners’ property as opposed to the money order sought.

The builder appealed, seeking to have the work order replaced with a money order for $18,845.84, being the rectification costs assessed by an expert quantity surveyor and provided in evidence during the Tribunal hearing. The grounds of appeal included that:

  • the Tribunal’s decision was not fair and equitable;
  • the parties preferred a damages award rather than the work order (notwithstanding that the owners initially sought $28,000);
  • the builder did not hold a licence to carry out the remedial work nor could it provide Home Warranty Insurance for the work – a money order would facilitate rectification by licensed / insured builders who specialised in remedial work;
  • the defect arose because of the engineer’s specifications and was not attributable to the builder;
  • a work order would exacerbate an already-tense relationship between the parties.

The decision

The appeal was dismissed, and the work order upheld.

The Tribunal determined that although ‘it does not have to order the preferred outcome [set out under the Act] … in order not to do so some persuasive reason or evidence is required … to rebut the presumption. Such an assessment is objective ‘and the Tribunal must weigh up the factors in each case and make the decision accordingly.’

To challenge a deviation from this preference requires evidence of a significant error or injustice in exercising the discretion, such that the decision-maker has acted upon an incorrect principle or been guided by irrelevant or superfluous matters.

Although the builder’s licence lapsed in 2014, the Tribunal noted that it was properly licenced at the time the work was undertaken and that the defect constituted a ‘major defect’ under s 18E of the Act.

Whilst the builder was not ‘itself responsible for the defective beam and the resulting damage there was a breach of the statutory warranty in s18B(1)(e) of the Act.’

The Tribunal upheld the order for the builder or licensed contractors on its behalf, to return to the owners’ property and carry out the rectification work.

The Tribunal’s reasoning

The Tribunal reiterated the policy objective of the Act, namely to ensure that owners are afforded the benefit of the statutory warranties contained therein. Consequently, if a contracting party enters into a contract with a licenced third-party builder to carry out remedial work, it satisfies the obligations contained in the Tribunal’s orders and the owners retain the protection of the implied warranties under the Act as non-contracting owners pursuant to Schedule 1.

Both parties in this case were in favour of a money order, the owners clearly stating that they would prefer not to have the builder return to carry out the rectification work. Despite this, and the fact that the builder had allowed its licence to lapse and was not properly licensed to perform the rectification work, the Tribunal considered it appropriate to uphold the work order.

Conclusion

The case reiterates the Tribunal’s approach in preferring a work order over a money order for rectification of defective building works.

Builders who have contracted to do work that is found defective (whether or not the defect is attributable to the builder) will likely need to stay around to carry out the repairs (or at least supervise them) rather than paying out an aggrieved owner. Owners and builders may therefore need to extend a period of tolerance whilst remedial works are performed.

If you or someone you know wants more information or needs help or advice, please contact us on +612 9248 3450 or email info@bradburylegal.com.au.

What are Latent Conditions and how do you manage the risk?

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The term ‘latent condition’ can strike trepidation in the heart of the most hardened builder or sub-contractor, especially when the term is preceded by the words ‘unexpected’ or ‘unforeseen’.

Depending on what the latent condition is and the expense involved in rectifying any problems that arise as a result of the latent condition, the existence and subsequent discovery of a previously unforeseen site condition can be the difference between turning a profit on a job and losing a considerable amount of money.  So it is important to understand what is meant by the term and what steps you can take to proactively manage your risk and exposure.

What is a ‘latent condition’?

Latent conditions are physical conditions which are either on, under or adjacent to a site. They cannot easily be identified during a routine site inspection and may also remain hidden even after a certain amount of site investigation has been carried out based on information provided at the time a tender or contract was prepared.

What constitutes a latent condition will vary depending upon the site in question.

Examples of latent conditions you may encounter on a site include hidden utility services such as power and drainage lines (if not shown on tender documents), mine shafts and soil contamination.

Who is responsible for latent conditions?

Just who will be responsible for any latent site conditions is an important consideration in any tender or contract process. Ideally the question of responsibility for any latent conditions should be considered and addressed as early as possible in the tender or pre-contract phase of any development or build.

Ultimately, the question of who will bear the risk of additional costs associated with any latent conditions comes down to a question of ‘What does the contract provide’?

Principals generally would prefer to pass the risk of any latent defects on to contractors and, not surprisingly, contractors would generally prefer the risk to be at the expense of the principal or at least shared with the principal.

If in doubt check and double check your contract and tender documents and always seek legal advice as soon as possible to avoid a potential costly dispute developing down the track.

Managing the risk of latent conditions?

Prior to entering into any contract or site investigation stage it is important that both principals and contractors are clear as to where the risk of any latent conditions lies.

In particular, consideration should be given to a range of matters including:

  • Deciding whether one party will bear all the risk of latent conditions or whether the risk and cost associated with any latent conditions will be shared between the principal and any contractors;
  • If a contractor is going to be responsible for the risk of any latent conditions, allowing them, as far as any time limits permit, sufficient time to carry out their own risk assessment and site inspections so as to ensure they are aware of the potential risks and costs involved;
  • Deciding what site testing is to be undertaken and who will bear the cost of any testing;
  • Considering any historical searches available in relation to either the subject site or any neighbouring properties; and
  • Agreeing, or providing, a framework that requires all parties to share any knowledge of any potential latent conditions that they suspect may be present or which are uncovered during any routine site testing and investigation.

What if liability for latent conditions is excluded or limited by contract?

If you are a principal and wish to exclude any liability for latent conditions it is recommended that you seek legal advice prior to preparing any contract or tender documentation.

Similarly, if you are a contractor and you are being asked to sign up to a contract where you will bear the risk of any latent conditions it is prudent to obtain advice prior to signing any documentation that may mean the chances of you turning a profit on a project are severely limited.

In particular, Courts in Australia have held that if a principal has a significant amount of bargaining power any exclusion clauses will be carefully scrutinised and must be properly drafted.

If there is any suggestion that a principal has been negligent or has provided any misleading or deceptive information or failed to provide any information that it already held they may well find themselves with an unenforceable exclusion clause and a large bill for any additional costs associated with a variation in works arising out of the latent condition. 

If in doubt seek advice first and sign on the dotted line later….

The old saying “a stich in time saves nine” is very apt when managing the risk and cost associated with latent conditions. Whether you are a contractor or principal it is always best to take a prudent approach to the issue of latent conditions and never to assume things will sort themselves out down the track as life and construction are rarely so simple.

If you or someone you know wants more information or needs help or advice, please contact us on +612 9248 3450 or email info@bradburylegal.com.au.

Construction contracts and unfair contract terms

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As reported by us at the time, in November 2016, the Australian Consumer Law (ACL) extended its unfair contract term provisions to certain small businesses. These provisions, which previously only applied to consumers, were introduced in an effort to level the playing field between small and large enterprises.

This article is intended to remind industry participants about the scope of the unfair contract term provisions and their relevance in business-to-business transactions within the construction industry.

Large businesses using standard form contracts to engage smaller operators should have reviewed their contract terms to ensure compliance and small contractors should be aware of what should and should not be included in a small business contract.

If you are unsure whether your business-to-business contracts comply with the unfair contract term provisions or whether a term would be considered unfair you should seek legal assistance.

The provisions apply to ‘small business contracts’

The unfair contract term provisions relate to ‘small business contracts’. These are business transactions when at least one of the parties is a small business (defined as a business employing fewer than 20 people), and the contract is a ‘standard form contract’.

The term ‘standard form contract’ is undefined but would essentially capture precedent contracts prepared by one party and offered on a ‘non-negotiable’ or ‘take it or leave it’ basis. The provisions apply to contracts for any type of goods or services with an up-front value of up to $300,000, or $1,000,000 where the contractual terms run for more than 12 months.

An unfair term contained in a small business contract will be unenforceable. The offending term will be struck out and, if possible, the remaining contract will remain in place.

The provisions took effect on 12 November 2016 however any contracts entered into prior to that time that have been varied will also be caught.

What is an ‘unfair contract term’?

A term is unfair if it:

  • creates a substantial imbalance between the parties’ rights and obligations; and
  • would cause a significant detriment (financial or otherwise) to the business if it were relied upon by the advantaged party; and
  • is not genuinely necessary to protect the interests of the advantaged party.

Factors generally considered in determining whether a term is unfair include:

  • the respective bargaining power between the parties;
  • the transparency of the unfair term and the way it is expressed (whether it is obvious and easy to understand);
  • the entirety of the contract and the surrounding circumstances.

Application in the construction industry

Builders and head contractors should ensure that when using standard form contracts to engage ‘small business’ subcontractors or independent contractors such as surveyors and architects that they comply with the unfair contract term provisions.

The provisions under the ACL have wider scope than previous legislation in most jurisdictions that prohibit onerous payment conditions such as ‘pay when paid’ terms. The ACL captures terms that may have previously been considered ‘the norm’ in the construction industry.

Recurring terms in standard construction contracts that might be deemed unfair when contracting with a small operator include:

  • Variation provisions which allow the head contractor to unilaterally vary the terms of the contract or the scope of works at any time. Unconstrained variation terms could be seen to cause significant detriment to a subcontractor. These terms should be redrafted by including provisions that enable the subcontractor to terminate if the variation is excessive or provisions that require the head contractor to give reasonable notice of variations.
  • Indemnity clauses that excessively extend liability to the subcontractor beyond what would reasonably be necessary to adequately protect the head contractor against loss or damage.
  • Liability clauses that exclude or disproportionately limit the liability of the main contractor even if they are partially at fault.
  • Termination clauses allowing the head contractor to cancel the agreement at any time ‘for convenience’ and without reason or default by the other party. Contracts should consider a fairer process for termination and set out the subcontractor’s rights or entitlements on termination. Reasonable notice of defaults or potential defaults and providing a timeframe for these to be remedied before terminating might also be more reasonable.
  • Entire agreement clauses or terms that imply that the subcontractor has no recourse to remedies outside the terms of the contract. These clauses could constitute misrepresentation.
  • Time bars which may provide onerous timeframes and notification procedures for subcontractors to claim for variations or an extension of time under the contract. The shorter the timeframe and more onerous notification requirements, the more likely the term will be considered unfair.
  • Principal discretion clauses which purport to give the head contractor the exclusive power to determine certain terms of the contract, for example, whether a term has been breached or whether work is considered defective.

Conclusion

If contracts have not already been reviewed, head contractors should ensure their small business contracts do not contain unfair terms which may be deemed unenforceable. Such clauses may attract unnecessary attention and could potentially affect the reputation of the business.

Rather than delete a potentially unfair clause entirely, terms may be redrafted so they are more even-handed whilst still protecting the legitimate interests of the business. Consideration should be given to ‘tiered’ clauses allowing an alternative clause to be adopted in the event that a more severe clause might be considered unfair.

If you are a small business contractor and believe you have entered into an agreement with unfair terms, you could request to have the term removed or try negotiating for a fairer replacement clause.

If you or someone you know wants more information or needs help or advice, please contact us on +612 9248 3450 or email info@bradburylegal.com.au.

Construction contracts and changes to insolvency laws

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Reforms to insolvency laws will prevent contracting parties relying on certain clauses in construction contracts effective from 1 July 2018.

The reforms introduce changes to the Corporations Act 2001 (Cth) and are likely to impact significantly on construction contracts.

The laws aim to assist contractors who are facing financial difficulties by allowing them to trade their way out of the predicament rather than having the contract unilaterally terminated. A contracting party will no longer be able to rely on an ipso facto clause to end a contract in certain circumstances pertaining to the other party’s financial position.

Participants in the building industry should be aware of the effect of these changes and review their contracts and internal processes accordingly.

What is an ipso facto clause?

Ipso facto is a Latin phrase which, broadly interpreted, means ‘by the fact or act itself’. Ipso facto clauses are regularly used in contracts to enable a party to terminate the contract based on the existence of a fact or circumstance, rather than default by the counterparty.

The trigger allowing the party to invoke the ipso facto clause will generally be an insolvency event. In the construction industry, such clauses can be grounds for a principal to terminate a contract when the subcontractor runs into financial difficulty. The provisions are drafted broadly to encompass not only actual insolvency but precursors to insolvency such as the appointment of an administrator.

The benefit to a principal of invoking an ipso facto clause is its ability to mitigate loss by taking action once the risk of insolvency becomes apparent. The contract will allow the principal to exercise certain rights before an actual insolvency occurs, such as:

  • terminating or modifying the contract;
  • suspending works, stepping into the contract and / or engaging third party subcontractors to complete outstanding works;
  • calling on bank guarantees, securities or retentions;
  • setting off claims against payment claims by the subcontractor.

How do the reforms change ipso facto clauses?

The new laws restrict a party from relying on an ipso facto clause by reason of:

  • the counterparty entering a scheme of arrangement or voluntary administration;
  • the counterparty’s financial position, credit rating or possibility that it might be under administration.

Effectively, the reforms put a ‘stay’ on a party exercising certain rights on the basis of a potential or pending insolvency. The contractor benefiting from the stay has an opportunity to continue receiving the benefit of the contract and trade its way out of financial difficulty.

If the contractor company subsequently goes into receivership or liquidation, the stay is lifted, the protection no longer exists, and the ipso facto rights will be enforceable.

The reforms do not affect other termination rights (such as non-performance).

In some circumstances, the stay may be lifted – either by arrangement between the administrator and the party seeking to rely on the ipso facto clause, or on application by that party to the Federal Court where it would be appropriate and in the interests of justice to do so.

The new laws are mandatory and cannot be contracted out of, with special government intervention powers being granted to address any loopholes.

The laws are not retrospective, thus any ipso facto clauses existing in contracts entered before 1 July 2018 will remain intact.

Why make these reforms?

The laws are part of an insolvency innovation reform package. They follow safe harbour provisions recently introduced to give additional personal liability protection to directors facing cashflow issues who take certain steps to better the company’s financial position.

The reforms aim to find an appropriate balance between encouraging enterprise and protecting the community.

By imposing a stay on the exercise of an ipso facto right in certain circumstances, it is hoped that a distressed contractor will be in a better position to trade its way out of the financial predicament and remain solvent.

What should those in the construction industry do?

Managing financial risk during a construction project has always formed an integral part of management. Introduction of the ipso facto regime places even greater importance for principals to implement proactive risk-management processes.

Moving forward, construction companies should understand the potential effect of the ipso facto regime on future contracts and review processes to ensure that they:

  • carry out comprehensive pre-contractual checks on all counterparties including company and name searches, PPSR checks and inspections of financial records;
  • have systems in place to identify early signs of insolvency of the counterparty;
  • obtain director guarantees and / or parent company guarantees;
  • consider / check termination for convenience clauses in contracts; and
  • strengthen other termination clauses that are not affected by the reforms such as termination based on non-performance.

If you or someone you know wants more information or needs help or advice, please contact us on +612 9248 3450 or email info@bradburylegal.com.au.

Bond… I’ve Been Expecting You… NSW Strata Building Bonds and Defect Inspection Scheme Finally In Play

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On 1 January 2018, a new strata defects bond and defect inspection scheme came into effect in New South Wales.  The new scheme is set out in Part 11 of the Strata Schemes Management Act 2015 (NSW) (Act).

In short, the new scheme applies to residential (or partly residential) strata developments that do not require home warranty insurance (ie developments of more than three storeys) and:

  1. requires developers, before an occupation certificate is issued, to lodge with the Department of Finance, Services and Innovation (Department) a bond equal to 2% of the contract price for the works (Defects Bond); and
  2. creates an independent defect inspection and reporting regime that is linked to the release of the Defects Bond.

The new scheme has been introduced in response to numerous cases of defective building works in high rise residential developments that often leave owners corporations out of pocket.  The need for the scheme is supported by the high volume of cases commenced by owners corporations against developers and builders for the rectification of defects.

The scheme does not apply to building work under construction contracts before 1 January 2018.

Defects Bond

Before an occupation certificate is issued for any part of the development, a developer of a residential (or partly residential) strata development that is more than three storeys high must lodge the Defects Bond with the Department.

The amount of the Defects Bond is 2% of the contract price, ie the total price paid under all applicable contracts for the relevant building work as at the date of issue of the occupation certificate.

The Defects Bond may be in the form of a bank guarantee or a bond.

Together with the Defects Bond, the developer must lodge with NSW Fair Trading various documents including: a copy of the building contract(s); relevant specifications; relevant warranties; ‘for construction’ and ‘as-built’ drawings; design certificates; and subcontractor certificates.

Owners corporation claiming on the Defects Bond

An owners corporation may claim all or part of the Defects Bond to meet the costs of rectifying any defective building work identified in the Final Report (discussed below) or with the consent of the developer.

A claim on the Defects Bond must be made within the later of 2 years after the relevant building work is completed or 60 days after the Final Report (discussed below).

The moneys realised from the Defects Bond must be used to rectify defective building work or for costs related to rectification.  Any excess amounts must be repaid to the developer.

Defect inspection regime

An independent building inspector (Inspector) must be appointed by the developer and approved by the owners corporation at a general meeting.  The Inspector must impartially carry out inspections of the building works at two different stages after completion and produce reports of the inspections – the Interim Report and the Final Report.

All costs incurred in respect of inspections and the production of the Interim Report and the Final Report are to be borne by the developer.

Interim Report

The Inspector must prepare the Interim Report and provide a copy to the developer, NSW Fair Trading, the owners corporation and the responsible builder not earlier than 15 months but not later than 18 months after completion of the building work.

The Interim Report will identify any defective work and, if practicable, the cause of that defective work.

Final Report

If the Interim Report does not identify any defective building work, the developer may apply to the Department to determine that a Final Report is not required and that the Interim Report is to be taken to be the Final Report of the purposes of the Act.

If the Interim Report identifies defects, the developer must arrange for the same Inspector that prepared the Interim Report to prepare a Final Report.

The Final Report must be carried out by the Inspector not earlier than 21 months and not later than 2 years after completion of the building works.  The Final Report must identify any defective building work which was identified in the Interim Report that has not been rectified, any defective work arising from rectification works associated with the Interim Report and how the defective work identified in the Final Report should be rectified.  However, the Final Report must not contain any matters which relate to defective work not previously identified in the Interim Report, unless those defects are a result of rectification of those previously identified defects.

Contractual considerations

To take into account the new scheme, it is recommended that industry participants consider the following issues when preparing and entering into construction contracts.

  1. Given that the Inspector must prepare the Interim Report and the Final Report more than 12 months after the completion of the building work, extended defects liability periods should be included in construction contracts so that a developer can require the builder to rectify the defects identified by the Inspector. Defects liability periods of at least two years or that are referable to the Inspector’s Interim Report and Final Report will be common.
  2. Construction contracts should require builders to supply all documents necessary to be lodged with the Defects Bond to ensure that the developer can comply with the new scheme.
  3. Construction contracts should clearly provide whether the developer or the contractor is responsible for lodging the Defects Bond with the Department.  A developer cannot contract out of the new scheme but can require the contractor to supply the Defects Bond or require the contractor to provide additional security equivalent to or greater than the amount of the Defects Bond with corresponding rights of recourse to that security as the owners corporation has under the new scheme.

If you or someone you know wants more information or needs help or advice, please contact us on +612 9248 3450 or email info@bradburylegal.com.au.

Quantum Meruit Building Work Claims

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When a contractor makes a claim for ‘quantum meruit’ they are seeking payment of a fair and reasonable amount for the work they have carried out and any materials they have supplied as part of that work.

A claim for quantum meruit does not necessarily rely on any amount specified in the construction contract but is essentially a claim for payment for ‘what the job is worth’.

Construction contracts in NSW are subject to the provisions of the Home Building Act 1989 (NSW) (the “Act”). Written contracts are required for all work over $5,000. For home building works over $20,000 more extensive contract documentation is required.

In particular, the insurance requirements set out in Sections 92 and 94 of the Act apply to all residential building works with a value of $20,000 or more. Failing to meet the requirements of these sections can prove to be very costly for a contractor and it is important to understand both the obligation to insure and the effect that a failure to insure residential building works may have on a contractor’s right to payment.

You need insurance

Section 92 provides that a person must not carry out any residential building work unless they have in place a contract of insurance that complies with the Act, taken out in the name of the person who contracts to do the work and for the specific work in question.

A certificate evidencing the relevant insurance must be given to all parties to the contract.

Importantly, section 92 provides that a contractor must not demand or receive payment under a residential building contract, whether as a deposit or some other payment and regardless of whether or not work has commenced, from any other party unless the insurance requirements of this section have been met.

Section 92 also provides that if the same parties enter into two or more contracts for work to be carried out in stages, the contract price will be the sum of the contract prices under each of the contracts. This means that insurance obligations cannot be avoided simply by breaking a larger contract for the same building project up into smaller areas of work.

In addition to not being able to make a demand or receive for work if the insurance requirements of section 92 are not met, heavy penalties apply if a contractor is found to have breached this section. These penalties increase for second and subsequent offences and can include, for an individual, imprisonment for up to 12 months in addition to any monetary fine.

Consequences if you fail to insure

Section 94 deals with the effect of failing to insure residential building works. It provides that if the insurance required by section 92 is not in force at the relevant time, a contractor will not be entitled to a claim for damages or be able to enforce any other remedy in respect of the contract which has been committed by another party. This includes any claim for quantum meruit.

Notwithstanding the general prohibition on quantum meruit claims outlined above, section 94(1A) provides that if a court or tribunal considers it just and equitable, a contractor may be allowed to recover money on a quantum meruit basis.

The court or tribunal may consider a range of factors when deciding the question of quantum meruit including the impact on the resale price of the property if no contract of insurance is provided. Even if a quantum meruit claim is allowed the contractor will still remain liable for damages and will be subject to any other remedy available to the other party for any breaches of contract.

It is possible to obtain insurance for residential building work after work has been carried out. If insurance is obtained after work is done the work will cease to be considered to be uninsured work for the purposes of section 94. This is worth considering given the ongoing liability for damages and other remedies that the contractor will remain liable for even after a quantum meruit claim is allowed.

The commercial reality of residential building work is that even with the best will in the world disputes between contracting parties do arise. It is therefore important that all insurance obligations are fulfilled prior to entering into the contract to ensure, not only that you have complied with your legal obligations but also that if a dispute arises, you will be able to be paid for the work you have done, preferably without the need to instigate costly legal proceedings.

If you are unsure of how best to meet your obligations it is always sensible to seek legal advice prior to entering into any contract for residential building work. We are always happy to assist in this regard as we know that timely legal advice may save you both time and money, not to mention a great deal of stress, in the long run.

If you or someone you know wants more information or needs help or advice, please contact us on +612 9248 3450 or email info@bradburylegal.com.au.

High Court reminder that it pays to take care with performance bonds

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The High Court in Simic v New South Wales Land and Housing Corporation [2016] HCA 47 has allowed an appeal against a decision of the NSW Court of Appeal on the construction of two unconditional performance bonds.  The appellant was the guarantor of a building company that tendered for a building contract from the respondent housing corporation.  The contract required the appellant to provide security in the form of bank guarantees.  The performance bonds were executed in favour of “New South Wales Land & Housing Department trading as Housing NSW ABN 45754121940” when in fact the beneficiary should have been ”New South Wales Land and Housing Corporation (ABN 24 960 729 253)”.  When the respondent called on the performance bonds, the bank refused to accept the demand based on the security being in favour of a non-existent entity.

The primary question concerned the obligation of the issuing bank to pay the demand of a party who claims to be the beneficiary which, as a result of common mistake, is not the beneficiary named in the performance bond.

However, the High Court held that the bank was justified in refusing to accept the demand under the performance bonds.  The bank was at risk of acting in breach of contract if it were to treat the bonds as referring to the respondent when the respondent was not the beneficiary.  The bank is usually not involved in the parties’ relationship and as such is entitled to take a “strict” approach in determining whether a demand fulfils the criteria for a demand for payment.

The High Court went on to decide that the wording of performance bonds may be rectified to reflect the true intention of the parties to the performance bond, (i.e. changing the name of the respondent in the performance bonds to “New South Wales Land and Housing Corporation”).  Rectification of the performance bonds would entitle the respondent to make a valid demand under the bonds which the bank must in turn honour.

This case highlights the importance of taking care when preparing performance bonds and bank guarantees.  It also allows banks to take a “strict” approach to such demands and alleviates the burden on banks to investigate the background of every demand for payment.

Time not a great healer of defects claims

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A recent Supreme Court decision has provided a timely reminder to building and construction litigants of the importance of considering limitation periods when prosecuting claims.  In The Owners – Strata Plan 7684I v Ceerose Pty Ltd [2016] NSWSC 1545 (Ceerose), the owners corporation did not have regard to the effect of relevant limitation periods and paid a hefty price.

What are the relevant limitation periods in New South Wales?

Generally, the relevant limitation periods for building actions are as follows.

  1. Breach of contract: a party has 6 years from the breach of contract to bring a claim for breach of contract.  If a claim is made under a deed, the limitation period is extended to 12 years.
  2. Negligence: the innocent party has 6 years from the negligent act becoming apparent to bring a negligence claim.
  3. Statutory warranties: for residential building work, a party has 6 years to bring a claim in respect of a major defect, extended to 6 years 6 months if the breach of warranty becomes apparent within the last 6 months of the warranty period.
  4. 10 year “long stop”: to bring a “building action” (an action for loss or damage arising out of or concerning defective “building work” (including design, inspection and certification works)), a party must bring a claim within 10 years after the date on which the final occupation certificate is issued.

The primary relevance of limitation periods is obvious – a party wanting to sue another party must do so within the prescribed limitation period depending on their cause of action and within the 10 year long stop for “building actions”.

However, the limitation periods are also relevant to related causes of action and cross-claims.  The failure to consider the overall effect of limitation periods can have adverse consequences for a plaintiff.

Ceerose decision

In Ceerose, the Owners Corporation commenced proceedings for breach of statutory warranties within time, however the Owners Corporation’s claim was not fully particularised and quantified and a series of amendments to the claim were made by the Owners Corporation.

The Owners Corporation applied for leave of the Court to further amend its claim.  The proposed amendment significantly increased the quantum of the Owners Corporation’s claim.

Ceerose opposed the Owners Corporation’s application to amend its claim for two reasons.

  1. Ceerose submitted that no amendments could be made to the claim after the 10-year long stop limitation period for “building actions” had expired because the amendments were out of time.
  2. Ceerose submitted that it would be prejudiced by the amendment because the 10 year long stop had passed and Ceerose was now out of time to cross-claim against relevant subcontractors.

The Court confirmed that the ‘cause of action’ for breach of statutory warranties was commenced within time and amendments were not a fresh ‘cause of action’ so the claim could be amended even after the 10 year long stop had passed.

However, the extent to which the Court was willing to permit the claim to be amended depended on the prejudice that would be suffered by Ceerose.

Ceerose had not taken steps to cross-claim against subcontractors because the quantum of the cross-claim did not justify the costs of bringing cross-claims when the owners corporation’s claim was first commenced and initially amended.  The 10 year limitation period for the cross-claims had passed.  For that reason, Ceerose argued that it would suffer irreparable prejudice if all of the amendments were allowed by the Court.

The Court determined that the builder would suffer irreparable prejudice if all of the amendments were allowed and refused to grant leave to amend as requested by the owners corporation.

The Court ordered that the Owners Corporation pay 75% of Ceerose’s costs in relation to the Owners Corporation’s motion seeking leave to amend.

Importance of prompt claims

Litigants and prospective litigants must always have regard to limitation periods.  Commencing proceedings within time is not the end of the story.

To avoid falling foul of limitation period issues, a plaintiff should move quickly to finalise the nature and quantum of its claim, usually by engaging appropriate experts to thoroughly inspect and document the extent of defects.

The consequences of not doing so can be costly.  In Ceerose, the owners corporation was unable to claim for hundreds of thousands of dollars worth of alleged defects and had to pay the majority of Ceerose’s costs of the motion.

The Fair is Coming to Town – Unfair Contract Terms and Small Businesses

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From 12 November 2016, small businesses will be protected from unfair terms in standard form “take it or leave it” contracts.  The unfair contract terms law will apply to standard form contracts entered into after 12 November 2016, provided:

  1. the contract is for the supply of goods or services, or the sale or grant of an interest in land;
  2. at least one of the parties to the contract is a small business, i.e. less than 20 employees (including casual employees employed on a regular and systematic basis); and
  3. the upfront price payable (i.e. payments provided for the supply, sale or grant under the contract that are disclosed at or before the time the contract is entered into) under the contract is not more than $300,000.00, or $1 million if the contract is for more than 12 months.

Contracts entered into prior to 12 November 2016 are excluded from the unfair contract terms law.

If a contract is varied on or after 12 November 2016, the protections will apply to that term but not to the rest of the contract.  A contract which is “assigned” on or after 12 November 2016 will not be subject to the new law, unless the incoming party enters into a new contract.

What is a “standard form contract”?

In broad terms, a standard form contract is one which has been prepared by one party to the contract and is not typically subject to negotiation – “take it or leave it”.  In determining whether a contract is a standard form contract, a court would take into account:

  1. whether one of the parties has most of or all of the bargaining power in the transaction;
  2. whether the contract was prepared by one party prior to any discussions between the parties regarding the transaction;
  3. whether the other party to the transaction was required to either accept or reject the terms of the contract in the form in which it was presented;
  4. whether the other party was given an opportunity to negotiate the terms of the contract, and
  5. whether the terms of the contract take into account any specific characteristics of the other party to the contract.

Standard form contracts are typically used for the supply of goods and services. Examples include supply agreements, distribution agreements and trade contracts.

What is an “unfair term”?

A term is an “unfair term” if it:

  1. would cause a significant imbalance in the parties’ rights and obligations arising under the contract;
  2. is not reasonably necessary to protect the legitimate interests of the party who would be advantaged by the term, and
  3. would cause detriment, whether financial or otherwise, to a party if it were to be applied or relied on.

Only a court or tribunal can determine whether a term is unfair under the new legislation. If a term is deemed to be “unfair”, the term will be void and non-binding upon the parties.  The contract will continue to bind the parties to the extent that the contract is capable of operating without that “unfair” term.

There are however, a number of terms that are excluded from the unfair contract terms law.  These include terms that:

  1. define the main subject matter of the contract;
  2. set the upfront price payable, and
  3. are required or expressly permitted by a law of the Commonwealth, or a State or Territory.

What is the upfront price payable?

The upfront price payable is the total amount payable under the contract which is disclosed at or before the time the contract is entered into.

Some portions of the upfront price payable cannot be calculated, i.e. the percentage of an unknown amount such as the commission on the sale of a property.  In this case, the term in the contract which includes the contingent payment is unlikely to be subject to the unfair contract terms law, provided the contingent payment was disclosed at or prior to the contract being entered into.

Any additional fees such as fees if a party exits the contract prior to completion, will not be included as part of the upfront price payable, neither will any interest payable.

How can businesses prepare for the new law?

The use of standard form contracts is a commercial reality for large companies that don’t have the time or resources to negotiate terms and conditions with hundreds or thousands of customers.  That being said, compliance with the increased scope of the unfair contract terms law will have to be carefully considered by companies who use standard form contracts.

Suggested ways to avoid breaching the unfair contract terms law include:

  1. requiring an express acknowledgement and signature from the customer confirming that the customer has had the opportunity to discuss and negotiate the terms of the contract (and actually complying with such a clause);
  2. inserting a section in the standard form contract for the customer to list any clauses of the contract that it would like to negotiate, i.e. a Special Conditions clause;
  3. adding an express note for the attention of the customer advising that the standard form contract comprises proposed terms that can be negotiated; and
  4. as part of the standard form contract, requiring a customer to disclose the number of its employees to assess the extent to which the unfair contract terms law will apply.

If a party to a contract is a small business, your contract will be affected by the new unfair contract terms law. All businesses should review standard term contracts to consider whether there are any terms that could be declared void for being “unfair”. Businesses now have less than a month to review and update contracts currently in use to avoid non-compliance.