Major Projects & Construction 5 Minute Fix 72: security of payment and the prevention principle

Residential home builders and owner occupiers are now subject to the Security of Payment Act in NSW

As of 1 March 2021, the Building and Construction Industry Security of Payment Act 1999 (NSW) (SOP Act) will apply to any new owner occupier construction contracts. These were previously exempt from the SOP Act but amendments to the Building and Construction Industry Security of Payment Regulation 2020 (NSW) that have now commenced remove that exemption.

An "owner occupier construction contract" is any contract for the carrying out of residential building work (within the meaning of the Home Building Act 1989 (NSW)) on such part of any premises as the party for whom the work is carried out resides or proposes to reside in.

The change has implications for residential home builders and owner occupiers. Builders are now permitted to use the statutory payment processes available under the SOP Act and can issue payment claims on owner occupiers for progress payments. Rather than pursuing lengthy and expensive claims for payment in court or the NSW Civil and Administrative Tribunal, they are entitled to apply for adjudication in the event of a payment dispute. 

Owner occupiers will need to familiarise themselves with the operation of the SOP Act, including those provisions regarding progress payments to builders and payment schedules, and the consequences of not issuing adequate or timely payment schedules.

Parties to owner occupier agreements should review their contracts to ensure consistency with the new regime, and familiarise themselves with the legislative timeframes that they must adhere to.

The prevention principle: a tale of two cities?

Two cases handed down in the last week, one in Victoria and one in New South Wales, have drawn attention to the application of the "prevention principle".

The "prevention principle", as it applies to construction contracts, is generally well understood. Where an act by Party A prevents Party B from undertaking the work required to be performed under their contract, Party A cannot complain that Party B has failed to undertake that work (that is, Party A cannot take advantage of its own wrong).

Growthbuilt v Modern Touch Marble & Granite

The NSW Courts, in a line of authority through Peninsula Balmain Pty Ltd v Abigroup Contractors Pty Ltd [2002] NSWCA 211 and Probuild Constructions (Aust) Pty Ltd v DDI Group Pty Ltd [2017] NSWCA 151, have typically grounded the prevention principle in an implied duty to act reasonably and/or in good faith.

In Growthbuilt Pty Ltd v Modern Touch Marble & Granite Pty Ltd [2021] NSWSC 290, a decision handed down by the NSW Supreme Court on 26 March 2021 (read more here), the Court was willing to find that parties had contracted out of duties of this kind. As the contract in issue provided Growthbuilt with "absolute discretion" to grant (or withhold) an extension of time, the Court found that the parties had contracted out of the application of prevention principle in that context.

Bensons Property Group v Key Infrastructure Australia

On 24 March 2021, the Victorian Court of Appeal handed down judgment in Bensons Property Group Pty Ltd v Key Infrastructure Australia Pty Ltd [2021] VSCA (read more here), finding that the prevention principle will be enlivened by breach of an implied duty to co-operate.  In that case, the contract in issue was a development agreement rather than a construction contract and at issue was the right to terminate the agreement in circumstances where a key approval had not been obtained by an agreed "sunset date".  

The Court held that, absent a finding that the alleged "preventing conduct" on Benson's part was in breach of the duty to co-operate, Key Infrastructure had no basis on which to invoke the application of the prevention principle. 

New law proposed in Victoria to charge zero and low emission vehicles

The Zero and Low Emission Vehicle Distance-based Charge Bill 2021 was introduced into the Victorian parliament on 17 March. If passed, it will require Victorian zero and low emission vehicle (ZLEV) owners to declare odometer readings and pay a charge based on the total kilometres travelled by the ZLEV in the previous registration period, or risk deregistration of their vehicles.

The Bill is the first of its kind in Australia and, according to the Victorian Government, is needed to "ensure all motorists contribute their fair share to the cost of funding road and road-related infrastructure" in light of falling Commonwealth fuel excise revenues due to improved vehicle fuel efficiency and the market shift to ZLEV ownership.

The Bill aims to limit access to the Victorian road network to those who have paid fees designed to cover the cost of maintaining the road network and administering road safety. The new law is proposed to commence on 1 July 2021.

Among other things, it requires:

• existing ZLEV owners to lodge an initial odometer reading within 14 days after 1 July;
• §owners to declare an updated odometer reading on renewing a ZLEV's registration;
• declarations to be supported by evidence; and
• §owners to keep relevant travel and odometer records for 5 years (there are offences for failing to do so).

Starting fees would be 2.5 cents per kilometre for electric or hydrogen vehicles, and 2.0 cents per kilometre for plug-in / fuel hybrid vehicles.

Peter Holcombe Henley's analysis of the Bill is here.

Lacrosse: original judgment largely upheld but valuable insights on issues including breach of professional duty and proportionate liability provided

The Victorian Supreme Court of Appeal has unanimously dismissed 10 of the 11 grounds of appeal against the 2019 VCAT decision that ascribed liability for the 2014 fire at Melbourne's Lacrosse building to three professional consultants contracted to the builder, LU Simon.

The Court of Appeal's judgment in Tanah Merah Vic Pty Ltd v Owners' Corporation No 1 of PS631436T [2021] VSCA 72 (26 March 2021) provides important points of clarification with respect to numerous issues raised in the proceedings, certain of which we have summarised below.

Background

In March 2016, proceedings were commenced in VCAT by applicants comprising owners’ corporations and the owners of individual apartments in the building in relation to the damage caused by the fire. In 2019 the Vice President of VCAT, Judge Woodward, found that:

• LU Simon had breached warranties implied into its design and construct contract (D&C Contract) by the Domestic Building Contracts Act 1995 (Vic) (DBC Act) and was primarily liable to pay damages to the Owners; and
• each of the building surveyor (Gardner Group), the architect (Elenberg Fraser) and the fire safety engineer (Thomas Nicolas) (together the "consultants"), who had been novated to LU Simon, breached their consultancy agreements with LU Simon by failing to exercise due care and skill in the provision of their services. Their liability was apportioned as follows:

• building surveyor: 33%
• architect: 25%
• fire engineer: 39%

Proportionate liability

VCAT determined that the Owners' claim that LU Simon breached implied warranties was not an apportionable claim within the meaning of Part IVAA of the Wrongs Act. In the proceedings, Thomas Nicolas and Elenberg Fraser submitted that these claims were in fact apportionable and that VCAT had erred in its finding. The Court of Appeal rejected this submission and relevantly held:

• the Owners' claim based on breaches of the DBC Act warranties did not include any claim that LU Simon failed to take reasonable care. The claim could not effectively be recast as an apportionable claim simply by the consultants asserting that the claim involved "circumstances arising out of a failure to take reasonable care". The claim must, the Court of Appeal said, "arise from a failure to take reasonable care";
• "terms in which a claim is framed against a concurrent wrongdoer are an essential determinant of whether the claim can be said to arise from a failure to take reasonable care" and further, the "terms in which the claim is framed are the starting point for deciding whether the claim is of the kind referred to in s 24AF(1)(a) of the Wrongs Act";
• the "view that the nature of the claim itself is irrelevant to the question whether the claim is one ‘arising from a failure to take reasonable care’ has a series of anomalous consequences" including that it would:

• "enable a party strictly liable in contract to plead its own negligence as a partial defence to the claim"; and
• "substantially deprive s 24AI(2) of operative effect."

Peer professional opinion

The building surveyor contended that VCAT erred in its conclusion that the ‘peer professional opinion’ was ‘unreasonable’ for the purposes of section 59(2) of the Wrongs Act. In rejecting this submission, the Court of Appeal stated:

• "peer professional opinion" is "constituted by the acceptance of the relevant practice by a significant number of respected practitioners in the field", and that it is the "opinion" that may be challenged (ie. "the acceptance of the relevant practice"), as opposed to the rationale for the practice;
• the relevant question is not whether the relevant practice was unreasonable but rather, whether the "acceptance" of that practice was unreasonable; and
• the "question whether an opinion is unreasonable is ultimately a question of fact.It is obviously open to conclude that an opinion is unreasonable if it lacks a logical basis (in the sense of a rationally defensible basis) but the ultimate question is simply whether in all the circumstances of the case the opinion was unreasonable."

Building Code of Australia (BCA)

The Court of Appeal's judgment contains detailed analysis of the BCA, in particular in relation to the deemed-to-satisfy (DTS) provisions. The building surveyor contended that the ACPs installed on the facade of the Lacrosse building met the DTS provisions contained in clause C1.12(f) of the BCA which relates to non-combustible materials. Relevantly it permitted use of "bonded laminated materials". The building surveyor argued that as the word ‘laminate’ used in clause C1.12(f)(i) does "not include the polyethylene core of the ACPs utilised to clad the Lacrosse building", the "core was not required to be non-combustible." Detailed technical discussion ensues with the ultimate rejection of the submission. Their Honours noted the VCAT decision gave effect to:

"(a)  the plain meaning of the language of the provision when read as a whole;

(b)   the underlying purpose of the section of the BCA containing this provision, which is to provide for effective fire safety in buildings of particular types;

(c)   a construction which gives work to each element of the clause; and

(d)   a construction which avoids the anomalous consequences of the alternative construction for which Gardner Group contends. "

Contractual allocation of responsibility

Various passages in the Court of Appeal's judgment serve as salutary reminders of the importance of clearly prescribing and allocating responsibility in contractual documentation. In particular, Elenberg Fraser submitted that as between it and LU Simon, it was LU Simon’s responsibility to ensure the ACPs selected for the external walls complied with the BCA. Elenberg Fraser relied on certain provisions of the D&C Contract and "T2 Specification" for this purpose.

The Court of Appeal squarely rejected these submissions. In so doing it referred to, and set out at length, obligations contained in the consultancy agreement between Elenberg Fraser and LU Simon (Elenberg Fraser Agreement). For example, Elenberg Fraser was:

• fully responsible for the services carried out by it;
• the principal design consultant responsible for the proper co-ordination and integration of the work of all other consultants appointed by LU Simon into the design of the works; and
• required to "prepare the contract material in a manner consistent with the requirements of the client brief and to satisfy all legislative requirements applicable to the design of the work including, without limitation, all applicable requirements of the BCA, Australian Standards and Authorities’ requirements".

The Court of Appeal stated that "[t]o construe the T2 Specification as submitted by Elenberg Fraser would require us to ignore the obligations expressly imposed on Elenberg Fraser under the Elenberg Fraser Agreement and would have the unreasonable result of absolving Elenberg Fraser of its liability to LU Simon as a consequence of the contractual obligations owed by LU Simon to the developer." To transfer responsibility for selecting a BCA compliant ACPs to LU Simon would "ignore the clear terms of the Ellenberg Fraser Agreement".

The terms of the D&C Contract similarly came into play in the finding that LU Simon had not been shown to have failed to take reasonable care