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Recent cases benefit councils in disputes with contractors

Two recent cases in the Supreme Court of NSW have made it easier for councils to prosecute claims against contractors for defective work and design under the Design and Building Practitioners Act 2020 (DBP Act) and to resist payment claims under the Building and Construction Industry Security of Payment Act NSW 1999 (SOP Act).

Firstly, in The Owners Strata Plan No 84674 v Pafburn Pty Ltd the Court of Appeal held that proportionate liability under the Civil Liability Act 2002 (CL Act) doesn’t apply to the duty of care under section 37 of the DBP Act.

Secondly, in Acciona Infrastructure Projects Australia Pty Ltd v EnerMech Pty Ltd the Supreme Court confirmed that by calling on security held under a construction contract a council can effectively neutralise an adverse SOP Act determination.

The DBP Act and proportionate liability

Before the introduction of the proportionate liability provisions of the CL Act, a contractor was jointly and severally liable for loss arising from a failure to take reasonable care in the execution of the work under the contract.

The contractor was liable for the acts and omissions of its subcontractors and consultants, as well as of its employees. So, a council would only have to sue one defendant.

By contrast, the proportionate liability provisions divide liability for loss amongst multiple parties (such as architects, engineers and 16 subcontractors) based on each party’s degree of responsibility. So, a council would have to bring claims against a number of defendants to recover all of its loss, making this litigation more expensive, complex, time-consuming and uncertain.

Earlier cases had indicated that the proportionate liability provisions apply to a claim for damages arising from a breach of the duty to exercise reasonable care to avoid economic loss caused by defects under section 37 of the DBP Act.

However, in Pafburn the Court of Appeal held that the duty of care under section 37 of the DBP Act is non-delegable and that developers and builders cannot apportion liability to subcontractors or consultants.

The case concerned proceedings commenced by the owners corporation of a strata development against the developer, Madarina, in relation to defective construction work. Madarina pleaded that its head contractor (and its subcontractors) were concurrent wrongdoers and that liability should be apportioned under the CL Act.

The primary judge agreed that Madarina was entitled to run this defence because the section of the CL Act that might take the duty of care under section 37 of the DBP Act out of the reach of the proportionate liability provisions (section 5Q of the CL Act which applies to non-delegable duties) only applies to common law negligence (a common law “tort”).

But the Court of Appeal overturned this finding. It considered that the intention of section 5Q is to address the full scope of the problem of non-delegable duties and should not be ‘read down’ and confined to liability for breach of a common law duty.

A claim relying upon section 37 of the DBP Act is a claim brought “in tort” because of the deeming phrase “as if the duty … were established in common law” in section 37(3).

Since section 39 of the DBP Act expressly states that:

39 Duty must not be delegated

A person who owes a duty of care under this Part is not entitled to delegate that duty.”

the builder is vicariously liable for breaches by concurrent wrongdoers pursuant to section 5Q of the CL Act and this is sufficient to exclude the proportionate liability provisions.

Key takeaways

The judgment confirmed that:

  1. a breach of the statutory duty of care under section 37 of the DBP Act is considered a ‘tort’

  2. it is non-delegable so that developers and builders are responsible for the actions of their subcontractors and consultants.  

The judgment is a welcome win for councils who can take comfort in the knowledge that the party with whom they contract will be held responsible for the whole loss and cannot ‘offload’ some or all of this responsibility to other parties. 

Using security to neutralise a SOP Act determination

The rationale behind providing security under a contract is considered to be two-fold. Its first purpose is as a risk allocation device. Its second purpose is to ensure a party has a fund from which to recover its losses if the opposing party causes a breach.

However, there is an intersection between an adjudication determination under the SOP Act providing cashflow for contractors, and a contractual right to have recourse to security.

In particular, the Courts have heard several matters in which a contractor has received a favourable adjudication determination and the principal then calls on its security for an amount equivalent to the determination.

Two key issues arise:

  1. Is a claim to repayment of the security amount by the contractor a claim in relation to ‘construction work’?

  2. Is a right to call on security in respect of an issue that has been the subject of an adjudication determination rendered void by section 34 of the SOP Act? 

The requirements of a payment claim

The essential requirements of a payment claim are outlined in sections 8 and 13(1) of the SOP Act which state:

8   Right to progress payments

A person who, under a construction contract, has undertaken to carry out construction work or to supply related goods and services is entitled to receive a progress payment.

13   Payment claims

(1)  A person referred to in section 8 who is or who claims to be entitled to a progress payment (the claimant) may serve a payment claim on the person who, under the construction contract concerned, is or may be liable to make the payment.”

It is clear from these sections that one precondition is for the claim to relate to “construction work”.

Section 34 of the SOP Act

This section states that a provision of any contract “under which the operation of this Act is, or is purported to be, excluded, modified or restricted (or that has the effect of excluding, modifying or restricting the operation of this Act)…is void.”

Acciona vs Enermech: section 34 gets tested in Court

In Acciona, a dispute arose in relation to a contract between the head contractor, Acciona, and a subcontractor, Enermech, for electrical works in the Sydney Westconnex tunnelling project.

The contract required Enermech to provide an unconditional undertaking as security for any money Acciona claimed it was owed by Enermech.

During the project, Enermech had two adjudication determinations in its favour which were paid by Acciona. Acciona then called on the unconditional undertakings for the same amount as it had paid, which Acciona assessed was an overpayment to Enermech under the contract.

Enermech subsequently served a payment claim which comprised the amount paid in response to the call on the unconditional undertakings.

After Acciona disputed the payment claim, Enermech gained an adjudication determination for the amount.

Acciona appealed the determination, arguing that the claimed amount was not for ‘construction work’ under the SOP Act. Enermech responded by claiming that the contractual provisions permitting Acciona to call on the security in respect of claims that had already been rejected by a determination under the SOP Act were rendered void by section 34 of the SOP Act.

Is 'security' construction work?

Acciona argued that a claim for the payment to Enermech of the amount obtained by Acciona from calling on the unconditional undertaking was plainly not a claim for, or on account of, ‘construction work’ or ‘related goods and services’. 

The essential question before the Court was whether a claim comprising an entitlement to claim as a credit of an amount equivalent to the security amount, was a claim for payment for ‘construction work’ for the purposes of the SOP Act.

The Court determined that the answer was no. In this it followed Grocon (Belgrave St) Developer Pty Ltd v Construction Profile Pty Ltd in finding that a claim which is in substance for the return of money paid by recourse to security is in effect a claim for credit and cannot be considered ‘construction work’, thus rendering the adjudication determination invalid.

Are contractual provisions void if they permit a principal to call on security for amounts paid pursuant to an adjudication determination?

The Court concluded that such contractual provisions could not be seen to exclude, modify or restrict the operation of the SOP Act, and were not void.

Acciona complied with the first and second adjudication determinations. The SOP Act had thus “operated” in accordance with its terms.

Acciona then exercised a contractual right to make the demand for the security amount and call on the unconditional undertaking.

It was true that following the payment to Acciona of the security amount, the effect of those determinations had, as a practical matter, been reversed. But that was a result of events after the orderly operation of the SOP Act, and not as a result of any modification, or restriction, on the operation of the SOP Act. 

Key takeaways

The judgment confirms that:

  1. a claim for return of security monies is, in effect, a claim for credit and cannot be considered ‘construction work’, and so cannot be the subject of a payment claim

  2. a carefully drafted and applied security provision can neutralise the effect of an adverse adjudication determination.

Authors: David Creais & Breitil Sulaiman

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