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28 May 2020

Major projects & construction 5 Minute Fix 53

By the major projects & construction team

Get your 5 Minute Fix of major projects and construction news. This issue: availability of quantum meruit claims tested again, under both general law and security of payment legislation; lost revenue for late completion can pass remoteness test and may be recoverable as damages; rectification damages not always available further down the contracting chain; and guidance on the availability of specific performance to rectify defective construction works.

NSW SOP Act: Court of Appeal enforces adjudication while Supreme Court stays summary judgment

Challenge to payment claim rejected and adjudicated amount awarded

The NSW Court of Appeal has provided clarity on important issues arising under the NSW Building and Construction Industry Security of Payment Act1999 (SOP Act). On appeal from a summary judgment application, the Court in TFM Epping Land Pty Ltd v Decon Australia Pty Ltd [2020] NSWSCA 93 found in favour of the builder who had submitted a progress claim seeking payment of $6.4 million.

The following conclusions are broadly relevant to payment claims made under the NSW SOP Act:

  • a payment claim for a variation can be properly characterised as a claim for works "under a construction contract" as required by the SOP Act, as opposed to a claim for quantum meruit, if the terms of the claim are framed as such (being that the works were performed pursuant to the construction contract, and the construction contract provides for variations);
  • a claim for an amount accruing after an available "reference date" does not prevent the claim being made with respect to that "reference date", following the High Court's findings in Southern Han (see our earlier article here). A payment claim including interest for late payments in respect of an earlier progress claim can relate to the "reference date" as does the construction works to which the interest charges relate; and
  • the requirement under s 13(7) of the SOP Act to provide a "supporting statement" is a penalty provision and non-compliance does not invalidate the payment claim, nor the act of serving the payment claim. Therefore, non-compliance with s 13(7) does give rise to a jurisdictional error resulting in the adjudicator's determination being quashed.

Accordingly, in this case the Court gave judgment enforcing the adjudicator's determination.

Summary judgment of adjudicator's determination stayed pending final determination

The background to In-Line Building and Construction Management Services Pty Ltd v Bluecarp Pty Ltd [2020] NSWSC 606 contains elements common to many construction disputes. Bluecarp claimed $35,895.50 by way of payment claim served under the NSW SOP Act, and within 14 days In-Line responded with a payment schedule indicating a payment amount of nil. In its subsequent adjudication response, In-Line also claimed that defect rectification works of $74,000 should be set off against any amounts owed to Bluecarp, of which In-Line had already paid $18,656.

The adjudicator determined that In-Line was obliged to pay Bluecarp $11,906.50, but did not make any reference to amounts already paid by In-Line in the adjudication determination. Accordingly, In-Line sought to resist paying the adjudicated amount by arguing that the adjudicator failed to "consider" the payment schedule as required by section 22(2)(d) of the SOP Act, which also constituted a denial of natural justice.

While Justice Stevenson was satisfied that there was a serious question to be tried and therefore stayed summary judgment pending a final determination, the judge sagely noted that "the parties would be well advised to explore whether some compromise is possible, lest the costs of the dispute exceed the amount in dispute".

Back to basics: case illustrates the traditional test of remoteness

Torok v Petersen; Gauci v Petersen [2020] NSWSC 482 concerned the construction of floating homes and usefully illustrates the application of basic contractual principles governing remoteness of damage in a construction context.

Damages for breach of contract seek to put the innocent party in the same position as if the contract had been performed, but damages will not be recoverable if they are too remote from the breach. The traditional test for remoteness was laid down in Hadley v Baxendale (1854) 9 Exch 341 and has two limbs:

  1. losses such as may fairly and reasonably be considered as arising naturally (that is, according to the usual course of things) from the breach; and
  2. losses such as may reasonably be supposed to have been in the contemplation of the parties at the time when they made the contract as the probable result of the breach of it.

In this case, the issue was whether the plaintiff (Torok) could recover damages for lost rental income from the specified completion date under the contract. The failure to complete the floating home on time meant that Torok was unable to rent out the floating home. The issue for the Court: was the plaintiff entitled to damages for lost rental income or was it remote?

Central to the concept of remoteness is what the parties contemplated. In this instance, Torok could establish that the loss of rental income was clearly in the parties' contemplation and therefore, recoverable. A brochure provided by the contractor that the floating home was a "highly rentable investment" illustrated that both parties contemplated that the floating home would be used to generate rental income.

It was held that:

  • Torok's decision not to terminate the contract did not preclude him from claiming damages for the builder's failure to deliver the floating home on time;
  • damages were available reflecting, amongst other things, the costs of completing the works and lost rental income from the date the floating home should have been delivered; and
  • claims for mooring and insurance costs were not recoverable, as those expenses would have been payable in any event and therefore were not caused by the breach.

Specific performance of defect rectification works remains a rare remedy

Obtaining an order of specific performance of a building contract is usually difficult, as courts are reluctant to grant such an order where enforcement would require continual judicial supervision. This was recognised in Ippolito v Cesco [2020] NSWSC 561, a case that concerned residential building work the subject of the Home Building Act 1989 (NSW).

Relevantly, section 48MA of the Act provides that in deciding claims involving defective building work, orders for rectification are preferred over monetary orders. This was described as a "curious provision, at least insofar as it applies to the Court" by Justice Ball. Indeed, in ordinary circumstances, a builder is usually permitted an opportunity to rectify defects as part of the owner's attempts to mitigate loss.

However, notwithstanding the provisions of the Act, the plaintiff had brought a claim for damages for breach of contract, which he is entitled to as of legal right. Justice Ball held that section 48MA of the Act should not be construed to change that legal entitlement, and should only be construed as requiring the court to give preference to a remedy of specific performance where one is sought. As the order was not sought in this case, the plaintiff was awarded rectification damages instead.

Quantum meruit tried again, remains unavailable as an alternative to accrued contractual rights

The consequences of the High Court's recent decision in Mann v Paterson Constructions (see our discussion of this important case here) continue to ripple across construction projects.  In Cohen v Zanzoul [2020] NSWSC 592, Zanzoul was claiming the costs of preliminaries, margins and delay damages primarily under progress claims and, in the alternative, a claim for restitution for unjust enrichment on a quantum meruit.

Critical findings by the judge included that the principal's repudiation of the construction contract took place after Zanzoul had made the final progress claims, and that Zanzoul had an accrued right to recover as a debt the money due under the progress claim.  Justice As Stevenson observed, "the problem for Mr Zanzoul is that he has failed to adduce the evidence necessary to prove an entitlement to a claim" under the contract.  But "there [was] a larger problem": as the unproven contract claim had accrued in a legal sense, the alternative claim for quantum meruit was not available.

Rectification damages not available from the subcontractor where the head contractor is not compelled to rectify

In Cubic Metre Pty Ltd v C & E Critharis Constructions Pty Ltd [2020] NSWSC 479, a builder was not entitled to rectification damages from a subcontractor. This case involved the supply of sandstone materials by a subcontractor that were not fit for purpose, which meant that the builder's work for the property owner was defective.

The builder appealed a Magistrate's decision to refuse a claim for the cost of rectification from the subcontractor. Ordinarily, a party who contracts for the performance of works has an entitlement to recover as damages the cost of putting them in the position they would have been in had the contract been performed. This often involves an entitlement to the cost of rectifying defective construction works.

Here, the Court agreed with the Magistrate on the unavailability of rectification damages in the circumstances of this case. This was a special case, where the plaintiff was not the owner of the property and the builder was suing a subcontractor. On the facts, there was no evidence that the builder was either obliged, or intended, to rectify the wall. The following factors were relevant:

  • there was no evidence of any expectation on the part of the property owner that the builder would rectify the wall; and
  • more significantly, any proceeding by the property owner against the builder would be statute-barred (due to limitations of actions legislation), so there was no basis for the builder being under a legal liability to rectify the wall.While a party without a proprietary interest (such as a builder) may be able to claim rectification damages where there is some possibility of the property owner compelling performance of rectification works, this reasoning is not applicable where there is no prospect of the builder being legally obliged to rectify the defective work.

In the absence of any legal requirement to rectify the wall, the builder could not demonstrate that it was entitled to damages for the cost of rectification and its appeal failed.

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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.