Building & Construction Update – December 2006

• Welcome to our final building and construction update for 2006

• What must a builder do to obtain a caveat?

• A looking glass into the future

• How many defects claims can you bring?

• Security of Payment Adjudication statistics

• Late payment schedules and the need for legislative intervention

The Christmas break and the January shut down provide a much needed chance to recharge the batteries. Many in the construction industry assume that there will be little or no activity in this period and shut down their offices and sites for a number of weeks.

Unfortunately there are some who will take advantage of this. Desperate claimants may take the shut-down as an opportunity to push through payment claims that they will know would be heavily disputed if provided at any other time.

The fact that your office is closed does not mean that time will not run, indeed quite the contrary. Under the security of payment legislation, after new years day, time to provide your payment schedule starts to run from the date it is left at your office (or facsimiled to your office, if your fax machine is left switched on). This is the case regardless of whether you are aware that a payment claim has been "stuffed under your door". The same applies with respect to a claimant's notice of its intention to apply for a (second round adjudication).

A payment claim that is left at, faxed or mailed to your office, but which does not to come to your attention, has the potential of:

1. deeming the amount claimed to be a debt due; or
2. disentitling you from relying on a payment schedule or lodging an adjudication response.

The consequences can be catastrophic.

Although it may be inconvenient, I strongly recommend that you arrange for your offices and mail to be checked every few days after the security of payment "black-out period" (which ends on New Years Day) to identify any such claims.

On that happy note all of us here at the building and construction group at Gadens Lawyers wish all our clients and correspondents and their families a very Merry Christmas and happy and prosperous 2007.
By Rob Riddell

What Must A Builder Do To Obtain A Caveat?

The principal purpose of much of Part 2 of the Home Building Act 1989 (NSW) (the Act) is to protect consumers from being taken advantage of by builders who generally have a greater understanding of the way the construction industry works. One aspect of this is section 7D, which limits the circumstances in which a builder can lodge a caveat over residential building work. However, a reading of section 7D can leave one wondering how it is intended to operate. The Supreme Court recently provided some guidance on this in Kell & Rigby Pty Limited v Flurrie Pty Limited.

Flurrie is the developer of a residential project in Rozelle. Disputes arose in relation to payments due under the contract. To protect its position, Kell & Rigby lodged a caveat on the title, notifying a charge over the property for money owed for work done by it at the site. Flurrie asserted that the caveat was void by virtue of the operation of section 7D of the Act. It served a caveat lapsing notice on Kell & Rigby. Kell & Rigby applied to the Supreme Court to have its caveat extended.

It was not disputed that section 7D would void any purported charge a builder had over residential building work, and consequently any caveat lodged on the strength of that charge, unless the requirements of the section were satisfied. The section contains four prerequisites for a valid charge, three of which are relatively straight forward:

• the land that is the subject of the charge must be the land on which the contract work was carried on

• the charge must be in favour of the builder who was a party to the contract; and

• the owner of the land must be the person against whom the judgment or order was made.

This leaves the fourth and most complex requirement: the charge must be created to secure to the builder money due under the contract, but only if a court or tribunal had made an order or judgment that such payment be made.

Kell & Rigby had obtained judgments by virtue of adjudications under the Building and Construction Security of Payment Act 1999 (the SOP Act). However, the two issues before the court were:

• whether the clause of the contract that purported to grant the charge to the builder must expressly state that a charge would only arise if a judgment was given that money be due under the contract; and

• whether a judgment obtained under the SOP Act constitutes a judgment for money due under the contract.

Flurrie successfully argued, that on a proper interpretation of section 7D, the clause granting the charge to the builder must expressly provide that a charge will only arise following a court or tribunal giving a judgment or order that money is due to the builder under the contract. A more general clause, giving rise to a charge prior to any such judgment or order being made, would be declared void under section 7D. The Court found that the caveat lodged by Kell & Rigby was void and had to be removed on this basis.

In relation to whether a judgment under the SOP Act amounts to a judgment that money is 'due under the contract', the Court held that the statutory right to collect payment provided by the SOP Act co-existed with the contractual right to payment and that a judgment ultimately obtained under the SOP Act was for money 'due under the contract' within the meaning of section 7D.

The effect of the decision in Kell & Rigby v Flurrie is that a builder is able to lodge a caveat over a property on which they have performed residential building work, provided that:

1. the clause giving the builder the right to do so has been correctly drafted; and
2. the builder has obtained a judgment or order against the owner for money due under the contract.

Builders should take care to ensure that the contractual provisions relied upon to secure payment are drafted having full regard to section 7D.
By Brendan Hoffman

A Looking Glass Into The Future

Increasing membership numbers and vigorous activity on many levels provide the Masters Builders Association of NSW (MBA) with the influence and ability to capture the NSW Government's attention. The MBA now strives to set the agenda through the publication of its 'policy priorities' for 2006-2007.

Space does not permit a review of all of the policy priorities, so this article focuses on what we see to be the most significant.

1. Establishment of an Independent Building Commission

With the declining level of residential building activity and pressure on housing affordability, the focus has been turned on the multitude of government departments and authorities that govern the building industry.

Building regulation is a mire of bureaucracy, delay and expense. The MBA will be lobbying for the establishment of an independent building commission to:

• focus on industry related issues

• draw together all the separate departments and government agencies which regulate the industry; and

• provide an independent, objective and experienced control over the industry.

2. Licensing of Architects, Designers and Engineers

The Office of Fair Trading administers residential building and specialist (electricians, plumbers, gas fitters, etc) licences, however this is incomplete coverage of those doing and responsible for residential building work. The MBA advocates the extension of the Home Building Act's licence requirements to include architects, designers and engineers, which provides a more complete compliance mechanism to address unacceptable practices and poor performance.

3. Owner-Builder Work Recorded on Certificate of Title

Subsequent purchasers of residential building work are not being informed that the work was undertaken by an unqualified owner-builder. The owner-builder exemption has spawned an unlicensed speculative building industry, side-stepping compliance requirements, occupational health and safety (OH&S) regulation and some insurance obligations. The consumer protection imperative is not being served. The MBA seeks that this issue should be addressed through:

• owner-building projects (under DA consent) being deemed as construction sites, and fall under the jurisdiction of WorkCover

• all projects (requiring DA consent) being recorded on the certificate of title

• owners being accorded status of developer under the Home Building Act on projects involving more than one residence; and

• where land is jointly owned by two or more persons, applications for owner-builder permits must be made jointly by all parties.

4. Co-Ordinating the Duration of Builder Warranties

There are stark inconsistencies between the limitation periods provided under the building and planning legislation. Section 104ZK of the Environmental Planning and Assessment Act 1979 provides a limitation period of ten years. The statutory warranties under section 18B of the Home Building Act survive for seven years. The period of insurance cover for home warranty insurance under clause 103B of the Home Building Act is six years for structural work and two years for non-structural work.

The MBA seeks uniformity to bring all of the limitation periods in line with that required for home warranty insurance.

5. Improved Dispute Resolution for Residential Building Work

The Building and Construction Industry Security of Payment Act 1999 (SOP) excludes residential building work and owner-occupiers from its quick, and relatively inexpensive, method of resolving disputes. The MBA seeks the establishment of an on-site independent third party arrangement to determine such disputes, allowing for an objective determination of consumer and builder concerns while getting the job done and seeing that the builder is paid for work that is not in dispute.

6. Home Warranty Insurance (HOW)

The MBA has been lobbying the NSW government for six years to implement a public scheme based on the similar Queensland Building services model.

The NSW Government has however resisted that model for reasons which, to this day, remain unexplained. We are left with a system that represents 'money for jam' for insurers and a largely inaccessible indemnity for the insured home owner. The MBA seeks reform of the home warranty system through:

• the reduction of HOW premiums

• ensuring the application and compliance of NSW market practice guidelines by insurers

• a voluntary 'opt out' for consumers

• ensuring competition amongst insurers by removing anti-competition barriers to builders across all approved insurers to obtain the lowest premium for their client

• the establishment of an independent umpire to hear and administrate complaints

• the provision of a uniform HOW scheme; and

• the establishment of an advisory council to the scheme board.

7. Planning of Projects

The MBA seeks a straight forward approval scheme for relatively simple housing projects that avoids the usual long delays and various forms of intervention. The MBA advocates:

• the enhancement of independent assessment panels

• the introduction of standard checklists for development applications and plan details; and

• the clarification of the role and responsibility of certifiers.

In relation to the last item, the MBA is concerned that the mandatory critical stage inspections have little relevance to the actual quality of work and are simply an administrative process to establish that the work is consistent with the development consent, Construction Certificate and Occupation Certificate.

Further, the MBA seeks clarification as to the role played by the principal certifying authorities (PCAs) and whether the inspection and certification process relates to the quality of the building work or complies with the PCA standards.

8. OH&S and Workplace Relations

The NSW Government is currently proposing legislation to allow employee safety committee representatives to issue safety recommendation notices or infringement notices to employers. The MBA is concerned that the line between OH&S and Industrial Relations is insufficiently clear. Employee safety committee notices could be used for industrial leverage. The MBA sees this as a conflict of interest and its position is that these proposed changes should not occur.

Additionally, the MBA advocates nationally consistent OH&S and industrial relations systems, allowing a uniform framework in this area.

Other areas of priority set out in the MBA's 'policy priorities' statement include business regulation, education, training and continuing professional development.

It can no longer be said that the MBA's priorities are unclear. The policy statement is an unequivocal marking of the turf, providing clear directions and ambition.
By Rob Riddell & Ourania Konstantinidis

How Many Defects Claims Can You Bring?

One of the most fundamental protections for home owners in NSW are the statutory warranties contained in Section 18C of Home Building Act 1989 (NSW) (the Act). Most claims by owners against both builders and developers in relation to residential works cite these warranties. A recent Court of Appeal decision had restricted the circumstances in which owners can access these warranties. The NSW government has responded by amending the Act to avoid the consequences of that decision. However, the decision still has implication for the developers of commercial property.

In Honeywood as Executrix of the Estate of the Late Neville Honeywood v Munnings [2006], the owners sought to bring a claim in the Consumer, Trader & Tenancy Tribunal (CTTT) for a breach of the statutory warranties against a builder in respect of a newly discovered defect. They did so after previously having been partly successful against the builder in an earlier claim relating to different defects in work performed under the same building contract.

The builder's estate (the builder having deceased) applied to the CTTT to have the second claim struck out on the basis of the principle applied in Onerati v Phillips Constructions Pty Limited (In liquidation). That principle is that a claim for defective works under a building contract is usually, in effect, a claim for a failure to complete works in accordance with that contract. Even though multiple defects can arise under building contracts, a claim for a failure to complete works in accordance with a contract is a claim that can only be brought once (as is the case with almost all types of claims).

The builder's application to the CTTT to strike out the second claim was dismissed. The CTTT came to the view that the principle in Onerati could not prevent claims for latent defects not known at the time the original proceedings were determined. Additionally, it was also of the view that the principle did not apply to claims brought under the statutory warranties, as the Act created a right to make subsequent claims.

The builder’s estate appealed this decision to the Supreme Court. Initially, the Supreme Court upheld the CTTT's decision on the basis that the section 18D of the Act abrogated the principal in Onerati. The builder’s estate then appealed this decision to the Court of Appeal, which upset the apple cart.

The Court of Appeal confirmed Onerati as good law. The court held that anything that amounted to a claim for a failure to complete the works in accordance with the contract can only be brought once (even if the claim related to latent defects). The court then considered whether principle in Onerati could be avoided by relying on the statutory warranties in the Act. It held that these provisions did not create a right to sue twice in respect of the same work.

In effect, the decision meant that a home owner was only entitled to bring one claim for a breach of the statutory warranties against a builder, even if latent defects are discovered after the claim had been determined. However, this did not remain the case for long. The decision set off alarm bells at the Department of Fair Trading, so much so that the NSW Government has now amended the Act to entitle a home owner to bring more than one set of proceedings in respect of the same works (but not the same defects).

The Act was amended on 27 November 2006 by the Home Building Amendment (Statutory Warranties) Act 2006. An owner is now entitled to bring subsequent proceedings to enforce the warranties in respect of other defects where the owner did not know, and could not reasonably have been expected to have known, of those other defects at the conclusion of the first set of proceedings.

The amendments apply to all proceedings commenced after the legislation came into effect. The amendments also apply to any proceedings to enforce a statutory warranty that have been commenced prior to the amendments taking effect , provided that those proceedings have not yet been heard.

Although Parliament has amended the Act to allow residential owners to potentially bring multiple claims for breaches of the statutory warranties, this legislation does not apply to commercial developments. For this reason the decision in Honeywood serves as an important reminder that developers of commercial properties need to carefully consider their options before commencing proceedings for defective work, and in particular the basis on which those proceedings are brought.
By Brendan Hoffman

Late Payment Schedules And The Need For Legislative Intervention

What Should the Adjudicator do?

Until recently, the status of a late payment schedule under the Building and Construction Industry Security of Payment Act (the Act) was clear; a payment schedule provided more than 10 days after the payment claim is made was not "a payment schedule under Division 1" and therefore did not entitle a claimant to apply for a "first round" adjudication.

It was assumed that the claimant's only route to adjudication was through provision, to the respondent, of five business days' notice of its intention to apply for an adjudication, ultimately stretching the pre-adjudication application procedure out for a further month or so. This understanding was based upon Campbell J's detailed investigation of the matter in Amflo Constructions Pty Limited v Anthony Jeffries (Amflo).

Now the Court of Appeal has muddied the waters. In his decision in Falgat Constructions Pty Limited v Equity Australia Corporation Pty Limited (Falgat), Hodgson JA found that section 17(1)(a) of the Act does not require that the payment schedule be provided within time. He wrote that he was inclined to the view that a claimant may be able to make an application where the payment schedule was late. Both Handley JA and Hunt AJA, the other Judges on the Court of Appeal Bench in Falgat, concurred with Hodgson JA's judgment, although they did not specifically address this timing issue.

Hodgson JA found solace in the notice procedures in section 17(2) being superfluous when a late schedule was provided as they are "plainly directed to giving the respondent a further opportunity to provide a payment schedule that it has not yet provided".

Section 22(2) sets out the things that an adjudicator must consider in coming to a determination. Subsection (d) specifies:

'The payment schedule, if any, to which the application relates…'.

If as the Court of Appeal suggests, a first round adjudication can be based upon a late payment schedule, it stands to reason that the adjudicator must take that payment schedule into account despite its lateness.

The real concern is uncertainty. What is the adjudicator to do when faced with a payment schedule that is out of time? Campbell J's thorough and coherent examination of the construction of the Act concludes that a late payment schedule cannot base a first round adjudication. On the other hand, in the Court of Appeal, one judge on a bench of three, in one paragraph suggests the converse, without having any express regard to the Supreme Court authority.

Any uncertainty is unsatisfactory. The issue goes directly to the adjudicator's jurisdiction. If Campbell J is correct, and an aggrieved party takes the point, then proceeding to determine the application exposes the parties to wasted adjudicator's fees and some very expensive visits to Phillip St and possibly an encore performance before the Court of Appeal. The rough and ready scheme for determining interim entitlements under payment claims could transform into a litigation odyssey.

Clarification of the matter by the Court of Appeal could be a long time coming. In the interim, adjudicators face great uncertainty as to whether they should accept referrals for first round adjudications on late payment schedules. There seems a strong case for Parliament to intervene by amending the Act to address this doubt.
By Robert Riddell

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.