Major Projects & Construction 5 Minute Fix 109: timing and payment schedules, joint ventures, domestic building legislation, rectification damages

By the Major Projects & Construction team 
26 Oct 2022
Time to read: 5 minutes

Get your 5 Minute Fix of legal trends in Major Projects and Construction. In this edition: NSW Supreme Court on the timing for provision of payment schedules; the risks of undocumented terms of joint venture agreements; variations and extensions of time under domestic building legislation; and rectification damages in the spotlight again.

Legislation trumps contract to validate late payment schedule

The Building and Construction Industry Security of Payment Act 1999 (NSW) (SOP Act) imposes strict time periods for responding to payment claims under the SOP Act.

Section 14(4) of the SOP Act requires that a recipient of a payment claim must “provide” a payment schedule in reply within 10 business days. Failure to comply can render the recipient provisionally liable for the full amount of the payment claim even if the recipient would otherwise have had good arguments to resist payment.

In Piety Constructions Pty Ltd v Hville FCP Pty Ltd [2022] NSWSC 1318, the meaning of the term “provide” under the SOP Act was considered in the context of a construction contract that sought to impose its own meaning to that phrase. The contract required that payment claims and payment schedules under the SOP Act be provided electronically and before 4.30pm on the relevant day, failing which the document will be deemed to have been provided at 9.30am on the next business day. These contractual restrictions and deeming provisions do not appear in the NSW SOP Act.

The facts of this case highlighted the tension between the contractual provisions and the NSW SOP Act. The plaintiff builder had served the defendant developer with a payment claim under the SOP Act. Ten business days later, at 6:30pm, the developer provided the builder a payment schedule. In the hours that followed, the builder downloaded and reviewed the payment schedule and found that the developer proposed to only pay approximately one third of the builder’s claim. The builder argued that, as a result of the contractual deeming provision, under the SOP Act the developer should be taken to have submitted the payment schedule the following business day and on that basis was provisionally liable for the full amount claimed.

The court rejected the builder’s argument and instead held that a “real world” view must be applied when considering whether a payment schedule has been “provided” in compliance with the SOP Act. It was held that if, as a matter of fact, a document is delivered electronically and is actually accessed, then it will be considered to have been “provided” on the day it was accessed. The court reached this conclusion in part because "to hold otherwise … would be to desert reality and impose on the developer a wholly artificial result with enormous financial consequences".

The court also held that a construction contract which purports to exclude, restrict or modify the way that a payment schedule may be “provided” under the SOP Act contravenes section 34 of the SOP Act and is void to that extent.

Silence is not always golden: undocumented joint venture agreements and adverse inferences

We have discussed the importance of clearly considering and documenting the intended nature and scope of joint venture relationships here, here and here. Further lessons can be learned from the recent case of Moses v Ratner [2022] NSWSC 1234. In that case, the parties had not documented who would be responsible for certain costs incurred in pursuit of a joint venture.

Before setting out his reasons, Harrison J observed that “adjudication of this contest is regrettably complicated by the fact that the joint venture agreement was never reduced to writing”. Despite that complication, it was generally understood that the parties had entered a joint venture to subdivide and develop two dwellings in Rose Bay, NSW. The plaintiff, a developer, was responsible for arranging financing for the project and the defendant, a builder, was responsible for constructing the dwellings.

The parties fell into dispute over who took on the risk of increased building costs. The plaintiff argued that the defendant had agreed to a fixed price to build the dwellings and that any additional building costs were not payable by the joint venture. The defendant argued that the joint venture agreement required the parties to share equally all costs associated with the development including building cost increases.

In the absence of a written joint venture agreement the judge was required to determine the dispute based upon competing witness testimony and limited supporting documentary evidence. Justice Harrison found in favour of the plaintiff in part because the defendant failed to adduce evidence from third parties who could be assumed to have a comprehensive knowledge of the joint venture arrangement. This failure allowed the judge to make a Jones v Dunkel adverse inference, being that the “uncalled evidence would not have assisted the [defendant’s] case”. In contrast, the plaintiff’s testimony was supported by some documents that contained references to a fixed price contract sum, and this supporting documentary evidence was relied upon by the Harrison J when concluding in favour of the plaintiff.

Domestic Building Contracts Act provides legislative mechanism for payment and extension of time for variation works despite potential non-compliance with contractual mechanism

The Domestic Building Contracts Act 1995 (Vic) (DBC Act) regulates contracts for the carrying out of domestic building work in Victoria and provides mechanisms for the resolution of building disputes by the Victorian Civil and Administrative Tribunal.

In Jolin Nominees Pty Ltd v Daniel Investments (Aust) Pty Ltd [2022] VSCA 209, the Victorian Court of Appeal rejected an application to set aside a determination of the Tribunal concerning the circumstances in which a builder can recover the cost of carrying out a variation to a domestic building contract which was not requested in writing by the owner. If the builder was able to recover, the second issue was whether the time for completion of the contract was extended to take into account the time spent in undertaking the variation.

The court recognised that the starting point under section 38 of the DBC Act is that a builder is not entitled to give effect to any variation which is not requested in writing by the owner; and section 38(6)(a) which provides that the builder may not recover any money in respect of a variation unless the builder has complied with the procedural notice requirements of section 38. However, this can be dispensed with by the Tribunal, which may allow recovery where the builder “would suffer a significant or exceptional hardship by the operation” of section 38(6)(a) of the DBC Act. Section 39 of the DBC Act then provides that the time for completion under a domestic construction contract is extended to take into account a variation in accordance with section 38 of the DBC Act.

The parties contended for different interpretations of the “hardship” that must be established for the purposes of section 38(6) of the DBC Act. The builder relied upon the financial hardship it would suffer if, having completed variation works despite the lack of written notice, it was prevented from being paid for those works. The owner argued that the relevant “hardship” for the purposes of the DBC Act is confined to hardship that prevented the builder from giving the written notice, and that it did not extend to financial hardship as a consequence of non-recovery.

The court rejected the owner’s interpretation and held that the Tribunal was permitted to rely upon financial hardship consequent upon non-recovery to justify dispensing with the notice requirements under section 38 of the DBC Act. Having reached that conclusion, the court also held that the time for completion could also be extended under the domestic construction contract. The court reached this conclusion notwithstanding potential arguments that the contractual requirements for extension of time claims had not been complied with. The court held that section 39 of the DBC Act could provide rights to an extension of time despite non-compliance with the terms of the construction contract.

Rectification damages again in the spotlight: key factors include the “performance interest”, the benefit bargained for and the lack of proportionality

As we reported here, the application of the legal principles regarding the availability of rectification damages for defective building works continues to develop in Australia.

The High Court’s judgment of Bellgrove v Eldridge (1954) 90 CLR 613 is a canon of Australian contract law and it was affirmed in Tabcorp Holdings Ltd v Bowen Investment Pty Ltd [2009] HCA 8. However, disputes over rectification damages continue to be heard and their outcomes remain difficult to predict. This was recognised in the recent decision of Member Kincaid of the Victorian Civil and Administrative Tribunal, who stated that:

“Other than its much-quoted example concerning second hand bricks, the Court’s decision in Bellgrove left room for debate about the matters required to be considered in an enquiry as to whether the undertaking of remedial work in a given situation constitutes (in the Court’s words) ‘a reasonable method of dealing with the situation’.”

In Nostra Homes and Developments Pty Ltd v Komuves (Building and Property) [2022] VCAT 1086, Member Kincaid was required to determine whether various categories of defects to a residential dwelling should sound in damages reflecting the cost of rectification (approximately $97,000 plus accommodation costs of $9,600), or a more modest measure of damages to reflect loss of amenity.

Member Kincaid determined that many of the alleged non-conformances were not defects under the contract. In many instances this was because the alleged non-conformances, for example internal paint work, were not apparent from the normal viewing position. Member Kincaid went further, however, and found that even if matters were in fact defects, it would be unreasonable to award all of the claimed rectification damages in the circumstances. This conclusion was based upon considerations of the owner’s performance interest (described as “the benefit bargained for”) and the contractual objective of the relevant works, while the disproportion between the cost and the benefit “would be a relevant consideration in [a] determination that it would be unreasonable to undertake the rectification work contemplated”.

An example of this line of reasoning related to brickwork:

  • The owner claimed $9,394 for the removal and replacement of approximately 100 bricks and the treatment of the brickwork with masonry staining technology to correct the appearance of faulty or mismatched bricks and mortar.
  • The brickwork was part of a brick veneer wall which did not provide any structural support for the dwelling. Therefore, the owner’s “performance interest” was a matter of aesthetic choice or amenity.
  • There was no evidence that the colour variations and mortar holes in the brickwork had affected the value of the property.
  • The affected area did not face the street or courtyard, but rather served principally as a setback from the adjoining property and as an access way.
  • In the above circumstances, the lack of proportionality between the proposed rectification work (replacement and staining) and the benefit to be achieved by the owners through this particular work was relevant.
  • Damages in the amount of $360 were ordered to cover the costs of cleaning the brickwork and rectification damages were refused.

Ultimately, it was found that the total damages (including cleaning costs, loss of amenity and delay damages) amounted to $23,647.89 which, after netting off other amounts, meant that the builder was liable to the owner for $68.49.

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.