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11 Jun 2020

Major projects & construction 5 Minute Fix 54

By the major projects & construction team

Get your 5 Minute Fix of major projects and construction news. In this issue, we take a look at two key pieces in the jigsaw puzzle of NSW Government regulatory reform addressing defects in apartment buildings, and also round up the latest developments across Australian jurisdictions including guidance by the NSW Court of Appeal of how to consider a contract's commercial purposes, tips for staying the enforcement of SOP judgment debt in NSW, as well as an update on the easing of regulatory pressure for major Western Australian resources projects.

NSW Residential Apartment Buildings (Compliance and Enforcement) Bill 2020 passed by NSW Parliament

The NSW Parliament passed the Residential Apartment Buildings (Compliance and Enforcement Powers) Bill 2020 (NSW) on 4 June 2020, only two days after it was introduced. Together with the Design and Building Practitioners Bill 2019 (NSW) (which we touch on below), it forms part of the NSW Government's response to address compliance, enforcement and community confidence issues in the construction industry.

The main features of the Bill include:

  • a role for the Secretary of the Department of Customer Service in relation to the correction of "serious defects" in residential apartment buildings (typically class 2 under the Building Code of Australia);
  • the establishment of a process where the Secretary can issue building work rectification orders to developers if the Secretary has a reasonable belief that building work was or is being conducted in a manner that could result in a "serious defect" with heavy penalties for those who fail to comply with an order; and
  • the grant of extensive investigative and enforcement powers for the Secretary's authorised officers, including an authority to enter occupied premises and to undertake (potentially destructive) testing of the building work.

A "serious defect" is defined as including a failure to comply with performance requirements under the Building Code of Australia, use of building products prohibited under the Building Products (Safety) Act 2017 (NSW), and any defects likely to prevent habitation or use of the building for its intended purpose. To ensure any such defects are rectified before residents take possession of their apartment, the Secretary can issue a prohibition order to delay the issue of an occupation certificate.

Further, the term "developer" is given a broad definition, including land owners where building work is conducted, principal contractors, strata scheme developers, people who contract or facilitate the building work to be conducted, and any other people to be prescribed by the forthcoming regulation.

Under the Bill, the Secretary may exercise their powers up to 10 years after the issue of the occupation certificate for residential building work. This retrospective application is significant and may open the door to further practitioner liability in addition to that provided by the statutory duty of care created by Design and Building Practitioners Bill 2019 (NSW).

The Bill (soon to be Act) is expected to come into force later this year.

NSW Design and Building Practitioners Bill 2019 passed by NSW Parliament

The NSW Parliament passed the Design and Building Practitioners Bill 2019 (NSW) on 3 June 2020. The Bill includes significant changes for the construction industry such as the introduction of a new statutory duty of care for any person who carries out construction work to exercise reasonable care to avoid economic loss caused by defects, as well as new methods for regulating building and design work, including additional registration requirements for designers, builders, engineers and other specialists.

The Bill addresses the NSW Government's aims of improving the quality of design documents and compliance with building standards, and toughening accountability across the construction industry. It forms part of the first-stage of the NSW Government's response to the Shergold-Weir Report released in April 2018 which considered the effectiveness of compliance and enforcement systems for the Australian building and construction industry, providing multiple recommendations. See our previous coverage of the Bill here.

We will address both the NSW Residential Apartment Buildings (Compliance and Enforcement) Bill 2020 and the NSW Design and Building Practitioners Bill 2019 in a future Insights.

Know the angles: Court of Appeal illustrates how a contract's commercial purposes must be considered

The NSW Court of Appeal in C & V Engineering Pty Ltd v Hamilton & Marino Builders Pty Ltd [2020] NSWCA 103 has illustrated that a commercial contract is to be interpreted with reference to its commercial purposes.

The case concerned a contract for the supply and installation of construction materials, namely plates and angles. C & V Engineering Pty Ltd (Supplier) argued that the contract provided for a fixed lump sum based on the supply and installation of 1,000 units. Hamilton & Marino Builders Pty Ltd (Purchaser) contended that the contract was priced by multiplying the Supplier's quoted price per unit with the actual number of required units.

During negotiations the parties acknowledged they could not determine the exact number of units required, but together determined an estimate of roughly 800 to 1000 plates. The contract was formed via several email communications, through which the Supplier provided a quotation of the price per unit (said to be based on an "award" of 1,000 units) and its standard terms and conditions. The Purchaser instructed the Supplier to proceed with the supply of plates and angles "as required", per the quotation's rates. Although the standard conditions allowed for the inclusion of a "contract sum", none was stipulated.

Upon completion of the engineering design, the Purchaser notified the Supplier that only 150 units were required. The Supplier alleged that the Purchaser had accepted a formal offer to supply 1,000 units. The Court of Appeal disagreed with the Supplier's submission and unanimously dismissed its appeal.

The Court of Appeal had to decide the proper construction of the contract. In the case of commercial contracts, the courts will give the contract a businesslike interpretation. To identify the intention of the contracting parties, the Court looked at the effect of the email correspondence between the parties and adopted the objective, "reasonable businessperson" approach. This well-established approach to issues of contractual interpretation requires consideration of the commercial purposes and objects of the contract. Relevantly, the Court of Appeal was entitled to assume that the parties intended to produce a commercial result.

The Court of Appeal focused on the fact that neither party accurately knew the required number of units, that the Supplier's profit margin was not contingent on 1,000 units being ordered, and the lack of a fixed "contract sum" in the standard conditions. It concluded that the Purchaser only accepted the rates in the quotation (not the total sum), and reasoned that this produced a businesslike result which accommodated the Purchaser's actual need and retained the Supplier's profit margin.

This case is a reminder that when negotiating and finalising commercial contracts, you should make sure that the contract reflects your commercial intentions. If all the parties have the same understanding of the commercial purpose, there is less room for dispute later down the track. The facts of the case also highlight the importance of properly executing formal contracts which have an "entire agreement" provision.

If you want to stay the enforcement of SOP judgment debt, make sure you diligently prosecute cross-claims

A recent NSW Supreme Court decision highlights the importance of pursuing cross-claims diligently to succeed in applications for a stay of a judgment debt obtained under the Building and Construction Industry Security of Payment Act 1999 (NSW) (SOP Act). The Court held that the requirements of justice did not warrant granting the stay: Vannella Pty Ltd Atf Capitalist Family Trust v TFM Epping Land Pty Ltd and Katoomba Residence Investment Pty Ltd; Decon Australia Pty Ltd v TFM Epping Land Pty Ltd and Katoomba Residence Investment Pty Ltd [2020] NSWSC 659.

The facts concerned a residential unit development. Decon Australia (Builder) commenced SOP Act proceedings for the amount of $6,355,352.46. Epping Land and Katoomba Residence Investment (Developers) did not pay the amount in the payment claim and failed to serve a payment schedule within the required timeframe under the SOP Act. Consequently, the Builder moved for summary judgment. The Developers resisted summary judgment and unsuccessfully appealed from that judgment.

The Builder commenced the current proceedings against the Developers in May 2019. However, it was more than a year later, and only after the Developers' unsuccessful attempt to appeal the summary judgment, that the Developers filed their cross-claim in the current proceedings. Of note, is the Developers' allegation that the Builder was liable to replace non-compliant cladding. The Developers sought a stay of the SOP Proceedings judgment until the cross-claim was determined, on the basis they could not pay the $6,355,352.46 due without falling into insolvency and liquidation.

The Developers' claim for a stay was characterised in their submissions as an application for a "Grosvenor stay". In Grosvenor Constructions (NSW) Pty Ltd (in administration) v Musico & Ors [2004] NSWSC 344 (Grosvenor), the risk of the rights of a party becoming worthless due to the insolvency of the claimant supported granting a stay. However, as Justice Stevenson highlighted in these proceedings, a "Grosvenor stay" is a stay restraining a party entitled to a judgment under the SOP Act from enforcing the judgment due to that party's financial position. Here, it was the Developers' financial position that was jeopardised by potential enforcement of the SOP proceedings judgment and not the entitled party, the Builder. Consequently, Justice Stevenson found the stay sought was not a "Grosvenor stay" and that the financial factors considered in Grosvenor were not relevant. However, Justice Stevenson noted that the Court maintains the power to grant a stay "whenever the requirements of justice so demand".

In considering whether the "requirements of justice" warranted granting a stay, Justice Stevenson accepted the cross-claim raised a serious question to be tried. But there was speculation as to whether the Developers would recover more than the amount of the SOP Proceedings judgment. Additionally, Justice Stevenson found that the serious question to be tried and balance of convenience requirements are "guidelines" and do not limit the Court's power to determine a stay.

Ultimately, the Developers' decision to submit the cross-claim only after dismissal of the SOP Proceedings appeal (and 12 months after commencement of these proceedings) sealed their fate, with the Court finding that the requirement of justice did not support the granting of a stay. Justice Stevenson noted that the SOP Proceedings had vindicated the Builder's right to payment under the SOP Act. To stay the enforcement of the judgment now, would render that vindication entirely pointless and undermine the purpose of the SOP Act – to ensure a reliable flow of funds to contractors. Had the Developers been more diligent in bringing their cross-claim, it could have served as the basis for a stay to the SOP Proceedings and, subsequently, the SOP Proceedings judgment may have looked very different.

Easing of regulatory pressure for major WA resources projects, owners now permitted to pay levy in yearly instalments

In Western Australia, an amendment to the Building and Construction Industry Training Fund and Levy Collection Act 1990 has come into operation as of 27 May 2020. Owners now have the option to pay the Building and Construction Industry Training Fund levy in yearly instalments, when the assessed levy is valued at $1 million or more, on a pro rata basis, over the life of the construction work or over another period, as agreed to by the minister. The changes will only apply to construction work that has a value exceeding $500 million. If the value does not meet this threshold, the levy must be paid in full prior to the start of construction.

The changes are part of the WA Government’s response to the 2019 statutory review of the Act following the 2018 decision to remove the resources sector’s exemption from the levy. The review identified concerns from resources sector stakeholders that paying the full amount of the levy (currently set at 0.2% of the value of the construction) prior to the commencement of construction work may affect the viability of large resources sector projects.

The amendments also implemented two other recommendations that have arisen from the review. First, an expansion of the Building and Construction Industry Training Board's membership to include members with expertise in minerals and petrol construction work, and second, implementation of a term limit for board members of 10 consecutive years.

These amendments will enable the resources sector to have greater input into the board’s decision-making. A shift that recognises the sector is beginning to provide a substantial contribution to the fund ($13.3 million for the year to date as at 30 April 2020, up from 1.96 million in 2018-19).

A number of the remaining recommendations from the 2019 review will be considered in the second stage of legislative changes later this year.

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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.