Major Projects & Construction 5 Minute Fix 104: ABCC, combustible cladding, step-in notice, WA security of payment

THE MAJOR PROJECTS & CONSTRUCTION TEAM
04 Aug 2022 Time to read: 5 MIN

Get your 5 Minute Fix of legal trends in Major Projects and Construction. In this edition, we look at: the recent changes to the Australian Building and Construction Commission; parties seeking relief for combustible cladding need to demonstrate evidence of combustibility; default interest clause survives challenge based on penalties doctrine; changed contract arrangements undermine homeowners' defects remedies; the NSW Court of Appeal determines the validity of a step-in notice, and the commencement of reforms to the WA security of payment regime.

Federal Government (almost) demolishes the Building Code

The Federal Government has made good on the first phase of its election platform of repealing the Building and Construction Industry (Improving Productivity) Act 2016 (Cth) (BCIIPA) and the Code for the Tendering and Performance of Building Work 2016 (Cth) (Building Code 2016). The repeal is part of a broader restructure of the building and construction industry, with the Australian Building and Construction Commission (ABCC) also set to be axed.

The Federal Government has implemented a two-step approach to repealing the Building Code 2016. As a first step, it has registered the Code for the Tendering and Performance of Building Work Amendment Instrument 2022 (Amendment Instrument) to remove the majority of requirements of the Building Code 2016 currently imposed on tenderers, funding entities and funding recipients for Commonwealth funded building work (Interim Building Code).

The requirement for tenderers to submit a Declaration of Compliance, the previous mechanism used to confirm Building Code compliance for projects, has now been removed. In addition, the ABCC has advised that it is no longer assessing applications for Letters of Compliance or approving Workplace Relations Management Plans.

The following key obligations have been retained in the Interim Building Code:

  • tenderers cannot be subject to an exclusion sanction (as defined in the Interim Building Code);
  • the section 34 requirements of the BCIIPA are included in tender responses (which establishes the Building Code 2016 and mandates specific information that preferred tenderers must provide); and
  • restrictions on subcontracting to entities subject to an exclusion sanction.

The practical effect of the Amendment Instrument is that documents released to the market by the Commonwealth (as a funding entity) or any Funding Recipient (eg State Governments) should contain significantly streamlined Building Code 2016 obligations, and any assessment process required of information supplied by tenderers will be substantially reduced.

The Federal Government has stated that the next step will be to repeal the BCIIPA in its entirety, meaning the complete "demolition" of the Building Code 2016. The Federal Government has flagged repeal of the BCIIPA is targeted to occur before the end of 2022.

Evidence and testing are required to prove combustibility of cladding

The NSW Supreme Court, in the recent decision of Strata Plan 92450 v JKN Para 1 Pty Ltd & Anor [2022] NSWSC 958, held that the Owners Corporation failed to establish a breach of statutory warranty with respect to combustible cladding.

The Owners Corporation commenced proceedings against the builder, Toplace, and developer, JKN, alleging that installed aluminium composite panels (ACP) breached the warranties set out in section 18B of the Home Building Act 1989 (NSW) (HBA). Toplace and JKN responded that the installed ACP complied with the Building Code of Australia (BCA) in force in 2013 (at the time of installation.)

The Court held that there was insufficient evidence to establish that the ACP was combustible within the meaning of the BCA. Justice Black noted that the risk of combustibility had not been established as relevant testing, such as a cone calorimeter test, had not been carried out.

In addition, the Owners Corporation alleged that the ACP "was not good and suitable for its purpose" because its core consisted of 35-40% polyethylene. According to the Owners Corporation, the fact that the product is now banned under legislation supported its contention. However, Justice Black reiterated that this argument raised the question of how the cladding would perform in a fire, for which no testing had been carried out, and the evidence could not establish. His Honour also rejected the notion that a legislative ban on a product that was "previously permitted" could warrant the conclusion that the product was never good and suitable for its purpose.

Given the finding that the Owners Corporation failed to establish its case, the question of liability to pay damages was not required to be answered.

Ultimately, the Owners Corporation's case failed, and it was made clear that simply establishing the possibility of non-compliance is insufficient to prove a breach of statutory warranties.

Penalties: default interest rate clause survives Court of Appeal's scrutiny

In Fayad v B&G Properties Pty Ltd [2022] NSWCA 129, a default interest rate was challenged (unsuccessfully) before the NSW Court of Appeal under the penalties doctrine. The Court of Appeal unanimously dismissed the appeal, holding that the default interest rate (of 30 per cent per annum) was not an unenforceable penalty. As we have previously noted, the case turns on its facts and should not be seen as setting a precedent about the exact interest rate. But, it provides a practical application of the penalties doctrine – an issue frequently arising in construction contracts.

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 on the basis that it amounted to a penalty. At trial, the guarantor was unsuccessful. The default interest rate was challenged as a penalty on appeal.

The Court of Appeal restated the relevant principle, as summarised by the trial judge:

"whether a contractual stipulation for a payment of a sum of money on breach of a contract is so extravagant and unconscionable as to amount to a penalty is to be judged by reference to the circumstances that existed at the time the contract was made."

The Court of Appeal found that the default rate (30% per annum, an increase from a “base rate” of 25% per annum) was not penal.

Justice Leeming stated that the Australian law of penalties is a matter of "substance, not form" –the question being whether extent of the increase in the interest rate in the event of default was, in substance, penal. In considering the circumstances that existed at the time the contract was made, the Court took into account that the parties were "experienced property developers".

Variation or rescission of a Home Building Contract: who is responsible for defects in the new agreement?

Warburton v County Construction (NSW) Pty Ltd [2022] NSWSC 941 concerned a high-end residential project. The owners claimed rectification costs for repairing defective works and for loss and damage suffered due to the builder's failure to carry out the works in accordance with the statutory warranties.

In October 2015, the owners (Warburton) entered into a building contract with County on a cost-plus project management basis. In February 2017, the parties entered into a Second Agreement. In this new arrangement, Warburton was responsible for contracting directly with the contractors and suppliers and paying for all other costs of completing the project, while County was obliged only to “carry out all the work reasonably necessary to manage and supervise the completion of the Project in accordance with the Plans and Specifications”.

Although the project reached practical completion, issues arose in respect of claims from unpaid trades, engaged directly by Warburton, and significant defects which resulted in severe damage including flooding of the house. The owners claimed the defects were the result of County’s failures under the contracts.

Justice Black ultimately found on the facts that the builder was responsible for only some of the defects, and left the parties to decide the quantum. The Court had to consider whether the Second Agreement could be said to have operated concurrently with the original agreement. However, it was found that the intention of the parties was to rescind the original contract and replace it with the Second Agreement. This was based on factors including County’s reduced scope and inconsistencies with the original agreement, by which there was no provision in the Second Agreement to deal with the inconsistency if the agreements were to operate concurrently. This meant, essentially, that the Second Agreement operated in a way which required the owners to look to third-party contractors for liability in respect of a significant part of the work rather than that liability falling under Country’s responsibility.

The decision highlights that in documenting amendments to, and agreements collateral to, an existing contract, care needs to be taken to ensure that the parties’ intentions in connection with continuing rights and obligations under that existing contract are properly considered and documented.

A reminder of the importance of clear and concise step-in clauses

A recent NSW Court of Appeal decision, in MP Water Pty Ltd in its capacity as Trustee for the MP Water Trust v Veolia Australia Pty Ltd [2022] NSWCA 127, involved a dispute between MP Water (Project Co) and Veolia (Service Provider) as to the validity of a step-in notice. Both parties had entered into a long-term Services Provider Agreement (SPA) under which Veolia, as the Service Provider, would operate and maintain a water treatment facility at a mine site.

An excessive flow of mine water at a mine site constituted a "Major Service Failure", which prompted Project Co to issue a default notice and later exercise its step-in right. It did so by issuing a direction to the Service Provider to cure the Major Services Failure, but otherwise to continue its other services under the SPA. Relevantly, the SPA's step-in clause provided that the Service Provider would “assist … wherever and however possible to ensure that [Project Co] is able to”, among other things:

“temporarily take or assume total or partial possession, management and control of the Facility (or any part of the Facility) and the provision of the Services (or any of them)”.

The Service Provider disputed the validity of the step-in notice and Project Co's exercise of its step-in rights by directing the Service Provider to perform the Services.

At trial, the Supreme Court found that the rights under the step-in clause were to be construed narrowly in favour of the Service Provider. As a result, the NSW Supreme Court stated that Project Co could not exercise its step-in rights by merely directing the Service Provider, taking the view that to "step-in", Project Co would itself have to take operational management and control of the facility.

However, the Court of Appeal favoured a broader construction of the rights available under the step-in clause, than was the case at trial. It concluded, "the composite phrase possession, management and control accommodates a broad range of action that MP Water may elect to take". Hence, Project Co's direction to the Service Provider was within the scope of the clause, being "an incident of MP Water's taking or assumption of control". As a result, the Court of Appeal interpreted the Service Provider's obligation to "assist" as applying to the broader construction of step-in rights.

The decision highlights that the rights and obligations contained in step-in clauses must be drafted and executed carefully, particularly where the principal is not in a position to take on operational control of a facility.

Western Australia’s Security of Payment reforms commence

As part of a three-year Action Plan, 1 August 2022 marked Stage 1 of Western Australia’s security of payment legislation reforms.

We provided details of this staged rollout in Edition 102 of 5 Minute Fix.

Stage 2 is due to commence on 1 February 2023 and Stage 3 on 1 February 2024.

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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.