Tag Archive for: contract

The dreaded ACL injury: the Australian Consumer Law and building contracts

/in

Since it fully came into effect on 1 January 2011, the Australian Consumer Law (ACL) has lived up to its infamous initials. Just as athletes live in fear of hearing those three letters from physicians, now businesspeople must also tread carefully to avoid hearing them from judges.

The ACL is part of the Competition and Consumer Act 2010 (Cth). Although recently enacted, many of its provisions were previously in effect under the now-repealed Trade Practices Act 1974 (Cth).

This law touches all trade and commerce in Australia in some way, and seeks to ensure that parties adhere to standards of fairness and honesty in business. Failure to do so can lead to a number of consequences, including a contract being torn up and even criminal sanctions.

The regime is part of a broad shift of the law away from the fundamental legal principle that if parties willingly and knowingly agree to a contract, they must keep their promise, regardless of how difficult this is or ends up becoming.

Perhaps its name is to blame, but many are under the false impression that the Australian Consumer Law only applies to everyday retail consumers. However, complex “high-end” commercial deals can equally be subject to the ACL. Your building contract could be affected in the same way that Amy buying a DVD player is affected.

This article is only a primer to a range of consumer law issues that people on construction projects should be thinking about. For information about how these might apply to your project or your claim, please seek legal advice.

What is the ACL?

The ACL is the primary law governing protections and expectations about business conduct in Australia. It applies nationally, to every State and Territory. It also applies where foreign companies do business with businesses in Australia.

In general, it is important for developers, homeowners and contractors to know that the ACL applies even if the parties have “agreed” that it doesn’t apply. Parties cannot contract to exclude the application of the ACL.

Having said that, courts are still working out how to deal with contracts that in roundabout ways exclude its operation.

What transactions are caught by the ACL?

This depends.

Certain protections apply to any trade or commerce taking place in Australia. Additional protections regulate more specific types of transaction.

Developers and builders would do well to ask themselves the following questions:

  1. Is my project trade and commerce?
  2. Is my contract a consumer contract?
  3. Is my contract a small business contract?

Is my project “trade or commerce” under the ACL?

This is the broadest category of protections given by the ACL, so if you are thinking about it the answer is very likely “yes, my project is trade and commerce”.

The ACL covers trade or commerce that takes place within Australia and includes business or professional activity (whether for-profit or non-profit).

Some previous examples of constructions that were affected by ACL claims include projects to:

  • build extensions to a large domestic airport;
  • construct a spillway for a dam;
  • design and install a ceiling to an aquatic centre; and
  • build a strata title development in Kirribilli.

So what protections apply in trade and commerce?

The most famous protection is misleading and deceptive conduct. Not precisely defined, it encompasses a broad range of statements, representations or behaviour that may mislead or deceive a reasonable person. In certain circumstances, silence may be misleading, and this will be caught too. It does not matter that the person did not intend to mislead with their conduct, and does not matter that the deception happened before the contract was executed.

Related to this is the protection from unfair practices, which are activities that are broadly misleading. These include false or misleading claims about the standard of goods and services being supplied. They also include prohibitions against bait advertising, against asserting a right to payment without a reasonable cause to believe there is a right to payment, and against supplying unsolicited services.

Another line that all businesses involved in trade or commerce must toe is that of unconscionable conduct. The definition of “unconscionable conduct” is broad and not limited to what is written down in the statute books. Either a supplier or an acquirer of goods or services may be accused of unconscionable conduct.

Some examples of what might be considered to be unconscionable include: the imposition of conditions not reasonably necessary to protect the interests of a party, the exertion of any undue influence or pressure on a party, and unreasonable failure by a party to disclose intended conduct or risks that would not be foreseen.

Is my contract a small business contract?

The contract in question might be a “small business contract”. This will be where:

  • A contract is for supply of good or services, and
  • A party to the contract is a business that has 20 or fewer employees, and
  • The upfront contract price is up to $300,000 (or the upfront contract price is $1 million and the contract has a duration of more than 12 months).

These are the questions businesspeople should be asking themselves.

Small business contracts have all the protections outlined above (including misleading and deceptive conduct, unfair practices, and unconscionable conduct). In addition, they are protected from unfair contract terms

An unfair contract term is a term in a standard form contract that would cause significant imbalance in the parties’ rights, is not reasonably necessary to protect the legitimate interests of the party benefiting from it, and would cause detriment to the other party.

There are no hard and fast rules about what is an unfair term, as the circumstances of the case will always be considered carefully by a court. However, an example is a term that allows one party unilaterally to vary the characteristics of the goods supplied, or to vary the terms of the contract.

Is my contract a consumer contract?

The most protected species under the ACL are consumers. The contract for goods or services is a consumer contract if:

  • The price of the goods or the services is less than $40,000; or
  • The goods or services were of a kind ordinarily acquired for personal, domestic or household use or consumption; or
  • The goods were a commercial road vehicle.

Where any of these apply, the person acquiring the goods or services could be a “consumer” in the eyes of the law. In addition to the protections listed above, consumers benefit from consumer guarantees.

Consumer guarantees are a litany of warranties that a supplier of goods or services makes to a consumer the moment the contract is in place. Some examples include:

  • The goods or services are of acceptable quality;
  • The services are rendered with due care and skill;
  • The services are reasonably fit for a purpose, if the consumer makes it know they hire the services for this purpose.

Many of these guarantees already exist elsewhere, in tort and contract. The difference here is that contracting parties cannot contract out of these consumer or small business guarantees. Subject to what is said below, they will apply regardless of any contractual term stipulating that they don’t.

Remedies

Parties who are a victim and suffer loss or damage because of another party’s breach of the ACL have many remedies at their disposal.

The main remedy is that they may make a claim for damages from the offending party. This claim for damages must be made within 6 years of the day that the entitlement for the claim first arose.

Some of the above breaches of the ACL are also criminal offences. This especially includes false or misleading representations, and unfair practices.

If the ACCC or local bodies such as Fair Trading NSW bring actions against businesses for the above breaches, they can enforce pecuniary penalties. They can also request injunctions preventing the offending conduct. There are a myriad of other remedies to suit the specific circumstances, including requirements to undertake training of staff.

Limiting the effect of the ACL

The effect of the ACL cannot be excluded, restricted or modified by a term of the contract. Any contractual term that purports to do this is struck out by courts.

Though this principle appears clear as day, courts have found it difficult to apply in the real world, and there are isolated examples of businesspeople who have avoided a nasty ACL claim through clever drafting of the contract.

In one NSW case, a contract purported to prevent claims made under statute after one year from the date of practical completion. This had the practical effect of reducing the 6 year limitation under the Act, and the court found this was acceptable. Similarly, another NSW case held that a monetary limit of $300,000 was effective to prevent a claim under the ACL from more than this amount. The courts in both cases gave detailed consideration to the surrounding circumstances.

However, a recent Victorian case has gone the opposite direction. The contract purported to require a claimant to give 7 days’ notice to the other party if it was going to make a claim, including under statute. The Victorian Supreme Court found that this contractual provision was void.

Hopefully these issues will be definitively settled by a superior court. Until then, parties must be wary both of the possibility that the ACL will override what their contract says, and of the possibility that contractual time bars or monetary bars might affect a claim they have.

Conclusion

It is essential for anyone involved in business and all their staff members to understand their obligations under the ACL, because you can be sure the lawyers of the other side will know them. There is no escaping them, as they apply irrespective of what the contract says and government regulators are on the lookout for breaches.

If you or someone you know wants more information or needs help or advice, please contact us on +61 2 9248 3450 or email [email protected].

Fire in the sky: Lacrosse building consultants found liable for cladding

/in ,

A Frenchman lights a midnight cigarette on his balcony in Melbourne. In less than three hours, most of the 23-storey high rise building catches fire. The Docklands area narrowly avoids burning to the ground.

Thanks to the incredible work of the fire brigade, the occupants and the sprinkler system, not a single one of the tower’s 400 occupants or anyone in the Docklands was hurt by the towering inferno.

Like Deep Purple’s rock classic, this is a true story, the butterfly effect of nightmares for three consultants to a building project. They were found, in what was crucially a breach of their consultancy agreements, to have contributed in various ways to the installation of combustible cladding on the building. This was against the regulations that applied to the high-rise.

They have been ordered by the Victorian Civil and Administrative Tribunal per His Honour Judge Woodward to foot a $5.75 million bill. More damages may follow. A further $6.8 million in claims is still being heard by the judge, mostly for removal and replacement of the unburnt cladding.

It was a landmark decision, one of the first in Australia on liability in relation to combustible cladding. It will not be the last. High rise building owners and building consultants must carefully examine their properties (and their contracts), or they could be next.

To see the full 227-page judgment, follow this link.

For the key details and what builders, consultants and residents need to know moving forward, keep reading.

The events

At about midnight on 24 November 2014, one of the Lacrosse residents returned from work and had a cigarette on a level 8 balcony. Leaving the almost-extinguished cigarette butt in a plastic tray, he went to bed.

Unfortunately, the tray contained aluminium foil, a plant and a packet of seeds. After two hours, everything combustible on the balcony caught alight, including the timber table, some clothes and an air conditioning unit. High-rise balcony areas are high-risk fire hazards.

The building was clad in aluminium composite panels (otherwise known as ACPs) which had a core containing the highly combustible material, polyethylene. Polyethylene has a combustibility similar to petrol and diesel. In the space of twelve minutes the fire spread from floor eight to floor twenty-one.

The use of an ACP with a 100 percent polyethylene core as part of the external wall of the building was found to be “primarily responsible” for spreading the fire.

The applicants

The 211 owners of the various floors and individual apartments brought the case. This included three owners corporations.

The respondents

The case was brought against eight respondents:

  • L U Simon Pty Ltd was the builder;
  • Stasi Galanos and his employer Gardner Group Pty Ltd, who was the building surveyor;
  • Elenberg Fraser Pty Ltd was the architect;
  • Tanah Merah Pty Ltd trading as Thomas Nicholas was the fire engineer;
  • the resident who lit the cigarette;
  • the primary occupier of the smoker’s apartment unit; and
  • the superintendent of the build, Property Development Solutions.

This was the cast of characters in Owners Corporation No.1 of PS613436T v LU Simon Builders Pty Ltd [2019] VCAT 286.

Liability of the builder

The builder’s warranties (promises) stated in the Victorian Domestic Building Contracts Act 1995 were the basis for its overall liability. It was alleged that the builder:

  • Had failed to provide materials good and suitable for the purpose for which they were used;
  • Had not carried out work in compliance with the Building Act 1993 (Victoria) and the Building Code of Australia (BCA), and
  • Had not used materials reasonably fit for a particular purpose which was stated in the contract, in circumstances where the building owner clearly relied on the builder’s skill and judgment.

Such warranties are a part of every domestic building contract, and very similar warranties are implied into many home building contracts in NSW law.

In this Victorian case, combustible panels were found to be not good or suitable for the purpose of being used as external walls of a high-rise residential building. The cladding did not avoid the spread of fire in the building so as to prevent injury and property damage. The builder had made an error in selecting these materials.

However this was not the end of the story, as “not every error is negligent” at law.

To be found negligent, the builder had to have failed to take reasonable care in selecting the ACPs. Judge Woodward found that the builder had not failed, for three reasons:

  1. The builder had not known that ACPs were highly combustible and was not expected (at least in 2011) to know this;
  2. The installation of ACPs was a part of the building contract itself, forming the annexed performance requirements; and
  3. The builder had signed consultancy agreements with “highly skilled professionals” (consultants) to supervise and ensure that the complex project was compliant with the BCA. By engaging them, the builder had relied on their expertise.

Liability of the consultants

Point (3) just above meant that there was a possibility that the consultants (the fire engineer, the building surveyor, and the architect) were responsible for the damage. It was alleged that these were the parties who had failed to exercise due care and skill in relation to the installation of the ACPs.

Judge Woodward agreed. Courtesy of the consultancy agreements, the builder was able to pass almost all of the risk in relation to the BCA compliance of the cladding down to the consultants. The consultants were ultimately at fault, and apportioned the $5.7 million in damages as follows:

  • The fire engineer was found liable for 39 percent of the damages;
  • The building surveyor was found 33 percent liable; and
  • The architect was found 25 percent liable.

The French smoker was found 3 percent liable, but given he did not appear in the proceedings and his responsibility was found to be “minimal’ by the judge, the builder copped this amount instead.

Each judgment was made considering the particular consultancy agreement between the consultant and the builder.

The fire engineer: 39 percent liable

As the “primary consultant responsible for fire safety compliance”, the fire engineer was always going to be in trouble.

It had failed to conduct a full fire engineering assessment that would inquire into and assess the range of construction materials. The purpose of this assessment was to identify potential fire hazards of the building.

The fire engineer made the almost-deadly error of assuming that it was not required to conduct an assessment under the consultancy agreement that it had signed. This was incorrect. It was in fact required to conduct some proactive investigation and assessment of the building materials, which it did not do.

It had also failed to warn the builder (and also the other consultants) that the ACPs used for the high-rise residential building did not comply with the Building Code of Australia. Finally, it had also failed to advise about a solution to the non-compliance.

The fire engineer was found the most liable out of everyone, for the simple reason that it was the only professional on the project who actually knew that ACPs were not compliant and were fire risks. A simple email or comment at a meeting may have got it out of trouble. Its inaction was costly.

The building surveyor: 33 percent liable

The builder surveyor was in the firing line primarily because it had decided to issue a Stage 7 Building Permit. Through this, ACPs were approved for use on the façade of the building despite not being in compliance with the BCA. This was allegedly a breach of its consultancy agreement.

However, it was also alleged that the building surveyor’ failed to query the incomplete description of the cladding systems in the fire engineering report, and also that it failed to properly inspect the work during construction for compliance with the BCA.

Judge Woodward found that, notwithstanding some expert evidence to the contrary, the building surveyor’s had failed to give adequate consideration to whether the ACP was compliant with the BCA before issuing the permit.

The building surveyors might have had a defence if the builder did not give them insufficient information about the materials used in construction. Unfortunately for the Lacrosse tower building surveyors, this was not the case.

The architect: 25 percent liable

The other consultant in hot water was the architect.

The allegation was that the architect had made an agreement to prepare architectural drawings of the external cladding that satisfied legislative requirements, and it had breached this agreement. The allegation was also that it had failed to check whether the sample of the ACP provided to it complied with the BCA and was fit for purpose.

Both allegations were proven. The design specified ACPs for the external walls of the tower, including one with 100% polyethylene core, which was a breach of the BCA. Secondly, as head design consultant, it was also responsible for ensuring that the ACP sample it provided was compliant with its design intent and the BCA. In approving of a sample of the ACP, it had failed to exercise due care and skill.

Overall

In summary, the consultancy agreements between the builder and the consultants existed for the commercial purpose of ensuring ongoing involvement from consultants in the project, and therefore ongoing responsibility for the work.

Judge Woodward found that the involvement of the consultants, on terms that they would advise on non-compliance of building materials, meant that they and not the builder were liable for the fire damage.

The lesson for consultants: know exactly your obligations under a contract, whether they are immediate or over a longer period of time, and warn of non-compliances with the law consistent with your knowledge.

Whose line is it anyway?

The line between what is the builder’s responsibility and what is a consultant’s responsibility is a difficult one for the law to trace. There are no hard and fast rules, especially as much will depend on the particular builder-consultant contract.

There will be cases where a commercial builder, given its expertise and experience, will be expected to identify and correct errors by another building professional.

However, in this case Judge Woodward ruled that “where (as here) the skill involved is beyond that which can be expected of a reasonably competent builder and there is no actual relevant knowledge”, the liability of a skilled consultant will be possible.

Knowledge of consultants

The lack of knowledge about the combustibility of ACPs, and the failure of the few who had this knowledge to pass it around, proved very costly and almost deadly.

In another important lesson for consultants, the building surveyor tried to argue that because its peers held similar (incorrect) assumptions about ACPs and their compliance with the BCA, it should not be liable. However, Judge Woodward was unimpressed, as these incorrect assumptions formed “organically and apparently without any practitioner seeking any kind of assessment or endorsement from a professional body or regulatory authority”.

Uncritically adopting a practice perceived to be widespread will not save a consultant. He or she must logically consider each issue they come across, and seek professional advice such as that of a fire engineer.

Conclusion

The judge emphasised that this decision was based on the specific facts of the case. If the building contract and the building had been different, or if ACPs had been used on buildings without obvious ignition sources like barbeques and air conditioning units, then the outcome of the case may have been different.

Nevertheless, building owners and consultants, especially those who have been involved in installing combustible cladding, should be on high alert.

They will need to review their building and consulting contracts immediately, not to mention their professional indemnity insurance. This applies not just for current projects, but for previous ones too. The Lacrosse fire happened in 2014 and the companies are paying dearly for it today.

Building owners will also need to go about registering their buildings on the NSW Cladding Registration portal (see link for more).

If you or someone you know wants more information or needs help or advice, please contact us on +612 9248 3450 or email [email protected].