Insight - Construction & Infrastructure
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construction & infrastructure insight
may 2008
Current trends in building disputes
Beware the tender that bites!
Recent cases have indicated that builders need to ensure their tender offers are accurate and complete, because it is not necessary for a formal contract to be executed for there to be a binding agreement.
3 recent superior court decisions indicate that if a tender offer is accepted, then a builder can be bound by the tender price on the basis that the parties expect an agreed form of contract would supersede the informal tender offer at a later stage. If, for instance, the tender contains a price, a start date, a finish date and provides details of the formal contract to be executed, then there is an argument that there is a concluded agreement, which will be formalised by the execution of the written contract.
Builders should consider protecting themselves from such a situation by including a clause in their tender offer that reads to the effect: “there is no binding agreement between the parties unless and until a formal contract is executed by both parties”.
In more than one recent case, the builder has made an error in its tender and was stuck with the tender price, because such a clause was not included in its tender.
Beware the principal that lacks bite!
Builders often find themselves in a situation where they have issued their final progress claim only to be met with part payment or refusal for payment until alleged back charges for delays, defects and other incidentals have been determined.
In those circumstances the principal often uses the money that is due to the builder to fund a defence to any action by the builder. Current trends in construction indicate that where the builder has power to lodge a caveat and “freeze” the site, the principal (often pressured by its bank) is more willing to negotiate.
Caveats cannot be used in domestic building work but can be used in all other building contracts. It is even possible to caveat other land, not just the site on which the construction is to take place. Builders should consider including a caveat clause in all building contracts to the effect that “charges the land with any and all moneys payable to the builder”.
The future of building disputes
More and more we are seeing that the costs and delays of litigation and arbitration are militating towards expert appraisal or expert determination. However, unless the agreement for referral to expert appraisal/determination is clear, there can be delays and unwarranted expense.
However, a recent decision this year indicates that unless the clause relating to expert determination is clear, the Courts will not uphold it and the parties will not be bound by it.
Thus it is important to ensure that the clause relating to expert determination or expert appraisal is in accordance with accepted authorities.
Return of bank guarantees under security of payment legislation
Introduction
The Building and Construction Industry Security of Payment Act 1999 (NSW) (NSW Act) and the Building and Construction Industry Payments Act 2004 (QLD) (QLD Act) both make express provision for a claimant to include the return of retention monies in a payment claim.
Section 13(3)(b) of the NSW Act states that:
“(3) The claimed amount may include any amount:
(a) that is held under the construction contract by the respondent and that the claimant claims is due for release.”
The Building and Construction Industry Security of Payment Act 2002 (VIC) has no such provision.
The question
If security has been provided in the form of a bank guarantee or bond, can a claimant validly include the return of that security in a claim under the NSW Act or the QLD Act? In other words, do the Acts only provide for the return of security if that security has been provided in the form of retention monies?
The answer
To date there has not been a case precisely on this point. However, in some circumstances it would seem illogical and contrary to the objects of the NSW Act and the QLD Act for a claimant to not be able to validly claim the return of security under the relevant Act.
For example, clause 5.4 of AS4000 - 1997 requires that, upon the issue of the certificate of practical completion, the entitlement to security shall be reduced by the percentage or amount listed in the reference schedule. That is, the return of a portion (typically half) of the security is mandatory upon the achievement of practical completion, in which case the return of the security could be said to form part of the consideration due to the contractor for achieving practical completion.
The consideration payable to a contractor does not have to be monetary. In Biseja v NSI Group [2006] NSWCA 35, the consideration paid to the contractor took the form of the transfer of 3 units in the completed residential development. This was held to not activate section 7(2)(c) of the NSW Act, which section excludes from the application of the NSW Act contracts in which the consideration payable is calculated otherwise than by reference to the value of the work carried out. In this case, the 3 units transferred as consideration constituted the claimant’s fee which had been agreed to be 10% of the construction costs.
If the contractor and principal agree that the value of the work completed up to and including practical completion consists of sum of money plus the return of the bank guarantee or bond, then those 2 things together can be argued to make up the value of the work at practical completion.
It should be borne in mind that there is a difference between what is to be paid in a progress payment and what is the value of the work. McDougall J in John Goss Projects v Leighton Contractors [2006] NSWSC 798, states at paragraph [40] that:
“Section 9 and 10 [of the NSW Act] make it clear that there is a distinction between the calculation of the amount of a progress payment and the valuation of construction work.”
Construction work is valued in accordance with section 10. Following an assessment of the balance of the requirements of the contract, there may be deductions or offsets against the value of that construction work, “… for example, retention payments or conceded back charges for defective or incomplete work” (John Goss at paragraph [38]), which may result in a different progress payment amount from the valuation.
Note also that a “progress payment” is defined in the NSW Act and the QLD Act as meaning:
“… a payment to which a person is entitled under [section 8 of the NSW Act/ section 12 of the QLD Act] and includes (without affecting any such entitlement):
- a) the final payment for construction work carried out (or for related goods and services supplied) under a construction contract, or
- b) a single or one off payment for carrying out construction work (or for supplying related goods and services) under a construction contract, or
- c) a payment that is based on an event or date (known in the building and construction industry as a “milestone payment”).”
For a claimant, the definition of progress payment which allows the contractor to receive consideration for achieving particular stages of completion of the works, when considered in conjunction with the purposes of the NSW Act and the QLD Act, presents a reasonable argument in favour of validly including in a payment claim the return of a bank guarantee or bond. That is, provided that the release of the security is mandatory under the relevant construction contract.
In John Holland v Roads & Traffic Authority of NSW [2007] NSWCA 140, John Holland sought an order that the RTA return to it one of 2 unconditional undertakings it had provided by way of security to the RTA. The RTA had previously refused to return the security because under the contract the return of any part of the security was at the discretion of the RTA and even then it was only obliged to return what it considered a “just and equitable” portion of that security. There were also unsuccessful in recovering its security Anecdotally, it seems that adjudicators substantial existing disputes between the from the RTA. are in favour of upholding claims for the RTA and John Holland with the RTA Convincing the adjudicator return of bank guarantees and bonds. having the view that John Holland had been overpaid as a result of previous It is the adjudicator who has to be adjudications. Given the interim nature convinced of the claimant’s entitlement of payments made under the NSW Act to the return of its security. The and in this case, an express entitlement adjudicator has to take into account the under the contract enabling the RTA to provisions of the construction contract in retain security, John Holland was making an adjudication determination.
Queensland licensing conditions - are they effective?
Issue
There are frequent disputes where the need for a licence to do certain building work is a central issue, particularly where payment, or an obligation to pay, is involved. Most often the rights seem clear as one party either does not hold a licence or does not hold a licence which allows the contracted work to be done.
However what is the position where a licensee holds a class of licence restricted by a condition, and performs building work within the class of licence but contrary to the condition? In this case, would the building work be considered to have been performed under an appropriate class of licence pursuant to the Queensland Building Services Authority Act 1991 (QLD) (QBSA Act)?
The question was recently examined in the Queensland Court of Appeal in Greg Beer t/as G and L Beer Covercreting v JM Kelly (Project Builders) Pty Ltd.
Facts
This was a dispute between a builder (J M Kelly) and a subcontractor (Beer).
Beer held a Building Services Authority (BSA) licence which was of the “Painting and Decorating” class. The licence was subject to condition restricting it to “residential spray-on painting only”. This condition was imposed due to the licence being granted under mutual recognition from NSW.
Beer did building works pursuant to a subcontract with JM Kelly which were within the scope of work permitted by the licence class “Painting and Decorating” but outside the restriction “residential spray-on painting only”.
Beer claimed payment for the works done, which JM Kelly refused. Beer then sought judgment against JM Kelly pursuant to the Building and Construction Industry Payments Act 2004 (QLD). This application for judgment was dismissed by the Supreme Court on the grounds that recovery was prohibited by section 42(3) of the QBSA Act, as Beer was alleged to have carried out the work without holding a contractor’s licence of the appropriate class.
Beer then appealed this decision to the Court of Appeal.
Summary
This decision considered the construction of section 42(1) of the QBSA Act which provides that “a person must not carry out, or undertake to carry out, building work unless that person holds a contractor’s licence of the appropriate class under this Act”.
The QBSA Act and the Queensland Building Services Authority Regulation 2003 (QLD) (Regulation) were considered and the Court found that no provisions were made in either the QBSA Act or the Regulation for licences of a restricted or limited class.
As the Court was not permitted to correct such an omission, they gave the licensing legislation a “literal and grammatical” meaning and found that the relevant class of work in the Regulation was “Painting and Decorating”, which is why the licence class was stated as “Painting and Decorating” and not “Painting and Decorating Restricted to Residential Spray-on Painting”.
The Court held that there was no power under the licensing legislative framework for the BSA to issue a license class subject to condition as to the type of work that the licensee may carry out within a class of licence.
As such, Beer’s work fell within an appropriate class of licence under section 42(1) and was licensed building work.
The decision leaves open the question as to whether a licence subject to conditions as to the scope of work can be created under mutual recognition laws.
The BSA does not have any current plans to have the QBSA Act and the Regulation amended in light of this decision but it is understood that it will be considering this issue in the future.