Tag Archive for: construction lawyers

The DBPA: when defects are just not enough

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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.

 

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].

NSW court provides guidance for hand delivering payment claims and payment schedules on site

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In MGW Engineering Pty Ltd t/a Forefront Services v CMOC Mining Pty Ltd[1], the vexed issue of valid service for documents under the Building and Construction Industry Security of Payment Act 1999 (NSW) (Act) has been revisited.

The case cautions against assuming a document (e.g. a payment claim or payment schedule) will be considered “served” under s 31 of the Act by handing it to any employee of the claimant or respondent under the Act (as the case may be) on the project site.

Facts

The claimant and respondent in the case were parties to four construction contracts for the claimant to provide various services at a NSW mine site.

A representative of the claimant handed four payment claims to an employee of the respondent at 5:15pm on 3 February 2021, claiming a total of over $6M in progress payments.  The transaction took place at an “Access Control Room” where the employee of the respondent (who was not the respondent’s representative under the contracts) was on duty.

It was common ground that the respondent’s representative under the contracts was not on site on 3 February 2021 and was not provided the physical payment claims until 4 February 2021.  The payment claims were also served electronically via Aconex on 4 February 2021.

The respondent served its payment schedules on 11 February 2021 (being 11 days after 3 February 2021), with a total scheduled amount of only $180,912.05.

The claimant purported to suspend works under s 15(2)(b) of the Act.  The claimant applied to court for judgment on the full claimed amount of circa $6M arguing the payment schedules were ineffective, being served one day late.  The claimant relied on ss 31(1)(a), (b) and (e) of the Act.

Decision

Stevenson J found that service did not occur on 3 February 2021.  Accordingly, His Honour rejected the claimant’s application for summary judgment and declared the claimant’s suspension of works invalid.

His Honour held that s 31(1)(a) of the Act, permitting delivery of a document ‘to the person personally’, does not mean that a document will be taken to be served by handing it to any employee of the claimant/respondent[1].  In relation to service on a corporation, some step must be taken to bring the document to the attention of a relevantly responsible person within the company[2].

Section 31(1)(b) of the Act, permitting service by ‘lodging’ ‘during normal office hours’ to the claimant/respondent’s ‘ordinary place of business’:

  • like s 31(1)(a), requires more than giving the document to any employee of the claimant/respondent[3]; and
  • requires consideration of the normal office hours of clerical staff at the particular business of the claimant/respondent concerned, not merely when the project site is operational[4]. In this case, though the mine was manned 24/7, the respondent’s normal operating hours at the mine commenced between 7 and 7:30am and concluded around 4 to 4:30pm.  Service at 5:15pm in this case was not within “normal office hours”[5].

Therefore, although the mine site was an “ordinary place of business” under the Act[6], the other criteria for service were not fulfilled on 3 February 2021.

Service had also not occurred ‘in the manner…provided under the construction contract[s]’ pursuant to s 31(1)(e) of the Act because the contracts in this case provided that documents served after 4:00pm on a day (e.g. at 5:15pm on 3 February 2021) would be taken to be served on the next business day (e.g. on 4 February 2021).

Stevenson J held that the relevant contractual provision was not void by reason of s 34 of the Act because the effect of the provision was “facultative”[7].  If service had been effected on 3 February 2021 via ‘one or other of ss 31(1)(a), (b), (c) or (d), such service would have been effective’[8] notwithstanding the clause.  The clause gave effect to s 31(1)(e) and did not modify the operation of s31(1) generally.

Take home tips

If you intend to serve a payment claim or payment schedule by hand delivery on site, you should consider the following:

  • If relying on s 31(1)(a) or (b) of the Act, is the person who you are handing the document to a relevantly responsible person within the corporation? The person the named representative in the contract or a director of the company needs to receive it.

 

  • If relying on s 31(1)(b) of the Act, what are the normal office hours on site? If clerical staff usual work from 7:00am to 4:00pm (for example), service at 4:45pm may not be effective.

 

  • If relying on s 31(1)(e) of the Act, is there a provision in the contract which deems notices given after a particular time on a day served only on the following business day? If so, you must ensure the notice is given prior to the cut off.

We can assist with your queries on validity of your usual service practices and methods to ensure compliance with the Act.

[1] At [23].

[2] At [24].

[3] At [43].

[4] At [51] to [53].

[5] At [68].

[6] At [74].

[7] At [80].

[8] At [81].

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.

Spring is here and so is the Building and Construction Industry Security of Payment Regulation 2020

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On 1 September 2020, the Building and Construction Industry Security of Payment Regulation 2020 commenced (2020 Regulation) repealing the 2008 Regulation.

The 2020 Regulation will provide the legislative support and administrative detail for the operation of the Building and Construction Industry Security of Payment Act 1999 (NSW) (Act) as provided by the amendments which commenced on 21 October 2019. These amendments came about to address poor payment practices and the high incidence of insolvencies in the building and construction industry and also, to facilitate prompt payment, preserve cash flow and resolve disputes quickly and efficiently.

The 2020 Regulation is not retrospective and will not apply to contracts entered into prior to its commencement date.

Key reforms of the 2020 Regulation include:

  • removing the annual reporting requirements for trust accounts to NSW Fair Trading,
  • introducing a requirement for head contractors to keep a ledger for retention money held in relation to each subcontractor and provide the subcontractor with a copy of a ledger at least once every 3 months or longer period of 6 months if agreed in writing, and also to provide trust account records to subcontractors if their money is held in trust,
  • supporting statements are only required for subcontractors or suppliers directly engaged by the head contractor,
  • removing owner occupier construction contracts as a prescribed class of construction contract to which the Act does not apply, and
  • introducing qualifications and eligibility requirements for adjudicators to improve the quality of adjudication determinations under the Act.  The eligibility requirements include either a degree or diploma in a relevant specified field with at least 5 years’ experience, or at least 10 years’ experience in a relevant specified field.  The continuing professional development requirements for adjudicators will commence on 1 September 2021.

Of particular note, the project value threshold (value of the head contractor’s contract with the principal) for retention money trust account requirements will not be reduced from $20 million to $10 million as previously foreshadowed. The existing threshold will remain. Perhaps, given the current climate, it was considered too much of an administrative burden on head contractors who are already dealing with the pressures of delivering projects during Covid. A copy of the 2020 Regulation is  here.

If you would like to discuss or would like any more information, please contact us at info@bradburylegal.com.au or (02) 9248 3450.

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Suspension of relief: take out notices, jurisdictional error and Security of Payment Act

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In Parrwood Pty Ltd v Trinity Constructions (Aust) Pty Ltd, the Court confirmed that, for the purposes of the Building and Construction Industry Security of Payment Act 1999 (NSW) (SOPA), taking the work out of the hands of a contractor will not remove reference dates accrued before the take out notice is served, even if they are not actually used until after the take out notice is issued.

Although the facts were unusual and complicated, in the unique world of the SOPA they are not unheard of. This note is useful for parties considering whether:

  1. to issue a take out notice instead of a termination notice (particularly for NSW construction contracts entered into before 21 October 2019); or
  2. to withdraw an adjudication application in the event of jurisdictional error by an adjudicator on the first determination, to re-lodge before a new adjudicator.

The facts

The contractor was working under the principal in a residential building project. The contractor accrued reference dates on the 25th day of each month. The contract contained an AS standard clause where the contractor fails to show reasonable cause for its default:

“the Principal may by written notice to the Contractor:

(a) take out of the Contractor’s hands the whole or part of the work remaining to be completed and suspend payment until it becomes due and payable pursuant to subclause 39.6; or

(b) terminate the Contract.”

The parties fell into dispute and the principal asked the contractor to show cause.

Then:

  • on 25 August 2019, the monthly reference date for a SOPA claim came about;
  • on 3 September 2019, the principal issued a notice that took out of the contractor’s hands all of the work remaining to be completed, instead of terminating the contract; and
  • on 6 September 2019, the contractor issued a payment claim in the amount of $2,023,645.76. This payment claim was said to use the 25 August 2019 reference date.

In response, the principal scheduled “$Nil”.

The contractor applied for adjudication under the SOPA. The adjudicator declined to determine an amount that the contractor was owed (if any), finding the payment claim was invalid.

After it received the first adjudicator’s decision, the contractor “withdrew” its application, and made a second adjudication application. The contractor argued that the first adjudicator had failed to exercise his statutory function in declining to determine the amount owing. The second adjudicator considered the application and awarded over $400,000 to the contractor. The principal applied to the Supreme Court to set aside the second adjudication determination.

There were two broad issues that the Court was required to consider.

Suspension and payment claims

The first issue was what effect the take out notice had on the ability to issue payment claims.

The Court found that even though the payment claim was served after a take out notice, it was saved by the fact that it was served for a reference date occurring before the take out notice was made.

The outcome would have been different if the take out notice was served before the reference date. In this case, the contractor’s rights are suspended by the take out notice, and it cannot make a payment claim under the fast-track SOPA. It can, however, still make a claim under general law.

A take out notice cannot extinguish a right to make a payment claim that already exists.

Second Adjudication

Jurisdictional error

The second issue concerned the unusual circumstances in which a claimant may effectively redo its application.

The Court found that the first adjudicator had not made a ruling that, for example, the contractor was entitled to “$Nil”. Rather, the adjudicator had decided that, no matter what he thought about the facts, he could not determine any adjudicated amount (“I must decline therefore from determining …”).

The first adjudicator had failed to determine the amount of the progress payment (if any) to be paid, as required under section 22(1) of the SOPA. Therefore, the first purported determination was void.

Making a second application

Section 26(3) of the SOPA allows for a claimant to withdraw an application and make a new adjudication application, if the adjudicator accepts the application but then “fails to determine the application within the time allowed”. The claimant must withdraw and make the new application within five business days after it is entitled to withdraw the previous adjudication application.

This may occur where the adjudicator has made a jurisdictional error in failing to determine the application.

If the original decision is decided by a court to be valid (because there was no jurisdictional error), then the second application is wasted. However, if the original decision is declared void, then the second application may still be valid.

Conclusion

It pays to be aware of when reference dates arise, and when take out notices can and should be served. Principals concerned to issue effective take out notices should be mindful of existing reference dates which have or may accrue before that notice.

Claimants should be keenly aware of the existence of any jurisdictional error on the part of adjudicators. Such error may allow them to re-lodge an adjudication application.

 

 

NCC 2019 Amendment 1: Changes starting on 1 July 2020

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In response to the recommendations of the Shergold Wier Building Confidence Report, the Australian Building Codes Board (ABCB) and the Building Ministers’ Forum have undertaken an out of cycle amendment to the National Construction Code (NCC). While the NCC was not due for review until 2022, the amendment known as “NCC 2019 Amendment 1” will be adopted by all Australian jurisdictions on 1 July 2020.

The NCC is a performance-based code containing technical standards for the design, construction and performance of buildings as well as for plumbing work and drainage systems. It is published and maintained by the ABCB and adopted by each Australian jurisdiction through its own legislation. For example, in NSW the NCC is given effect by the Environmental Planning and Assessment Act 1979 (NSW), the Plumbing and Drainage Act 2011 (NSW) and subordinate legislation.

The aim of the NCC is to create a uniform set of technical standards that apply to all Australian jurisdictions. However, as identified in the Shergold Wier Building Confidence Report, there have been a number of systematic issues with the implementation and enforcement of the NCC which has prompted NCC 2019 Amendment 1.

What will change?

Following a period of key stakeholder consultation last year, NCC 2019 Amendment 1 will introduce the following changes:

  • a new provision regarding egress from early childhood centres (NCC Volume One);
  • clarification of the concession that permits the use of timber framing for low-rise Class 2 and 3 buildings (NCC Volume One);
  • clarification that anti-ponding board requirements only apply to roofs where sarking is installed (NCC Volume Two);
  • an update to the Governing Requirements for all Volumes to require labelling of aluminium composite panels in accordance with SA Technical Specification 5344; and
  • correction of minor errors, including the correction of typographical errors and errors in diagrams.

In addition to the above, the ABCB announced last month that NCC 2019 Amendment 1 will also include a provision mandating the process for developing Performance Solutions. This process is based on the ABCB’s existing Development of Performance Solution Guideline and requires that the process for documenting Performance Solutions be commensurate with the complexity and risk of the design.

Unlike the other amendments, this amendment will not commence until 1 July 2021. However, as the process is included in NCC 2019 Amendment 1 there is plenty of time for industry participants to prepare necessary documentation to encompass the process for Performance Solutions prior to the amendment taking effect next year.

Other changes expected

It was also proposed that NCC 2019 Amendment 1 would include the new defined term of “building complexity”. The draft definition proposes a risk-based system from levels 0 to 5 for classifying complex buildings, which assists to identify buildings where additional regulatory oversight is needed during the design, construction and certification processes.

 

The ABCB announced last month that this new definition would not be included in NCC 2019 Amendment 1, however it has been published on their website with a six month consultation period for comments and feedback.

A copy of the preview of NCC 2019 Amendment 1 is available on the ABCB website via the NCC Suite.

If you or someone you may know is in need of advice regarding NCC 2019 Amendment 1 or the NCC generally, please contact our office by phoning (02) 9248 3450 or by email at info@bradburylegal.com.au.