Major Projects & Construction 5 Minute Fix 105: developer's liability for cladding rectification, expert determination, security of payment

The Major Projects & Construction Team
18 Aug 2022
Time to read: 5 minutes

Get your 5 Minute Fix of legal trends in Major Projects and Construction. In this edition: NSW Court of Appeal decision considers developer's liability to owners corporations for cladding rectification; a reminder that the statutory demand process in the context of SOP Acts will not always yield the desired outcome; the Queensland Supreme Court refuses to stay the expert determination process under a royalty deed, and the NSW Supreme Court considers security for costs.

Developers "on the hook" for cladding rectification costs

In Rialto Sports Pty Limited v Cancer Care Associates Pty Limited [2022] NSWCA 146, the NSW Court of Appeal has upheld findings in the NSW District Court that lot owners of a commercial building completed in 2014 were able to recover around $1.4 million in façade cladding rectification costs directly from the developer (Rialto) via their contracts of sale. In doing so, the Court rejected arguments by Rialto that its materials and workmanship obligation in the sale contracts was merely on a "best endeavours" basis, and found that that obligation survived completion of the contracts despite there being no express provision to that effect. The case is therefore of significant interest in the context of the ongoing "cladding crisis" in NSW and beyond, confirming that developers could well be "on the hook" for liability to lot owners via contracts of sale, especially where (as here) the builder has gone into liquidation.

Appeal Justice Gleeson gave the judgment of the Court; Chief Justice Bell and Appeal Justice Macfarlan agreed with his Honour. The key special conditions in the off-plan contracts, run together here, required Rialto (as "vendor") to construct the building "in a proper and workmanlike manner" in accordance with the plans and specifications approved by the Council and with the Development Consent. The Court said that it would require a "significant rewriting" of the workmanship obligation to accept Rialto's contention that it required only something "replicating substantially" the relevant plans. Moreover, though Rialto was entitled to subcontract the building work, that did not excuse it from its workmanship obligations to the lot owners.

The Court also took a holistic view of liability in the light of the lack of contractual links between Rialto and the (later formed) owners corporations and liability in negligence to those corporations for defective work, observing that "it was commercially sensible for the purchasers to obtain a warranty from Rialto as to good workmanship of the building as a whole."

The question of whether Rialto's workmanship obligations survived completion of the contracts was determined by the Court by way of interpreting provisions across the contract. Whilst there was no provision specifically about the workmanship obligations' survival, various special conditions referred to those provisions "which are intended to have application after Completion" having such application. The Court found that survival of the workmanship obligation was not inconsistent with them.

The Court also found in favour of the lot owners in relation to rectification which had not yet been carried out, observing that the lot owners were able "to recover the costs of rectification of incomplete or defective building work in accordance with the contract". The Court made clear that that applied even if the work may never be carried out by the owners corporation because Rialto has majority control of the owners corporation, or because the lot owners were unwilling to commence proceedings to force the owners corporation to carry it out.

Head Contractor resists statutory demand pressure for purported payment claim

In Re J Build Developments Pty Ltd [2022] VSC 434, the Supreme Court of Victoria considered the interplay between the Victorian security of payment (SOP) legislation and the statutory demand process under the Corporations Act. The statutory demand, in this case, concerned a relatively minor amount, $35,000 for which it was asserted the applicant was liable under the SOP legislation. But, the recipient of the statutory demand disputed the debt and did not yield to the pressure of the statutory demand process. The case is a reminder that parties seeking to obtain payment in reliance on the operation of the security of payment Acts coupled with the statutory demand process under the Corporations Act need to be aware that the statutory demand avenue will not always produce the desired outcome.

The head contractor, J Build Developments Pty Ltd (J Build), sought to set aside a statutory demand received from its electrical subcontractor (AES) on the basis that there was a "genuine dispute" about the existence of the debt to which the demand related. The threshold issue was whether AES's purported payment claim was validly served under the Building and Construction Industry Security of Payment Act 2002 (SOP Act). The parties accepted that, if AES's payment claim was valid and J Build failed to serve a payment schedule within time, J Build would become statutorily liable to pay the claimed amount under s 15(4) of the SOP Act. Such an outcome would mean that J Build could not rely on a disputed debt as a means to set aside the statutory demand.

However, Associate Justice Hetyey did not consider that the SOP Act precluded J Build from establishing a genuine dispute, allowing the Court to set aside the statutory demand. His Honour held that a genuine dispute existed that AES served the invoice referred to in the statutory demand before the relevant reference date arose. Alternatively, a genuine dispute existed concerning the applicable reference date.

His Honour was also willing to find that there was a genuine dispute about:

  • whether the purported claim "impermissibly" contained an "excluded amount". In Victoria, the SOP Act prohibits certain "excluded amounts" from being considered in calculating progress payment entitlements (see our note on the Yuanda case dealing with the "excluded amount" regime). Evidence existed that variation works claimed had not been completed; raising an issue of whether the invoiced amount represented an "excluded amount"; and
  • the existence or the amount of the debt referred to in the statutory demand.

Queensland Supreme Court upholds expert determination process

In Mineralogy Pty Ltd v Adani Mining Pty Ltd [2022] QSC 154, the Queensland Supreme Court refused an application to stay an expert determination process initiated under a royalty deed because it found that the relevant dispute fell within the scope of the deed's dispute resolution clause. The decision reinforces that the courts will hold the parties to their agreement to pursue expert determination. It highlights that parties must carefully consider the dispute resolution process in their contracts, including: the dispute escalation process itself, appropriate forums to resolve the dispute, and the formal requirements that must be observed.

Under the royalty deed, Adani had agreed to pay mining royalties to Mineralogy. Adani was permitted to obtain funding from financiers if the financiers executed a priority deed. Adani sought to execute a priority deed, but Mineralogy did not sign the proposed priority deed. Subsequently, Adani commenced the dispute resolution process under the royalty deed.

Mineralogy argued that the dispute did not come within the terms of the dispute resolution clause because:

  1. the dispute resolution clause should be narrowly interpreted;
  2. the dispute involved the rights of third parties; and
  3. the dispute involved questions of fact or mixed law and fact.

After a detailed review of the dispute resolution clause, Justice Freeburn ultimately dismissed each of these grounds.

In relation to ground 1, his Honour held that read as a whole, the clause was wide enough to encompass the dispute. Notably, the clause also contained "catch-all" wording which was wide enough to capture complex matters mixing factual and legal matters, including the subject of the dispute.

On ground 2, Justice Freeburn held that the dispute did not involve the rights of third parties, as the dispute related to the rights of the parties under the royalty deed and did not impact the rights of the financiers or any other parties (who were not a party to the dispute).

Finally, on ground 3, Justice Freeburn held that the parties should be bound by the contract, noting that expert determination was the most appropriate forum for resolving the dispute.

NSW Supreme Court considers security for costs and whether $600 per hour is "reasonable" for legal fees

The NSW Supreme Court recently considered an application for security for costs, including the reasonableness of the parties' legal costs.

KLG Trading Pty Ltd was previously successful in an adjudication determination against Equa Building Services Pty Ltd in relation to a payment claim submitted by KLG. However, Equa sought to relitigate the matter, claiming that KLG's work was incomplete and defective.

The question before the NSW Supreme Court was whether KLG was entitled to seek security from Equa for the cost of the current proceedings.

Equa submitted that the Court should not order security for costs because Equa should be regarded as the defendant in the proceedings, and KLG's conduct had caused Equa's impecuniosity.

Justice Ball rejected Equa's submissions and found no basis for saying that the claim was defensive in nature, as Equa's claim related to damages for defective work. His Honour also found that Equa's evidence failed to establish that it was not in a position to provide security.

Interestingly, Justice Ball analysed the reasonableness of the parties' cost estimates. His Honour found that KLG's estimate was "reasonable", as it was based on its solicitor's firm's charge-out rates ($600 per hour for a principal, $370 per hour for an associate and $320 per hour for a solicitor). In contrast, His Honour found that Equa's estimate was "overly conservative", as it involved significant reductions in the estimated time to complete tasks, and reduced the solicitors' fees by 35%.

Justice Ball ordered Equa to provide security for KLG's costs in the amount of $300,000, to be paid ahead of the final hearing.

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.