Major Projects & Construction 5 Minute Fix 126: overpayments, wasted expenditure, builders' duty of care, anti-slavery

05 Jun 2024
5 minutes

Overpayments and bank guarantees: who's out of pocket?

In Sun Engineering (Qld) Pty Ltd v Ravenswood Gold Pty Ltd [2024] QSC 68, the Court construed the contractual provisions governing recourse to and retention of a bank guarantee to give effect to its commercial purpose – that of a risk allocation device.

Justice Applegarth found that the principal (Ravenswood) could have recourse to a bank guarantee provided by the contractor (Sun) because of Ravenswood's restitutionary claim that it was owed money by Sun at the end of the Defects Liability Period. The (very wide) definition of "Claim" which gave rise to Ravenswood's ability to draw on the guarantee and also a promise by Sun not to seek an injunction, was held not to be limited to liquidated claims and so captured Ravenswood's claim for restitution. This interpretation was consistent with the guarantee's role as a risk allocation device: allocating "the risk of litigating a disputed claim to Sun". Otherwise, if it were limited to claims for which a court or arbitrator had determined an amount to be payable, Ravenswood would be out of pocket pending the dispute's resolution.

In Queensland, the contract alone may not govern the principal's rights to recourse to security. The Queensland Building and Construction Commission Act 1991 (Qld) (QBCC Act) imposes statutory qualifications concerning security and the right to have recourse to security held under a "building contract" (as defined in section 67AAA of the QBCC Act). Justice Applegarth found that the contract was not a "building contract" as defined in section 67AAA of the QBCC Act (essentially, because it fell within the mining work exclusion). Therefore, the QBCC restrictions did not apply.

Even if Part 4A applied, Justice Applegarth observed that section 67J only applies to the use of a security to obtain "an amount owed under the contract". The section does not regulate the use of a security to recover other amounts (such as Ravenswood's overpayment claims).

High Court gives guidance on wasted expenditure damages

A recent High Court decision (Cessnock City Council v 123 259 932 Pty Ltd [2024] HCA 17) navigates the legal principles relevant to damages for breach of contract, particularly the ability to recover wasted expenditure incurred in reliance upon an expectation that the other party would honour its contractual obligations ("reliance damages").

Whether or not a contractor can demonstrate that it would have made a profit from the relevant contract, it will ordinarily be entitled to recover damages for expenditure it has made under the contract and which it would have recouped. In Cessnock, the High Court unanimously dismissed an appeal from the decision of the NSW Court of Appeal concerning $3.7M in wasted expenditure damages incurred by the respondent contractor 123 259 932 Pty Ltd, formerly Cutty Sark Holdings Pty Ltd, constructing an airport hangar. The Council repudiated the contract (by failing to take reasonable action to apply for and register a plan of subdivision), leaving Cutty Sark with a "stranded" investment.

There were four separate judgments, but the joint judgment of Justices Edelman, Steward, Gleeson, and Beech-Jones contains the following guidance:

  • As per the legal burden for the recovering damages, Cutty Sark bore the responsibility of proving its loss. However, where uncertainty arises from the defendant's breach, making it difficult for the plaintiff to establish its position had the contract been performed, the court will "facilitate" the plaintiff's proof of loss.
  • The "facilitation principle" helped Cutty Sark overcome the uncertainty in proof of loss by assuming that, had the contract been performed, it would have recouped any expenditure reasonably incurred in constructing the hangar in reliance on the performance of the contract.
  • Cutty Sark could not recover the expenditure that would have been made anyway. But it was incumbent upon the Council to prove that even if the contract had run its course, Cutty Sark would not have recouped all, or some of, the expenditure which it made in reliance upon the Council's promise to perform its obligations under the contract. The Council could not establish that Cutty Sark "would not have recouped its expenditure had the contract been performed".
  • The expenditure incurred must be reasonable.

Buyer beware: no duty of care in negligence to subsequent purchasers if they are not "vulnerable"

The Queensland Court of Appeal has provided a reminder that the original builder of a defective building, including where that building is a dwelling house, owes no duty of care in negligence against pure economic loss to subsequent purchasers of the building unless the subsequent purchasers are "vulnerable" in the relevant sense.

In Raymond v Lewis [2024] QCA 43, Ms Lewis purchased a residential property in Paddington after being the successful bidder at an auction. Prior to the auction, Ms Lewis had reviewed building and pest inspection reports of the property that had been obtained by the vendor, but did not obtain her own independent report. The reports provided by the vendor identified only minor defects. Following settlement, Ms Lewis obtained her own independent report from a structural engineer, which concluded that there were a significant number of minor defects which had the potential to impact the structural condition of the house. Ms Lewis sued the original builder on the basis that the builder owed a duty of care in negligence to subsequent purchasers.

The Queensland Court of Appeal overturned the finding at trial (stemming from Bryan v Maloney (1995) 182 CLR 609) that there was a duty of care owed to Ms Lewis, confirming that such a duty will not be owed by a builder to a subsequent purchaser of the building in negligence unless there is relevant vulnerability on the part of the purchaser at the time of the purchase of the building. The Court observed that such vulnerability exists when the subsequent purchaser is incapable of protecting themselves from pure economic loss sustained as a result of defects in the building at the time of purchase.

Here, the Court found that the relative speed and ease with which the defects were identified soon after the settlement of the purchase indicated that the defects were, in fact, discoverable before the auction, and could have been discovered by Ms Lewis had she chosen to engage others to undertake appropriate inspections on her behalf. There was nothing in the evidence which suggested that Ms Lewis was unable to take that course.

Accordingly, the Court found that the requisite vulnerability was not made out, and that there was no duty of care owed by the original builder to Ms Lewis.

No jurisdictional error: adjudicator's reasons brief, but adequate

A New South Wales Supreme Court decision draws attention to the challenges parties face in seeking to establish jurisdictional error in adjudication determinations. In Bega Valley Shire Council v Kenpass Pty Ltd [2024] NSWSC 399, Justice Nixon declined to overturn an adjudication determination on the grounds of alleged jurisdictional error.

The particular issue of interest is his Honour's consideration of the requirement for an adjudicator to "refer to" in their reasons to matters which appear in submissions as part of the requirement to show that they had "considered" them, in the light of the rearticulation of the relevant principles in Ceerose [2023] NSWCA 215 (see 5MF120). Justice Nixon found that, even though the references were brief, the adjudicator had discharged their statutory function.

Importance of procedural fairness in an adjudication

Ingeteam Australia Pty Ltd v Susan River Solar Pty Limited & Ors [2024] QSC 30 illustrates that an adjudicator's choice to deny procedural fairness can turn a small issue (a claim of $294.24 for a piece of plywood and materials bought at Bunnings) into a material jurisdictional error.

In this case, an adjudicator made a finding that Ingeteam had engaged in unlicensed building work when it undertook a minor floor repair by taping the plywood over an existing shed floor. This finding was solely based on Susan River's submissions in reply in respect of other unrelated issues. The adjudicator went on to determine that he had no jurisdiction to decide Ingeteam's $2m+ claim because, as Ingeteam was unlicensed, there was no enforceable contract that authorised the making of the payment claim. He made that determination without such a submission by Susan River and did not give Ingeteam the chance to make submissions on the point.

The Queensland Supreme Court held that the adjudicator had failed to afford Ingeteam procedural fairness. Further, the adjudicator's finding of unenforceability was irrational, lacked logic and was not based on facts or inferences. The result was that the adjudicator's decision that he did not have jurisdiction was legally unreasonable and amounted to a jurisdictional error, as did the denial of procedural fairness that led to it. The Court found that the jurisdictional error was material and so warranted intervention by the Court because the adjudicator's finding that the contract was unenforceable would, under Queensland's security of payment legislation, deprive Ingeteam of any right to pursue future payments under that legislation.

The Court considered that had procedural fairness been accorded, there was "at least a realistic possibility" that the adjudicator would have made a different decision on the licensing issue and the consequent conclusion that he lacked jurisdiction. Consequently, the adjudication determination was declared void (in part) due to jurisdictional error on the licensing issue.

Australian Anti-Slavery Commissioner to be established

The Australian Parliament has this week passed the Modern Slavery Amendment (Australian Anti-Slavery Commissioner) Bill 2023 which will establish the Australian Anti-Slavery Commissioner. The function of the Commissioner will be to work with Government, business and the wider community to support compliance with the Modern Slavery Act 2018. This is to be achieved through functions of the Commissioner set out in the Bill including to:

  • promote compliance with the Modern Slavery Act;
  • support Australian businesses to address risks of modern slavery practices;
  • support, encourage and conduct education and community awareness initiatives;
  • support, encourage, conduct and evaluate research about modern slavery;
  • consult and liaise with all levels of government and agencies on matters relating to modern slavery; and
  • advocate to government continuous improvement in policy and practice.

The Commissioner will not have a role investigating or resolving complaints of instances of modern slavery (which is the role of law enforcement agencies), but is to support victims of modern slavery by providing to them information about support resources, programs and services and engaging with victims to inform measures for addressing modern slavery.

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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.