Tag Archive for: building defects

The DBPA: when defects are just not enough

/in ,

OXFORD (NSW) PTY LTD V KR PROPERTIES GLOBAL PTY LTD TRADING AS AK PROPERTIES GROUP ABN 62 71 068 965 [2023] NSWSC 343

 

FACTS

 

On 8 October 2015 the first and second defendants (AK Properties Group), the ‘Owners’, entered into a contract with the plaintiff, the ‘Builder’, whereby the Builder was to construct a six-unit apartment building. The third and fourth defendants, Mr Eswaran and Mr Sharma, entered into a Deed of Guarantee and Indemnity with the plaintiff, where they guaranteed the fulfilment of the Owners’ obligations under the contract.

The plaintiff brought proceedings against the four defendants to recover amounts claimed in nine separate invoices. However, the Owners sought a cross claim against the director and the shareholder of the Builder, Mr Kazzi, and the architect of the Building, Mr Mahedy. Here they claimed that the works were incomplete, the work was defective, and that there was interest that had to be paid on borrowing that was used to fund the completion and rectification of the works. Furthermore, the first and second defendants also sought damages from the plaintiff under section 37 of the Design and Building Practitioners Act (DBPA), alleging that there were defects in the work that had occurred from the act of negligence by the Builder.

The DBPA establishes, under Part 4, that individuals and companies owe a statutory duty of care to the owner and subsequent owner of land where construction is being carried out in order to avoid economic loss caused by defects. This duty of care applies to a person who carries out construction work in or related to a building, where building is defined by section 1.4 of the Environment Planning and Assessment Act 1979 as “any part of a building and also includes any structure or part of a structure”.

 

ISSUES

 

The issue that was to be decided by the Court was the “extent to which the costs admittedly incurred by the Owners should be attributed to rectification of defects, rather than the completion of the work” [287]. As the DBPA states, economic loss may be incurred where there is a cost for the rectification of defects, including damage caused by defects, rather than work completion. Additionally, with respect to s37 of the DBPA, there was debate as to whether there was a ‘personal’ breach of duty that had occurred.

Another issue that the Court had to consider regarding the cross claim of the Owners was their entitlement to Hungerfords v Walker (1989) 171 CLR 125 damages. Here it notes that there may be an interest on damages following the time of the breach due to the fact that the plaintiff in this case incurred an economic loss by being deprived of the use of money and, thus, an opportunity to invest. This case brought forward the issue of whether the interest that was paid in order for the works to reach a stage of completion should also be included in the amounts recoverable.

 

HELD

 

The Court held that the Builder did not complete the works and that much of the work that had been completed was defective. Hence, while the Builder had originally sued for their entitlement to the invoices, it was the Owners of the property who were entitled to their cross claim for the incomplete and defective works. Importantly, the Owners made a claim based on Hungerford v Walker damages, stating that they had to take out additional loads to fund the building works in order for them to reach practical completion by a certain date which they were unable to repay. The Owner’s claim was for Hungerfords interest alone and the Court found that they were entitled to this interest.

Regarding the owners claims against Mr Kazzi personally under the DBPA, the Act provides that “a person who carries out construction work has a duty to exercise reasonable care to avoid economic loss caused by defects”, going on to define construction work as the “supervising, coordinating, project managing or otherwise having substantive control over the carrying out of” the building work. While the Builder “offered the formal submission that Mr Kazzi was not a ‘person’ for the purpose of s 37 of the DBP Act” [332], it was determined by the Court that, due to the affidavit that noted Mr Kazzi to “attend the Property on a weekly basis… to oversee the construction of the Building” [330], he was therefore a person who had substantive control over the work in this instance; Stevenson J citing Boulus Constructions Pty Ltd v Warrumbungle Shire Council (No 2).

The Court then sought to establish whether Mr Kazzi acted in a breach of a duty to exercise reasonable care. The Court considered the findings in The Owners – Strata Plan No 87060 v Loulach Developments Pty Ltd (No 2) [2021] NSWSC 1068 at [59] and noted that “it is not sufficient simply to assert a defect and allege that the builder was required to take whatever precautions were needed to ensure that the defect not be present”, reiterating the notion that the Act was developed to establish that a duty of care is owed. Should a party seek a breach of the duty, the other elements of negligence must be proved i.e. that a duty exists, the duty was breached, and the breach caused loss. The judge here determining that a defect is not enough to establish a breach of duty.

 

TO CONSIDER

 

With regard to this case, what is of central importance is that while the DBPA is highly influential in its purpose of protecting owners through the establishment of a duty of care, a defect alone is not enough to establish a breach of that duty.

 

Breach of contract or breach of statutory warranty? A lesson on limitation periods

/in

Part 2C of the Home Building Act 1989 (NSW) (HBA) sets out the statutory warranties which are implied into all contracts for residential building work. The statutory warranties are given by the holder of a contract licence (usually the builder) for the benefit of owners and serve as a guarantee that the works will meet a certain standard, for example, that the works will be done with due care and skill and will be in accordance with contract plans and specifications.[1] Section 18E(1) of the HBA provides that if a statutory warranty is breached, the limitation period for commencing proceedings is six years in the case of major defects, and two years in other cases.

In Onslow v Cullen [2022] NSWSC 1257, Justice Adamson considered the applicable limitation period where defective residential building works amount to both a breach of contract and a breach of the statutory warranties. The decision has important consequences for owners bringing a claim for breach of the statutory warranties, particularly in respect of non-major defects.

Facts

In January 2016, Mr Onslow, the builder, contracted with Mr and Mrs Cullen, the owners, to carry out building work on their residential property.[2] The contract was in the standard form issued by the Housing Industry Association (HIA) and clause 39 incorporated the statutory warranties into the contract.[3]

In April 2017, the builder left the property before completing the building works.[4] In August 2019, the owners commenced proceedings against the builder, claiming damages for breach of contract in respect of the incomplete works and certain defects in the completed works.[5] A dispute arose as to the applicable limitation period for the owners’ claim:

  • The builder argued that the defects in the completed works were non-major defects, and therefore that a two-year limitation period applied to the claim under section 18E(1)(b) of the HBA.[6] Since the owners commenced the proceedings 2 years and 4 months after the builder left the site, this would mean that the portion of the claim relating to defects in the completed works would be statute-barred and the owners would be unable to recover.
  • The owners argued that they had framed their claim as breach of contract, not breach of the statutory warranties, so a six-year limitation period should apply.[7]
  • Both parties accepted that the incomplete works constituted major defects, and therefore a six-year limitation period would apply regardless of whether the claim was framed as breach of contract or as breach of statutory warranty.[8]

Limitation period: two years or six years?

Justice Adamson considered that the applicable limitation period for the non-major defects was two years.

Relevant principles from the Limitation Act 1969 (NSW) (Limitation Act)

While the limitation period for breach of contract is typically six years,[9] section 7(a) of the Limitation Act provides that where legislation specifies another limitation period, that other limitation period will apply. Therefore, Justice Adamson held that if the owners claim could be properly characterised as a claim for breach of statutory warranty, the two-year limitation period under section 18E(1)(b) of the HBA would take precedence over the typical six-year limitation period for breach of contract.[10]

Clause 39 of the contract

The owners’ argument that they had framed their claim as breach of contract, not breach of statutory warranty, did not impact the applicable limitation period. Justice Adamson emphasised that a statutory warranty is merely a contractual term which has been implied by statute.[11] The fact that the statutory warranties were expressly incorporated into clause 39 of the contract did not change the nature of the owners’ claim.

Justice Adamson construed clause 39 and held that the parties objectively intended that the statutory warranties would only be given in so far as is required under the HBA, i.e., that the warranties for non-major defects would only be given for two years. This was because:

  • section 7(2)(f) of the HBA requires that the statutory warranties are included in the HBA;[12] and
  • the statutory warranties in clause 39 were expressed subject to the qualification “to the extent required by the Act, the builder warrants that […]”.[13]

Other relevant considerations

Justice Adamson also highlighted section 18G of the HBA, which prevents parties from restricting or removing statutory warranties “to remove the rights of a person”. His Honour emphasised that “a person” in section 18G applies equally to builders as well as owners, and a builder has a right not be sued in respect of non-major defects after the two-year period has expired.[14] Section 18G therefore provided support for the construction that the applicable limitation period in respect of the non-major defects was two years.

Finally, Justice Adamson noted that the contract was in the standard form issued by the HIA. Accordingly, it could not be described as having been “prepared by the builder” and therefore could not be construed against the builder.[15]

Decision

Justice Adamson held that the owners’ claim in respect of the non-major defects, being the defects in the completed works, was governed by the two-year limitation period in section 18E(1)(b). As a result, this portion of the owners’ claim was statute-barred, and the owners could not recover this amount.[16]

Take home tips

In cases involving defective residential building works, owners should avoid delay in commencing proceedings. Even where a contract is in place, a short limitation period may apply if the defects are non-major.

Owners should seek legal advice promptly to preserve their ability to commence proceedings. Bradbury Legal is experienced in advising both owners and builders in respect of defective residential building works, both before and during litigation. 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] Home Building Act 1989 (NSW) s 18B(1)(a).

[2] Onslow v Cullen [2022] NSWSC 1257, [1].

[3] Onslow v Cullen [2022] NSWSC 1257, [10]–[13].

[4] Onslow v Cullen [2022] NSWSC 1257, [1].

[5] Onslow v Cullen [2022] NSWSC 1257, [2].

[6] Onslow v Cullen [2022] NSWSC 1257, [2].

[7] Onslow v Cullen [2022] NSWSC 1257, [29].

[8] For the limitation period for breach of contract, see Limitation Act 1969 (NSW) s 14(1)(a). For the limitation period for breach of statutory warranty which results in a major defect, see Home Building Act 1989 (NSW) s 18E(1)(b).

[9] Limitation Act 1969 (NSW) s 14(1)(a).

[10] Onslow v Cullen [2022] NSWSC 1257, [52].

[11] Onslow v Cullen [2022] NSWSC 1257, [58].

[12] Onslow v Cullen [2022] NSWSC 1257, [55]–[56].

[13] Onslow v Cullen [2022] NSWSC 1257, [56].

[14] Onslow v Cullen [2022] NSWSC 1257, [59]–[60].

[15] Onslow v Cullen [2022] NSWSC 1257, [61]–[62].

[16] Onslow v Cullen [2022] NSWSC 1257, [63].

Implied Contractual Terms for Payment

/in

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.

10 things that residential builders need to get right

/in ,

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.

CONTRACTOR STRIKES SECURITY OF PAYMENT GOLD BY SKIRTING THE MINING EXCEPTION

/in

Mining owners and operators in most Australian States[1] will be aware of the “mining exception” in security of payment legislation.  The mining exception excludes ‘the extraction (whether by underground or surface working) of minerals, including tunnelling or boring, or constructing underground works for that purpose’[2] (Mining Exception) from the definition of the term “construction work” and, consequently, the ambit of statutory interim progress payment mechanisms.

However, in a decision handed down on 11 November 2020, the NSW Supreme Court[3] followed the approach of the Queensland courts[4] by construing the Mining Exception narrowly in favour of contractors and subcontractors.  In short, the Mining Exception does not  extend generally to some broad category of mining industry operations.[5]

Facts

Downer EDI Mining Pty Ltd (Downer) was engaged by Cadia Holdings Pty Ltd (Cadia) the operator of the Cadia East underground panel cave mine south-west of Orange, under a “Works Contract” dated 16 November 2018 (Contract), to perform “development phase” works, being (for the most part) underground works to provide access to the proposed undercut and extraction levels for future extraction of minerals in the “production phase”[6]

Downer proceeded to adjudication on a payment claim served on Cadia.  An adjudicator appointed under the Building and Construction Industry Security of Payment Act 1999 (NSW) (SOPA) determined that Cadia pay Downer $1,017,741.72.[7]

Cadia challenged the determination on two grounds:

  1. the Mining Exception applied so the Contract was not a “construction contract” within the meaning of the SOPA; and
  2. there was no available reference date to support Downer’s payment claim.

Decision

Cadia’s challenge to the adjudication determination was unsuccessful on both grounds.

Stevenson J framed the effect of the Mining Exception as excluding ‘from the definition of “construction work”, the following works:

  • extraction (whether by underground or surface working) of minerals;
  • tunnelling or boring for the purpose of extraction (whether by underground or surface working of minerals; and
  • constructing underground works for the purpose of extraction (whether by underground or surface working) of minerals.’[8]

His Honour held that the heart of the question of the application of the Mining Exception to a contract is what a contractor undertakes to do under the contract in question, not what work that contractor actually does[9] (which comes to be answered later).

The works under the Contract did include “tunnelling or boring” as well as “constructing underground works”.  However:

  1. these activities were not for the “purpose of” extraction of minerals; and
  2. the Contract required Downer to undertake work beyond these activities which fell within the meaning of “construction work” or the supply of “related goods and services”.

On considering generally whether activities performed by a contractor are for the “purpose of” extraction of minerals, His Honour:

  1. agreed with Fryberg J in Thiess that the relevant purpose should be decided ‘by reference to what a reasonable person in the position of the parties would conclude as to the object of what purpose of the contract’[10];
  2. held that the Mining Exception is to be construed narrowly to benefit the subcontractor[11];
  3. held that a close “proximity” between the act of extraction and the tunnelling and boring or construction of underground works was required (and this was not so in this case, where the extraction phase would not begin until 2022 after subsequent works)[12];
  4. considered that “extraction” does not include work “associated with” or “preparatory to” extraction[13]; and
  5. noted that the SOPA expresses where there is an intention to bring in ancillary activities, which is not the case with the Mining Exception[14].

Further, in this case, His Honour considered that some works under the Contract required of Downer were “construction work” or supply of “related goods and services”, meaning the SOPA applied.  Relevantly, His Honour stated (accepting Downer’s counsel’s submission):

‘…if there is a contract which contains undertakings to carry out construction work and undertakings to carry out work that it not construction work, the contract remains a construction contract. If a payment claim includes a claim for work that is not construction work, the payment claim is valid, but the adjudicator should not award an amount for work that is not construction work. Thus, the Mining Exception has an important role to play in limiting the amount that the adjudicator should award.’[15]

On the reference date point, His Honour determined that there was an available reference date under the Contract for the service of the payment claim.  Most of the points raised were of limited significance for general application.  One point of general interest was that a clause of the Contract required Downer to invoice ‘in respect of the Services performed’ of the proceeding month.[16]  Downer’s works were performed not in the preceding month, but at an earlier time.

His Honour relied on s.13(4) of the SOPA which allows a contractor to serve a payment claim within the period determined under the construction contract or 12 months after construction work to which the claim relates was last carried out.  The payment clause in the Contract attempted to restrict the operation of s.13(4) and was a void provision, by operation of s.34 of the SOPA.

Take Home Tips

Contractors who consider that they are not entitled to have recourse to security of payment legislation simply because they work on a mine site should re-examine closely the terms of their contract.  Can it really be said that the contract works are for the “purpose of” extraction?  Or is there some distance between the works to be performed and the eventual act of extraction?

Perhaps there are portions or stages of works under the contract to which the Mining Exception would apply, but this would not necessarily mean that the entire contract is not a “construction contract” within the meaning of the security of payment legislation.

 

 

[1] Queensland, Victoria, South Australia, Tasmania and the Australian Capital Territory.  However, Western Australia is likely to shortly follow suit once the Building and Construction Industry (Security of Payment) Bill 2020 (WA) passes through Parliament.

[2] Section 5(2) of the Building and Construction Industry (Security of Payment) Act 1999 (NSW).

[3] Cadia Holdings Pty Ltd v Downer EDI Mining Pty Ltd [2020] NSWSC 1588 per Stevenson J.

[4] HM Hire Pty Limited v National Plant and Equipment Pty Ltd [2012] QSC 4 and Thiess Pty Ltd v Warren Brothers Earthmoving Pty Ltd [2012] QCA 276 (Thiess)

[5] At [133].

[6] At [92] and [93].

[7] At [3].

[8] At [34].

[9] At [70].

[10] At [96], quoting Fryberg J in Thiess at [76].

[11] At [102]

[12] At [103] and [91].

[13] At [104].

[14] At [105].

[15] At [134].

[16] At [171].