Major projects & construction 5 Minute Fix 39

By the Major projects & construction team
22 Aug 2019
Get your 5 Minute Fix of major projects and construction news. This issue: quantum meruit in the spotlight, again; recovery of liquidated damages claim against a third party guarantor; the latest on the NSW Modern Slavery Act, submissions invited regarding draft Regulation and Bill; the High Court examines the issue of cross-border registration of building practitioners; further cladding reforms for Queensland; and guidance to making a valid payment claim.

Quantum meruit not available to redistribute risk allocation in ongoing contract

The Queensland Supreme Court has emphasised that quantum meruit claims cannot be used to redistribute risk allocation in a contract that remains on foot. In Harro Group Pty Ltd v Aspire Pty Ltd [2019] QSC 189, Justice Jackson held that a restitutionary remedy was not available where it would be inconsistent with the agreed contractual risk allocation in an ongoing contract.

This case involved a 15 year lease of commercial premises in Brisbane for use as a restaurant and bar. Under a separate incentive deed, following an initial rent free period of 12 months, rent was to be calculated as a percentage of the turnover from trading. However, as no trade from the bar and restaurant was carried on, no rent became payable under the express contractual mechanism in the lease.

In addition to a claim for damages for breach of contract, the plaintiff pursued a cause of action in restitution for the benefit of the use and occupation of the premises. This was to be measured by the market value of rent for the premises rather than the amount that would have been payable under the lease.

The Court recognised that while restitution may be available in the instance of a legally ineffective contract, the situation in respect of a valid contract is more complicated. Referring to a long line of cases on the subject, the Court also observed that the question of availability of quantum meruit where a contract has been repudiated is currently the subject of an appeal to the High Court in Mann v Paterson Constructions Pty Ltd.

In this case, however, Justice Jackson was of the view that a restitutionary cause of action should not be available, as the lease had not been terminated. He concluded that judgment on a restitutionary basis would be unreasonable as this would result in the allocation of risk and limitation of liability provided for in the lease being overturned. This approach is inconsistent with another entrenched High Court decision, Lumbers v W Cook Builders Pty Ltd (in liquidation) (2008) 232 CLR 653, 663 [79].

Liquidated damages guarantee enforced

In Bettar Holdings Pty Ltd v All Sydney Plumbing Pty Ltd, Justice Parker determined a liquidated damages claim against a third party guarantor in favour of the plaintiff.

The case involved a subcontract for plumbing work on a building project in which the director of the subcontractor guaranteed to the contractor:

  • the due and punctual observance and performance by the subcontractor of its obligations under the subcontract; and
  • that if the subcontractor defaulted, the director would indemnify the contractor against all losses arising as a result of the subcontractor's default.

Following suspension of work by the subcontractor, the contractor purported to terminate the contract and commenced proceedings against the subcontractor and its director, relying on the indemnity to recover liquidated damages.

To establish that the director of the subcontractor was liable under the guarantee, the plaintiff had to prove on the balance of probabilities that the director assented to the subcontract and signed it as guarantor. The subcontract contained separate execution blocks for the director, to bind the company, and for the director acting as guarantor. In the execution block for the director on behalf of the company, the name of the director was handwritten next to the signature. In the guarantor execution block, the name of the director had not been handwritten, but the signature looked similar to the signature of the director. Justice Parker took the view that in the circumstances of this case, while the legal onus was on the plaintiff, the evidentiary onus was on the director to rebut the inference that arose from the apparent presence of his signature as both guarantor and director.

As the director failed to rebut that inference, the contractor succeeded in its claim for recovery of liquidated damages against the director, the subcontractor having failed to complete the subcontract works by the contractual completion date.

Wait for commencement of the NSW Modern Slavery Act 2018 continues

As previously noted in our 5MF 35, commencement of the NSW Modern Slavery Act 2018 has been slowed by concerns about its parallel operation with the Commonwealth Modern Slavery Act (2018) (which commenced on 1 January 2019).

The NSW Government has now taken steps to address questions surrounding the coexistence of these two regulatory regimes by releasing:

  • a draft Modern Slavery Regulation 2019; and
  • an Explanatory Paper providing background and guidance on the draft Regulation.

Under section 24(4) of the NSW Act, a modern slavery statement must be prepared in accordance with, and contain such information as may be required by, regulation. The draft Regulation now clarifies that a statement must, among other things, describe:

  • an organisation’s structure, operations and supply chains;
  • the risks of modern slavery in the operations and supply chains of the organisation, and any entity that the organisation owns or controls;
  • the actions taken by the organisation and any entity it owns or controls to assess and address those risks, including due diligence and remediation processes; and
  • how the organisation assesses the effectiveness of such actions.

The NSW Act and the Commonwealth Act therefore set out the same minimum mandatory criteria for the content of modern slavery statements, and both require the publication of those statements on a public register. The draft Regulation, however, expressly prescribes the Commonwealth Act as a "corresponding law" to relieve businesses of duplication in terms of reporting requirements.

It is proposed to commence the draft Regulation on the NSW Act’s commencement date once set.

Additionally, as of 6 August 2019 the Legislative Council Standing Committee on Social Issues is leading an inquiry into the NSW Act, the Modern Slavery Amendment Bill and the draft Regulation. The Committee is scheduled to deliver its final report by 14 February 2020.

Stakeholders are invited to make submissions:

  • responding to the draft Regulation by 13 September 2019; and
  • to the Committee by 4 October 2019.

Cross-border registration of builders

The High Court has dismissed an appeal of a Federal Court decision in Victorian Building Authority v Andriotis [2019] HCA 22.

The Federal Court found that the Victorian Building Authority (VBA) was unable to refuse registration to a NSW-registered practitioner who failed to meet the “character requirements" provisions in the Victorian Building Act 1993.

The appeal centred on section 20(2) of the Mutual Recognition Act 1992 (Cth) which does not provide much scope for state regulators to refuse registration on good character grounds. Section 20(2) is subject to exceptions, including section 17(2) by which the mutual recognition scheme is said not to “affect the operation of laws that regulate the manner of carrying on an occupation" in another jurisdiction. The question was whether Victoria's character provisions fell within the exception.

The High Court upheld a narrow view of the exception (and of the VBA's discretion to refuse registration), meaning that the applicant was entitled to have his registration in Victoria considered without regard to character-related matters. In the VBA's view, these character-related matters should have disqualified him from registration in Victoria.

While this approach promotes the goal of freedom of movement, at the same time it potentially derogates from another key policy goal which is being strenuously pursued by the States and Territories as part of their response to the current deep concerns about quality and building materials. This is the need, underpinning the Building Confidence Report and many other reviews, for improved and assured competence across the industry. In turn, the decision underscores the need for a nationally-consistent approach to such improvement and assurance.

Queensland cladding reforms

The Queensland Government has temporarily relaxed its professional indemnity (PI) insurance requirements for building certifiers in connection with certain cladding products. Previously, Queensland legislation required building certifiers to hold PI insurance for a claim that may arise from the performance of private certifying functions. However, with PI insurers imposing exclusions in respect of any liability in relation to combustible cladding and seeking to increase premiums to a point where the cost of insurance is prohibitive, allowing cladding-related PI exclusions avoids an impasse where building certifiers are unable to remain licensed. The changes to the PI insurance requirements for building certifiers operate from 9 August 2019 until 30 June 2021. The Department of Housing and Public Works will review the exclusion in May 2021, having regard to the state of the insurance industry at that time. However, while this temporary step avoids the construction industry grinding to a halt, professionals potentially remain exposed to legal liabilities that may arise in connection with past projects.

The amendments to the Queensland Building Regulation 2006 also include administrative and operational improvements to the three-part building cladding checklist process, currently on foot and administered by the Queensland Building and Construction Commission. The next key date for Queensland building owners is 31 October 2019. This is the date by which owners who have progressed to Part 3A of the checklist process must engage a fire engineer and register the details on the combustible cladding checklist.

Payment claims – when close enough isn't good enough

In the decision of KDV Sport Pty Ltd v Muggeridge Constructions Pty Ltd & Ors [2019] QSC 178, the Queensland Supreme Court considered the requirement of section 17(2) of the Building and Construction Industry Payments Act 2004 (Qld) (Act) that the payment claim identifies the construction work to which it relates.

The decision involved a lump sum contract for the construction of student accommodation. The Court found that the contractor had submitted a payment claim that was not suitably detailed to identify the construction work the subject of the claim. As a result, the payment claim was invalid. Justice Brown observed that whether a payment claim is sufficiently detailed is a "relatively undemanding test". She noted the intent of the legislation to facilitate the quick resolution of payment claims. However, to achieve this purpose, the claimant is required to identify, in a reasonable way, the construction work to which the claim relates.

References in the payment claim to:

  • various trade breakdowns, without further line item description of the work performed;
  • completed percentage categories of work,

were insufficient to identify the construction work to which the claim related. Accordingly, the adjudicator's decision was void for jurisdictional error.

Justice Brown acknowledged that it was not incumbent upon the respondent to engage in a "process of reconstruction" based on previous claims and amounts paid. This view has been expressed in other decisions considering the requirements of a valid payment claim.

The key take away from this decision is that, when preparing a payment claim, ensure it is sufficiently detailed to allow the principal to understand the basis of the claim. This case considered the requirement of section 17(2)(a) of the Act. The Act has since been repealed and replaced by Chapter 3 of the Building Industry Fairness (Security of Payment) Act 2017. However, section 68 of the new Act retains the same requirement that the payment claim identify the construction work or related goods and services to which the progress claim relates.

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Clayton Utz communications are intended to provide commentary and general information. They should not be relied upon as legal advice. Formal legal advice should be sought in particular transactions or on matters of interest arising from this communication. Persons listed may not be admitted in all States and Territories.