Major Projects & Construction 5 Minute Fix 60

Construction contracts may be declared void when entered into under economic duress

The case of Classic Deco Pty Ltd v Fine Touch Pty Ltd [2020] ACTSC 209 considered whether deeds between two subcontractors were voidable because of economic duress. On the facts of this case, the ACT Supreme Court held that there was insufficient evidence of the alleged duress to find the deeds in question were void. The judgment does, however, provide useful guidance on the legal principles relevant to economic duress – an issue rarely considered in a construction context. 

The dispute involved four separate contracts for various projects. In each contract, the defendant (a subcontractor to a head contractor) engaged the plaintiff as its subcontractor. In each case, the plaintiff asserted that a deed poll signed as a condition of receiving final payment from the defendant was entered into as a result of economic duress and, hence, was voidable. The defendant's conduct that was alleged as amounting to economic duress included: withholding progress payments, denying the plaintiff the opportunity to check the accuracy of calculations within the deeds, denying the plaintiff the opportunity to receive the necessary source documents and stating that if deeds remained unsigned the plaintiff would receive no payment whatsoever. For these reasons, the plaintiff sought to have the deeds declared void and then to claim money which it alleged was outstanding under the relevant contracts.

Justice Mossop set out the relevant test for economic duress from Crescendo Management Pty Ltd v Westpac Banking Corporation (1988) 19 NSWLR 40 as follows:

• the law will not give effect to an apparent consent which was induced by pressure exercised upon one party by another party when the law regards that pressure as illegitimate.
• In such circumstances the consent is treated as revocable unless accepted as valid either expressly or by implication after the illegitimate pressure has ceased to operate on the person’s mind.
• It is necessary to ask whether any pressure applied induced the victim to enter into the contract and then ask whether that pressure went beyond what the law is prepared to countenance as legitimate.
• Pressure will be illegitimate if it consists of unlawful threats or amounts to unconscionable conduct, but the categories are not closed.
• Even overwhelming pressure not amounting to unconscionable or unlawful conduct will not necessarily constitute economic duress.
• It is not necessary that the illegitimate pressure be the sole reason for the victim entering into the contract. It is sufficient that the illegitimate pressure was one of the reasons for the person to enter that agreement.
• Once the evidence establishes that the pressure exerted on the victim was illegitimate, the onus lies on the person applying the pressure to show that it made no contribution to the victim entering into the agreement."

In this case, it was held that the evidence led by the plaintiff was manifestly inadequate to establish the deeds were entered into as a result of illegitimate pressure. Justice Mossop noted that there was no attempt to provide a firm factual foundation for the assertions of financial pressure alleged to be caused by the defendant.

While the circumstances of this case did not allow for a thorough application of the legal principles of economic duress, they are a reminder that economic duress is a high threshold.

Victorian Supreme Court case reinforces "contracting out" prohibition in security of payment regime

A head contractor has been unsuccessful with its argument that an unfavourable adjudication determination made against it under the Building and Construction Industry Security of Payment Act 2002 (Vic) (SOP Act) should be set aside for jurisdictional error, because there was no referrable reference date for a payment claim to be made (absent any "finding" that there had been a repudiation of the subcontract).

The Supreme Court of Victoria in the case of Watpac Constructions Pty Ltd v Collins & Graham Mechanical Pty Ltd [2020] VSC 414 considered a "deemed termination for convenience" clause, and the generation of a "reference date" for the associated payment following such termination.

The clause purported to make the right to payment contingent on a "finding" (by a court or tribunal) of repudiation, as opposed to the point of repudiation itself. The Court found that this requirement contravened the prohibition against contracting out in section 48 of the SOP Act, because it served to delay the subcontractor's right to make a progress payment until a court or tribunal made a decision on the repudiation issue.

The Court considered the balance to be struck between the freedom of contracting parties to fix, or provide a mechanism for fixing, a reference date and the purpose of the SOP Act to provide a statutory right for builders to recover progress payments due under a construction contract by establishing a procedure by which disputed claims are referred to an adjudicator for determination. The Court found that in this case a mechanism which would effectively delay a right to a progress payment until a decision is made by a court or tribunal on a substantial issue such as repudiation was inconsistent with the purposes of the SOP Act. If applied in its terms, the provision would have the effect of excluding, modifying or restricting the operation of the SOP Act.

However, the Court ultimately found that the clause was only rendered void to the extent of its incompatibility with the SOP Act. The Court held that the offending words (upon which the right to issue the payment claim was contingent) could be severed from the clause, and it remained valid.

Other jurisdictions have adopted statutory restrictions on "contracting out" which are consistent with section 48 of the SOP Act. Contracting parties should consider whether their contracts include termination clauses of a type which might be construed as an attempt to "contract out" of the applicable SOP legislation.

Queensland sets date for commencement of BIF Act amendments

The Queensland Government has proclaimed the dates for commencement of certain provisions of the Building Industry Fairness (Security of Payment) and Other Legislation Amendment Act 2020 (Qld), which was passed earlier this year.

Amendments to the Building Industry Fairness (Security of Payment) Act 2017 (Qld) (BIF Act) which alter the eligibility criteria for the later phases of the new trust account framework under the BIF Act which commenced on 27 August 2020. This framework seeks to replace the present project bank account (PBA) framework under the BIF Act, and will initially apply to the existing PBA cohort ie. eligible State government building contracts with a contract price between $1-$10 million. More information about this reform is available here.

Amendments to the BIF Act that relate to progress payments, including new payment enforcement mechanisms such as:

• payment withholding requests;
• charges over property; and
• offences for a failure to pay a scheduled amount,

will commence on 1 October 2020.

We previously discussed the implications for principals, developers and lenders with the new measures for withholding requests and statutory charges.

Residential Apartment Buildings (Compliance and Enforcement Powers) Act 2020 (NSW) effective 1 September 2020

By 1 September 2020, the Residential Apartment Buildings (Compliance and Enforcement Powers) Act 2020 (NSW) will have come into effect.

The main features of the Act include:

• a role for the Secretary of the Department of Customer Service in relation to the correction of "serious defects" in residential apartment buildings (typically class 2 under the Building Code of Australia);
• the establishment of a process where the Secretary can issue building work rectification orders to developers if the Secretary has a reasonable belief that building work was or is being conducted in a manner that could result in a "serious defect" with heavy penalties for those who fail to comply with an order; and
• the grant of extensive investigative and enforcement powers for the Secretary's authorised officers, including an authority to enter occupied premises and to undertake (potentially destructive) testing of the building work.

A "serious defect" is defined as including a failure to comply with performance requirements under the Building Code of Australia, use of building products prohibited under the Building Products (Safety) Act 2017 (NSW), and any defects likely to prevent habitation or use of the building for its intended purpose. To ensure any such defects are rectified before residents take possession of their apartment, the Secretary can issue a prohibition order to delay the issue of an occupation certificate.

Further, the term "developer" is given a broad definition, including land owners where building work is conducted, principal contractors, strata scheme developers, people who contract or facilitate the building work to be conducted, and any other people to be prescribed by the forthcoming regulation.

Under the Act, the Secretary may exercise their powers up to 10 years after the issue of the occupation certificate for residential building work. This retrospective application is significant and may open the door to further practitioner liability in addition to that provided by the statutory duty of care created by Design and Building Practitioners Act 2020 (NSW).

Insights into NSW Government Bushfire Inquiry Report

On 31 July 2020, the NSW Government released the independent NSW Bushfire Inquiry Report, examining the causes, preparation and response to the devastating 2019-20 bushfires. The report makes 76 recommendations which will be accepted in principle, with further work to occur under specific timelines to give communities assurance that changes to ensure their safety. 

Further details can be found in our Insights article here.