15 Apr 2021

Major Projects & Construction 5 Minute Fix 73: recourse to security, building product safety, and Vic reform

BY THE MAJOR PROJECTS & CONSTRUCTION TEAM

Get your 5 Minute Fix of major projects and construction news. This issue: the WA Supreme Court considers when a principal can have recourse to security; the ABCB releases a discussion paper addressing building product safety; Victoria's Building Reform Expert Panel invites consultation on a paper aimed at reforming the State's building legislative and regulatory system; in NSW the Supreme Court considers the interplay between a force majeure clause and a contractual indemnity; and still in NSW, the Design and Building Practitioners Regulation 2021 is released.

WA decision prompts a re-evaluation of when a principal might be entitled to have recourse to a contractor's security

The WA Supreme Court in Weston v Perkins (WA) Pty Ltd [2021] WASC 84 has adopted a broad interpretation of the expression "money due" that should prompt parties providing securities to look again at clauses providing for rights of recourse.

The contract permitted a party to have recourse to security where the party has become entitled to exercise rights under the contract in respect of the security. Clause 42.11 gave rights in respect of security that were in fairly familiar terms:

Clause 42.11: "Where a party fails to pay to the other party an amount due and payable under the Contract within the time provided by the Contract or a party fails to pay the other party any money due otherwise than under the Contract, the other party may have recourse to security under the Contract…".

In a fairly complex set of circumstances, the question arose as to whether the principal's right to have recourse to the security provided by the contractor for the cost of rectifying defects had arisen prior to the termination of the contract. At that point in time, the Superintendent had earlier certified practical completion and a direction to rectify a number of defects under clause 37 which provided:

"As soon as possible after the Date of Practical Completion, the Contractor shall rectify any defects or omissions in the work under the Contract existing at Practical Completion.

At any time prior to the 14th day after the expiration of the Defects Liability Period, the Superintendent may direct the Contractor to rectify any omission or defect in the work under the Contract existing at the Date of Practical Completion or which becomes apparent prior to the expiration of the Defects Liability Period…

If the work of rectification is not commenced or completed by the stated dates, the Principal may have the work of rectification carried out at the Contractor's expense, but without prejudice to any other rights that the Principal may have against the Contractor with respect to such omission or defect in the cost of the work of rectification incurred by the Principal shall be a debt due from the Contract." [emphasis added].

Following the termination, the contractor did not comply with the direction to rectify and the superintendent did not give the contractor notice of the principal's intention to engage others to rectify the defects. Several months later, on 15 October 2020, the contractor was notified of the estimated rectification costs.

The contractor argued that clause 37 outlines the procedure for determining the amount to be paid for defective work and, because the parties had not followed that procedure, there was no amount due from the contractor to the principal.

For the principal, it was argued that the obligation in clause 37 to "rectify any defects or omissions… existing at Practical Completion" was independent of any direction by the superintendent under clause 37. Emphasis was placed on the statement in clause 37 that the right to have the work carried out at the contractor's expense is "without prejudice to any other rights that the Principal may have against the Contractor with respect to such omission or defect". As a result, it was said, the principal was entitled to call on the contractor's security to satisfy its claim for the estimated rectification costs as damages for breach of clause 37 of the contract.

Justice Allanson held that the principal had been entitled to call on the security on and after the date of practical completion because, although there was no "amount due and payable under the Contract" by reason of the parties' failure to comply with the procedure in clause 37:

  • the principal's claim and the contractor's liability for damages for breach of clause 37 was independent of the procedure in clause 37 (meaning that non-compliance with the procedure in clause 37 did not defeat that claim);
  • the principal's claim for damages for breach of contract was a claim made "otherwise than under the Contract";
  • money is "due" irrespective of whether the time for payment has arrived (cf. money is only be "due and payable" when the time for payment has arrived); and
  • therefore, at the time of practical completion, the contractor had failed to pay the principal "money due otherwise than under the Contract".

Justice Allanson's conclusion is surprising in circumstances where, at the time of practical completion, the contractor did not know the estimated rectification cost, and therefore was not in a position to pay that amount. Indeed, at the time of practical completion, the defects do not appear to have been the subject of any correspondence between the parties.

This decision suggests that an extra-contractual claim will fall "due" as soon as the underlying cause of action accrues, and regardless of whether the contractor has been notified of the claim, or given an opportunity to effect payment.

On the face of the judgment, the contractor accepted liability for the defects existing at the time of practical completion. Therefore, it is unclear from Allanson J's reasoning whether the expression "money due" might also capture a claim in respect of which liability has not been accepted or determined.

Notwithstanding this decision, it remains prudent for principals to submit the claim (whether under or outside the contract) that is said to give rise to an entitlement to call on security, before or simultaneous with making the call on security. The timing of that submission will largely depend on whether and if so when the principal is required to give notice of its intention to call on security.

On the other hand, contractors might consider seeking protections when negotiating contracts, for example:

  • requiring the principal to give written notice of all claims in connection with the contract as a precondition to entitlement (the focus being on the fact of notification, not the timing of notification relative to the events giving rise to the claim);
  • specifying the due date for payment of amounts claimed by the principal from the contractor; and
  • limiting the principal's right to have recourse to security to the contractor's failure to pay amounts "due and payable" (cf. "due").

ABCB releases Draft National Building Product Assurance Framework addressing building product safety

The Australian Building Codes Board (ABCB) has recently released for public comment a paper addressing the issue of building product safety and proposing areas of reform. The Draft National Building Product Assurance Framework responds to recommendation 21 of the 2018 "Building Confidence" report authored by Professor Peter Shergold AC and Ms Bronwyn Weir, which urged the Building Ministers’ Forum to agree a position "on the establishment of a compulsory product certification system for high-risk building products." That recommendation was made in deference to the high incidence in the industry of products that don't comply with NCC standards, and to criticisms of product certification systems.

The Framework aims to address these deficiencies by the implementation of 5 categories of reform:

Element 1: strengthened NCC evidence of suitability requirements – proposals are directed to concerns relating to the sufficiency of existing NCC evidence of suitability requirements and ‘fit for purpose’ provisions. Issue is taken with the fact NCC provisions are not specific to product types or levels of risk, and include options for evidence types. It is suggested that these features not only make it difficult for building practitioners to determine the type of evidence appropriate to a product and its intended use, but can also lead to practitioners selecting minimum evidence types, that is, types that demand a level of assurance not commensurate to a product's risk. Hence the Framework contends that assessments should deliver "sufficiently detailed, rigorous information to allow for a product’s appropriate selection and use". This could be achieved by:

  • amending the NCC to "set minimum and consistent information requirements to demonstrate evidence of suitability" and increase the rigour of evidence of suitability provided;
  • investigating changes to the NCC evidence of suitability provisions; and
  • adding further guidance in the NCC evidence of suitability handbook "to assist users of the NCC to better match the appropriate evidence to the circumstances where compliance is being sought."

Element 2: Building product information obligations for manufacturers and suppliers – this element considers the importance of access to appropriate product information supported by evidence of fitness for purpose. Access to this information is needed to enable practitioners to, among other things, appropriately select and specify products. The Framework therefore proposes mandating "Product Technical Statements" for manufacturers and suppliers, developing industry conformance schemes and requiring manufacturers to have identified products assessed to a pre-determined standard.

Element 3: Improved product labelling and traceability – targets product labelling and traceability to alleviate a range of problems, from uncertainty in determining whether products specified correspond with those provided for installation, to counterfeit and fraud. Exploration of digital tracing and information solutions is recommended.

Element 4: Increased research, surveillance and information sharing – the Framework identifies "a role for improved research, surveillance and information sharing to ensure the effective and robust operation of a product assurance framework." It proposes the development of both a central building product information portal and "a conformance and specification guide and training to step manufacturers, suppliers and building practitioners through the requirements to supply and use compliant products."

Element 5: Strengthened compliance and enforcement – lastly, the Framework notes that State and Territory regulators responsible for the regulation of building products must be vested with appropriate compliance and enforcement powers, including to:

  • target information omissions, misrepresentation and fraud;
  • strengthen product auditing (including powers to issue safety warning notices, ban products, impose mandatory safety standards and issue compulsory recall notices for construction products); and
  • introduce and enforce accountability obligations.

Responses to the Framework via the ABCB’s Consultation Hub are welcomed until 11:59AEST Sunday 6 June 2021.

Expert panel in Victoria releases discussion paper directed to legislative and regulatory reform

On 7 April 2021, the independent Building Reform Expert Panel established by the Victorian Government in 2019 released a discussion paper, "Framework for Reform: Modernising Victoria's Building System". The Panel has been tasked with undertaking a comprehensive review of the State's building legislative and regulatory system.

The Panel's review is being conducted in three stages and over two years commencing in 2021. This staged approach is intended to enable the implementation of significant changes in 2021, followed by further reforms in 2022 and culminating in a new Building Act in 2023.

Stage one of the review focusses on the following regulatory aspects:

  • Practitioner registration;
  • Building approvals;
  • Regulatory oversight; and
  • Consumer protection.

These issues were identified by the Panel because of the "potential for conflicts of interest between private building surveyors and builders, developers or design practitioners" resulting from insufficient regulatory oversight. The Panel's paper identifies key questions for stakeholder consideration in the context of each of these issues:

Practitioner registration: the Panel notes that only some classes of work require practitioner registration, relevantly pointing to the fact that "complex and high-risk work can be performed by practitioners without specialist skills" and "not all aspects of work undertaken for today’s construction projects are covered by registered practitioner classes". Questions identified include whether:

  • currently unregistered practitioners should be considered for registration;
  • practitioner competence frameworks to support system-wide industry competence should be developed;
  • accreditation by industry bodies should become part of the practitioner registration and/or licensing process; and
  • the NSW approach to design practitioners should be considered for Victoria.

Building approvals: deficiencies cited by the Panel include inadequate processes and oversight of complex buildings (including mandatory inspections); the concentration of responsibility and risk on building surveyors in the building approvals process; limited oversight over decision-making by building surveyors during the building approvals process, and the potential for conflicts of interest between private building surveyors and other stakeholders (builders, developers and designers). Questions for stakeholder consideration include:

  • the benefits and potential risks of different models for building approvals;
  • whether a stronger regulatory framework for building approvals for complex or high-risk building is needed;
  • whether other approaches to strengthen accountability in the building approvals process should be considered;
  • how to remove the potential for conflicts of interest between private building surveyors and stakeholders;
  • whether a "clerk of works" (or similar) oversight function in the approvals process be considered; and
  • whether the NSW system should be considered.

Regulatory oversight: the Panel noted key issues as including the overlap of regulatory functions and powers, the fragmented approach to the oversight of design practitioners and inadequate data collection and sharing. Questions for stakeholders address:

  • changes to the functions and/or structure of regulators that would improve regulatory outcomes; and
  • the benefits and risks of establishing an independent Office of the State Building Surveyor.

Consumer protection: issues relating to consumer empowerment and representation are identified by the Panel, including difficulties encountered by consumers in accessing and acting on information to exercise their rights, and a lack of transparent information. Key questions include how to better represent consumers in the building system.

Stakeholder input and comments responding to the paper are invited until 19 May 2021.

Can a force majeure clause relieve a party of an obligation to indemnify? It's all in the drafting

A recent decision of the NSW Supreme Court considers the interplay between a force majeure clause and a contractual indemnity. While the case relates to a transport (and not a construction) contract, it raises interesting issues for consideration relating to the drafting of such provisions.

In Woolworths Group Ltd v Twentieth Super Pace Nominees Pty Ltd atf the Byrns Smith Unit Trust t/as SCT Logistics [2021] NSWSC 344, Woolworths engaged the defendant (SCT) to transport goods. Those goods were damaged when the train on which they were being transported derailed as a result of extreme weather. Woolworths claimed losses incurred in relation to the damaged goods pursuant to an indemnity contained in its transport contract with SCT, and SCT denied liability. SCT argued that a force majeure clause operated to relieve it of its obligation to indemnify because the goods were damaged in the course of a force majeure event. The Supreme Court did not agree with SCT's interpretation of the contract, and upheld the construction advanced by Woolworths. 

Clause 7.2 of the contract provided as follows:

"If a Force Majeure Event occurs, neither party is liable to the other for any delay or failure to fulfil its obligations under these Terms or the Procedures that is owing to the Force Majeure Event".

Clause 13.1 required SCT to indemnify Woolworths against losses incurred arising from or in connection with "any loss, theft, destruction or damage to the Goods". The Court was otherwise satisfied that further contractual provisions made it clear the parties intended allocating risk and liability in respect of the goods to SCT until acceptance by Woolworths at the contracted delivery point.

Of particular relevance in this case was the reference in clause 7.2 to liabilities for “any delay or failure to fulfil" SCT’s obligations. In holding that SCT was not relieved of its obligation to indemnify, Justice Henry noted that clause 7.2:

"is directed to relieving SCT of liability for delays or failures in fulfilling its obligations in performance of the Services to the extent that the delays or failures are due to a Force Majeure Event but it does not absolve SCT of the risk and liability in respect of the Goods. The primary obligation and liability of SCT as an indemnifier to Woolworths under cl 13.1(b) for damage to the Goods is distinct from SCT’s liabilities as a contracting party in the performance of its obligations to transport the Goods in respect of which a delay or failure may give rise to breach of the Agreement."

Further, Justice Henry stated that clause 7.2:

"operates as a mechanism to reallocate liability in respect of performance of an obligation that is delayed or prevented due to factors outside the control of the parties and avoids any such delay or failure from becoming a breach of the Agreement for which SCT is liable."

Despite resulting in damage to the goods, the force majeure event did not delay or prevent compliance with the obligation in issue, namely the obligation to indemnify. Deferring again to the text of clause 7.2, Justice Henry stated "In my view, the words “owing to” make clear that a causal link must be established between the alleged Force Majeure Event and SCT’s failure to perform the obligations for which it seeks to be relieved. Where force majeure relief is sought, a causal connection must usually be established between the circumstance relied on (the force majeure event) and the effect on performance".

This decision reinforces the care that must be taken by parties when drafting contracts, in particular to ensure that interrelated provisions yield the commercial outcomes intended.

Design and Building Practitioners Regulation to commence on 1 July 2021

Last week saw the release of the Design and Building Practitioners Regulation 2021 (NSW) (DBP Regulation), which will commence on 1 July 2021.

The DBP Regulation is made under the Design and Building Practitioners Act 2020 (NSW) (DBP Act), which introduced a new statutory duty of care for the benefit of owners of land, and new methods of regulating building and design work, including registration requirements for designers, builders, engineers and other specialists.

A draft of the DBP Regulation was released in late 2020, for public consultation. We are in the process of reviewing the final DBP Regulation against the draft, and considering the practical impacts of any changes for our clients. Watch this space!

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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.