Building and Construction Case Wrap Up 2017

With several large construction projects underway in the region, and more in the pipeline, it is time for those involved in the building industry to brush up on their legal knowledge.  Below we have set out reports on selected key cases and key legislative amendments from the last year. 

Keep an eye out for our free information sessions for all parties involved in the construction industry.  The sessions will cover selected topics on contract administration, security of payment and insolvency.

Beware of contractual provisions requiring you to swear statutory declarations – in this case the court imposed personal liability on an officer of building company for swearing a false statutory declaration.

470 St Kilda Road Pty Ltd v Robinson [2017] FCA 597

The defendant was the chief operating officer of Reed Constructions Australia Pty Ltd (Reed).  In December 2011 he signed a statutory declaration in support of a progress claim by Reed to the effect that as at that date the subcontractors engaged under the contract have been paid in full.  The principal paid the progress claim to the value of approximately $1.5M.

As a matter of fact, Reed owed subcontractors hundreds of thousands of dollars.  The subcontractors subsequently abandoned the site and the principal terminated the contract.  It then sued Mr Robinson personally for misleading and deceptive conduct under the Australian Consumer Law.  As it transpired during the trial, Mr Robinson had simply signed the declarations without making any reasonable enquiries as to the truth of the statements he was swearing to - he had not examined the company’s accounting software, looked at any invoices and did not check the terms of payment the company had with its subcontractors.  The court found that if Mr Robinson had not sworn the false declaration, the principal would have withheld the progress claim and terminated the contract.  Accordingly, Mr Robinson’s conduct resulted in a loss to the principal to the value of the claim.  He was ordered to personally pay the value of the progress claim, approximately $1.5M, to the company.

The decision serves as a reminder for company officers or company employees responsible for swearing statutory declarations to treat those obligations seriously.  If you are swearing a document stating that you have made reasonable enquiries as to a particular state of affairs, then you should not swear it until those enquiries have been carried out.  It is also a good idea to keep written records of the enquiries you have made.

Principal denied claim for liquidated damages because it was found to have caused the delay, even where the subcontractor failed to submit a claim for extension of time.

Probuild Constructions (Aust) Pty Ltd v DDI Group Pty Ltd [2017] NSWCA 151

While relationships within the contractual chain are going smoothly, parties will often ‘put the contract in the back pocket’ – contractual notices will not get delivered on time or at all.  The date for completion might pass without either party making a complaint or submitting an extension of time (EOT) claim.  Later, when the relationship is not going so well, the contractor decides to make an issue out of the subcontractor’s failure to deliver notices in support of a claim for liquidated damages against the subcontractor.  To those subcontractors reading this, it will sound all too familiar.

In Probuild v DDI, the completion date passed without the subcontractor making an EOT claim.  Variations were then ordered by the contractor which were then the subject of an additional payment claim by the subcontractor.  Against that claim the contractor sought to offset liquidated damages relying on the subby’s failure to deliver an EOT claim at the relevant time. 

Courts are regularly asked to consider cases like this.  A balance needs to be struck: on one hand are the head contractor’s rights where subcontractors fail to comply with contractual provisions; on the other, the general principle which prevents an owner or head contractor from claiming liquidated damages for a delay which it caused (for example by ordering variations).  In this case, the contract contained a provision allowing the contractor to unilaterally (independent of any EOT claims) extend time.  These provisions are common, although it is usually an architect or superintendent who grants the claim, not the contractor as it was in this case.  While the contractor did not exercise it at the time, the court found that it ought to have done so based on an implied duty of good faith which arises in all commercial contracts.  While DDI was found to have caused some of the delay, the claim for liquidated damages was reduced considerably.

The decision serves a reminder to subcontractors to adhere to notice provisions in the contract.  While DDI managed to significantly reduce the claim for liquidated damages, it remained liable for some of the delays based on a failure to submit claims.  The decision should remind principals and head contractors not to try and take advantage of other parties where they themselves have caused delays.

To claim damages for rectification of defective work, the rectification work must always be proportionate to the defect.  In this case, the work was disproportionate to the defect and the majority of the owners’ claim was refused by the court.

Stone v Chappel [2017] SASCFC 72

The plaintiffs engaged the defendant to build framework for an apartment in a retirement village.  The contract required a 2700mm ceiling however when built the ceiling was on average 26mm lower.  The owners subsequently sued the builder for breach of contract, claiming the full rectification cost to raise the roof to 2700mm – a cost of approximately $330,000 (against a contract value of $1.85M).

The court found that while the ordinary measure of damages is the cost of rectifying the work so that it conforms with the contract, that was always subject to the qualification that the work is necessary and reasonable.  In deciding whether the proposed rectification works were reasonable, the judge identified a number of relevant considerations including:

• the degree of departure from the contractual requirement;
• the extent of any adverse functionality, amenity or appearance;
• the reasons the innocent party included the contractual requirement which was breached;
• the practical feasibility of rectifying the defect, including the effects on third parties;
• whether or not the innocent party intends to carry out the rectification work;
• the cost of the rectification work and whether it is in the circumstances disproportionate to the value of the building and contract price, the diminution in commercial value of the building and the extent of any adverse functionality, amenity or appearance;
• the nature of the wrongdoer’s fault for the defect; and
• the public interest in reducing economic waste.

After considering these matters, the court awarded the plaintiffs $30,000, being damages for loss of amenity only.

PPSA – the devil is in the detail – consequences of defective registration

Alleasing Pty Ltd v Onesteel Manufacturing Pty Ltd (Administrators appointed) [2017] NSWSC 21

Alleasing leased equipment and parts to Onesteel for many years.  The leasing arrangement met the definition of a PPS lease within the Personal Property Securities Act 2009 (PPSA) and was registered accordingly, or so it was thought.  Onesteel entered voluntary administration with $23M of leased equipment in its possession. 

On close examination of the details of Alleasing’s registration, it was found that its security interest had been registered using its ABN not its ACN which the PPS Regulations require.  Because a search of the Register using the company’s ACN would not have yielded any results, the defect was considered to be seriously misleading.  Accordingly the registration was ineffective, and the security interest Allleasing thought it had vested in the lessee company on its insolvency under section 267 of the PPSA.  Alleasing effectively lost $23M of assets due to an administrative defect in registration.

This decision serves as a reminder to all users of the PPSR, including suppliers and hirers of building equipment, to carefully consider their registration practices.  While registration itself is administratively-simple, the registration must be completely accurate so as not to risk misleading other users of the register – if the registration is misleading it runs the risk of being found invalid.

NOTEABLE NEW LEGISLATION IN 2017:

• Personal Property Securities Amendment (PPS Leases) Bill 2017 – this legislation amends the definition of PPS Lease in the Personal Property Securities Act 2009 by extending the term of a qualifying lease from 1 year to 2, and by providing that a lease/bailment for an indefinite term will only meet the definition if the lessee/bailee remains in uninterrupted possession of the good for at least 2 years with the lessor/bailor’s consent. The legislation attempts to lessen the administrative burden on regular lessors/bailors of goods, many of whom are small to medium enterprises.  The amendments commenced on 20 May 2017.   
• Insolvency Law Reform Act 2016 (Cth) – this legislation amends the Corporations Act 2001 by inserting a Part 3 into the Insolvency Practice Schedule (IPS) at Schedule 2, and in Part 3 of the Insolvency Practice Rules (Corporations) 2016. Firstly, the legislation significantly expands the rights of creditors during an external administration – they can now request various documents in the possession of the external administrator, and can also in some circumstances give the external administrator a written direction to take a particular action during the administration.  Secondly, the legislation creates statutory ‘defences’ to insolvent trading claims against directors if they take particular actions upon learning that the company may be insolvent.  Further amendments restrict ‘ipso facto’ provisions in contracts which give parties rights to terminate contracts on grounds of insolvency.  The amendments commenced on 12 September 2017.  
• Building and Construction Legislation (Non-conforming Building Products – Chain of Responsibility and Other Matters) Amendment Act 2017. This Act was introduced following London’s Grenfell fire in June 2017 and Melbourne’s Lacrosse fire in November 2014.  The legislation amends provisions of the Queensland Building and Construction Commission Act 1991 (Qld) to impose obligations on all participants in a supply chain regarding non-conforming building products.  Designers, manufacturers, importers, suppliers and contractors will all owe obligations under this legislation.  The amendments commenced on 1 November 2017.
• Building Industry Fairness (Security of Payment) Act 2017 (Qld) – this legislation introduces project bank accounts into the Queensland building industry commencing from 1 January 2018. Project bank accounts (PBA) will be required for all projects where the principal is the State or a State authority.  Rather than paying the head contractor, the principal makes progress payments into the PBA, from which the head contractor distributes funds from the PBA to subcontractors and itself.  Where there is a shortfall for subcontractor payments, the head contractor will be required to deposit money into the PBA to cover the shortfall.  The purpose of the amendments is to protect subcontractors from head contractor insolvency.  The amendments  commenced on 10 November 2017.

STAY TUNED FOR DETAILS OF OUR 2018 SEMINARS:

• Seminar 1:  Building Contract Administration Refresher – key provisions in AS contracts. What to look for during a contract review, and how to avoid disputes during the process. 
• Seminar 2: Qld Payment Legislation Refresher – Getting paid - using the payment legislation to your advantage, and dealing with insolvency in the building industry.

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