6 key considerations of building law and our TIPS to stay ahead of the game

The legal mechanisms that regulate the building and construction industry can be difficult to navigate. Many industry professionals have fallen prey to these mechanisms and been caught by the intricacies of the Building and Construction Industry Security of Payment Act 1999 (NSW) (‘SOPA’). We provide tips below on how to stay ahead of the game and avoid being ‘caught out’.

1. Insurance Policies & Claims – know your cover and your rights.

Many builders and developers use brokers to cover their insurance needs. Claims are generally made for large loss situations involving damage to persons, property or occasioning economic loss.

Apart from the common policies such as workers compensation and public liability, builders and developers may be unaware of risks for which they may not be covered. In many circumstances, substantial legal fees can be incurred resisting a claim or providing advice on a situation which may be covered under an insurance policy.

Policies for Professional Indemnity and Contractors All Risks are typical examples of policies where the extent of coverage is often not known by the directors. This is especially so where the type of policy is sourced and placed by a broker, and other than in general terms, the policy coverage has never been explained to the insured party.

Insurance coverage can be obtained in the building industry to cover a wide range of risks, however it is essential to properly understand policy terms as many aspects of loss are excluded. For example, many Material Damage Policies will cover faulty materials (such as cracking tiles), however damage arising from workmanship is excluded.

Our Tip: Some policy documents may be cumbersome to read and interpret, and if there is any doubt regarding the operation or applicability of terms of coverage, legal advice should be sought.

2. Liquidated Damages – are they a penalty?

Contractors should be careful in reviewing the ‘Liquidated Damages’ provisions of their contracts. Such clauses are intended to provide a genuine pre-estimate of the Builder’s loss should the construction works become delayed beyond the date for practical completion.

Liquidated damages are typically calculated at a daily rate for every day on and from the date for practical completion. This rate varies on a case by case basis, but usually depends on the value of the contract works. Often times, this rate can be disproportionately high – in which case it is considered a ‘penalty’.  

But what does ‘disproportionality high’ mean?

The Court’s view on penalty-like liquidated damages rates were effectively summarised by McDougall J in the landmark case of Paciocco v Australia and New Zealand Banking Group Ltd [2016] HCA 28. If the rate is extravagant, disproportionate or unconscionable compared to the maximum loss suffered due to the breach (i.e the delay), it is considered a penalty.

If the liquidated damages rate is found to be a ‘penalty’ and not a genuine pre-estimate of loss, the Courts will consider such a clause to be unenforceable.

Our Tip: When entering into contracts containing rates for liquidated damages, calculate the rate based on daily fixed costs of site operation, or averaged variable costs (if applicable) to clearly establish a quantifiable “daily loss”. This may include site preliminaries, holding costs or any other costs which are certain to form a developer’s loss on a daily basis in the event of late completion.

3. Adjudication Documents – what happens if you can’t prove service?

The adjudication process is often considered an effective and quick payment dispute resolution mechanism to assist with cash-flow issues that are inherent in the building and construction industry.

Although the claims process under the Act is not onerous, courts expect substantial compliance. Proof of service is essential and often the subject of conjecture given the significant consequences for late service of documents under the Building and Construction Industry Security for Payment Act 1999 (NSW) (Act).

Two aspects of service are considered here:

(a) Whether the adjudication application was validly served

(b) Whether the adjudication application served on the relevant authority was identical to the one served on the Respondent.

The requirements for valid service of an adjudication application are outlined in sections 17(2)-(3) and (5) of the Act. If the adjudication application as lodged with the relevant authority is not an exact copy to that served on the Respondent, service issues are more likely to arise.

Take the example of delivering a USB containing a document to a party’s registered office. One view taken in Parkview Constructions Pty Limited v Total Lifestyle Windows Pty Ltd t/a Total Concept Group [2017] NSWSC 194 (Parkview), was that this method of service was invalid, largely because there were substantial differences between the USB version and the version lodged with the relevant authority.

Contrastingly, in Equa Building Services Pty Ltd v KLG Trading Pty Ltd [2021] NSWSC 1674 (Equa), the version delivered to the party contained minor differences to that lodged with the relevant authority. These differences were in summary:  

(a) A video recording did not display an image on one laptop, but could be viewed on a different laptop (the sound still played on both computers)

(b) Three missing documents which were inconsequential as they related to organizational structures and administrative information

(c) Illegible documents which were difficult to read in the due to sizing differences (e.g architectural plans which were minimised to A4 format

(d) Mislabeling of tabs in the hard-copy bundle.

In light of the above, using personal service (by courier or process server) is usually advised, as this will minimize conjecture as to when the Adjudication Document was served. When using a courier, it is advisable to obtain a copy of the courier “run sheet” which shows the address and time of service. Most courier companies will provide run sheets upon request.

If a Builder cannot prove service of an adjudication application, as was the case in Parkview, any subsequent Adjudication Determination may be quashed and declared void due to jurisdictional error or a denial of procedural fairness (or both).

Our Tip: Pay for personal service, obtain an affidavit of service/courier run sheet and make absolutely certain your Adjudication Documents lodged with the Adjudicator are identical to those served on the Respondent.

4. Notices to remedy – where are you left if not accurate?

In construction contracts, a notice to remedy is also referred to as a “notice of breach”. They are issued when a wronged party notifies a breaching party to remedy a breach within a certain period of time or otherwise face termination of the contract.

As a rule of thumb, the following matters must be carefully considered: 

(a) Have you relied on the correct contract provision which triggers the entitlement to issue the notice?

(b) Have you included any supporting factual information?

(c) Have you indicated how the breaching party must rectify its breach?

(d) Have you provided enough time to rectify the breach?

If this information is incorrect or inaccurate, it may be an invalid notice. Such an invalidity can mean that the party issuing the notice is incorrectly terminating the Contract. This is known as repudiation.

The test for construction of a notice of breach relies on:

1. The objective interpretation of the words and purpose.[1]

The Court’s approach is to consider the ordinary meaning of the words used. Generally, this requires clear and distinct language relying on the relevant contract clause between the parties. The notice must also state when the contract thereafter terminates.[2] It is always advisable to adopt the wording of the contract clause.

2. The recipient’s objective interpretation.[3]

It is useful to consider how the recipient would interpret the notice and whether the words, clause references and intention of the notice is clear. 

In Etlis v New Age Constructions (NSW) Pty Ltd [2005] NSWCA 165 [39], this required a consideration of the recipient, his relevant background knowledge of the factual circumstances.

3. The “business common sense” of the parties involved.[4]

The objective test takes into account that the parties involved have a reasonable commercial understanding of the circumstances. In Etlis v New Age Constructions (NSW) Pty Ltd [2005] NSWCA 165, the Court found that in circumstances where both parties already had the information required under a clause of their building contract, the relevant notice was only required to provide the evidence required by that clause as the parties had the business common sense to understand their contract administration.  

Minor errors in a notice to remedy are generally not fatal to the validity of the notice, as long as these errors are not relevant to the parties obligations under the contract.[5]

Repudiation

A repudiation can be characterized as a wrongful termination of the contract. Where a party shows an inability/unwillingness,[6] or otherwise acts in a way that is inconsistent with their obligations in performing the contract, this can be considered repudiatory conduct.

Our Tip: Use the contract wording and reference the clause relied upon when drafting a notice to remedy/notice of breach. Always review your notices from an objective standpoint and consider whether they are clear.

5. SOPA Notice of Suspension – failure to validly invoke

The SOPA Act makes reference to ‘Claimants’ and ‘Respondents’. A ‘Claimant’ is a party is who is making a claim for construction work (i.e issuing a payment claim). A ‘Respondent’ is a party who responds to this claim with a payment schedule, which outlines how much they propose to pay.

A valuable tool at a claimant’s disposal, arising from section 27 of the Building and Construction Industry Security of Payment Act 1999 No 46 (SOPA Act), is the statutory right to suspend work under a construction contract.

There are three circumstances in which a party may exercise this entitlement:

1. The claimant has received a valid payment schedule but the respondent fails to pay the scheduled amount by the due date for payment

2. A payment schedule was not served within time and the respondent fails to pay the whole or any part of the claimed amount by the due date for payment

3. The adjudicated amount is not paid within five business days after an adjudication determination is received by the respondent or later date if determined by the adjudicator.

Under section 27(1) of the SOPA Act, to validly invoke a notice of suspension a claimant needs to provide written notice to the respondent at least two business days. 

When calculating the days, the day on which the notice was given is not included (i.e if the notice was received on a Monday, start counting from Tuesday). To ensure compliance with the SOPA Act the notice should reference:

1. Section 27 of the SOPA Act

2. The payment claim

3. The fact that the claimant intends to suspend work in two business days.

There are common phrases which are used in these kind of notice, and they should ring alarm bells. Take the example of the following: 

“We hereby put you on notice that you have failed to make payment of the amount due under the Building and Construction Industry Security of Payment Act 1999 No 46 in relation to the payment claim served on you on [date]

“Pursuant to section 27 of the Act, we intend to suspend work at the expiration of two business days from the date of this notice, being [date].”

“In the event the amount is paid prior to the above date we will cease suspension of the works accordingly.”

A poorly or loosely drafted notice may result in suspension being invalid, thereby losing the significant statutory protection suspension might otherwise provide to an unpaid claimant.

Should the claimant receive payment, then the claimant must cease their suspension of the work within three business days.

Our Tip: Ensure the wording of a suspension notice follows the strict requirements of the SOPA Act, and timing is strictly observed to avoid invalid suspension.

6. Quantum Meruit – Where and when can you fall back on it?

‘Quantum Meruit’ is considered the ‘value of the work performed’. Where a builder has performed construction work for an owner, and this owner has received a benefit in unfair circumstances, quantum meruit can be an avenue for the builder to recover a fair and reasonable amount for the work it has performed.

A quantum meruit claim may be invoked in the following circumstances:

1. Work done under a contract that does not include a fixed price or method for calculating costs

2. Work outside of the contract more commonly referred to as variations

3. Work under a void, unenforceable or terminated contract

4. Work under a heads of agreement, but cannot claim payment.

The most common ground claimed by contractors is repudiation. Repudiation of the contract by the principal does not, in itself, bring a contract to an end. If the principal indicates that the party is not ready, willing and able to perform the contract in accordance with its terms, the contractor must first elect to terminate the contract; that is to say, choose between continuing the performance of his contractual obligations or accepting the principal’s repudiation and bringing the contract to an end.

If the contractor chooses the latter, then a claim can be made. If the claim is successful, the damages must be assessed on a quantum meruit or contractual basis.

To establish a claim for quantum meruit, there has to be an element of unjust enrichment. We provide some examples below:

1. The owner was enriched, as it received the benefit of the construction work 

2. The benefit must have been gained at the contractor’s expense

3. It would be unjust in the circumstances to allow the principal to retain the benefit.

Our Tip: Ensure when claiming for building work that quantum meruit is pleaded in the alternative, in case a court or fact finding Tribunal finds that the contract in unenforceable or unclear in its payment calculation terms.

Key Summary

These topical areas of building law demonstrate the importance of getting it right when selecting insurance, applying liquidated damages, running SOPA claims, exercising final contractual rights, suspending works or claiming in the absence of contract.

Failing to be accurate can lead to substantial financial turnaround, and advice should be sought when making key decisions in building insurance, contractual claims and statutory enforcement.

The team at Bartier Perry regularly assists clients in all of these areas, saving clients time and money.

 

Authors: Robert Kalde, Gabriella Porcu, Breitil Sulaiman

 

[1] Haniotis v Owners Corporation Strata Plan 64915 [2014] NSWDC 81, 84 -98.

[2] Hughes v NM Superannuation Pty Ltd (1993) 29 NSWLR 653.

[3] Haniotis v Owners Corporation Strata Plan 64915 [2014] NSWDC 81, 85.

[4] Haniotis v Owners Corporation Strata Plan 64915 [2014] NSWDC 81, 86.

[5] Mannai Investment Co Ltd v Eagle Star Life Assurance Co Ltd [1997] AC 749, 767-769.

[6] Foran v Wight (1989) 166 CLR 623, 642.