Major Projects & Construction 5 Minute Fix 74: security of payment compliance audit, Project Remediate report, and damages

Australian Building and Construction Commission to audit security of payment compliance

The ABCC has advised that it will be carrying out an audit of contractors currently engaged on projects funded by the Commonwealth to ensure they are meeting their security of payment obligations. This Audit is in addition to the rolling security of payment audit the ABCC undertakes involving approximately 10 contractors each quarter. The Audit commences in April 2021.

Who will be audited?

The ABCC has not identified which contractors will be the subject of the Audit, only that a "targeted national audit involving a large sample" will be undertaken. The multi-pronged approach will involve the ABCC:

• writing to contractors requesting details of subcontractors engaged for the project; and
• identifying contractors with a history of non-payment or delayed payments.

What will the Audit examine?

The Audit will examine whether contractors are discharging their security of payment obligations as required by section 11D of the Code for the Tendering and Performance of Building Work 2016 (Cth) (Building Code 2016), including ensuring:

• subcontractors are paid on time and for the agreed amount; and
• delayed or disputed payments are reported to the ABC Commissioner and the relevant Commonwealth funding entity within the required period.

How the Audit will be undertaken?

As a first step, the ABCC will identify contractors to be audited and request that they:

• identify subcontractors they have engaged for a project; and
• provide documents regarding payment of subcontractors, such as invoices, proof of payment and any other relevant records.

In addition, the ABCC will also interview contractors and undertake desktop audits.

What if the Audit finds non-compliance?

Suppose the ABCC finds that a contractor has not complied with its security of payment obligations under the Building Code 2016? It will first work with the Contractor to remedy the situation, with "improvement" being the focus. Contractors may be required to train staff, update their processes, amend dispute resolution mechanisms and reorganise budget frameworks.

If the ABCC uncovers deliberate security of payment breaches under the Building Code 2016, it may refer the contractor to the Minister for Industrial Relations with a recommendation that an exclusion sanction is imposed, preventing it from tendering for or being awarded contracts for Commonwealth funded building work.

NSW releases initial endorsement of safe cladding products for Project Remediate

Project Remediate, the response to the use of combustible building materials in NSW, has achieved a major milestone. The NSW Cladding Product Safety Panel (CPSP) has published a report outlining four safe and non-flammable product categories representing the first tranche of materials to replace high-risk combustible cladding.

The four product categories considered acceptable replacement options for Project Remediate are: solid aluminium, solid metal sheets, fibre cement and non-combustible cement render. The CPSP also made the following recommendations regarding design and installation systems:

• insulation and any other materials forming cladding systems and external walls are also to be non-combustible, except where otherwise permitted by the BCA;
• cavity barriers are to be installed in appropriate locations and need to be effective in mitigating or minimising fire spread within cavities formed in the external walls; and
• fire-proof mechanical fixing for external wall panels is required to prevent large pieces of debris falling off building in a fire.

The CPSP is continuing to evaluate products, and it expects to include additional acceptable products and systems in future reports. CPSP is still to finalise it view on inclusion of bonded laminate as a further product category – at this stage.

Proving causation in claims for lost profits – lost opportunity to obtain more than nominal damages for breach of contract

Claiming lost profits as damages for breach of contract is often easier said than done. The decision of the Supreme Court of Victoria in KSG Investments Pty Ltd v Open Markets Group Ltd [2021] VSC 145 emphasises the importance of proving the causal connection between the breach and the loss claimed. In the context of claims for lost profits, this usually requires proof of possible conduct in competing hypothetical scenarios, which can be very difficult to prove. This case relates to a shareholders' agreement but should be considered when bringing claims for lost profits generally.

KSG alleged that Open Market Group Ltd breached a shareholders' agreement when it issued securities without giving KSG a right of refusal. The quantum of loss of profits claimed by KSG was assessed as the difference between cost of acquiring the shares and subsequently selling them at a higher price, plus interest. The Company conceded that it had breached the shareholders' agreement, but contended that KSG had not proved to the required standard that the breach had caused the loss claimed.

Where a contract provides a commercial opportunity, a breach of that contract enables the innocent party to bring an action for loss of the advantage of that opportunity. The breach gives rise to at least nominal damages for loss of a promised opportunity, and an entitlement to further damages is established by reference to the causal connection between the loss and the non-fulfilled promise to provide that opportunity.

Applied to KSG's claim, the shareholders agreement did not include a promise that KSG would make a profit after acquiring shares. Had the SHA been performed, the benefit conferred upon KSG would have been receipt of offers to purchase more shares. Therefore, KSG was required to prove on the balance of probabilities that KSG had lost an opportunity to profit. This required proof that:

• upon receiving an offer of shares, KSG could and would have acquired them; and
• the existence of some opportunity of some value to sell its actual and hypothetical shares.

After a detailed assessment of KSG's main witness under cross-examination, it was held that KSG had failed to discharge the burden of proving these matters to the requisite standard. Accordingly, its claim for lost profits was unsuccessful.

Liquidated damages of $1 per day applied, and no additional diminution of value damages awarded despite seven month delay to completion

In Cappello v Hammond & Simonds NSW Pty Ltd [2021] NSWCA 57 the Court of Appeal addressed the availability of delay damages for diminution in the value of a house where the owners did not intend to sell the property. We reported on the trial decision of this case, including the enforcement of liquidated damages valued at $1 per day, here.

The validity of liquidated damages set as $1 per day was not raised on appeal. Of the grounds of appeal, the most interesting related to the owners' claim for $100,000 damages for a decrease in the perceived market value of the property during the seven months' delay to completion.

These amounts were claimed on the basis that flowed from the fact that construction of the property was completed seven months after the contractual completion date. However, these claims were rejected because the property might not have been sold for the price in a valuation report relied upon by the owners, and because the owners did not intend to sell the property. The latter point was important, as otherwise the owners would have benefited from a short-term fluctuation in property prices despite not intending to sell the property. This outcome would be contrary to the basic principles of contract damages, as it would have placed them in a position that was not the same, but was in fact better, than the position they would have been in had the contract been properly performed (that is, construction was completed on time).

Scope of works contemplated by the contract price and entitlement to variations

In Payce Communities Pty Ltd v Canterbury-Bankstown Council [2021] NSWSC 331, a case that turned on its facts, Justice Stevenson allowed Payce to recover damages for variations it said were directed by Council.

Under a "Fit Out Agreement" (FOA), executed by the parties on 4 December 2015, Payce agreed to construct the shell of a library at its own cost and pay the first $1.52 million of the library fit-out costs. Shortly after execution of the FOA, the Independent Certifier provided an estimate of the fit out costs (2015 Estimate). In May 2016, Council retained its own quantity surveyor to provide an estimate for the fit out works (2016 Estimate). The difference between these two estimates was $346,425, and on 24 February 2017, the parties agreed to split the difference between the two estimates which resulted in a FOA Contract Price of $2.171 million. The part of this FOA Contract Price above $1.52 million was to be paid by the Council to Payce progressively.

The central issue was whether subsequent fit out works were the result of a series of variations or whether the works were included in the agreed scope and contract price. In determining this issue, Justice Stevenson considered:

• the scope of works covered by the agreed FOA Contract Price;
• whether it was necessary for Payce to have pointed to written directions to vary the works in order that it be entitled to variations; and
• the amount of Payce's entitlement for any variations.

In relation to the first issue, Payce claimed that although the FOA Contract Price was to be determined by reference to the agreement between the parties on 24 February 2017, the scope of works for that price was based upon the design drawings prepared in 2015.

The Council, on the other hand, alleged that the price was based on that 2015 design but "as amended" by subsequent discussions and agreements between the parties. Justice Stevenson held that as both the Independent Certifier and Council's quantity surveyor based their opinions on the same identified elements making up the 2015 design, those elements defined the scope of work to be done for the FOA Contract Price.

In relation to the second issue, while a clause of the FOA required a direction in writing if Payce initiated a variation, there was no such requirement for a Council-directed variation. Justice Stevenson held that if there is a document that contains information that fits within the definition of "direction", that suffices to constitute a direction. In this case, minutes of a meeting between Council, Payce and the builder, which recorded agreements to Council's requests for additional scope, sufficed.

As to the third issue, Payce's calculation of its entitlement was based on the actual cost of the variations. Citing Justice Giles from Hyder Consulting (Australia) Pty Ltd v Wilh Wilhelmsen Agency Pty Ltd [2001] NSWCA 313, Justice Stevenson found that where the work has been carried out and the actual cost is known then "that provides sound evidence of reasonable cost and should ordinarily provide the basis for damages".