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

/in

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 [email protected].

National review of security of payment legislation by John Murray AM

/in

The long-awaited national review of security of payment legislation by John Murray AM has been released.

The ‘Murray Report’ recommends harmonised security of payment laws across Australia by selecting various provisions of each state’s and territory’s model and emphasises the importance of the Commonwealth, states and territories working together to implement those recommendations.

Some of the key recommendations of the Murray Report:

  1. Reference dates to be replaced with an entitlement to make a payment claim every named month, or more frequently if so provided under the contract;
  1. Payment claims to identify a detailed breakdown of the amount claimed; the time period within which the respondent is to provide a payment schedule; and should be endorsed as a claim made under the legislation (among other related requirements);
  1. Supporting statements to accompany payment claims submitted to a head contractor to the principal (requiring a statement that subcontractors and suppliers have been paid);
  1. All adjudicators are to be trained, registered, graded and appointed to disputes by a new regulator;
  1. The introduction of statutory trusts for subcontractor payment and the adoption of an extended Christmas shutdown period; and
  1. Any parts of an adjudicator’s decision that falls into jurisdictional error, but does not affect the whole of the decision, can be severed;
  1. Claimants to be entitled to withdraw and make a new application if an adjudicator has not accepted its application within 4 business days, an adjudicator fails to determine an application within the prescribed timeframe or an adjudicator has given notice of their withdrawal from the adjudication;
  1. Parties entitled to make an application for a review of an adjudication determination if the adjudicated amount is equal to or greater than $100,000 of the scheduled amount, or $100,000 (or more) lower than the claimed amount.

The Australian Government is working with the states and territories through the Building Ministers’ Forum (BMF) to consider and respond to the findings and recommendations of the Murray Report.  Responsibility for this project has now transferred to the Department of Industry, Innovation and Science which provides secretariat support to the BMF.

We will keep you posted on developments and look forward to the proposed harmonisation of security of payment legislation.

Regards Brendan and Scott

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

/in

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 [email protected].

Construction contracts and unfair contract terms

/in

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 [email protected].