Tag Archive for: building specialists

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

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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].

Building professionals beware – statutory duty under the DBP Act is not limited to class 2 buildings or the contracting builder

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The recent decision of the NSW Supreme Court in Goodwin Street Developments Pty Ltd atf Jesmond Unit Trust v DSD Builders Pty Ltd (in liq) clarifies the scope of the statutory duty found in Part 4 of the Design and Building Practitioner’s Act 2020 (NSW) (DBP Act). Section 37(1) of the DBP Act provides that a person who carries out construction work has a duty to exercise reasonable care to avoid economic loss caused by defects–

  • in or related to a building for which the work is done, and
  • arising from construction work.

Justice Stevenson explains that the duty extends not only to class 2 and mixed-use buildings (typically multi-story residential/mixed-use apartment buildings) but to all building types.

Facts & issues

The plaintiff, Goodwin Street Developments Pty Ltd (Goodwin), was the owner of land located close to the University of Newcastle. In July 2017, Goodwin entered a building contract with the first defendant, DSD Builders Pty Ltd (DSD), for the construction of three residential boarding houses on the land. Goodwin contended that the second defendant, Mr Roberts, negotiated and administered the building contract and controlled the carrying out of construction work on the site on behalf of DSD.[1]

In early 2018, disputes arose between Goodwin and DSD in relation to defects and delays in the building works. In March 2018, Goodwin discovered that someone (found by Justice Stevenson to be Mr Roberts) had maliciously damaged the buildings and works at the site – including by removing materials, fittings and fixtures.[2]

Goodwin terminated the building contract and commenced proceedings against DSD and Mr Roberts. DSD became insolvent in 2021. Justice Stevenson’s judgment concerns claims brought by Goodwin against Mr Roberts for:

  • trespass, in respect of the malicious damage to the site, and
  • breach of the statutory duty owed under section 37 of the DBP Act, in respect of the pre-existing defects in the works.

In relation to Goodwin’s claim for breach of the statutory duty, Justice Stevenson considered whether:

  • the statutory duty of care could arise in relation to the construction of a boarding house;
  • Mr Roberts did “construction work” for the purpose of section 36(1) of the DBP Act; and
  • Mr Roberts breached the requisite standard of care.

Does the statutory duty of care arise in relation to a boarding house?

Mr Roberts argued that he did not owe a duty of care to Goodwin under section 37 because the construction of a boarding house did not fall within the definition of “construction work” in the DBP Act.

The definition of “construction work” at section 36(1) of the DBP Act includes (a) building work, […] and (d) supervising, coordinating, project managing or otherwise having substantive control over the carrying out of building work. There is a tension between the definitions of building work under section 4 and 36 of the DBP Act.

On the one hand, section 4(1) provides that “for the purposes of this Act” building work only includes buildings of a class or type prescribed by the regulations – that is, class 2 and mixed-use buildings.[3] On the other hand, section 36(1) provides that in Part 4, “building” has the same meaning as it has in the Environmental Planning and Assessment Act 1979 (NSW) (EPAA). The EPPA of “building” is much broader and extends to any structure or part of a structure (with certain exceptions such as manufactured homes and moveable dwellings).[4] It is worth noting that section 36(5) of the DBP Act states that the regulations may exclude work from being construction work for the purposes of Part 4.

Justice Stevenson resolved this tension by finding that the definition of “building work” in section 4 of the DBP Act (and in the regulations) has no application to the statutory duty at Part 4 of the DBP Act.[5] His Honour reached this conclusion for two main reasons:

  • It appears from parliamentary transcripts that the legislature intended for the duty of care to provide “broad coverage” for “all buildings”.[6]
  • Part 4 of the DBP Act commenced in June 2020 with retrospective operation, but the regulations, along with Parts 2, 3 and 5 to 9 of the DBP Act, only commenced in July 2021 and have no retrospective operation. Justice Stevenson therefore held that the statutory regime could only operate coherently if the section 4 definition of “building work” is limited to the parts of the DBP Act commencing in July 2021 and does not apply to Part 4.[7]

Following this reasoning, the boarding house is a “building” on which “construction work” was done under section 36(1). The boarding house therefore fell within the scope of the statutory duty in section 37(1).[8]

Did Mr Roberts do “construction work” on the boarding house?

Justice Stevenson held that Mr Roberts had clearly done “construction work” because he had been engaged in project management and supervision of DSD’s works within the meaning of section 36(1)(d) of the DBP Act. Mr Roberts’ supervision of the works included introducing himself as the builder and repeatedly assuring Goodwin of the progress of the works and status of defects.[9]

Did Mr Roberts breach the requisite standard of care?

There were 38 defects in the construction of the boarding house. Mr Roberts gave repeated written assurances that defects would be “all fixed” and that Goodwin should not worry.[10] Justice Stevenson held that breach of the statutory duty was established because Mr Roberts was the project manager and supervisor of the construction works, gave these repeated assurances, but failed to correct the defects.[11]

Given that Goodwin had successfully established the existence of duty, breach and causation, Mr Roberts was liable for damages reflecting the cost of rectifying the defects.[12]

Justice Stevenson’s explicit discussion of breach is consistent with his Honour’s previous remarks in The Owners – Strata Plan No. 87060 v Loulach Developments Pty Ltd (No 2).[13] In that case, his Honour explained that although claimants can rely on section 37 of the DBP Act as a shortcut to establishing duty, they are still required to adequately establish that the duty has been breached. Our previous article, available here, discusses this case in further detail.

Key takeaways

Building professionals beware: the decision in Goodwin Street Developments Pty Ltd atf Jesmond Unit Trust v DSD Builders Pty Ltd (in liq) means that you may be liable in negligence for a failure to exercise reasonable care in construction works on virtually all buildings – not just class 2 or mixed-use buildings.  Further, that liability is not necessarily limited to the contracting entity (usually a company) that is engaged as the builder.

Bradbury Legal is experienced both in assisting owners with potential claims under the DBP Act, and in acting on behalf of building professionals to defend these claims. 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] Goodwin Street Developments Pty Ltd atf Jesmond Unit Trust v DSD Builders Pty Ltd (in liq) [2022] NSWSC 624, [1]–[5].

[2] Goodwin Street Developments Pty Ltd atf Jesmond Unit Trust v DSD Builders Pty Ltd (in liq) [2022] NSWSC 624, [6]–[10].

[3] Design and Building Practitioner’s Regulation 2021 (NSW) s 12.

[4] Environmental Planning and Assessment Act 1979 (NSW) s 1.4.

[5] Goodwin Street Developments Pty Ltd atf Jesmond Unit Trust v DSD Builders Pty Ltd (in liq) [2022] NSWSC 624, [11].

[6] Goodwin Street Developments Pty Ltd atf Jesmond Unit Trust v DSD Builders Pty Ltd (in liq) [2022] NSWSC 624, [106].

[7] Goodwin Street Developments Pty Ltd atf Jesmond Unit Trust v DSD Builders Pty Ltd (in liq) [2022] NSWSC 624, [113].

[8] Goodwin Street Developments Pty Ltd atf Jesmond Unit Trust v DSD Builders Pty Ltd (in liq) [2022] NSWSC 624, [118]–[120].

[9] Goodwin Street Developments Pty Ltd atf Jesmond Unit Trust v DSD Builders Pty Ltd (in liq) [2022] NSWSC 624, [133]–[138].

[10] Goodwin Street Developments Pty Ltd atf Jesmond Unit Trust v DSD Builders Pty Ltd (in liq) [2022] NSWSC 624, [142]–[144].

[11] Goodwin Street Developments Pty Ltd atf Jesmond Unit Trust v DSD Builders Pty Ltd (in liq) [2022] NSWSC 624, [145].

[12] Goodwin Street Developments Pty Ltd atf Jesmond Unit Trust v DSD Builders Pty Ltd (in liq) [2022] NSWSC 624, [148].

[13] The Owners – Strata Plan No. 87060 v Loulach Developments Pty Ltd (No 2) [2021] NSWSC 1068, [35]–[36].

Statutory duty of care – don’t get caught out by a poorly drafted claim.

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The Supreme Court’s decision in The Owners – Strata Plan No. 87060 v Loulach Developments Pty Ltd (No.2) provides useful insights into the newly created statutory duty of care by section 37 of the Design and Building Practitioners Act 2020 (NSW) (Act).

Recap of the Duty of Care

The Act was enacted in 2020 and introduced significant legislative changes to the building industry. One such change was the creation of a statutory duty of care owed by any person who carries out construction work to exercise reasonable care to avoid economic loss caused by defects:

  • in or related to a building for which the work is done; and
  • arising from the construction work.

The Act states that this duty of care is owed to each owner of the land on which the construction is carried out. The duty of care extends to all subsequent owners of that land.

The duty of care operates retrospectively in that it applies to economic loss caused by a breach of duty of care if the loss first became apparent within the 10 years immediately before the commencement of the duty of care.

How to correctly plead a claim for a breach of the duty of care?

When the statutory duty of care was first enacted, there was uncertainty among the legal profession on how a claim for a breach of the statutory duty of care should be pleaded, and what elements and evidence will be required to successfully prove economic loss arising from a breach.

The Supreme Court in The Owners – Strata Plan No. 87060 v Loulach Developments Pty Ltd (No.2) has provided clarification on this matter.

Facts & Issues

In this case, the Owners alleged that there were a number of large defects in the works performed by the developer and builder, Loulach. The Owners claim was based on the alleged breaches of statutory warranties implied by the Home Building Act 1989 (NSW).

The Owners subsequently sought leave to amend their claim to also include a claim for an alleged breach of the statutory duty of care.

The Owners argued that the mere fact that there was a defect in the building, established that the defect was a result of the breach of the statutory duty of care, and had Loulach not been negligent, there wouldn’t be defects.[1]

Loulach opposed leave being granted to the Owners to plead its case in this way and contended that whilst there was no dispute that a duty of care existed, the proposed pleading did not properly articulate the breach of that duty.[2]

The Court agreed with Loulach and rejected the Owners’ position.[3]  The Court noted that the Owners’ argument posed difficulty as it was unclear what breach the Owners were alleging in relation to each item of the Scott Schedule.[4]

For instance, one of the defects in the Scott Schedule was identified as “Unit 5- Bathroom: Corrosion affecting the door jambs”. But what was the breach of duty alleged to have caused the corrosion? Was it:

  • installing the wrong PC item; or
  • installing the wrong lining; or
  • something else?

A similar difficulty was present in most of the 451 defects identified in the Scott Schedule.

Decision

The Court held that Act is designed to remove the hurdle for the Owners to establish that a duty of care is owed, and it is not intended to provide a shortcut manner in which a  breach of that duty might be established.[5]

In that sense, a party looking to claim a breach of the statutory duty, must also prove the other elements of a negligence claim in order to show a breach and then losses from that breach.

A claim for negligence, must satisfy the following elements:

  1. That a duty of care existed between the parties; and
  2. That the duty of care was breached; and 
  3. That the breach caused loss.

Section 37 of the Act simply answers the first element; however a party must also answer the balance of the elements in order to succeed on their claim for a breach of the statutory duty of care. There is no provision in the Act to suggest that a mere fact of a defect establishes breach.[6]

Furthermore, a claim for negligence also requires a party to identify the “risk of harm” and show that the person who owed the duty of care knew, or ought to have known of the risk of harm and failed to take precautions against a risk of harm that a reasonable person would have.

In this case, the Court was not satisfied that the Owners’ proposed pleading:

  • showed that the statutory duty of care was breached;
  • identified the specific risks that Loulach was required to manage; and
  • the precautions that should have been taken to manage those risks.

It was not sufficient for the Owners to simply assert a defect and allege that Loulach was required to take whatever precautions were needed to ensure that the defect not be present.

Therefore, the Court refused the Owners’ application for leave to amend their claim to include a claim for a breach of the statutory duty of care. It was also noted that the required degree of specificity may have been achieved if the Owner’s List Statement referred to the Scott Schedule and the Scott Schedule was revised to include further information regarding each defect, the relevant risk and what the Owners contend Loulach should have done in relation to that risk.[7]

Key Takeaways

The statutory duty of care established by the Act can provide an extremely useful remedy for parties such as the Owners, however, such a claim should be carefully drafted to avoid the risk of missing out because of a poorly drafted claim.

All three elements must be established for a party to succeed in a claim for a breach of statutory duty:

  • that a duty of care exists (this is automatically proven by existence of section 37 of the Act); and
  • that the duty was breached; and
  • that the breach caused harm (loss or damage).

We regularly assist parties which may find themselves either in the position of the Owners or Loulach. We can assist you with preparing your claim for a breach of the statutory duty of care, or help you defend a such a claim brought by an owner. For specialist and tailored advice, please contact a member of our team by phone on (02) 9030 7400 or by email at info@bradburylegal.com.au.

 

 

[1] [20] – [22] The Owners – Strata Plan No 87060 v Loulach Developments Pty Ltd (No 2) [2021] NSWSC 1068.

[2] [19] The Owners – Strata Plan No 87060 v Loulach Developments Pty Ltd (No 2) [2021] NSWSC 1068.

[3] [23] The Owners – Strata Plan No 87060 v Loulach Developments Pty Ltd (No 2) [2021] NSWSC 1068.

[4] [24] – [34] The Owners – Strata Plan No 87060 v Loulach Developments Pty Ltd (No 2) [2021] NSWSC 1068.

[5] [35] – [36] The Owners – Strata Plan No 87060 v Loulach Developments Pty Ltd (No 2) [2021] NSWSC 1068.

[6] [38] The Owners – Strata Plan No 87060 v Loulach Developments Pty Ltd (No 2) [2021] NSWSC 1068

[7] [44] The Owners – Strata Plan No 87060 v Loulach Developments Pty Ltd (No 2) [2021] NSWSC 1068.

Security Of Payment Reminder: Christmas Is Coming, But Adjudicator Shopping Is Not Permitted

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The Building and Construction Industry Security of Payment Act (NSW) (‘SOPA’) is touted as establishing a scheme of “pay now, argue later” which promotes the speedy payment of progress claims and resolution of disputes. While these objects do not prevent parties from serving multiple payment claims in respect of the same amount,[1] they do dictate that parties will not be permitted to reagitate the same issues at multiple adjudications. It is necessary to examine the circumstances in which a previous adjudicator’s finding will be binding in a subsequent adjudication.

 

Section 22(4) of SOPA

Section 22(4) of the SOPA provides a helpful starting point for this analysis. This section provides that where one adjudicator has determined the value of any construction work or of any related goods or services under a construction contract, an adjudicator in a subsequent adjudication must give the work (or goods or services) the same value as previously determined, unless satisfied that the value has since changed.

 

Back in 2009, the New South Wales Court of Appeal considered the effect of section 22(4) of the SOPA in the decision of Dualcorp Pty Ltd v Remo Constructions Pty Ltd.[2] Macfarlan JA held that section 22(4) is not an exhaustive statement of the matters determined by an earlier adjudication which are binding on a subsequent adjudicator. His Honour held that the Act as a whole “manifests an intention to preclude reagitation of the same issues”.[3]

 

Objects of SOPA

Section 3 of the SOPA sets out the objects of the Act: promoting the prompt making and payment of progress claims and speedy resolution of disputes. In Dualcorp, the court held that it would be inconsistent with this objective to allow a claimant who was dissatisfied with the outcome of an adjudication to obtain a fresh reconsideration of its claim by simply serving an identical payment claim. If this were possible, there would be no limit to the number of times a claimant could seek to reagitate the same issues at adjudication.[4] Clearly, such abuse would be inconsistent with the object of the legislation.

 

Did the previous adjudicator determine the merits of the issue?

A claimant will only be barred from reagitating an issue addressed in a previous adjudication where the adjudicator decided the merits of the issue. This point was emphasised by the New South Wales Supreme Court in Arconic Australia Rolled Products Pty Ltd v McMahon Services Australia Pty Ltd.[5] In that case, McMahon made three contentious payment claims describing costs for delay and variations. In a fourth adjudication between the parties, Arconic argued that McMahon was not entitled to reagitate its claim since it had been determined by the previous adjudicator.[6]

 

The Court followed the approach in Dualcorp[7] but clarified that the objects of the SOPA would only be frustrated where the first adjudicator had heard and decided the merits of the claim.[8] Here, the adjudicator had rejected the relevant payment claim as it was made prematurely by McMahon. Given that the adjudicator did not consider the merits of the claim, McMahon was entitled to reagitate the issues raised in that payment claim in a subsequent adjudication.[9]

 

Take home tips

Parties should be wary that they are not entitled to raise the same issues at multiple adjudications.

If you are claimant considering whether to proceed with a second adjudication application, you should carefully consider whether the merits of your claim has been determined by a previous adjudicator.

We can assist with advice regarding a previous adjudication determination and the prospects of seeking a further determination.

[1] SOPA s 13(6).

[2] [2009] NSWCA 69 (‘Dualcorp’).

[3] At [67].

[4] At [52].

[5] [2017] NSWSC 1114.

[6] At [3]–[9].

[7] At [13]–[15].

[8] At [29].

[9] At [31]–[32].

Remember your umbrella! Drafting umbrella contracts for a rainy day.

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This article focuses on risks for construction contractors and suppliers when agreeing to standing, purchase order or umbrella contracts and provides some tips on how to avoid or mitigate those risks.

“Standing”, “purchase order” or “umbrella” contracts are frequently used where:

  • the client engages, or intends to engage, a contractor or supplier across in multiple projects; or
  • where the quantity of works, goods or services or time when those works, goods or services are required is unclear or subject to change.

Umbrella contracts aim to settle a set of standard terms and conditions with which both parties are comfortable, with the variables such as quantities and time for performance set out in the purchase order later.

Purchase order contains additional adverse terms or terms that conflict with the umbrella contract

A risk in using umbrella contracts is that the client issues a purchase order which includes or appends an additional set of terms and conditions which are not agreeable to the contractor and/or conflict with the umbrella contract.  If the contractor commences performances in accordance with that purchase order or otherwise does not raise objection within a reasonable time:

  • a “battle of the forms” may occur, where which terms and conditions prevail becomes debatable; and/or
  • the client’s purchase order terms may be considered accepted due to the contractor’s performance of the works or services the subject of the purchase order[1].

Some ways that the risk can be avoided or mitigated include:

  1. Prevent inconsistency: Ensure that the umbrella contract contains a term which states that it will apply to the extent of any inconsistency with the purchase order.
  2. Settle form: Ensure that the umbrella contract contains a term which requires any purchase order issued to be in the form appended to the contract as an annexure (and ensuring that the purchase order issued aligns to that form).
  3. Minimise variables: Minimise the amount of variable information that will be subject to the purchase order. The parties should agree as many terms as possible via the umbrella agreement and leaving the purchase order less work to do.
  4. Contractor’s acceptance: Include a term in the umbrella contract that the purchase order will not become operative (i.e. an agreement on its terms reached) unless the contractor accepts the purchase order in writing. Then, do not accept the purchase order in writing unless the variable terms included in it (such as the time for delivery of goods) are achievable.
  5. Limits on liability: Ensure the umbrella agreement contains all necessary limits on liability – e.g. a cap on liquidated damages.

Creation of multiple contracts

It is not uncommon for an umbrella contract to contain a term to the effect that a separate contract is created upon issue (or acceptance) of each purchase order.  This is generally desirable when the umbrella contract is intended to operate as a standing agreed set of terms governing the parties’ relationship across multiple projects.

However, where such a term is included and multiple purchase orders are issued on the one project, such a term can:

  • create general difficulties in administering the contracts and enforcing rights under those contracts; and
  • impact the operation of security of payment legislation.

On the first issue, the parties would need to issue contractual notices with reference to various purchase orders.  For example, in the event of a delay event occurring which impacts multiple purchase orders a notice would need to be issued to the client with reference each separate purchase order, satisfying all relevant criteria under the umbrella agreement for such a notice.  By way of another example, a dispute between the parties may arise due to non-payment of various purchase orders or defects in goods or services supplied under various purchase orders that may need to be individually pursued using the relevant contractual dispute mechanism.

On the second issue, the security of payment legislation in NSW (and other States and Territories) does not permit a payment claim being served (and adjudication application being made) across multiple contracts.

If there is a clause in the umbrella contract stating that each purchase order will give rise to a new contract, the contractor must submit separate payment claims in relation to each purchase order and pursue separate adjudications on each payment claim.

This was highlighted in a case where Holcim pursued an adjudication application against Acciona for work on the Sydney Light Rail project where some 12,500 purchase orders had been issued.  The New South Wales Supreme Court determined that Holcim’s payment claim which encompassed several purchase orders was not a valid payment claim[2] and Holcim lost out on the benefit of an adjudication determination worth nearly $3M.  In this type of case, the issuing of purchase orders which created separate contracts resulted in commercial and administrative unworkability and prejudiced the subcontractor’s ability to pursue a large adjudication against the head contractor.

Whether or not the umbrella contract should contain a clause which provides that each purchase order issued will give rise to a new contract should be considered on a case-by-case basis.

[1] Both of these risks are discussed in our previous article on Samios Plumbing Pty Ltd v John R Keith (QLD) Pty Ltd [2019] QDC 237.

[2] Acciona v Holcim [2020] NSWSC 1330 at [40].

Cooler heads will prevail – Tribunal finds that direct notice of termination of a home building contract is not required

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It is not uncommon in home building projects for disputes to occur at the end of the project in relation to the quality of the work carried out by the Builder and a claim for outstanding money by the Builder.  Inevitably, this can lead to the contract coming to end by way of abandonment, termination or repudiation.

If the matter proceeds to a Court or Tribunal, the first issue to be determined is:

  • whether the contract is still on foot;
  • whether the contract has been terminated; and
  • if the contract has been terminated, whether that termination was valid.

The answers to these questions will dictate the parties’ entitlement to claim damages (and the types of damages) and ultimately, the outcome of any legal proceedings.

In an ideal world, the terminating party would issue a notice of breach or default under the contract, which would result in a termination of the contract if the breaches are not remedied.

Building cases are never this clear cut and more often than not, the Courts and Tribunals have to delve into the conduct of the parties and what their intentions were in ascertaining whether the contract is still on foot, or whether it has been terminated validly or otherwise.

In the case of Rudas and Andrassy v Eid [2021] NSWCATAP 4 the Tribunal dealt with this very issue of termination of a home building contract by the Owners in the absence of any direct notice to the Builder and what circumstances or conduct would give rise to a finding that the contract was no longer on foot.

The first Tribunal determination

  1. The Owners entered into a home building contract with the Builder to carry out renovations at their property in Frenchs Forest (Site).
  2. In the first instance, the Tribunal found that the Builder abandoned the Site before completing the building works and thereby repudiated the building contract as the Builder ceased carrying out the building works at the Site and removed all of his tools and any materials that he felt he could use elsewhere.
  3. The Owners made a claim against the Builder under the Home Building Act 1989 (NSW) (HBA Act) for costs to complete the building works by another builder consequent upon their acceptance of the Builder’s repudiation of the building contract and its termination by them.
  4. The Tribunal held that even though the Builder had repudiated the contract, the contract still remained on-foot because the Tribunal was not satisfied that the Owners had terminated the contract by accepting the repudiation of the Builder. The Tribunal found that there was no evidence relied upon by the Owners that they accepted the Builder’s repudiation by their conduct of engaging another builder and further, there was no evidence that the Builder knew of this conduct.

The Appeal

5. The Owners appealed the determination principally on the basis that the Tribunal erred in failing to find that the contract had been terminated.

6. The appeal panel upheld the Owners’ appeal and determined that the Tribunal did determine this issue incorrectly for the following reasons:

(i)  there is no real issue as to the legal principles applicable to determine whether an innocent party to a contract has accepted the other party’s repudiation and thereby terminated the contract.  In other words, any communication or conduct which clearly conveys to the repudiating party that the aggrieved party is treating the contract as at an end is sufficient; and

(ii)  where the innocent party has by conduct elected to treat the contract as at an end, it is sufficient that the fact of election comes to the repudiating party’s attention.

Examples of conduct that would demonstrate that the contract has been terminated in the absence of any direct notice to the other party

In this case, the Tribunal said:

(i)   the commencement of the proceedings and/or the service of an appropriate pleading, claiming relief on the basis of termination for breach or otherwise clearly conveying in such pleading that the aggrieved party is treating the contract as at an end can be regarded as communication of the innocent party’s acceptance of repudiation and subsequent termination; and

(ii)    the commencement of the proceedings by the Owners claiming damages based upon the cost to complete the works will act as the communication of the prior election to treat the building contract as terminated, if this had not previously occurred. Indeed, the Owners in this case could have simply claimed damages on the basis of the contract coming to an end without more.

The Tribunal determination also contained a table of examples of cases where a termination has been held to have taken place, despite the absence of any direct notice to the relevant party, see below:

Case Paragraph
“The actual commencement of the hearing of lengthy and expensive litigation, directed to a final resolution of the parties’ rights, was conducted by both parties manifesting an intent ion wholly inconsistent with any continuing obligation of performance on either side Brewarrina Shire Council v Beckhaus Civil Pty Ltd (2005) NSWCA248 75
A maintenance provider was held to have accepted the  other party’s repudiation  by executing an agreement transferring  its  assets and employees to a third party although the transfer agreement did not purport to exercise any right to terminate Wallace–Smith v Thiess Infraco (Swanston) Pty Ltd

(2005) FCAFC 49

 103 and

152
Service of an appropriate pleading can be unequivocal election to terminate a contract. Janos v Chama Motors Pty Ltd (2011)NSWCA
na		 23
The commencement of an action claiming relief on the basis of termination for breach normally amounts to an election to terminate the contract if such an election has not already been made. Perri v Coolangatta Investments Pty Ltd (1982) 149 CLR 537
A seller of land who on expiry of a notice to complete proceeded to advertise and sell the land was held to have manifested an election to t rea t the contract as terminated. Holland v Wiltshire

(1954)

HCA 42 ; (1954)

 416 and

424
90 CLR409
The closing down of a business and vacating a premises
was held to be sufficient communication of the
termination of the lease.                                                         Karacominakis v Big 155                                                                                                       Country
Developments Pty Ltd
(2000) NSWCA 313.

Quantum of damages

The Tribunal then went onto assess the quantum of damages.

To be consistent with the guiding principle of ensuring the just, quick and cheap resolution of the real issues in the proceedings, the Tribunal determined the question of damages, rather than remit the matter for further hearing.

The Tribunal then assessed the damages owing by the Builder to the Owner in the amount of $187,280.24 plus costs on the ordinary basis.

What does this mean for residential builders?

  • contracts need to be terminated carefully as the Court and Tribunal will consider the conduct of the parties if there is any argument that the contract was repudiated.
  • if the contract is not validly terminated it can affect the builder’s entitlements to damages.
  • if the homeowner terminates the contract, the builder would need to prove that the termination was wrongful in order to claim any loss of profits, demobilisation costs and loss of wages etc.
  • obtain legal advice before you terminate.

You win sum, you lose sum (but it’s still a sum)

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Some construction contracts provide that expert determinations (or other alternative dispute processes) will be considered “final and binding” unless the claim or determination is excluded or carved-out.

In the matter of CPB Contractors Pty Ltd v Transport for NSW [2021] NSWSC 537, the New South Wales Supreme Court considered an expert determination clause which precluded litigation in respect of the determination, unless it:

  1. Did not involve a sum of money; or
  2. Required one party to pay the other an amount in excess of $500,000.[i]

The decision in this case was that one party was not entitled to any further payment for the Works.  Did the determination “involve” paying a sum of money?

Facts

Transport for NSW (“Transport”) engaged CPB Contractors (“CPB”) to carry out road widening works. Transport issued CPB instructions to remove excess spoil from one location to another (“Works”).

The determination concerned CPB’s entitlement to payment for the Works. Transport contended (and paid CPB) on a “Dayworks” basis which equated to $1.4 million. CPB contended that it was entitled to be paid for the Works in accordance with a schedule of rates (“Rates”) which equated to $11.4 million.

The Honourable Robert McDougall QC (“Expert”) determined that CPB was not entitled to any further payment for the Works (“Determination”).

CPB sought to litigate its claims, seeking payment in accordance with the Rates. Transport sought a stay. Transport pointed to clause 71 of the relevant GC21 Contract, arguing that the Determination was final and binding.

CPB contended that it was free to litigate the claims for the Works for two reasons.

The first was that the Expert made no determination for the purposes of the Contract.  CPB submitted there is a “deficiency or error” in the Determination, meaning it was not “a determination in accordance with the contract”.  These errors were said to include a “plainly incorrect” answer to a question referred to determination[ii], a failure to give reasons as required by the contract[iii] and a failure to answer a question at all[iv].  The first ground was specific to the facts of the case.

The second reason was that the Determination (to the extent it was a valid determination under the contract) did not “involve paying a sum of money”.

On this issue, CPB submitted that the question is what the Determination itself is and not the “matters for determination” involve.  It was argued that a determination that no money is payable is in effect a dismissal or rejection of that claim.  CPB submitted that such a decision does not and cannot involve “paying” a sum of money.

Decision

Transport’s application for a stay was granted.  CPB was precluded from litigating on the claims.

On the first ground, Stevenson J found that the Determination did not contain a deficiency or error.  The Expert’s Determination complied with the contractual requirements.

On the second ground, Stevenson J concluded that a determination dismissing a claim for money does “involve” “paying a sum of money” in the sense that it deals with the claim that, if successful, would have resulted in the paying of a sum of money; and rejects that claim.[v] The focus is not on the amount to be paid pursuant to the determination, but on the nature of the determination – i.e. whether it “involves”, in the sense of “concern” paying a sum of money.[vi] This is distinguished from a distinct category of determinations that are not in respect of money claims, such as a dispute about the construction of the contractual terms.[vii]

Therefore, in finding that the Determination did “involve the paying of sum of money”, the exception to the preclusion of litigation did not apply.

Take home tips

Dispute resolution clauses are often overlooked by parties in a contract negotiation. This case highlights that parties should carefully consider the types of disputes or claims that may be captured by a binding alternative dispute resolution process.  Parties should draft clear carve-outs from an otherwise final and binding dispute resolution clause if they wish to have recourse to the courts.

For carve-outs involving sums, consider whether the monetary thresholds are arbitrary or considered by reference to the whole of the contract sum.  Also consider whether it is the value of the claim that is of importance, or the value of the determination.

If parties wish to preserve the right to apply to the courts concerning the interpretation of a contractual term, for example, it would be prudent for the dispute resolution clause to reserve the right for an application for declaratory relief or contain a carve-out in relation to claims or disputes not involving or concerning payment of a sum.

[i] At [26] – [27].

[ii] At [47].

[iii] At [58].

[iv] At [66].

[v] At [91].

[vi] At [92].

[vii] At [94].

Near enough is not good enough in contract drafting

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We have been recently acting for a subcontractor negotiating departures to a design and construct for a high-rise office tower in the Sydney CBD.  Grappling with a confusing, inconsistent and untidy subcontract, one of our recommendations was that the contract defined terms should be updated to:

  • remove defined terms that were not used in the operative clauses;
  • define capitalised terms used in the subcontract, but for which no definition was provided;
  • make the defined terms consistent (sometimes two distinct defined terms were used but were intended to have the same meaning); and
  • check and update the contract definitions for changes in law.

The upstream contractor party’s counsel suggested that this work was unnecessary and would make no difference.  We strongly disagreed.

Why did these drafting issues matter?

A significant case for insurers and COVID-19 impacted businesses decided by the NSW Court of Appeal in October 2020 provides an example of how failures to update contracts for law and precisely draft terms (including updating definitions) can lead to real headaches down the line.  The decision has been widely reported in major media outlets due to the multi-billion dollar payouts that may result due to what appears to be a drafting oversight.

In HDI Global Specialty SE v Wonkana No. 3 Pty Ltd [2020] NSWCA 296 (Wonkana), a key test case funded by insurers, the NSWCA was required to decide whether a coverage exclusion applied to claims made by business owners under their insurance policies for interruption to their businesses due to COVID-19.

The exclusion was framed as follows:

‘The cover … does not apply to any circumstances involving ‘Highly Pathogenic Avian Influenza in Humans’ or other diseases declared to be quarantinable diseases under the Australian Quarantine Act 1908 and subsequent amendments.’

The problem for the insurers was that the Quarantine Act 1908 (Cth) (repealed Act) was repealed and replaced prior to COVID-19 by the Biosecurity Act 2015 (Cth) (current Act).  While COVID-19 had been determined a “listed human disease” under the current Act, it had not (and could not) been listed as a “quarantinable disease” under the repealed Act.  It appears that at the time of contract neither party knew about the change in law.

The insurer’s primary argument was that the exclusion clause should be construed as referring to ‘diseases determined to be listed human diseases under the Biosecurity Act 2015 (Cth)’ because:

  1. the current Act constituted a “subsequent amendment” (Subsequent Amendment Argument); or
  2. the references to the repealed Act were obvious mistakes which should be construed as if they were or included references to the current Act (Obvious Mistake Argument).

In summary, the NSWCA held that the exclusion clause could not be construed as referring to the current Act.  This meant that the insured businesses were prima facie entitled to a claim under their policies.

On the Subsequent Amendment Argument, the Court held that the words “and subsequent amendments”, given their natural and ordinary meaning, do not extend to an entirely new enactment[1].  The repealed Act was not a “subsequent amendment” of the current Act.

Looking at the matter objectively (as required by proper principles of contractual interpretation), if the parties intended that the clause capture an alteration to, or replacement of, the repealed Act, drafting to capture this intent would have been used[2].

On the Obvious Mistake Argument, the Court held that it was critical to apply the ordinary principles of construction to the drafting (and natural and ordinary meaning of words) to ascertain the parties’ objective intention[3].

There was no mistake by the parties in drafting which was objectively identifiable to be “corrected” or rectified.  It was not possible to correct the contract merely because the parties incorrectly assumed that the repealed Act was still in force[4].

Key Takeaways

Contracting parties sometimes rely on the words “and subsequent amendments” as an excuse not to update their contracts to deal with changes to law.  This is dangerous because if a law has been repealed and replaced prior to (or during the course of) the contract, there is clearly no guarantee that the replacement statute will apply.  These words are not a “get out of jail free card” to deal with legislative changes.

We caution against the assumption that in the event there is a later argument on interpretation, the departures table, correspondence or other extrinsic evidence will be relied upon to answer the question.  Firstly, this assumes that reliable records of the negotiation will be kept.  Disputes often arise years after the contract is executed and we all know of the knowledge and records vacuum when key personnel move on from a project or employer.  Secondly, the court will only consider extrinsic evidence if the drafting is ambiguous.  On pure questions of contractual interpretation, the court is not concerned with the subjective intentions of the contracting parties, but what the words say to the objective reader.

We strongly recommend:

  • regularly reviewing and updating your contracts for changes in law; and
  • ensuring that simple issues such as errors and inconsistencies in defined terms are taken seriously and corrected prior to execution.

[1] Per Meagher JA and Ball J at [44].

[2] Per Meagher JA and Ball J at [42].

[3] Per Meagher JA and Ball J at [64].

[4] Per Meagher JA and Ball J at [65].

Attention residential builders in NSW – big changes ahead from 1 March 2021 you will be able to use the Building and Construction Industry Security of Payment Act to recover money owed by homeowners

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On 1 September 2020, the NSW Government released the Building and Construction Industry Security of Payment Regulation 2020 (2020 Regulation) which radically changes the way residential builders and homeowners resolve disputes in relation to outstanding progress claims after 1 March 2021.

Currently, section 7(5) of the Building and Construction Industry Security of Payment Act 1999 (NSW) (the Act) and section 4(1) of the Act provide that the Act does not apply to owner occupier construction contracts, that is, contracts where the homeowners intend to live in the premises.  In these instances, residential builders cannot use the Act to recover outstanding progress claims due from homeowners.

This will all change on 1 March 2021 when the 2020 Regulation commences which will remove owner occupier construction contracts as a prescribed class to which the Act does not apply.

This means come 1 March 2021, residential builders will have a statutory right to payment and be able to serve payment claims on homeowners under the Act and apply for adjudication in relation to any outstanding progress claims.

This is a big game changer for residential builders as it will improve cash flow and mean that residential builders will be able to claim outstanding progress claims from homeowners without having to get involved in expensive and lengthy Tribunal and Court proceedings in order to get paid.

Whilst homeowners will still be entitled to bring a building claim in the Tribunal or Court for defective work and the like, such a claim will not defeat or delay residential builder’s entitlements under the Act.  This means that homeowners will be required to pay any amount awarded pursuant to an Adjudication Determination prior to the determination of any Tribunal or Court proceedings which will (in most cases) reduce in the issues in dispute in any Tribunal or Court proceedings.

What residential builders need to know now

The NSW Government has given residential builders and homeowners a transition period to adjust to these major reforms.  We suggest during this period residential builders should familiarise themselves with the Act and their contracts in relation to:

  • the requirements of valid payment claims including serving supporting statements with all payment claims where builders contract directly with homeowners;
  • the dates from and methods of service of valid payment claims;
  • identification of a valid payment schedules by homeowners;
  • review of your standard contracts to ensure that they comply with the minimum contracting requirements and minimum variation requirements under the Home Building Act 1989 NSW (HBA), as this may effect how an adjudicator assesses amounts payable under the contract so your paperwork has to be in order;
  • review your practices and procedures to ensure that you have the necessary resources to utilise the adjudication process and respond within the strict time frames. The benefit of this is that it will reduce the time and cost (in most cases) of litigation as an Adjudication Determination will usually be received within 21 days of lodging the Adjudication Application; and
  • get legal advice to set yourself up so you can utilise the Act and put yourself in the best position to get paid.

CONTRACTOR STRIKES SECURITY OF PAYMENT GOLD BY SKIRTING THE MINING EXCEPTION

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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].