Insight - Construction & Infrastructure
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construction & infrastructure insight
march 2008
Is your Queensland supervision up to scratch?
From 21 December 2007, new rules relating to the supervision of building work by licensed building contractors and construction managers came into effect.
The Building Services Authority (BSA) has, for quite some time, considered ways it may avoid defective building work arising. Traditional regulatory measures have been aimed at the rectification of defective building work once carried out, or at punishing those who carry out or repeatedly carry out sub-standard work.
After identifying a lack of qualified supervisors and the quality of supervision as being a key issue, the BSA have introduced reforms aimed at improving the level and quality of supervision in the building and construction industry.
If you are a licensed contractor, you must ensure that your building work is both personally and adequately supervised.
To be personally supervised, the building work must be supervised by the company’s nominee, or by an officer or an employee of a company who holds either:
- a nominee supervisor’s licence;
- a site supervisor’s licence;
- an occupational licence; or
- a contractor’s licence at the relevant class.
In essence, the BSA expects that an appropriately qualified person will personally supervise each and every project.
To be adequately supervised, you must ensure that your business has in place documented systems that will ensure there is supervision of work, and that this system is in fact implemented.
The BSA will also look at whether work is completed in accordance with plans and specifications and is of a standard expected of a competent holder of a contractor’s licence in determining if there is adequate supervision.
Your supervision system must have regard to the size and complexity of the building work that you are carrying out and to the level of control, oversight and direction exercised by your supervisors and the number, timing and quality of the inspections which are carried out.
Similar rules apply for construction managers under construction management contracts.
If you do not have in place appropriate systems for supervision and ensure that those systems are implemented, you may be liable for fines of up to $15,000 for an individual and $75,000 for a company. A company’s nominee may also be exposed to penalties of up to $15,000.
Key points
- ensure that you have a documented system as to how building work carried out by you is to be supervised. This system is to state the checks and balances you will have to maintain the quality of supervision; and
- ensure that you audit or regularly review the implementation of this supervision system for each building project and that supervisory matters are raised as an agenda item in senior management meetings.
Vulnerability in pure economic loss and a statutory corporation’s capacity to sue
New South Wales v Bovis Lend Lease Pty Ltd (formerly Civil & Civic Pty Ltd) [2007] NSWSC 1045
On 20 September 2007, Justice Einstein in the NSW Supreme Court handed down this decision, which addresses the issue of pure economic loss and the standing of a statutory corporation to sue on behalf of a predecessor.
History
The Sydney Olympic Park Authority (SOPA) commenced court proceedings as a statutory corporation representing the Crown in right of NSW and in the name of the State of NSW against Lend Lease Corporation Ltd (LLC) and Civil & Civic Pty Ltd, now known as Bovis Lend Lease Pty Ltd (BLL).
These proceedings involved claims arising from significant defects in the Sydney Aquatic Centre at Homebush, which had been constructed by BLL.
In May 2006, the whole of the proceedings were referred for enquiry and report to a referee (Referee). Following the completion of his report dated 12 June 2007 (Report), the claim against LLC was dismissed.
SOPA sought to have the Report adopted while BLL objected to adoption of the Report on a number of grounds.
Facts
The Homebush Abattoir Corporation (HAC) owned the land upon which the Sydney Aquatic Centre would ultimately be constructed. In 1985 Lend Lease Development Pty Ltd (LLD) entered into an exclusive development agreement with HAC (HAC Agreement) under which LLD acquired exclusive development rights in respect of the land on which the Sydney Aquatic Centre was built.
On 19 December 1991 a Supplemental Deed to the HAC Agreement (Supplemental Deed) was executed providing that LLD would forgo its development rights on the condition that it would be retained to construct the Sydney Aquatic Centre. The Supplemental Deed also provided that LLD’s rights would be assigned to Civil & Civic Pty Ltd.
At that time the NSW Premier directed all ministers that the NSW Public Works Department was to be engaged by all government agencies (of which HAC was one) as the constructing authority for all capital works programs within NSW having a capital value of more than $500,000.
On 19 December 1991 a building contract for the Sydney Aquatic Centre was entered into between the Minister for Public Works as principal, Civil & Civic Pty Ltd, LLD and LLC.
On 1 January 1992 HAC was dissolved and Homebush Bay Ministerial Corporation (HBMC) took over from HAC as the first of HAC’s statutory corporation successors. On 24 September 1993 HBMC was dissolved and all assets, rights and liabilities of HBMC were transferred to the Homebush Bay Development Corporation with effect from 1 November 1992. Further statutory successions occurred and SOPA was the last statutory successor.
Judgment -pure economic loss
Einstein J began by reviewing a number of the recent decisions regarding pure economic loss, being Bryan v Maloney (1995) 182 CLR 609; Woolcock Street Investments Pty Ltd v CDG Pty Ltd (2004) 216 CLR 515; Avenhouse v Council of the Shire of Hornsby (1998) 44 NSWLR 1; and Perre v Apand Pty Ltd (1999) 198 CLR 180. His Honour then observed (at [40]) what the majority judgment of the High Court of Australia in Woolcock had to say in relation to the concept of vulnerability:
… the vulnerability of the plaintiff has
emerged as an important requirement
in cases where a duty of care to avoid economic loss has been held to have been owed. “Vulnerability”, in this context, is not to be understood as meaning only that the plaintiff was likely to suffer damage if reasonable care was not taken. Rather, “vulnerability” is to be understood as a reference to the plaintiff’s inability to protect itself from the consequences of a defendant’s want of reasonable care, either entirely or at least in a way which would cast the consequences of loss on the defendant. So, in Perre, the plaintiffs could do nothing to protect themselves from the economic consequences to them of the defendant’s negligence in sowing a crop which caused the quarantining of the plaintiffs’ land. In Hill v Van Erp, the intended beneficiary depended entirely upon the solicitor performing the client’s retainer properly and the beneficiary could do nothing to ensure that this was done. But in Esanda Finance Corp Ltd v Peat Marwick Hungerfords, the financier could itself have made inquiries about the financial position of the company to which it was to lend money, rather than depend upon the auditor’s certification of the accounts of the company. [Woolcock at [23]. The quote cites Hill v Van Erp (1997) 188 CLR 159 and Esanda Finance Corp Ltd v Peat Marwick Hungerfords
(1997) 188 CLR 241].
Einstein J then held (at [42]) that the Referee’s finding that a duty of care was owed by BLL to HAC - because of the series of agreements between, variously, HAC, the Minister for Public Works, BLL, LLC and LLD - was incorrect. There was no relevant ‘vulnerability’ (or other relevant circumstance) which justified the imposition on BLL of a duty of care to HAC in addition to BLL’s contractual obligations to the Minister for Public Works. His Honour particularly noted that HAC was in a position to protect its own interests as owner of the land, either by contract or statute, and that BLL was entitled to reasonably assume that State authorities could be relied upon to provide that protection to HAC as well as to its successors.
Judgment -capacity to sue
In the first instance, SOPA argued that, pursuant to the Crown Proceedings Act 1988 (NSW), it could sue on behalf of the Crown which made the contract. In the alternative, SOPA argued that the Minister for Public Works entered into the contract with BLL as the agent of HAC and that the contractual rights of HAC became vested in SOPA.
Crown Proceedings Act
SOPA argued that it had standing to bring proceedings as it was a statutory corporation representing the Crown and was entitled to sue in the name of the State of NSW. The Referee, whose reasons Einstein J adopted, stated that:
… something more than SOPA being so constituted to represent the Crown and to sue in the name of the State of NSW is necessary, otherwise it would follow that any statutory corporation so constituted (and there are several) would have been entitled to bring these proceedings while having no connection with the Contract or its subject matter. [See at [60] of the judgment].
Agency
SOPA argued that it had succeeded to rights accrued through its statutory predecessors, originating in the Minister for Public Works entering into the contract as agent for one or other of those predecessors.
On this point, His Honour again adopted the Referee’s reasons, which referred to the building contract and, in particular, the description of the Principal as the contracting party (namely, The Minister for Public Works for The State of NSW for and on behalf of Her Majesty Queen Elizabeth the Second in the State of NSW). It was held that this description alone left little or no room for debate on the proposition that the Minister acted as the Crown as principal.
Einstein J concluded that the Minister for Public Works could not have contracted as agent for SOPA as:
- SOPA did not exist at the time the contract was formed or performed;
- SOPA is a separate entity to HAC, not a continuation of HAC under a new name; and
- while an agent may contract on behalf of an undisclosed principal, an agent may not contract on behalf of a nonexistent principal (that is, SOPA).
His Honour was critical of the attempt to rely on the principles of agency in relation to private transactions in a government context as, unlike private entities, it would not necessarily be assumed that a Minister, when entering into a contract, would be acting as agent for a statutory corporation such as either HAC or SOPA.
His Honour further stated that the argument by SOPA relies upon the notion that a private corporation which owned land would have a very real interest in a contract for the construction of improvements on that land. His Honour was of the opinion that this argument is not able to be made in the case of statutory corporations, particularly because the statutory corporation may not operate the facility to be constructed or continue to own the land. Further, the subsequent legislation transferring the land from HAC did not deal with the rights and obligations pursuant to the contract between the Minister and BLL.
Statutory vesting of right to sue BLL
Einstein J concluded his judgment by addressing the issue of whether the right to sue in tort had ‘devolved’ to SOPA via the chain of statutes from HAC to SOPA, giving SOPA the entitlement to sue BLL in negligence. His Honour held that, prior to the dissolution of HAC, no right to sue in negligence could have been conveyed from HAC to its successor because at that time:
- there had been no act or omission with want of reasonable care on the part of BLL; and
- HAC itself had suffered no loss or damage.
An alternative argument put by SOPA was that the right vested in SOPA was a chose in action and therefore an ‘asset’. His Honour held that this also failed because a right to sue for damages for tort is not a statutorily assignable chose in action.
Finally, Einstein J concluded that because any duty of care not to cause pure economic loss depends upon the particular personal characteristics of the person claiming the benefit of the duty, such a duty of care is a truly personal obligation which is incapable of assignment.
Implications
The case affirms ‘vulnerability’ as the touchstone for determining whether a duty of care to avoid pure economic loss is owed and provides another good example of the application of this principle.
It also provides valuable guidance as to the standing of successor statutory corporations to sue in reliance upon rights which accrued to the Crown or an earlier statutory corporation.
New Queensland licensing rules for construction managers, project managers and developers
Everyone in the Building and Construction Industry needs to be aware of recent changes to the Queensland Building Services Authority Act (QBSA Act) which started on 21 December 2007, and which have significant implications for construction managers, project managers and developers.
Meaning of building work
To understand the effect of the changes, you need to consider the expanded (and clarified) meaning of building work. This is important as a person or a company cannot contract to carry out building work without holding an appropriate Building Services Authority (BSA) license. To “carry out” building work is defined to mean any of the following:
- to carry out the work personally;
- to directly or indirectly cause the work to be carried out; or
- to provide building work services for the work.
Building work services is further expanded to mean one or more of the following:
- administration services;
- advisory services;
- management services; or
- supervisory services.
The activities captured by building work services is extremely broad. If you do any of the activities then you may need to hold a BSA licence
“Administration services” includes the preparation of tender documents, calling and selecting tenders or arranging payment of subcontractors. Importantly, it also includes the administration for the work usually carried out by a construction manager or a project manager, or that is usually carried out by a licensed contractor in the course of that contractor’s business.
“Management services” includes coordinating the scheduling of work by building contractors. “Supervisory services” includes the development, implementation and management of a system for the supervision of work and also includes the actual supervision of building work.
These changes make it clear that regulated building work is extremely broad and that many contractors in the industry, who previously were considered not to require a license, now require a license.
Below we consider the impact of these changes on certain key players.
Project Managers and Superintendents
Historically, a project manager or a superintendent was not considered to require a building license. The BSA have now made it clear that it is its view that a project manager and a superintendent are required to be licensed.
Traditionally, project management is where the project manager coordinates the design, development and key trades while the actual work is undertaken by a contract directly between the principal and a licensed builder.
A superintendent will normally be engaged to undertake supervision of building work and administration of a contract on behalf of a principal while also being an independent certifier for assessing claims for payment and extensions of time. As with project management, the actual work on a project in which the superintendent is involved is undertaken by a licensed builder.
Notwithstanding the existence of a licensed builder, the BSA now requires both project managers and superintendents to be licensed. If not licensed it is arguable that the management, administration and supervisory services provided by the project manager or superintendent is unlawful. This in turn may raise questions as to the validity of any certification or assessment made by the project manager or superintendent under a building contract and may also raise questions as to the entitlement of the project manager or superintendent to be paid for services provided.
A key concern is where the project manager or superintendent issues a payment schedule under the Building and Construction Industry Payments Act and whether the lack of a license then makes that payment schedule invalid, exposing the principal to summary judgment for the amount of the progress claim.
Project managers and superintendents should also seek to review the terms of their agreements as the contractual regulation under Part 4A of the QBSA Act may apply to their contracts as contracts for the carrying out of building work. This may impose obligations as to the form of the contract and also affect terms regarding payment and the suspension of services.
Key tips
- project managers and superintendents should ensure they hold a license which would enable them to actually do the work that they are project managing/superintending;
- terms of engagement should be reviewed to ensure compliance with QBSA Act Part 4A and the Building and Construction Industry Payments Act; and
- principals should do license checks to ensure that the project manager or superintendent holds the appropriate license to avoid potential pitfalls.
Construction Managers
The recent changes also signalled a major shift in the regulation of construction management services. In essence the BSA now treats construction managers the same as builders.
A construction manager is a contractor who provides building work services for the carrying out of building work for a principal under a construction management contract.
Under the new provisions, construction managers must:
- hold a licence which would allow the construction manager to actually build the building work which is being managed;
- ensure that the building work is adequately and personally supervised; and
- have the construction management contracts in writing and complying with Part 4A of the QBSA Act.
The ramifications for failure to be licensed are substantial. Orders made by the construction manager may not be enforceable, and the construction manager may not be entitled to be paid for their work. Penalties for failing to ensure adequate supervision of construction work can be up to $15,000 if the manager is an individual. If the manager is a company, the penalty may be up to $75,000.
Additionally, the BSA now has the power to issue directions to rectify in respect of building work for which the construction manager has provided building work services. The BSA may exercise the power to give a direction to a construction manager where it believes that the building work may be defective due to inadequate supervision. If a direction is issued to the construction manager, then the construction manager is responsible for the rectification of the defective work, even though they were only responsible for supervising the works.
If a construction manager directed to rectify building work does not adhere to that direction, then the construction manager may suffer an increase in licence fee as well as a fine and having the direction noted on the public record. The construction manager’s directors may be personally liable for the cost of rectification work should it be carried out by others and/or under the statutory insurance scheme.
Construction managers are also required to take out QBSA warranty insurance, if they are involved in a contract for the construction of residential building work. The BSA warranty insurance premium is to be calculated on the entire value of the building work (including the construction manager’s fee) and not just the construction manager’s fee. The BSA has powers to audit licence holders to determine insurance premiums. Penalties for breach of these new obligations can be up to $7,500.
Key tips
- construction managers need to price these new risks; and
- construction managers need to review documentation to ensure they have appropriate protection.
Developers
Finally, the recent changes have now captured developers in the regulating framework. After initially being subject to regulation under the contract provisions in Part 4A regarding giving warning notices to trade contractors, developers have now been made subject to further obligations in relation to defective building work.
The BSA can now:
- issue a direction to rectify building work directly to a developer, in certain circumstances;
- make the developer liable for the cost of having that defective building work rectified by others, should it fail to follow the direction to rectify. This liability would extend personally to the directors of the developer; and
- place developers on a register, making note of each time a direction to rectify has been issued, and any offences that have been committed.
It should be noted that as the QBSA has the power to issue more than one direction in respect of the same building work, directions may be issued to both the developer and the builder or construction manager.
It is unclear how these laws will operate where the builder takes all design and construct risk under the contract for the works, even where the developer approves the design and can direct changes to it.
Key tips
- developers should review their contracts to determine what protection they need in the event of a BSA direction; and
- developers need to be aware of the risk being assumed where a direction is given to use certain materials or do certain work against the builder’s or construction manager’s recommendations.
Conclusion
The latest QBSA Act changes have increased the accountability of construction managers, project managers, and developers for defective building work. Changes and introductions including licensing requirements for construction managers, a register of developers, and an expansion of the QBSA’s ability to issue direction to rectify notices, will have a significant impact on the building and construction industry.