Major Projects & Construction 5 Minute Fix 118: conditions precedent, insolvency in construction, cladding

Conditions precedent and automatic termination: The Court applies the prevention principle

A recent Queensland Supreme Court decision highlights that a party failing to satisfy the conditions precedent for which it is responsible to meet will not be able to take advantage of its default to assert that the contract has ended. Even though the contract provided for automatic termination upon a failure to satisfy or waive the conditions precedent by a nominated date, the Court invoked the prevention principle to prevent the contractor from taking advantage of its own default to contend that absent waiver, the contract had terminated under the relevant clause.

In Veesaunt Property Syndicate 1 Pty Ltd v Alliance Building and Construction Pty Ltd (No 2) [2023] QSC 129, a contractor (Respondent) and principal (Applicant) entered into a residential D&C contract for townhouses. The contractual rights and obligations of the parties were subject to certain conditions precedent being satisfied or waived. However, the Respondent failed to satisfy the conditions precedent which required it to provide evidence of bank guarantees and relevant insurance policies.

The key issue for the Court was whether the contract became "automatically terminated" or voidable upon a failure to satisfy or waive the conditions precedent by the nominated date.

As a matter of construction, the Court determined that a reasonable businessperson would construe that the contract automatically terminated if the conditions precedent were not satisfied or waived but the Respondent was precluded from taking advantage of its failure to provide the insurances and bank guarantee as required under the conditions precedent regime.

The Court found that the Respondent was seeking to rely on its non-satisfaction of the conditions precedent in asserting that the contract had terminated and thus seeking to take advantage of its own default. 

It was then left to the Applicant to decide whether to treat the contract as terminated or affirm the contract (despite the non-fulfilment of the conditions precedent). The Applicant elected to proceed with the contract, which remained binding on the parties.

The judgment is an important reminder that a party cannot take advantage of its own wrong. If that were the case, a party could decide not to proceed with the contract and thus refuse to fulfil the conditions precedent, forcing the other party to forego the benefit of the conditions or to allow the contract to terminate.

Parliamentary Joint Committee comments on insolvency in the construction industry and security of payment reforms

The Final Report of the Commonwealth Parliamentary Joint Committee on Corporations and Financial Services' inquiry into Corporate insolvency in Australia was released on 12 July 2023.

The Report states that the construction industry is experiencing one of the highest rates of insolvencies compared to other sectors. The Report cited ASIC data which shows that the number of companies entering external administration has increased relative to the same month in the previous two financial years, with the construction industry being the most highly represented.

The 358-page Report contains 28 recommendations. Overall, the Report concluded that:

• Australia's corporate insolvency regime is "overly complex, difficult to access" and not fit for purpose; and
• corporate insolvency law reform had been "piecemeal" in recent years, without having regard to the system as a whole.

Most of the Committee's recommendations relate to implementing a comprehensive independent review addressing both corporate and personal insolvency. However, several recommendations address "low-hanging fruit" and are intended for immediate action. For example, the Committee recommends:

• implementing the findings of the Safe Harbour Review released in March 2021 (recommendation 7)
• reforms to the small business restructuring pathway (recommendation 8)
• consideration of changes to the Assetless Administration Fund (recommendation 11)
• improving the insolvency process for trusts (recommendation 28).

The Report refers to the significant problems associated with security of payment legislation outlined in the 2017 Murray Report, including:

• a failure to address insolvencies in parties "higher up the contractual chain"
• the security of payment regimes, which are "unduly complex" and discourage usage;
• uncertainty around appointing adjudicators and the variability of their decisions;
• imbalances of bargaining power within the contractual chain and passing on contractual risk resulting in the imposition of unfair contract terms preventing payment to those carrying out construction work;
• suggestions that head contractors' intimidation and bullying conduct prevent subcontractors from pursuing entitlements; and
• late payments.

The Report identifies proposals for construction industry security of payment reforms but offers no specific recommendations for reform, instead noting:

• the Murray Report's recommendation that the Australian Government take a lead role in establishing a nationally consistent approach using a statutory trust model to all parts of the contractual chain for construction projects over $1 million; and
• evidence put to the inquiry supports the proposed "cascading trust" approach set out in the 2017 Murray Report, which would involve cash retentions being held on trust for the party following in the contractual chain.

Cladding rectification: product liability insurer (potentially) on the hook

A Federal Court judge has allowed the insurer of a manufacturer of combustible aluminum composite panels to be joined to an action against the manufacturer. This decision is significant because the manufacturer is under administration and unlikely to meet any monetary judgment.

The Owners – Strata Plan No 91086 v Fairview Architectural Pty Ltd (No 3) [2023] FCA 814, concerned an interlocutory application by an owners corporation of two residential buildings to join Fairview Architectural Pty Ltd's product liability insurer, AAI Limited, to a proceeding.

The proceeding concerned aluminum composite panels which were manufactured and installed on the building by Fairview. The owners alleged the panels were "not of merchantable or acceptable quality" and that there was a risk the panels were not compliant with the Building Code of Australia, banned by regulatory authorities and posed a material risk of rapid fire spread. Accordingly, the owners sought compensation for the loss or damage arising from the supply of the Panels, including the costs of and incidental to, removing the panels and remediating the damage caused by affixing the panels to the building.

The central issue was whether the insurer's policy responded to Fairview's claim or potential liability to the owners. To determine this, Justice Wigney had to consider if Fairview's potential liability arose from any property damage and whether such damage was caused by an occurrence (being an event which results in property damage that is neither expected nor intended).

It was found that "the affixation of the panels had an instant and damaging effect on the building because the panels posed an immediate and unacceptable danger to the residents of the building" and that the physical damage to the "top hat" substructure of the façade occurred during the period of insurance.

To arrive at this conclusion, Justice Wigney considered:

• the technical evidence around the damage that would likely be done in replacing the cladding, being to the existing top hat subframe, the screws fixing the top hats together and to the walls, the disposal of the existing top hat subframe, filling holes in the concrete and stud wall frames, and repair of the sarking; and
• the relevant authorities in relation to "property damage" (observing, for example, that installation of the combustible panels was somewhat analogous to incorporating into a building a dangerous or toxic substance like asbestos).

Justice Wigney did not conclude whether the policy would actually cover the claim (being an interlocutory application) but found that it was "at least arguable" that it would.

The decision was significant for Justice Wigney's finding that the installation of the defective panels constituted an occurrence causing property damage, through the need to remove and replace the panels. This opened up the possibility that the insurance policy will respond.

False online reviews found to constitute misleading or deceptive conduct under the Australian Consumer Law

A recent Federal Court case illustrates the broad range of powers available to a court to tailor a remedy to achieve policy objectives of the Australian Consumer Law.

The Federal Court of Australia found that two companies offering electrical, plumbing and gas fitting services had engaged in misleading or deceptive conduct in trade or commerce for posting false testimonials, reviews and invoices on review websites.

In Commissioner for Consumer Affairs (SA) v Star Plus Group Pty Ltd (in liq) [2023] FCA 778, the Commissioner for Consumers Affairs for South Australia applied for declaratory and injunctive relief, as well as pecuniary penalties for conduct by Star Plus Group Pty Ltd (in liq) and SPG (SA) Pty Limited (together, the Respondents).

The Respondents posted over 100 testimonials on review websites between 2017 and 2020 found to be false, using invented names and purporting to be real customers. Star Plus then advertised the falsely boosted ratings on the Star Plus Group website.

Justice McElwaine found that the Respondents contravened sections 18(1), 29(1)(b), 29(1)(e) and 29(1)(f) of the Australian Consumer Law (ACL) as the false testimonials and reviews were from fictitious individuals and the content of the reviews and testimonials did not reflect the opinion of a genuine individual. This amounted to conduct in trade or commerce which was misleading or deceptive, or likely to mislead or deceive.

The Respondents' degree of planning to deceive customers and potential customers deliberately was "centrally relevant" to the question of deterrence and the quantum of damages. Justice McElwaine granted the declaratory relief, injunctive relief, advertisements, and pecuniary penalties on the following basis:

Declaratory relief

The purpose of the declarations was to formally record the outcome of the proceeding, publicise why the conduct contravened the ACL and to deter others from engaging in similar conduct. Justice McElwaine noted that there is no entitlement to declaratory relief, it is discretionary.

Injunctive relief

Injunctive relief restrained SPG from making "a false or misleading representation that purports to be a genuine testimonial from a customer who had engaged its services" in connection with electrical, plumbing and gas fitting services. Justice McElwaine emphasised the purpose of injunctive relief as protecting the public interest. The Court also acknowledged that granting injunctive relief may "mark the Court's disapproval" (irrespective of whether the conduct is likely to be repeated).

Publication of advertisements

Publishing advertisements identifying the contravening conduct dispels false impressions created by the impugning conduct and assists with the deterrence objective. The Court noted that advertisements must not be employed as an additional form of punishment.

Pecuniary penalties

Justice McElwaine ordered SPG to pay $125,000 to the State of South Australia. This comprised $15,000 for each false review posted by SPG (five in total), $20,000 for the fake review and invoice posted on one product review website and $30,000 for the false publication on the Star Plus Group website claiming the business had a "4.8 Yellow Pages Rating".