Tag Archive for: construction in sydney

Substantive control – the broad scope of the DBP Act statutory duty

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The scope of the statutory duty of care created by Part 4 of the Design and Building Practitioner’s Act 2020 (NSW) (DBP Act) is clarified in the NSW Supreme Court decision of The Owners – Strata Plan No 84674 v Pafburn Pty Ltd.[1] 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 the construction work.[2]

In this decision, Justice Stevenson elaborates on the definitions of “construction work” and “a person who carries out construction work” under the DBP Act.

Facts

This case involves a claim brought by the Owners Corporation of a North Sydney strata development. The Owners Corporation claimed in respect of alleged breaches of the statutory duty by both the builder, Pafburn Pty Limited (Pafburn), and developer, Madarina Pty Limited (Madarina), of the strata development.[3] Relevantly, the builder and developer were related entities:

  • Mr and Mrs Obeid are the directors and shareholders of Pafburn; and
  • Mr Obeid is the director of Madarina, and Pafburn is the sole shareholder of Madarina.[4]

Interpretation of “construction work”

The Owners Corporation argued that Madarina owed the duty of care under section 37(1) of the DBP Act, notwithstanding that it had not done physical building work at the strata development. To resolve this issue, Justice Stevenson turned to the definition of “construction work” under section 36(1). This section provides that “construction work” means any of the following—

  • building work,
  • the preparation of regulated designs and other designs for building work,
  • the manufacture or supply of a building product used for building work,
  • supervising, coordinating, project managing or otherwise having substantive control over the carrying out of any work referred to in paragraph (a), (b) or (c).[5]

Justice Stevenson’s analysis focused on section 36(1)(d) of this definition, noting that there are two possible interpretations of “substantive control”. Either:

  • the person must have actually exercised substantive control; or
  • it is sufficient to show that the person had the ability to exercise substantive control, regardless of whether such control was in fact exercised.

Justice Stevenson preferred the latter interpretation of section 36(1)(d); a person will be held to have carried out “construction work” where they were in a position to exercise substantive control, even if they did not in fact exercise that control.[6]

A person will be considered to have the ability to exercise substantive control over building work where they were able to control how the building work was carried out. This is a question of fact which will turn on the circumstances of each case. For example, Justice Stevenson suggested that a developer may have substantive control over building work where it owned all the shares in a builder and the two entities had common directors.[7]

In the present case, the question of whether Madarina had substantive control over the building works (and therefore whether it might owe a duty of care to the Owners Corporation) was left by Justice Stevenson for further consideration in a subsequent hearing.

Interpretation of “person who carries out construction work”

Next, Justice Stevenson considered whether an owner who carries out construction work on its own land may owe the duty of care. Madarina argued that the reference to “a person” in section 37(1) should be interpreted as excluding a person who was the owner of the land at the time at which the construction work was carried out. Madarina said that this interpretation would avoid the nonsensical result that the owner of the land might owe a duty of care to itself.[8]

Justice Stevenson did not accept this argument. Instead, his Honour avoided the nonsensical result by interpreting section 37(2) to mean that the duty is owed to each owner except an owner that has itself carried out the construction work.[9] This interpretation does not affect section 37(1), meaning that an owner who carries out construction work on its land will still owe a duty of care to subsequent owners of the land.

Does the duty extend to developers?

Finally, Justice Stevenson acknowledged that the Second Reading Speech for the Design and Building Practitioners Bill 2019 (NSW) suggested that the duty “does not extend to owners who are developers or large commercial entities”.[10] This suggestion is underpinned by the idea that these entities are sufficiently sophisticated to protect their commercial/financial interests through contract or otherwise. Despite this comment in the Second Reading Speech, there is nothing in the text of the DBP Act which excludes developers or large commercial entities from the scope of the duty of care. Justice Stevenson therefore concluded that the duty of care in section 37(1) extends equally to these entities.[11]

Key takeaways

The decision in The Owners – Strata Plan No 84674 v Pafburn Pty Ltd emphasises the broad application of the DBP Act duty of care. The decision is particularly relevant to parties with shared directors or similar corporate structures to builders who undertake ‘construction works’ for the purposes of the DBP Act. These parties may be held to owe a duty of care, even where they themselves have not carried out any physical building work.

Bradbury Legal is experienced in advising on parties’ potential liability under the DBP Act, including where the parties have not carried out any physical building work. 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] [2022] NSWSC 659.

[2] Design and Building Practitioners Act 2020 (NSW) s 37(1).

[3] The Owners – Strata Plan No 84674 v Pafburn Pty Ltd [2022] NSWSC 659, [6]–[10].

[4] The Owners – Strata Plan No 84674 v Pafburn Pty Ltd [2022] NSWSC 659, [4].

[5] Design and Building Practitioners Act 2020 (NSW) s 36(1).

[6] The Owners – Strata Plan No 84674 v Pafburn Pty Ltd [2022] NSWSC 659, [25]–[26].

[7] The Owners – Strata Plan No 84674 v Pafburn Pty Ltd [2022] NSWSC 659, [26].

[8] The Owners – Strata Plan No 84674 v Pafburn Pty Ltd [2022] NSWSC 659, [43]–[46].

[9] The Owners – Strata Plan No 84674 v Pafburn Pty Ltd [2022] NSWSC 659, [52]–[57].

[10] New South Wales, Parliamentary Debates, Legislative Council, 19 November 2019, 1781 (The Hon. Damien Tudehope) <https://www.parliament.nsw.gov.au/Hansard/Pages/HansardResult.aspx#/docid/’HANSARD-1820781676-81076′>

[11] The Owners – Strata Plan No 84674 v Pafburn Pty Ltd [2022] NSWSC 659, [49]–[50].

Injunctions and bank guarantees: When can a contractor prevent a developer having recourse to bank guarantees or performance bonds?

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Case: Uber Builders and Developers Pty Ltd v MIFA Pty Ltd [2020] VSC 596

One feature of construction contracts which is distinctive and unique from other types of contracts is the provision of security from the contractor to the principal. Commonly, security takes the form of retention monies or bank guarantees. The consequences of having recourse to bank guarantees can be serious for the party providing the security (the security provider). In September 2020, the Supreme Court of Victoria handed down a decision in relation to bank guarantees. The decision Uber Builders and Developers Pty Ltd v MIFA Pty Ltd [2020] VSC 596 (Uber), sets out a helpful summary of the principles in respect of bank guarantees, interlocutory hearings and recourse to bank guarantees.

The Facts

Uber Builders and Developers (Uber) sought an injunction preventing MIFA from calling on its bank guarantees. MIFA asserted that it was entitled to have recourse to the bank guarantee as the Superintendent had certified amounts as payable by Uber in respect of rectification costs for defective and incomplete work, liquidated damages, credit allowances and purported variations. As a result of non-payment by Uber of these amounts, MIFA sought to have recourse to the bank guarantees to recover the amounts certified against Uber. To prevent MIFA from having recourse to the bank guarantee, Uber sought interlocutory relief (lawyer jargon for an interim/immediate court order) that MIFA was not allowed to have recourse to the bank guarantee.

The Principles

Nichols J summarised the governing principles in respect of where interlocutory relief is sought to restrain the calling of a performance bond/bank guarantee that has been given under a contract. There principles are:

  1. The applicant for interlocutory relief must show there is a serious question to be tried. The applicant, in this case Uber, must show that there is sufficient reason to think that the applicant would be successful if the matter were to progress to a final hearing;

 

  1. The applicant must show that the ‘balance of convenience’ favours the granting of the injunction. This means that the court should take whichever course appears to carry the lowest risk of injustice should it be wrong in either granting pr not granting the injunction;

 

  1. The court must consider whether damages would be an inadequate remedy. This means that the court has to consider whether the applicant would suffer irreparable injury for which monetary compensation would not be an adequate option; and

 

  1. These questions and factors to consider must be considered together and not as isolated issues.

 

In the context of setting out these guiding principles, Nichols J set out some drafting considerations for security clauses in construction contracts. These are summarised below:

  • Purpose: Bank guarantee or performance bonds may be stipulated for two reasons.
    • The first is to provide security against the risk that the security holder will not recover a sum owing by the defaulting party. In this way, the security acts as a means of ensuring the principal or security holder can recover some money if an amount is payable to the principal/security holder.

 

  • The second is to allocate risk as to who will be out of pocket while a resolution of a dispute is pending. If the security is to allocate risk, then the party holding the security may have recourse, even if it turns out that the other party was not actually in default.

 

  • Conditions of Recourse: If the purpose of the security is to act as an interim allocation of risk, then it is important to consider in what circumstances the principal/security holder will be entitled to have recourse to the security. The parties may agree to allow the security holder to have recourse to the security pending a final determination, but this right should be limited to certain circumstances. For instance, the parties may agree that recourse to the security can only occur if notice is given and/or where the dispute relates to damage caused by the security provider to the works/the project and/or adjoining properties.

 

  • Conditions imposed by the Courts: Where there are no contractual conditions under the contract, the Courts will prevent a party from calling on security where the security holder acts fraudulently or unconscionably in calling on the security.

 

  • Interim Risk Allocation: If the security is intended to be an interim risk allocation tool, the security holder will be entitled to have recourse to the security even if it turns out that the other party was not in default, notwithstanding the existence of a genuine dispute and a serious issue to be tried as to underlying entitlements.

 

Interim Risks

So far, this article has discussed a lot about ‘interim risk allocation’ but what does this actually mean and when is it relevant? Throughout the projects, various issues (such as the valuation of variations and defective work) may arise and payments are generally made on account only. At the end of the contract, the Superintendent will generally issue the final certificate. The final certificate will determine if there has been any over or underpayment by the principal to the contractor, whether there are any liquidated damages, and any other interim issue (such as the valuation of defective work and variations). If a party does not agree with payments to be made under the final certificate, they are generally able to issue a notice of dispute under the contractual provisions or can commence proceedings in relation to the contract. In these circumstances, the interim risk is the amount certified under the final certificate and a final determination of the issue made pursuant to a Court or the dispute resolution process set out in the contract. As the dispute resolution process (whether it be Court, expert determination, arbitration, or another dispute resolution forum under the contract) can take substantial time to finally determine the issues, if the security is an interim risk allocation tool, the principal will be able to have recourse to the security until the matter is finally determined. If it turns out the final certificate was incorrect, this will not prevent the principal from having recourse to security. It will mean that the decision maker will generally order for the principal to make payment of however much they have been overpaid so that the parties’ entitlements are finalised and concluded.

Bringing it back to the case study, Uber, the Superintendent certified that an amount was payable by the contractor to the principal. The contractor disputed the amount that was payable and did not make payment as and when required by the final certificate. As a result, the principal was entitled to have recourse to the security once it had complied with the conditions of recourse under the contract. As these conditions were predominantly notice requirements, the principal was not prevented from having recourse to the security. If Uber had made payment of the final certificate amount and issued the notice of demand, it is arguable that MIFA would not have been able to have recourse to the security. This is because MIFA would not be able to claim that the amount in the final certificate remained unpaid. As a result, contractors are put in the difficult position of paying a disputed amount or the principal may have recourse to the security.

The Takeaways

Intention of the Security

Parties need to be clear about the intentions behind providing security. This can be achieved by drafting the purpose of the security into the security clause of the contract. If there is an intention for the security to be an interim risk allocation tool, it will be much easier for the security holder/principal to have recourse to the security. If the security is only to protect against the failure to pay a sum owing by a party, then the security holder will be able to have recourse to the security if the amount is not paid as and when required under the contract.

Conditions of Recourse

Conditions of recourse essentially mean the security holder promises that they will not have recourse to the security unless those conditions are met. If the parties agree on the circumstances where the security holder can or cannot have recourse to the security, this will bind the security holder irrespective of the terms of the bank guarantee. Typical conditions include where the principal is entitled to payment under the contract.

If the security provider seeks to prevent the security holder from having recourse to the security, the security holder (generally the principal) will be required to show that it has met and/or followed the contractual process.

It is important to note that some jurisdictions, such as Queensland, may impose restrictions on when a party can have recourse to security. For example, under the Queensland Building and Construction Commission Act 1991 (QLD) section 67J(1)-(2), a principal may use a security or retention amount only if they have given 28 days’ notice in writing to the contractor advising of the proposed use and the amount owed. In these jurisdictions, the additional conditions will be imposed in addition to with the conditions of recourse under the contract.

Interim amounts owed

The crux of the purpose of security comes to a head in circumstances where a party disputes the amount owed. For instance, when the Superintended issues that final certificate (as was the case in Uber). If the security clause is drafted to allow for the security to be an interim risk allocation tool, the principal will be entitled to have recourse to the security. This will mean that contractor holds the risk of being out of pocket until the matter is finally determined.

If you are a developer, a contractor or a subcontractor and you or someone you know needs advice in respect of whether it is possible to have recourse to security, please get in touch with the staff at Bradbury Legal. Alternatively, if you are in the process of drafting and negotiating a contract, including the clauses relating to security, Bradbury Legal is able to assist and help you know exactly what you are signing up to.