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02 May 2019

Major projects & construction 5 Minute Fix 32

By the Major projects & construction team

Get your 5 Minute Fix of major projects and construction news. This issue: defective work on dream home turns into repudiation nightmare; conduct which could waive your contractual entitlements; a classic "battle of the forms" where work is started before agreement on contractual terms; certification may be required to recover LDs under AS2124; and beware of the implications of executing a deed.

Paradise lost: defective work could amount to wrongful repudiation of contract

The Queensland Supreme Court recently found in Mousa & Anor v Vukobratich Enterprises Pty Ltd & Anor [2019] QSC 49 that construction work by a builder of a luxury residential property (with an initial contract price of $2.1 million) in Cairns was so defective that it constituted a breach of statutory warranty and a repudiation of the building contract at general law.

Dr and Mrs Mousa terminated their contract with Vukobratich Enterprises Pty Ltd trading as MV Designer Homes for the construction of their "dream home", claiming that:

  • the builder had breached its statutory warranty to undertake the works in an appropriate and skilful way, with reasonable care and skill and in accordance with the plans and specifications, and in a competent manner;
  • the builder had wrongfully repudiated the contract; and
  • the builder's sole director breached a duty in negligence to adequately supervise the building work.

The Court found that the builder had breached its statutory warranty and that the owners were entitled to terminate on the basis the builder’s conduct satisfied the test for repudiation in that it “evince[d] an intention no longer to be bound by the contract or the party shows an intention to fulfil the contract only in a manner substantially inconsistent with the party’s obligations under it and not in any other way”.

Justice Henry gave as reasons for this finding:

“The nature and extent of the defective works went well beyond the superficial and readily remedied flaws which might occur in progressing an otherwise competent construction process. For instance, one of the elementary purposes of a house is protection from the elements. The company constructed a house which leaked, including through the roof and structural walls. This was not merely the result of minor error. Such a pervasive and high level of ineptitude exhibits an obvious ongoing preparedness, even if unintended, to perform the works inappropriately, without reasonable care and skill.”

The Court awarded the owners completion costs approximating $1.1 million, less an unpaid amount which would have been payable had the builder completed the contract, and sought further submissions in relation to the owner’s entitlement to rectification costs (the unadjusted amount for which amounted to approximately $900,000).

On the other hand, Justice Henry dismissed the owners’ claim in negligence against the director of the builder as an individual (of vital strategic importance to them as the builder is now in liquidation). The director was not a party to the contract. While this will not of itself preclude the existence of a duty of care, the Court concluded that the owners were not vulnerable to the adverse consequences of a failure to adequately supervise because they could protect themselves from such adverse consequences via the contract with the builder, or by engaging a more competent builder. 

Waiving variations requirements farewell

In SHA Premier Constructions Pty Ltd v Lanskey Constructions & Ors [2019] QSC 81, the Queensland Supreme Court considered the principle that, for a payment claim to be valid under the Building and Construction Industry Payments Act 2004 (Qld) (the forerunner to the current Building Industry Fairness (Security of Payment Act) 2017 (Qld)), it must relate to only one construction contract.

SHA Premier Constructions Pty Ltd engaged Lanskey Constructions Pty Ltd to construct petrol stations around Queensland and Victoria, including one in Carrara and one in Yeppoon, under two separate contracts. SHA sought an order declaring void two adjudication decisions that payment claims made by Lanskey (relating to some extensive additional work) were invalid because they contained claims for work under different construction contracts.

Justice Boddice upheld the adjudicator's decisions in relation to both projects, finding that the payment claims were validly made and that the additional work constituted variations under the existing contracts, rather than new, separate contracts.

In respect of the Carrara project specifically, he found that either:

  • the Superintendent made a general direction in relation to variations which consequently extended to the extra work claimed by Lanskey; or
  • by its conduct, SHA waived its right to strict compliance with the contractual variations clause.

Similarly in the Yeppoon project, he found that email correspondence from SHA gave rise to a variation direction and amounted to a waiver of the variations clause.

The case is a reminder of the potential for dispute where parties fail to administer a contract according to its terms. . 

Agree and document your contractual terms before beginning work or risk a "battle of the forms"

A recent judgment of the Supreme Court of New South Wales in Boss Constructions (NSW) Pty Ltd v Rohrig (NSW) Pty Ltd [2019] NSWSC 374 provides a timely reminder of the importance of negotiating and documenting contracts prior to commencing any works.

In this case, Rohrig (NSW) Pty Ltd was responsible for the design and construction of a performing arts centre in Orchard Hills, and invited Boss Constructions (NSW) Pty Ltd to quote for the fabrication and supply of structural steel to form part of that project. The parties engaged in a "lengthy course of dealings" in which various proposed contracts were exchanged but never agreed or executed by both of them. Parallel to the parties' exchanges regarding contractual terms, Boss took various steps to perform the contract (including raising purchase orders to third parties for the preparation of shop drawings and manufacture and supply of components) and issued various invoices and payment claims. Rohrig made a number of payments to Boss.

The parties continued to disagree on terms, and other issues including delays arose, ultimately leading to Boss initiating proceedings in the Supreme Court of NSW. Both parties' causes of action were exclusively in contract and they engaged in a classic "battle of the forms" over what the supposed contractual terms were (with a Court Book of some 3000 pages). Justice Hammerschlag found that neither party had established that there was a contract between them, and therefore dismissed the claim and cross-claim.

He provided a useful summary of the objective test to be applied when determining whether parties have entered into a binding contract and concluded:

“The conduct of each party can be characterised as seeking to impose, unsuccessfully, its terms on the other. Neither party bent to the other’s will. Even though it may be appropriate, where there have been lengthy dealings between the parties, to strive to find the existence of some binding contract, an objective assessment of the parties’ behaviour here reveals none.”  

More than a piece of paper: The need for certification to recover liquidated damages under AS2124

The Supreme Court of Western Australia recently considered whether clause 35.6 of Australian Standard AS2124-1992 entitles a party to recover liquidated damages in the absence of certification under the payment provisions in clause 42.1.

In Seafocus Holdings Pty Ltd and Atalanta Investments Pty Ltd v Doric Contractors Pty Ltd [2019] WASC 100, Seafocus Holdings Pty Ltd contended that the effect of clause 35.6 was that liquidated damages are a debt immediately due and payable without the need for certification. Doric Contractors Pty Ltd argued that Seafocus was not entitled to liquidated damages under AS2124 in the absence of a final payment certificate issued under clause 42.

The Court examined principles of contractual construction, citing the following from Re Concrete Construction Group Pty Ltd (1997) 1 QdR 6:

"the process involved is one of making, certifying and paying progress claims. Such claims and payments are, in building contracts in the common form, always intended to be provisional only … That is to say, they await the day when a final certificate issues, in which the ultimate indebtedness by one party to the other is ascertained and fixed. Before that stage is reached, it is generally correct to say that no payment is capable of finally determining the rights of the parties with respect to matters in dispute between them. So much is expressly recognised in this instance by cl 42.1".

The Court accepted that the character of liquidated damages payments under clause 35.6 are provisional only and that, consequently, AS2124 requires liquidated damages claims to be certified via the payment provisions in clause 42.

However, the Court noted that as this was an application for summary judgment, it was not required to conclusively determine the proper construction of clause 35.6, but only to be satisfied that the construction proposed by Doric was an arguably good defence to Seafocus' claim. The Court was so satisfied and dismissed Seafocus' application for summary judgment.  

Too late, you're bound by your deed

Realm Resources v Aurora Place Investments [2019] NSWSC 379 looks at whether a sublease agreement constituted a deed, rather than a simple agreement. An important difference between deeds and agreements is when they become binding on a party: it is presumed that once a party signs, seals and delivers a deed, it is bound immediately and cannot withdraw, even if the other party is yet to sign.

In this case, the tenant, Realm, claimed the agreement intended to operate as a simple contract (not as a deed) and purported to withdraw from the agreement before it was binding on the parties. In contrast, the landlord, Aurora, claimed that Realm had executed and delivered the sublease as a deed, and thereby became bound by it and was unable to resile from the deal.

The sublease contained competing indications of intention as to whether or not it was a deed. However, weighing up these features, Justice Darke found that the indications that the parties intended the sublease to take effect as a deed, prevailed. The sublease contained a substantive provision that expressed that the sublease should operate as a deed. He indicated that the form of language typically used with deeds (for example, referring to terms as "covenants") was not indicative of a simple agreement rather than a deed. Similarly, Justice Darke observed that the usual attestation language, such as “signed, sealed and delivered”, was not necessary given the passing of legislation relaxing the formalities for the execution of deeds and the existence of an express statement that the instrument is a deed.

Following satisfaction of the formal requirements for a deed, the next issue was to establish that "delivery" of the deed had occurred. Once Realm executed the sublease as a deed and provided executed copies to Aurora, all that was left was for Aurora to execute and deliver the sublease. In its dealings, there was nothing said or done by Realm to rebut the ordinary presumption that Realm intended to be bound immediately upon execution of the sublease.

The take-out from this case is to beware of the implications of executing a deed. If the execution of a deed is not intended to constitute delivery, this should be made clear. For example, express wording should be included in the instrument to the effect that the deed is not delivered and will not be binding upon the parties until all parties have executed the deed. 

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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.