Greater regulation of buildings using external combustible cladding

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Recent disasters befalling high-rise buildings locally and overseas have intensified calls for owners and developers to take greater steps to prevent such tragedies. The Grenfell Tower tragedy in June 2017 was one of the worst modern disasters in the United Kingdom, as 72 Londoners died as a direct result of a 60-hour fire that caught the side of the residence and enveloped the entire outer building.

The cladding was an exacerbating factor in the disaster. The University of Leeds found that the burning of the combustible material would have released the same energy as if 51 tonnes of pinewood were wrapped around the building. The UK has since banned combustible cladding on external walls of high-rise residential buildings.

NSW government getting tougher on unsafe cladding

Australian states and territories are also attempting to limit the use of dangerous cladding on such buildings. This year the NSW government put into effect a ban on unsafe use of building products, which now includes some types of external combustible cladding, in the Building Products (Safety) Act 2017 (NSW). This Act also authorises councils or other government authorities to order unsafe products to be removed.

The NSW government is now also imposing greater obligations on owners to register their buildings if they use unsafe cladding, and is making development consent harder to obtain where combustible cladding is proposed, in two pieces of legislation:

  • Environmental Planning and Assessment Amendment (Identification of Buildings with External Combustible Cladding) Regulation 2018  (the Identification Amendment)
  • State Environmental Planning Policy Amendment (Exempt Development – Cladding and Decorative Work) 2018  (the SEPP Amendment)

These amendments will take effect from 22 October 2018.

Identification Amendment: who is affected?

These changes affect owners of both new and already existing buildings, so it doesn’t matter if a building was constructed before the amendments take effect.

The Identification Amendment applies to any building that (1) is in a prescribed class, (2) has two or more stories, and (3) has external combustible cladding.

For point (1), a building is in a prescribed class if it is at least one of the following:

  • A building containing two or more sole-occupancy units each being a separate dwelling (class 2);
  • A building that is residential, and a common place for long term or transient living for a number of people unrelated to each other (e.g. a boarding house, guest house, hotel, residential part of a health-care building or detention centre, or accommodation for the aged, children or people with disabilities) (class 3)
  • A building of a public nature (including a health-care building, an aged care building, or an assembly building such as a trade workshop or a laboratory) (class 9)
  • A dwelling in a building of a public nature, if it is the only dwelling in the building (class 4)

For point (3), a building is considered to have ‘external combustible cladding’ if it has either of the following:

  • Any cladding or cladding system comprising metal composite panels, including aluminium, zinc and copper, that is applied to any of the building’s external walls or to any other external area of the building; or
  • Any insulated cladding system, including a system comprising polystyrene, polyurethane or polyisocyanurate, that is applied to any of the building’s external walls or to any other external area of the building.

Identification Amendment: what do building owners have to do?

The Identification Amendment amends the Environmental Planning and Assessment Regulation 2000 (NSW).

It makes the following changes:

  • Any owner of a building above with external combustible cladding must now provide the Secretary of the Department of Planning and Environment (the Planning Secretary) with a number of details about:
    • The building itself (including the name and address of the owners corporation representative, and number of storeys); and
    • The building’s cladding (including a description of the external combustible cladding, any materials comprising the cladding, and a description of the extent of the application of external combustible cladding to the building).
  • The details of the buildings will have to be provided to the government through an online portal. Emails will not be accepted. This portal will soon be up and running, and building owners are encouraged to register to receive an alert for when this happens at: https://www.planning.nsw.gov.au/Policy-and-Legislation/Buildings/Combustible-cladding.
  • Once the portal is running, the deadlines for owners to register are as follows:
    • For buildings that were occupied before 22 October 2018, the deadline for registration is 22 February 2019.
    • For buildings first occupied on or after 22 October 2018, owners must register their building within four months of the building first being occupied.
  • Failing to register a building to which the Act applies attracts a penalty of $1500 for individuals and $3000 for corporations.
  • Owners are also now obligated to provide details about a building and any external combustible cladding if the Planning Secretary, an authorised fire officer or the council of the area directs them to do so in writing. Failure to provide these details within 14 days of the written request attracts a penalty of $3000 for individuals and $6000 for corporations.

The NSW government hopes to use this information to enable Fire and Rescue NSW to educate occupants about fire prevention and to improve its response to fires. It will also assist councils with determining whether further action is necessary.

The SEPP Amendment: greater oversight for combustible cladding

The SEPP Amendment amends eight NSW government planning policies:

  • State Environmental Planning Policy (Affordable Rental Housing) 2009
  • State Environmental Planning Policy (Educational Establishments and Child Care Facilities) 2017
  • State Environmental Planning Policy (Exempt and Complying Development Codes) 2008
  • State Environmental Planning Policy (Infrastructure) 2007
  • State Environmental Planning Policy (Kosciuszko National Park – Alpine Resorts) 2007
  • State Environmental Planning Policy (Mining, Petroleum Production and Extractive Industries) 2007
  • State Environmental Planning Policy (Three Ports) 2013
  • State Environmental Planning Policy (Western Sydney Parklands) 2009

Each amendment is aimed at increasing developmental consent requirements for works that involve external combustible cladding. Certain developers proposing to use combustible cladding will no longer be exempt from requirements to obtain developmental consent.

For example, the State Environmental Planning Policy (Exempt and Complying Development Codes) 2008 has been changed. This Policy provides streamlined assessment processes by listing certain developments that do not need to secure development consent. It is now a requirement for some developments, such as the maintenance of buildings in draft heritage conservation areas, that if the development involves cladding and developers do not want to be burdened by consent processes, the work must not be carried out on any building more than two storeys high, and the work must not involve the use of external combustible cladding.

Conclusion

In 2017, the NSW Shadow Minister for Innovation and Better Regulation Yasmin Catley said that as many as 2500 buildings in NSW could be clad in material that did not comply with regulations. The changes aim to clarify the numbers.

Whether these changes in NSW will work to protect residents remains to be seen. A number of parties had expressed concerns about the Grenfell Tower fire safety and emergency infrastructure, but tragically this was not enough to avert the disaster.

Nevertheless, many of those working with combustible cladding are now subject to greater oversight and must carefully review these new regulations and seek advice about them if necessary. The obligations to report could kick in for some owners as early as February 2019. Failure to do so may mean financial penalty.

Please contact us should you require any further information, on +612 9248 3450 or email [email protected].

Dealing with variations in building contracts

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Variations to the scope of works, or variations to the services to be provided, under a construction project are common in the building industry.

A variation may be requested by either party or arise out of necessity, for example, due to changes required in legislation or because of a latent condition.

When negotiating a variation, it is important to follow the process required under the contract and to ensure that the variation is clearly documented.

What is a variation?

The scope of works to be provided under a building contract will generally be set out in attached specifications, plans, or a service brief, which together form the whole contract.

The scope of works is an integral part of the contract. It identifies those works for which the contractor will ultimately be liable and is the basis from which alterations or additions will be classified a variation. The categorisation of a variation is important as it affects a contractor’s right to claim additional costs and a principal’s obligation to pay them.

The following concepts are relevant in determining what constitutes a variation:

  • The variation must be requested and be something that is not already covered in the scope of works. If there is no request by a principal to vary the scope of works, a contractor will have difficulties in claiming additional costs.
  • Similarly, if higher quality materials are provided than what is specified in the scope of works, a contractor will not have a right to charge for the upgrade unless this was specifically requested.
  • Work that is indispensably necessary to complete the job, although not spelt out in the contract or scope of works, is not a variation. An example of work that is intrinsic to the job is the installation of hinges when hanging doors – although the specifications may not refer to ‘hinges’ per se, it is obvious that the provision and installation of doors cannot be completed without this component.
  • A complete change to the scope of works by the principal is not a variation and may give a contractor a right to terminate the contract.

Dealing with variations

Variations to the scope of works often lead to disputes in the construction industry. It is therefore important that both parties understand the significance of a variation and the processes required for requesting and claiming them.

A principal may require that the contractor undertake more or less work than that provided in the scope of works. Issues can arise where a contractor is not qualified for, or does not have sufficient resources to, undertake the additional work. Similarly, if work falling within the scope of works of a contract with one contractor is given to another contractor, this will be problematic for both parties and may result in a breach of the contract by the principal.

To avoid a potential breach which could allow a contractor to terminate the agreement, principals should ensure that their contracts contain provisions that enable them to request variations to the original scope of works. The contract should identify the circumstances under which a variation might be requested and set out clear processes for varying the scope of works or services.

Principals should also be aware of the difference between a variation and a complete overhaul of the scope of works which may entitle the contractor to terminate the contract.

Contractors should ensure that they will be adequately paid for works additional to the original scope and follow the processes outlined in the contract for applying for modifications.

A variation may be requested by a contractor who needs to carry out additional work to fulfil the scope of works. This may occur where latent conditions arise. Latent conditions are physical conditions on the development site that are materially different to those that would reasonably have been contemplated, notwithstanding a contractor having made all due inspections and investigations of the site.

The contract will generally provide a timeframe during which a contractor may notify the principal of a pending variation. The contractor will typically be required to set out reasons why the variation is required and the costs in carrying out the additional work. The contractor should always obtain approval before undertaking any variations.

Quantum meruit claims

In some circumstances, strict compliance with the variation procedures set out in the contract will not be commercially efficient. The need to make a variation may arise without adequate time to follow due process, particularly when it is necessary to avoid delays or wastage.

Even if they are refused payment for the variation on the basis that the correct process was not followed, a contractor may still have a quantum meruit claim. In this case, the amount of the claim will be a reasonable price for the work carried out by the contractor, often based on industry standards.

A principal that requests and supervises a variation, despite the fact that the formal process was not followed, will be prevented from benefiting from the additional or modified works.

To succeed in a claim, it must be shown that the principal received a benefit, the contractor incurred expenses in doing the work, and that it would be unfair for the principal to retain the benefit without paying for it.

A contractor who refuses to undertake work requested by a principal that falls well outside of the scope of works provided in the contract, may also have a quantum meruit claim. One example of this is work that is unexpected and that does not ordinarily fall within the principal’s area of construction. In this case, if the contract is terminated, the contractor may be paid for the work completed to date.

Conclusion

A clearly defined scope of works and detailed process for dealing with variations must be included in all construction projects.

The scope of works should be sufficiently detailed and cover additional matters that may arise during construction of the project. The clearer the scope of works, the easier it will be for both parties to recognise and deal with a variation.

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].

The cost of poorly-drafted building contracts

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The importance of having in place a written contract is widely accepted in the construction (or any) industry. But are you putting in the time necessary to understand and document your negotiations, so that your rights are properly secured by your building contracts?

An unresolved contractual dispute depletes time and resources and has potential to damage the parties’ reputation and relationship. Disputes have a devastating effect on a building project and if they are not resolved by negotiation between the parties, they will likely escalate to dispute resolution processes, or even to a hearing before a Court.

In many cases, determination of the dispute will turn on the contract between the parties and what it does, or does not, contain. The words of the contract will be scrutinised, and poorly-drafted terms that are unclear or ambiguous can be the undoing of an otherwise valid agreement.

Case study

Incomplete contract terms that lack explanation or process lead to uncertainty. This was the case in Port Macquarie-Hastings Council v Diveva Pty Limited [2017] NSWCA 97.

In 2011, Diveva Pty Limited trading as Mid Coast Road Services entered into a contract for asphalt works with the council, having successfully tendered in 2005 and 2008. The contract contained an ‘option clause’ which merely stated, ‘with a future twelve (12) month option available’.

There were issues regarding one of the projects undertaken by Diveva, with the council claiming that Diveva had failed to comply with certain specifications under the contract. This matter appeared to remain unresolved both at the time when the council notified Diveva that it would not be exercising the option, and when the council advertised for tenders for future works.

In reliance of the contract, Diveva notified the Council that it was exercising the option. It did not take part in any tendering process. No further contract was offered, and Diveva sued the council for breach of contract.

Original proceedings

In the original Supreme Court proceedings, the Council claimed that the option could only be exercised unilaterally by the Council. The Supreme Court disagreed.

The task of the Supreme Court was to determine in whose favour the option worked. In the absence of a clear term in the contract, the Supreme Court was required to look at the overall language used throughout the entire agreement and found that repeated use of the term ‘option’ was a commercial inducement to tenderers.

The Supreme Court determined that, upon its construction, the 2011 agreement ‘conferred an option upon [Diveva] to extend the Agreement for a further 12 month period’. This conclusion was based on the words ‘with a further 12 month option available’ and the meaning of these words determined objectively and within the context of the Agreement.

Hall J considered that the Council could have protected its interests with clear drafting: ‘It would have been open to the Council to simply have said expressly that the option could only be exercised by Council. However, it did not. The Council could have, but did not use the same formulation, as discussed above, “Council reserves the right…” (employed in other sub-clauses in the Agreement) had it wished to make clear that the Council had the right to renew the Agreement for a further 12 month period.’

Diveva was successful and was awarded damages for loss of profits and opportunity.

Appeal

The council appealed to the NSW Court of Appeal, asserting again that the option clause could only be exercised by the Council alone, or at the very least by mutual agreement.

The Court of Appeal arrived at the same conclusion, and the appeal was dismissed. In its judgment, the Court considered that interpretation of the real meaning in the contract relied on the words used and the intent and purpose of the parties.

The Court found that there was an inference throughout the agreement that the council would offer further work to successful tenderers. The words ‘option’ and ‘available’ were used repeatedly in both the agreement and tender request which, according to the Court, deemed the option capable of being exercised by Diveva unilaterally.

The Court also noted that the option clause provided no qualifying matters, hence council’s allegations of the non-complying work would not preclude Diveva from validly exercising the option. But for the disputed works, the Court considered there was a strong likelihood that the council would have entered into a further contract with Diveva, given its track record, previous dealings and knowledge of council works.

Key points

As the option clause referred to in the above case was silent as to the time, method and respective rights of the parties to exercise, the Court was required to determine its true meaning by looking at the intent of the parties and the language used elsewhere in the agreement.

This may have been avoided if the option clause was drafted to provide how and when the option could be exercised, in what circumstances, and by whom. As stated by the Court, had the council required that the option was to be exercised only unilaterally then it was open for it to have included this in the terms.

Keep in mind the following points to ensure that your building contracts can, under tight scrutiny, protect your rights and interests:

  • Your construction contracts should be negotiated, prepared and reviewed with assistance of an experienced construction lawyer. Money spent now can protect your business against loss down the track.
  • Read your construction contracts, highlight the terms that you don’t understand and ask for them to be explained. Ask, ‘what if’, ‘what happens when’, ‘how should’, ‘who might’.
  • Construction projects often comprise several contracts – these need to align and, where relevant, reflect reciprocal obligations and rights. Pay attention to timelines, completion dates, extension and delay clauses and, of course, options.
  • Use precedent contracts carefully – ensure the fields that are likely to vary from build to build are highlighted so that important information can be populated. Don’t rely on the precedent alone – read the entire contract for each project for relevance and completeness.
  • It is easy for important terms to be overlooked or formatting errors to occur when using precedent contracts, particularly if prepared by staff who are unfamiliar with their contents. Appointing a precedent custodian to supervise access to precedent contracts will help minimise some of these issues.

Conclusion

Poorly-drafted contracts can have unforgiving results, and roll-on effects to subsequent building projects.

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].