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12 Nov 2020

Major projects & construction 5 Minute Fix 65

By the major projects & construction team

Get your 5 Minute Fix of major projects and construction news. This issue: reasonableness of rectification works and recovery of rectification damages; residential building claims determined in the Federal Court; trial decision requiring proof of delays instead of only programming analysis upheld on appeal; Victoria cladding legislation passes; and Senate Committee reports on Foreign Relations Bill.

Defect rectification damages not unreasonable where required to bring defective works into compliance with Building Code of Australia and Australian Standards

Deane Projects Building Pty Ltd v Kinda Kapers Holdings Pty Ltd [2020] NSWDC 622 covers ground common to construction disputes, including variation claims, implied terms and alleged defective works. Of particular interest is the discussion and application of the "unreasonableness" limb that can limit the recovery of defect rectification costs.

The matter concerned the construction of a child care centre in NSW. During the proceeding, the parties' experts identified numerous non-compliances with the requirements of the Building Code of Australia and various Australian Standards incorporated as a contractual standard.

The key principles regulating the recovering of rectification costs (as stated in Bellgrove v Elridge (1954) 90 CLR 613 and restated by the High Court in Tabcorp Holdings Ltd v Bowen Investments Pty Ltd (2009) 236 CLR 272) can be summarised as follows:

  • The owner is entitled to have something built in accordance with the plans and specifications in the construction contract. Where that has not been done, the usual measure of damages is the amount required to rectify defective work. If that cannot be proven, however, it is open to the owner to claim damages based on diminution of the property on which the works were performed.
  • But that is only a starting point. The measure of damages recoverable by the owner for rectification works is the amount required to give the owner the equivalent of a building on land which is substantially in accordance with the contract. In practical terms, this is measured by the difference between the contract price and the cost of making the work substantially conform to the contract.
  • Nevertheless, the entitlement to receive rectification damages depends upon findings that rectification works are both:
    • a reasonable course to adopt; and
    • necessary to produce conformity to the contract.
  • In this regard, the High Court has framed the reasonableness qualification as a question of whether rectification would be "unreasonable". The High Court has said that this test of "unreasonableness" will only be satisfied to disallow recovery of rectification costs in fairly exceptional circumstances.
  • Therefore, the owner cannot use a technical breach to secure a profit that it was not entitled to receive under the contract, or where the cost of rectification is out of all proportion to the benefit to be obtained from the rectified work.

The concepts of reasonableness and proportionality require factual assessments. However, caution must be exercised so that the bargain that the innocent party contracted for is not undercut. In deciding what is reasonable, regard is had to the purpose of the building work.

In this case, rectification costs (as opposed to merely the diminution in value of the building) were not unreasonable. This was because, taking into the account the purpose of the building, including its intended use by members of the public and children, non-compliance with building standards designed to improve safety meant that rectification of the defective works to produce conformity with the contract was a reasonable and necessary course to take.

South Australian residential building statutory warranties claims determined by Federal Court

The first issue considered in Janbar Pty Ltd v Arborcrest Pty Ltd [2020] FCA 1519 was whether  the Federal Court had jurisdiction to determine claims for breach of statutory warranties (made based on State-based building legislation around Australia).

Justice White held that the State Parliament was not competent to confine the scope of the Federal Court jurisdiction, which is instead derived from s 39B of the Judiciary Act 1903 (Cth) and s 19 of the Federal Court of Australia Act 1976 (Cth). Owners usually commence residential construction cases in State courts, so this decision has potentially far-reaching implications.

Having disposed of the jurisdictional challenge, White J then turned to the substantive claims:

  • breach of the fitness for purpose warranty in section 32(2)(f) of the Building Work Contractors Act 1995 (SA). The evidence demonstrated shortcomings with the installation of doors and that they were not weatherproof, which was sufficient to show that the works were not reasonably fit for their intended purpose; and
  • misrepresentations in contravention of section 18 of the Australian Consumer Law. The owner pleaded that the builder had represented that doors would be "perfect". In fact, the doors were far from perfect because they let significant amounts of water into the house. However, the Court rejected the claim because the owner failed to prove that the representation as pleaded had been made.

Trial decision regarding proof of causation for delay claims maintained on appeal

In White Constructions Pty Ltd v PBS Holdings Pty Ltd [2020] NSWCA 277, the NSW Court of Appeal dismissed an appeal regarding certain findings of Justice Hammerschlag's first instance decision rejecting delay claims for lack of factual evidence.

As we noted in ‘Causation is king: NSW Supreme Court delivers hammer blow to programming analysis for delay claims’, the trial judgment included a detailed examination of programming and delay methodologies and highlighted that factual proof of the existence of delaying events and their causes is required, and cannot be substituted for expert programming analysis. While Justice Hammerschlag’s findings about delay and damage constituted one of the grounds of appeal, the appeal decision considered that it was “neither desirable nor efficient … to seek to deal with them” in the appeal.

Regulatory update: Report on Foreign Relations Bill and Passage of Cladding Safety Victoria Bill

Senate reports on Australia's Foreign Relations (State and Territory) Arrangements Bill 2020

The Senate Foreign Affairs, Defence and Trade Legislation Committee has released its report on Australia's Foreign Relations (State and Territory Arrangements) Bill 2020 (Foreign Relations Bill).

The Foreign Relations Bill has wide implications for inter-governmental arrangements, extending to subsidiary commercial frameworks and ventures. As such, once passed, it can have a significant impact on international procurement of large infrastructure projects and research and development projects investigating the potential to commercialise technologies at an industrial scale. The Bill has the potential to affect projects in many sectors; spanning from transport infrastructure to energy generation and transportation.

The Senate Committee report notes that the Foreign Relations Bill seeks to establish a legislative mechanism to enable Commonwealth engagement with arrangements between State or Territory Governments and foreign governments; as well as related entities such as local governments and public universities. The main concerns of stakeholders identified in the report, relate to uncertainty about the scope of the legislation. The report recommended the addition of a defined term of "institutional autonomy", which would set the scope of the legislation in respect of arrangements made with foreign universities (which do not have institutional autonomy).

Passage of Cladding Safety Victoria Bill 2020

The Cladding Safety Victoria Bill 2020 completed its passage through Victorian Parliament on 27 October 2020 and received Royal Assent on 4 November 2020. See 5MF 61for an overview of the legislation and the creation and role of Cladding Safety Victoria.

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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.