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28 Nov 2019

Major projects & construction 5 Minute Fix 45

By the Major projects & construction team

Get your 5 Minute Fix of major projects and construction news. This issue: NSW merges road and transport agencies; NSW Interim Report into building standards released; Professor Doug Jones AO delivers keynote address at the 18th annual International Arbitration Lecture; NSW Supreme Court decision on when an insolvent principal needs to return a bank guarantee; and NSW Court of Appeal decision on the right to terminate without notice.

NSW Parliament passes bill to dissolve Roads and Maritime Services

On 20 November 2019, the Transport Administration Amendment (RMS Dissolution) Bill 2019 was passed by both houses of Parliament. The Bill is currently awaiting assent, and will commence on a day to be proclaimed. The Bill reflects the major reshuffle that is currently occurring within NSW's main transport agency and the aim for a fully integrated transport cluster.

The Bill dissolves Roads and Maritime Services (RMS) and transfers its functions, assets, rights and liabilities to the newly-expanded Transport for NSW. According to the second reading speech, there will be "no change to the RMS functions that will be exercised by Transport for NSW once the dissolution occurs". The intent is that the newly integrated TfNSW will deliver greater community outcomes and have more effective and customer-focused oversight of the transport network.

The Bill also provides various industrial protections for RMS workers and sets out that for 4 years after RMS's dissolution, work that was performed by RMS must not be privatised.

Australian Arbitration Week – an update

Australian Arbitration Week was held this year in Brisbane from 18-21 November 2019. This occasion marked the first time that Brisbane has hosted Australia’s flagship arbitration gathering and saw many leading national and international arbitration practitioners take part in a wide range of sessions.

Given the close practical relationship between the construction world and arbitration, it is unsurprising that there was considerable attention placed on the particular issues arising in the construction context. In this regard, some key takeaways include the value of:

  • maintaining accurate records of daily progress on-site, including through the effective deployment of modern technologies such as drone fly-overs;
  • properly drafting dispute resolution clauses, as well as carefully selecting the seat of arbitration and any pre-arbitration steps such as expert determination or a Dispute Avoidance Board; and
  • considering the use of joint expert evidence based on an agreed list of issues and a common data set.

Also hosted during Australian Arbitration Week was the 18th annual Clayton Utz/University of Sydney International Arbitration Lecture. This year’s speaker was Professor Doug Jones AO, a former long-standing partner of Clayton Utz who currently works as a full-time international commercial arbitrator and part-time judge of the Singapore International Commercial Court. His address was titled “Arbitration in Australia – Rising to the Challenge” and began by commenting on the characteristics that make Australia a great seat for arbitration. Professor Jones then questioned why Australia had not achieved the prominence that it deserves as an arbitration seat, before suggesting that Australia would be able to properly compete in this space if a truly national approach were adopted to the promotion of Australian arbitration and well as the development of a unified Australian commercial law.

NSW parliamentary inquiry urges further reforms to restore public faith in construction quality

On 13 November 2019, the NSW Legislative Council's Public Accountability Committee released its Interim Report into the Regulation of Building Standards, Building Quality and Building Disputes. The Report puts forward 19 recommendations, including:

  • implementing a financial support package for combustible cladding rectification (you an learn more about the Victorian scheme, announced in July, here) (Recommendation 3);
  • establishing a Building Commission as an independent statutory body (along the lines of the Queensland Building and Construction Commission and Victorian Building Authority), to provide support to the Building Commissioner (David Chandler OAM, who was appointed earlier this year) (Recommendation 5);
  • extending the limitation periods for bringing building actions for breaches of the NSW Home Building Act's statutory warranties to seven years (instead of the current six years for "major defects" and two years for other defects under that Act) (Recommendation 7);
  • increasing the defects bond amount under the Strata Building Bond and Inspections Scheme (Recommendation 9);
  • implementing, wide-ranging review of the current licensing system for building trades in NSW (Recommendation 10);
  • consolidating the existing building-related legislation into a standalone Building Act (as exists in some other States and Territories, including Victoria) (Recommendation 11);
  • vesting a single, senior Building Minister with overall responsibility for the proposed Building Act and Commission (Recommendation 12); and
  • considering the reintroduction of the position of "clerk of works" on significant projects. (Recommendation 18).

If implemented, these recommendations would bring further, far-reaching changes to the regulation of building in NSW.

The context in which the Report was published is that the Design and Building Practitioners Bill 2019 (which we reviewed last month) was before the NSW Parliament. The dissenting statement on behalf of Government members of the Committee, which appears at the end of report, made it clear that the NSW Government's preferred position is to continue with its reforms as outlined in that Bill, along with the implementation of the Shergold-Weir "Building Confidence" report as set out in its February 2019 response (which we reviewed here). In turn, the Government was generally unsupportive of the 19 recommendations in the Public Accountability Committee's Report, and rejected several of the more significant ones (including the establishment of a Building Commission).

By contrast, the Report's recommendation 13 was that the Bill be substantially amended to take into account the Committee's other recommendations, and recommendations 14-15 called for further consultation with stakeholders, including the insurance industry, before passage of the Bill. On 18 November 2019, the Greens party (which chaired the Committee) proposed amendments to the Bill to introduce a NSW Building and Construction Commission. Soon afterwards, according to media reports, the Government decided to withdraw the Bill from the Parliament.

All in all, then, while the Committee's Report provides food for thought in the ongoing regulatory response to the recent crisis of confidence in aspects of the Australian construction industry, it remains to be seen how many of the recommendations will ultimately result in reforms.

Notice period no bar to termination where defects unable to be promptly remedied

In Visual Building Construction Pty Ltd v Armitstead (No 2) [2019] NSWCA 280, the New South Wales Court of Appeal unanimously upheld a District Court decision awarding damages for breach of contract and finding the contract was validly terminated despite no notice being given.

Visual Building Construction (Appellant) entered into a contract with David Armitstead and Maria-Luisa Patisso (Respondents) to construct two duplexes. The contract was varied twice, extending the date for completion, to allow for rectification of defects to the construction work. The Appellant had also failed to obtain a construction certificate prior to commencing works in direct contravention of the development consent. The Respondents instantaneously terminated the contract because of this failure, as well as a failure to complete the works by the date for completion, and commenced proceedings in the District Court seeking damages for breach of contract.

At trial, the Appellant argued that, as the Respondents had not provided the 10 day notice period to remedy any defect cited as grounds for termination required under the contract, the termination was not valid. The primary judge found the notice period only applied where a defect was capable of being remedied within the 10 day period. Further, the primary judge held that it was not possible for the Appellant to remedy the failure to obtain a construction certificate in 10 days and awarded damages for breach.

On appeal, the Appellant made the same argument and did not challenge the award of damages. The Court of Appeal unanimously upheld the trial decision and dismissed the appeal. The Court held that commencing works without a construction certificate was a "once and for all" breach of contract that was not capable of remedy, enabling the Respondents to instantaneously terminate without providing 10 days' notice. Finding it irrelevant to the question of damages, the Court declined to consider whether it was theoretically possible for the Appellant to seek and obtain a retrospective construction certificate for the already built works within the 10 day period.

Even if the contract had not been validly terminated, the Court held that the Respondents were entitled to damages for breach due to the Appellant's failure to obtain a construction certificate prior to commencing works, as required under the development consent. The award and availability of the damages did not depend on termination.

Insolvency and frustration: grounds for guarantee return

A recent New South Wales Supreme Court decision highlights that a failure to produce supporting evidence, frustration of contract and termination for insolvency can necessitate the return of bank guarantees, even when not expressly required under contract.

In Advanced Constructions Pty Ltd v Lainson Holdings Pty Ltd [2019] NSWSC 1484, Advanced and Lainson had entered into a contract (a modified form of AS4000) for construction of a building on a site owned by Lainson. Advanced was required to provide two bank guarantees in favour of Lainson as security for its performance.

In December 2018, receivers were appointed to manage Lainson's property and notified Advanced they had taken possession of the site and would not adopt the contract. Advanced was given access to the site to retrieve its plant and equipment. Advanced gave notice to Lainson in March 2019 that it had terminated the contract on the basis of the insolvency provisions. However, the contract did not expressly provide that bank guarantees were to be returned in the event of termination for insolvency (in contrast to where the Contract had been terminated for frustration where it clearly stipulated security must be returned).

During proceedings, Lainson failed to submit any evidence to the court in support of its claim resisting the return of the bank guarantees and its assertion that it had a pending claim of $1.13 million. Justice Rein heavily criticised this failure by Lainson. Citing Eddy Lau Constructions Pty Ltd v Transdevelopment Enterprise Pty Ltd [2004] NSWSC 273, Justice Rein found that while the contract did not expressly provide for the return of bank guarantees following valid termination for insolvency, no basis for recourse or a right to call on the bank guarantees had been outlined by Lainson.

Justice Rein was also willing to find that the contract had been terminated by frustration (an event explicitly requiring the return of bank guarantees under the contract) on the basis that it was impossible for the contract to be performed (ie. the building to be constructed) after the receivers had sold the site where construction was planned. He concluded that even if the contract had not been validly terminated for insolvency, the contract was frustrated and required return of the bank guarantees.

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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.