Major projects & construction 5 Minute Fix 31

Foiled by the “code” argument: $1 LDs limits general damages

A recent decision of the NSW Civil and Administrative Tribunal on a residential building contract provides a useful example of when liquidated damages will be the owners’ sole remedy for late completion, even though they were set at a far lower rate than the owners’ actual damages.

In Onethree Pty Ltd v Seaman [2018] NSWCATCD 83, while the specified liquidated damages were $1 per day, the owners claimed (or rather, counterclaimed in the face of a final payment claim by the builder) $36,037, including for lost rent, loss of amenity and stress. The owners essentially argued that the liquidated damages provision should not limit their right to general law damages, taking into account factors including how low the liquidated damages rate was calculated.

Unfortunately for the owners, the Tribunal gave short shrift to this argument, observing that the owners were able to agree any amount to be put in the contract, and that they should not be able to resile from the “clear contractual provision… with the benefit of hindsight”.

The Tribunal provided a useful refresher on the “code” argument:

"I find that the contract in these proceedings is drafted in terms that make it clear that it provides a code so far as liquidated damages are concerned and if the building works do not reach practical completion by the end of the building period the owners’ only entitlement is to liquidated damages. Moreover the contract provides no indication that the owners’ common law rights to damages are in any way preserved or reserved. Another way of describing the position is … that the contract provided an agreed and comprehensive procedure for the owners’ damages in the event that the builder failed to bring the building works to practical completion by the expiration of the building period."

In other words, the Tribunal found that the clause in issue (which provided that the owners were “entitled” to liquidated damages for late completion) formed a code of rights in relation to late completion such that there was no right to claim general damages.

The Tribunal offered some gratuitous advice to the owners (which might resonate for all people in a similar situation) at the end of the decision:

“It is difficult to form a view whether the owners’ conduct has been fuelled by their upset over the building process, or their desire to punish the builder by subjecting it to non-payment of the final claim and the process of these proceedings. In either case a more rational approach would have spared both parties the costs and stress of these proceedings.”

Statutory demands v SOP debts: NSW Court of Appeal weighs in

Last year, we reported on a case before the NSW Supreme Court that considered the use of statutory demands under the Corporations Act 2001 for the purpose of recovering debts arising under the SOP legislation.

To recap, at trial the primary judge, Justice Parker, dismissed an application by the builder (Grandview) to set aside a statutory demand served by a subcontractor (Budget) in respect of two unpaid progress claims made under NSW SOP Act. The application was made by Grandview on the basis of alleged offsetting claims. In dismissing Grandview's application, Justice Parker held that two of its claims for damages were not offsetting claims under section 459H(1)(b) of the Corporations Act.

In Grandview Ausbuilder Pty Ltd v Budget Demolitions Pty Ltd [2019] NSWCA 60, the NSW Court of Appeal has now dismissed an appeal by Grandview from the decision of Justice Parker and, in so doing, usefully elucidates whether claims in particular circumstances will be sufficiently plausible to constitute offsetting claims under the Corporations Act. In particular, Justice White observed that:

"a claim by a respondent in answer to a statutory demand founded on a judgment debt arising under the Building and Construction Industry Security of Payment Act 1999 (NSW) … that the respondent was not truly indebted in the amount found to be due by an adjudicator is not an offsetting claim within the meaning of section 459H of the Corporations Act 2001 (Cth)."

After revisiting case law interpreting the meaning of the expressions “genuine dispute” and “offsetting claim”, the Court concluded that despite the "relatively low threshold that is necessary to be satisfied to establish an offsetting claim for the purposes of section 459H(1)(b)", Grandview had nonetheless failed to meet that threshold. Its claims in issue were marred by such "considerable generality" that they could not, in the Court's opinion, be relied on as a "credible or plausible answer to Budget’s statutory demand". 

Draft Modern Slavery Guidance released

The Department of Home Affairs has released for public comment The Modern Slavery Act 2018: Draft guidance for reporting entities.

The Commonwealth Modern Slavery Act 2018 commenced on 1 January 2019 and imposes reporting obligations on certain large entities. The Guidance is designed to help those entities understand what they need to do to satisfy the Act's requirements.

Among other things, the Guidance canvasses such topics as:

• how an entity determines whether or not it needs to report, which includes guidance on how to determine consolidated revenue for the purposes of the monetary threshold under the Act and how to determine whether an entity is a relevant Australian entity or foreign entity carrying on business in Australia;
• what to include in a modern slavery statement, including explanation of key terms used in the Act such as "structure", "operations" and "supply chains" and what "risks of modern slavery practices" entails; and
• suggested actions that can be taken to assess and address modern slavery risks.

Stakeholders have been invited to provide submissions by 19 May 2019. 

New National Construction Code to be adopted 1 May 2019

The National Construction Code (NCC) describes the minimum necessary requirements for safety, health amenity and sustainability in the design and construction of new buildings as well as new building work in existing buildings throughout Australia. Compliance with the NCC is required by each of the States and Territories under the relevant legislation.

The NCC is updated on a three-year amendment cycle. Following an extensive feedback and consultation period, a number of changes have been made to the NCC for the 2019 edition. For example, performance-based compliance options will be provided for a greater number of Performance Requirements, with the introduction of some 20 new Verification Methods. NCC 2019 will also introduce "[n]ew and improved acceptable construction practices (ACPs), including new ACPs for masonry and attachment of decks and balconies and improved ACPs for roof and wall cladding and fire safety."

More information on the changes can be found on the Australian Building Codes Board's website here, National Construction Code – What to expect in NCC 2019. 

What exactly does "Practical Completion" mean?

Anyone tasked with drafting a definition of "Practical Completion" would do well to read the recent UK Court of Appeal decision in Mears Ltd v Costplan Services (South East) Ltd & Ors [2019] EWCA Civ 502. Noting that the concept "is easier to recognise than define", the Court of Appeal surveys relevant authorities on the subject and proffers some very useful guidance on what the cases provide.

In this case, Pickstock was engaged by PNSL to design and build two blocks of student accommodation. Under an agreement for lease (AFL) between Mears and PNSL, Mears agreed to take a long lease of the accommodation on practical completion under the building contract. Clause 6.2.1 of the AFL prohibited PNSL from making any variations to the building works which "materially affect the size (and a reduction of more than 3% of the size of any distinct area shown upon the Building Documents shall be deemed material), layout or appearance of the Property".

As constructed, some 56 rooms were more than 3% smaller than the sizes shown on the drawings. Mears therefore contended that any failure to meet the 3% tolerance was "a material and substantial breach" of the AFL so:

• it was entitled to terminate the AFL; and
• the certifier under the building contract was not entitled to certify practical completion.

Dismissing the appeal, the Court of Appeal held that the materiality referred to in clause 6.2.1 went to the issue of whether a variation of the nature proscribed by that clause had occurred so as to give rise to a breach. It did not mean the resultant breach itself was "material" or "substantial".

As for whether the breaches of clause 6.2 were sufficiently material or substantial to justify termination of the AFL or preclude practical completion, the Court of Appeal noted that this was a matter of factual assessment and, summarising the law on the subject, observed:

• the existence of latent defects won't prevent practical completion;
• in the case of patent defects, authorities support the approach that there is no difference between incomplete items of work and defects;
• the better view is that patent defects that are "trifling" will not prevent practical completion;
• whether an item can be characterised as trifling is a matter of fact and degree, "to be measured against 'the purpose of allowing the employers to take possession of the works and to use them as intended'"; and
• the mere fact that a defect is irremediable will not prevent works from being practically complete.

Of particular note are the Court of Appeal's following comments:

"In my view, the parties to contracts of this sort are entitled to agree, in advance, that a breach of a particular clause amounted to a material or substantial breach of contract. The issue is whether or not that is what these parties did at clause 6.2.1… I have concluded that they did not."

And:

"[I]n the absence of any express contractual definition or control, practical completion is, at least in the first instance, a question for the certifier."

In other words, the case is a reminder that, first, care and rigour need to be brought to the task of defining the requirements of practical completion (including clearly prescribing the intent and purpose of a building). Reliance on the usual, general language will leave more in the realm of the certifier's discretion. Secondly, if it is intended that breach of a particular clause should give rise to a material or substantial breach, this should be clearly reflected in the drafting. 

Deadline approaches for submissions to Special Joint Taskforce

Prompted by the collapse of a number of Queensland construction companies, the Queensland Government has appointed a Special Joint Taskforce to investigate "complaints or allegations of fraudulent behaviour that have led to subcontractor non-payment in Queensland’s building industry."

The scope of the Taskforce's mandate includes:

• inviting and investigating matters and complaints provided through confidential submissions;
• if material discloses evidence of possible breaches of legislation, referring that material to the relevant prosecuting authority; and
• considering whether sufficient and appropriate investigative and supervisory powers exist for the purpose of dealing with illegal conduct.

Individuals and organisation are invited to make confidential submissions to the Taskforce by 5.00pm on Friday 17 May 2019. The Taskforce is then scheduled to provide its final report and recommendations to the State Government by 30 June 2019.