24 Jun 2021

Major Projects & Construction 5 Minute Fix 78: cladding and liability, NSW building reforms, QBCC's trust account tool

BY THE MAJOR PROJECTS & CONSTRUCTION TEAM

Get your 5 Minute Fix of major projects and construction news. This issue: a footnote on the Lacrosse Building Fire cases following final orders apportioning liability; the importance of timing in making an offer of compromise: an update on the Building Legislation Amendment Bill 2021 (NSW); the QBCC's project trust account tool; staged developments in Victoria; and the right of recourse to a defect bond.

A footnote on the Lacrosse Building fire cases

The Victorian Court of Appeal has provided a footnote (or, perhaps, a bookend) to the Lacrosse Building fire cases with the delivery of final orders in relation to the consultant parties' proportionate liability and costs

In Tanah Merah Vic Pty Ltd v Owners' Corporation No 1 of PS613436T [No 3] [2021] VSCA 155, the Court notes that, after the trial decision was handed down and the consultants had sought leave to appeal it in the Victorian Court of Appeal, two sets of offers were made to the consultant parties. The Owners sent a Calderbank offer to the consultant parties proposing that the appeals be discontinued on the basis that each party bore its own costs. The builder (LU Simon) offered to pay 10% of the damages awarded in favour of the Owners, and to bear a 10% reduction in the costs awarded to the Owners and to LU Simon.

The Court found that it was unreasonable for the consultant parties not to accept the Owners' first Calderbank offer because "[t]here was no realistic basis upon which any of the applicants could have expected to set aside orders made between the Owners and LU Simon". However, it was not persuaded that it was unreasonable for the building surveyor (the only consultant party which did not ultimately decide to accept LU Simon's offer) to have rejected LU Simon's offer.

In turn, the Court awarded LU Simon its costs on the standard basis and the consultants were largely left to bear their own costs of the appeal (with a small contribution by the fire engineer to the building surveyor's costs).

A reminder on when and how to make offers of compromise

The NSW Supreme Court decision in The Owners – Strata Plan No 87265 v Saaib (No 2) [2021] NSWSC 394 (Saaib 2) provides an important reminder for litigants to carefully consider when and how to make offers of compromise.

Saaib 2 concerned the determination of costs following an earlier judgment of the Court dismissing a claim by the plaintiff (Owners) against the first defendant (Saaib).

Saaib made application for indemnity costs on the basis that two separate offers of compromise made prior to the hearing – one on 5 June 2017 and the other on 30 July 2019 – were not accepted by the Owners.

The 5 June offer sought consent orders and a release from the Owners to the effect that:

  • the Owners would discontinue the proceedings against Saaib; and
  • each party would bear their own costs.

Although the letter containing the 5 June offer provided reasons why, in Saaib's view, the Owners' claims were unsustainable, it was sent prior to any list response responding to the Owners' claims and also before any evidence had been served by Saaib. Further, Saaib's costs at the time of the offer were less than $9,800.

The 30 July offer came later in the proceedings and sought:

  • judgment in favour of Saaib; and
  • no order as to costs.

The 30 July offer also provided reasons why, according to Saaib, the Owners' claims were unsustainable. At the time the 30 July offer was made, Saaib had incurred costs of approximately $180,000 (that Saaib had then incurred substantial costs would have been apparent to the Owners) and had served on the Owners a list response detailing its arguments as well as evidence.

The Owner's arguments against paying indemnity costs

Although the Owners accepted that Saaib had obtained a judgment no less favourable than the terms of each of the offers of compromise, the Owners opposed indemnity costs on the basis:

  • the 5 June offer was not in the form required by r 20.26 of the UCPR, as it was an offer to "discontinue" the proceedings rather than for "disposal" of the proceedings; and
  • of the Court's discretion under the UCPR to not order indemnity costs.

Judgment

In respect of the 5 June offer, the Court found that:

  • an offer of compromise that provides for proceedings to be discontinued can be characterised as an offer that provides for "disposal" of the proceedings;
  • to take an overly technical approach to the interpretation of r 20.26 undermined the values underlying the UCPR and the overriding purpose of the Civil Procedure Act 2005 (NSW);
  • for an offer of compromise to attract an indemnity costs order, it must involve some element of compromise and not merely be made so as to trigger the right to indemnity costs. This requisite element of compromise was not present in the offer as Saaib had incurred minimal costs at the time of the offer; and
  • as no list response or evidence had been served, the Owners were not in a position to test any of the assertions made by Saaib or to make any realistic assessment of the likely outcome in the proceedings.

However, the Court held that the 30 July offer was genuine and made in the proceedings at a point where:

  • Saaib has incurred costs of over $180,000; and
  • the Owners had had an opportunity to properly assess the strengths and weaknesses of its case and test the assertions made by Saaib through both Saaib's list response and the evidence served.

Accordingly, the Court determined that:

  • as there had been a genuine offer of compromise, the Court would only exercise its discretion to not order indemnity costs where "there [are] circumstances in the case that are out of the ordinary to justify departure from the prima facie position provided under the Rules [to order indemnity costs]…"; and
  • the Owners could not demonstrate that there was reason to justify the Court exercising its discretion and not awarding indemnity costs to Saaib.

Do I need a project trust account? QBCC's project trust account tool has the answer.

The Queensland Building and Construction Commission (QBCC) has developed an online project trust account tool. The tool helps you to ascertain whether your project needs a project trust account.

The roll-out of Queensland's new trust account regime is underway, and the next phased commencement date of 1 July 2021 is fast approaching. From 1 July 2021, Government and hospital and health services' contracts over $1 million will require a project trust account where more than 50% of the contract price is for project trust work.

In addition to the project trust account tool, the QBCC's website contains factsheets and other resources to help principals and contractors get across the new arrangements.

NSW passes the Building Legislation Amendment Bill 2021: reforms to restore consumer confidence and improve building quality

In 5 Minute Fix 76 we summarised the key features of the Building Legislation Amendment Bill 2021 (NSW) which was introduced into the Legislative Assembly on 12 May 2021.

The Bill was declared urgent on 8 June 2021, and was passed by the Legislative Assembly the same day with key amendments, including further amendments to:

  • the Gas and Electricity (Consumer Safety) Act 2017 (NSW), to provide that:
    • the Asbestos Management Code of Practice must be complied with prior to installation, maintenance or replacement of an advanced meter; and
    • a person entering a premises for purposes relating to advanced meters may only do so if requirements of the proposed section 55A are met.
  • the Residential Apartment Buildings (Compliance and Enforcement Powers) Act 2020 No 9 (RAB Act) section 6, to clarify that the exercise of functions under the RAB Act extends to building work on residential apartment buildings that are required to be authorised by a construction certificate or complying development certificate (rather than only to those residential apartment buildings that were authorised to commence in accordance with a construction certificate or complying development certificate issued under the Environmental Planning and Assessment Act 1979). Section 6 (as amended by the Bill) extends to functions exercised under the RAB Act before the commencement of this amendment.

Further amendments were introduced by the Legislative Council on 10 June, to:

  • the RAB Act, to provide for the delegation of the Secretary's functions under section 9 ; and
  • the Design and Building Practitioners Act 2020 (NSW) (DBP Act) to provide that the Design and Building Practitioners Regulation 2020 (NSW) may exempt all persons or bodies, specified persons or bodies, or classes of persons or bodies, or all work specified work or classes of work, or all or specified registrations from insurance requirements under the DBP Act for a maximum period of 12 months.

The Bill has been sent back to the Legislative Assembly for consideration in its amended form.

Clarification on the operation of section 134 of the Building Act 1993 (Vic)

The recent Victorian case of Lendlease Engineering Pty Ltd v Owners Corporation No. 1 & Ors [2021] VSC 228 has clarified the operation of section 134 of the Building Act 1993 (Vic) in the case of staged developments with multiple occupancy permits.

The Owners Corporation of the Chevron Apartments in Melbourne had applied to the Victorian Civil and Administrative Tribunal for orders against Lendlease for the rectification of alleged defective building work on the exterior of the building. Lendlease had filed an application to have the claim dismissed on the basis that:

  • some of the claims bought by the Owners Corporation were brought more than 10 years after the relevant occupancy permit had been issued and were therefore barred by section 134 (which provides that a building action cannot be brought more than 10 years after the date of issue of the occupancy permit in respect of the building work); and
  • the Owners Corporation only had standing to bring a claim in relation to works that had been carried out on common property.

The Owners Corporation subsequently made an application for joinder of the 137 owners of the private lots affected by the defective work.

The Tribunal refused to dismiss the application made by the Owners Corporation, finding that the proceedings had been commenced within time. While the private owners' claims were statute barred, the Tribunal also permitted the joinder application on the basis that the Owners Corporation had commenced its action within time and had done so both on its own behalf and on behalf of the private owners.

Lendlease appealed, arguing that:

  • where multiple occupancy permits have been issued in respect of building work, the 10 year limitation period under section 134 commences on the date on which the first permit relating to that building work was issued; and
  • the joinder application should have been dismissed because the owners' claims were out of time and barred under section 134 (and were therefore doomed to fail), and because there was no evidence to support the Tribunal's finding that the Owners Corporation was acting on behalf of the private owners.

In relation to the first point, the Victorian Supreme Court considered the construction of section 134 and noted that, while the words of that section are clear and unambiguous, it is silent as to how the relevant occupancy permit will be identified in circumstances where multiple permits have been issued. The Court noted that while an occupancy permit may attach to the whole or part of a building and there is a link between the occupancy permit and the work it covers, this does not lead to a conclusion that the occupancy permit that first identifies the relevant work is the relevant permit for the purposes of section 134.

Instead, the Court found that, where multiple occupancy permits have been issued, the final permit will be the relevant permit for the purposes of section 134. The Court noted that construing section 134 in this way gives certainty to both owners and builders and is not dependent on the way in which applications for building and occupancy permits may be staged (which are matters entirely within the control of builders and outside the control of owners and purchasers).

However, the Court allowed the appeal on the second point, finding that it was not open to the Tribunal to conclude as a matter of fact that the Owners Corporation was acting on behalf of the private owners.

Tasmanian Supreme Court provides guidance on the right of recourse to a bank guarantee

The Tasmanian Supreme Court case of Hansen Yuncken Pty Ltd v Parliament Square Hobart Landowner Pty Ltd [2021] TASSC 7 considered a Principal's right of recourse to an unconditional bank guarantee in circumstances where the underlying construction contract did not contain an express provision pursuant to which calls could be made on the bank guarantee. The Court upheld the principal's right of recourse.

Hansen Yuncken Pty Ltd (the Builder) had been required to provide a "Defects Bond", being a bank guarantee for 2.5% of the contract sum, as security for the defects liability period.

The form of bank guarantee in the contract, and the definition of the Defects Bond, made it clear that the bank guarantee was an irrevocable, unconditional promise by the relevant bank to pay on demand any sum demanded by the Principal during its currency, notwithstanding any objection from the plaintiff. However, there were no provisions addressing the right to draw on the defects bond.

The plaintiff Builder sought to argue that the purpose of the Defects Bond was to operate only as security for the performance by the Builder of its obligations during the defects liability period. This construction, the Builder submitted, would mean the Principal could only have recourse to the security in the case of an event of default (which is notified and not remedied). The Court rejected this submission as it did not accord with the construction of the contract as a whole, and would give the defects bond no work to do with respect to the defects liability period.

The Court concluded that, given the prescribed form of the Defects Bond, there was a clear intention that it serve as a risk allocation mechanism. The Defects Bond was intended to be available to the Principal in the event of a bona fide dispute arising during the defects liability period, so that the Principal would not be out of pocket pending its resolution. The judicial precedent also led the Court to find a Principal may have such recourse without reference to the plaintiff, and without demonstrating the merits of the dispute.

Finally the Court concluded that, despite "inadequacies in the drafting", the intended risk allocation continued such that the Defects Bond could be called upon in relation to disputes which originated before stage practical completion, ie. outside the defects liability period.

In related proceedings in which judgment was delivered on 31 May 2021, Hansen Yuncken Pty Ltd v Parliament Square Hobart; Landowner Pty Ltd (No 2) [2021] TASSC 20, the Supreme Court of Tasmania declined to extend the operation of an injunction (which prevented Parliament Square Hobart Landowner Pty Ltd from having recourse to the Defects Bond) pending an appeal, essentially on the basis that Justice Brett's determination was "not plainly wrong. The terms of the parties' contract must also be respected."

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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.