11 Nov 2021

Major Projects & Construction 5 Minute Fix 88: NSW net zero, warranties, combustible cladding litigation, default interest rates

By THE MAJOR PROJECTS & CONSTRUCTION TEAM

Get your 5 Minute Fix of major projects and construction news. In this issue: NSW Government's framework to boost the transition towards net zero emissions; the consequence of warranties that contravene Australian Consumer Law; latest in combustible cladding litigation, and NSW Supreme Court considers penalties in the context of default interest rates.

A step closer to NSW's Net Zero Buildings

On 28 October 2021, the NSW Energy and Environment Minister Matt Kean announced that as part of the NSW Government’s Net Zero Buildings Initiative, the Government would be investing $4.8 million to speed up the transformation of the State's built environment towards net zero emissions.

The initiative will be delivered nationally as part of the National Australian Built Environment Rating System (NABERS) program, which is the program used to measure a building's energy efficiency, carbon emissions, water consumption, and waste production.  The building's performance is then compared to similar buildings and provided a rating.

In partnership with NABERS, the NSW Government is developing a framework to measure, benchmark and certify embodied carbon - the emissions created in making construction materials like aluminium, concrete and steel. Embodied carbon is expected to become the largest source of emissions in the building sector in the coming years. 

According to Minister Kean, the program will "boost transparency around building sustainability for investors, building owners and tenants and help to create consumer-led demand for low carbon construction materials."

The roll-out of the framework will initially commence with commercial buildings including offices, hotels, shopping centres and warehouses, with a view to expand it to residential buildings in the future.

The Net Zero Buildings initiative also includes financial incentives to existing building owners to receive their first NABERS Energy rating to embed a culture of measurement and annual improvement of energy performance. Meanwhile, new buildings will receive NABERS fee waivers for buildings committing to energy performance targets beyond those required by the building code.

The initiative builds on the continued work done in this area by government and industry groups such as the Property Council of Australia and Green Building Council Australia, who in 2019 together released the Every Building Counts plan, which includes practical recommendations around achieving a net zero buildings plan.

Be careful what you warrant: ACCC action highlights consequences of contravening Australian Consumer Law

While not a construction case per se, Australian Competition and Consumer Commission v AA Machinery Pty Ltd [2021] FCA 1293 serves as a reminder to those in the construction industry providing warranties that there can be serious consequences if those warranties are found to be misleading or deceptive in contravention of the Australian Consumer Law (ACL).

AA Machinery, a supplier of agricultural machinery, made representations when advertising tractors, including that they were "a high-quality product, which would be fully supported with nationwide after-sales service, a five year nationwide warranty and access to spare parts". In reality, the warranty was limited to replacement parts only, there was no national service network and spare parts were not readily available. The Federal Court noted that AA Machinery had admitted that these representations were not truthful and amounted to misleading and deceptive conduct under sections 18 and 29(1)(j) of the ACL.

Murphy J made a series of orders against AA Machinery, including the payment of a material pecuniary penalty which was considered appropriate due to the seriousness of the contravening conduct, the loss or damage suffered and the deterrence impact of the penalty. As part of the resolution of the proceedings, AA Machinery and its sole director also provided an undertaking under s 87B of the Competition and Consumer Act 2010 (Cth) to the effect that, amongst other things:

  • the director would be prohibited from being involved in any business importing or selling tractors (other than AA Machinery) without the ACCC's written consent;
  • ACL training for all company employees would be implemented; and
  • the company would create an electronic customer complaint handling system and would report to the ACCC in relation to any complaints received.

Combustible cladding: NSW Supreme Court upholds decision that "Biowood" constituted an undue risk of fire spread in Sydney residential building

A recent NSW Supreme Court decision focuses on the risks posed by combustible cladding products other than polyethylene core, aluminium composite panels.  Taylor Construction Group Pty Ltd v Strata Plan 9288 t/as The Owners Strata Plan 92888 [2021] NSWSC 1315, involved cladding product Biowood. The NSW Supreme Court provided insights into whether the combustible material "Biowood" could be used compliantly as an "attachment" on a multi-storey residential development in Sydney under the then-current 2014 Building Code of Australia (BCA).

In November 2019, the NSW Civil and Administrative Tribunal (NCAT) found that Biowood cladding used as an attachment to an external wall was non-compliant with the BCA and, in consequence, breached several implied warranties under s 18B of the Home Building Act 1989 (NSW).  As a result, NCAT ordered both the builder of the works comprising the common property and the developer NCAT to rectify the breach of statutory warranties by removing the Biowood attachments and replacing them with materials that complied with the codes, standards and statutory warranties.  The Appeal Panel of NCAT affirmed this decision.

The builder and developer sought leave to appeal from the Appeal Panel's decision in the present Supreme Court proceedings.  They contended that the NCAT Appeal Panel had, amongst other things, erred in its formulation and application of the test under the BCA for determining whether the use of Biowood as an "attachment" constituted an "undue risk" of fire spreading via the façade of the buildings. 

Though her judgment is very detailed as to the technical issues and the evidence and findings below, Henry J did not need to lay down definitive guidance on how that assessment ought to be made. Her Honour did, however, uphold the NCAT approach to whether the risk of using the product was "undue (or unwarranted or excessive)", involving an "evaluative" assessment taking into account a number of factors including:

  • "the context and circumstances in which the combustible material is used";
  • "the possibility of fire spread eventuating"; and
  • "the gravity of that risk".

Significantly, Henry J also found that in determining whether there is an undue risk, evidence is not required to confirm fire will spread via the façade. Instead, the evidence must simply identify that the "use of [the combustible material] gives rise to a risk of fire spread occurring via the façade and the risk is an unwarranted or excessive one".

Ultimately, Henry J dismissed the grounds of appeal, meaning that NCAT's findings were upheld - significantly, that the use of Biowood on the building was non-compliant with the BCA and, in consequence, breached several implied warranties under s 18B of the Home Building Act 1989 (NSW).

Default interest clause survives challenge based on penalties doctrine

In B&G Properties Pty Limited v Fayad [2021] NSWSC 1382, the NSW Supreme Court considered whether a default interest clause fell foul of the rule against penalties.  While the case turned on its own facts, so should not be seen as setting a precedent about the exact rate of interest, it provides useful guidance about the applicable principles.   

In this case, the lender (B&G Properties Pty Limited) sought to recover payment under the guarantee given by the guarantor (Mr Fayad).  However, the guarantor rejected a claim for payment for default interest (at the rate of 30 per cent per annum) on the basis that it amounted to a penalty. 

The Court invoked the traditional test in Dunlop Pneumatic Tyre Co Ltd v New Garage & Motor Co [1915] AC 79 whether the sum stipulated was extravagant and unconscionable.  The Court also confirmed that the assessment of whether a default interest rate is extravagant and unconscionable takes place at the time of entry into the contract: Paciocco v Australia & New Zealand Banking Group Limited (2016) 258 CLR 525.

Ultimately the Court found that the default interest rate of 30 per cent per annum did not amount to a penalty in the context of the parties' agreement because:

  • although the default interest rate was 30 per cent per annum, the interest rate under the agreement was 25 per cent;
  • an increase of 5 per cent on default could not be characterised as a penalty. Because the increase was not "out of all proportion to the loss that [the lender] might suffer if [the borrower] defaulted"; 
  • the interest rate was negotiated by "experienced property developers" and reflected the "risks and rewards associated with the project" and the convenience of a short-term loan on "informal terms".

The Court also rejected the guarantor's argument that compound interest amounts to a penalty: "There is nothing penal in the nature of compound interest. The requirement to pay interest on interest compensates a creditor for the fact that the creditor is out of pocket for the interest and consequently is unable to invest that interest in other profit-making investments".

Not just about rail: Victorian Suburban Rail Loop Act clarifies and strengthens project authority road-related powers

The Suburban Rail Loop Act 2021 (Vic) (Act) clarifies and strengthens the powers of project authorities to manage roads and traffic under the Major Transport Projects Facilitation Act 2009 (Vic) (MTPFA). To read more click here.

High Court refuses special leave to appeal prevention principle decision

The High Court has recently rejected an application for special leave to appeal the judgment of the Victorian Court of Appeal in Bensons Property Group Pty Ltd v Key Infrastructure Australia Pty Ltd [2021] VSCA 69, which concerned the application of the prevention principle.

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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.