What is the Effect and Consequence of the Builder’s Failure to Comply with the Contractual Mechanisms? Is the Builder’s claim always doomed to fail – Owners and Builder’s Be Aware!

18/05/2023

In the case of Renbar Constructions Pty Limited v Sader, Sader v Renbar Constructions Pty Limited in 2022 the Supreme Court of New South Wales considered the position where the Owner and Builder entered into a Contract whereby the Builder would demolish an existing structure and construct a new residence. 

Watson & Watson have undertaken and advised Builders, Contractors Owners and Proprietors and other entities associated with building works in particular, residential building works for many years.  Based on the facts of this case, it was a likely candidate for expensive Supreme Court litigation to determine the matter.

The Builder entered into the Contract with the Owner 1 July 2014 for the demolition of the existing structure and construction of the new residence.  Briefly:

*         The Contract was a HIA Cost Plus Contract.

*         The Contract cost estimated for Home Owners Warranty was $1,650,000.

*         The original estimate of the works was apparently $2,200,000.

*         The Construction period allowed was 52 weeks for the Builder to reach Practical Completion.  This was subject to reasonable extensions of time under clause 9 of the Contract.

*         Work commenced 31 July 2014.

*         Practical completion was reached on 14 April 2018.

*         On the 24^th of August 2020, the Owner purported to terminate the contract.

The Building Contract was a Cost Plus Contract in that the Owner agreed to pay the costs of the works, labour and materials and to pay an agreed Builder’s Margin.  The Contract terms allowed the Builder to make claims monthly and the Contractor was required to provide details of the claim and the claim was to be accompanied by such invoices, receipts or other written documents and records that may reasonably be expected to support the claim and evidence of the cost of the building works being claimed.  This is a common form of a Cost Plus Contract. 

The facts pertaining to this case demonstrates that one needs to properly consider the terms of the Contract before the Contract is entered into and throughout the building process.  Cost Plus Contracts are often contentious if the parties fall out in relation to the building works whether throughout the process or after the building works have been completed, as in the recent Supreme Court case referred to above.

The Builder did not provide monthly claims as was allowed under the Contract.

The Builder issued several progress payments number 1 – 12 between 13 June 2014 and 3 February 2018 for a combined total of $1,690,432.  These progress payments did not comply with the mechanism for claiming progress payments and the documentation required to be provided was not provided with those claims. 

The Owner made the payments without any objections at the time.  The Owner in making the payment took no issue in relation to these failures by the Builder. 

Further, the Builder did not make claims for extensions of time or comply with the Contract in relation to the requirements in relation to Practical Completion. 

On 31 January 2019 the Builder sent to the Owner a spreadsheet of expenses.  It particularised:

(a)      Total amount expended by the Contractor was $3,266,198.61;

(b)      Amount paid to date by the Owner was $1,209,454; and

(c)      Amount said to be due by the Owner to the Builder was $1,935,799.21.

The Owner then replied within an hour.

The owner and builder then exchanged a number of emails relating to various claims.

His Honour found there was nothing in the evidence to support the view that either party believed that the 31 January 2019 claim was the final claim for the purposes of clause 23 of the Contract.

On 4 May 2020 the Owner issued a Notice of Serious Breach to the Builder claiming that the Builder failed to rectify the defects.

On 12 May 2020, the Builder replied stating it was ‘willing and able’ to rectify any defects.

On 24 August 2020 the Owner purported to terminate the Contract on the basis of serious breach pursuant to clause 31.3 of the Contract.

Subsequently on 13 November 2022 the Builder issued Payment Claim 15 which was an amalgamation of claims 13 and 14.  This claim did not comply with the requirements of clause 13 of the Contract. 

The Owner disputed invoices 13 and 14 on the basis that they were null and void.  Moreover the Owner claimed that Payment Claim 15 was invalid due to it being served after the date of termination of the Contract.

Decision

The Court reviewed the various clauses of the Contract.  We note that this Contract is a standard form Contract that is utilised in the industry on many occasions.

His Honour determined that the Contract on a proper reading of clause 13 did not impose an obligation on the Builder to make a progress claim, rather it was a procedure by which the Builder could make monthly claims under the Contract.  There was no obligation to make the claims monthly. 

His Honour noted that there was a gap in the Contract in that there were no mechanisms for establishing the Builder’s entitlement for any works, the subject matter of the Contract in the circumstances, where the Builder failed to serve a progress claim or the claim was not made in accordance with the provisions of clauses 13.3 and 13.4 or in such a situation, the Owner’s obligation to pay.

The Court considered and followed the Supreme Court Case of Creative Building Services Pty Ltd v Jolene Investments Pty Ltd decided in 2013, which considered similar issues and held that where the Owner failed to take the opportunity during the administration of the Contract, during the Contract period of raising defences to the claims based on the failure of the Builder to comply with the Contract, the Owner was obliged to pay the claim.

It appears that if such defences had been taken at the early stage, they may have had the effect of denying the entitlement of that particular progress claim which the Owner objected to.  However it would not bar the Builder from making any further claims which complied with the terms of the Contract. 

The difficulty that occurred in Renbar’s Case was that the Owner had asserted that the Building Contract had been terminated.

Eventually the Court considering the matter ordered that the Owner pay the amounts claimed by the Builder.  However, the Owner would be allowed to off-set the Owner’s claims for damages arising from the Builder’s delay in completing the works, and damages for the costs associated with rectifying defective works.

In this case, the Supreme Court held that where there was a gap in the Contract as referred to above; one would need “intractable language in the Contract” which would set out that the Builder could not make a claim unless certain preconditions were met.

His Honour had to consider this issue in circumstances where the Contract was terminated.

His Honour held that without the intractable conditions referred to above, that there should be an implied term in the Contract that the Owner’s obligation to pay for the completed work accrued on the dates those works were completed and in this case, the obligation is not affected by non-compliance with clause 13 or the termination of the Contract.

Accordingly, the Court ordered that the Owner pay for the works that had been completed before the date of termination.

We also note that separate from the claim under the Contract, there may have been an opportunity to bring a claim based on quantum meruit if the Builder was unable to enforce the terms of the Contract.

If you are unsure of your rights pertaining to the Contract you seek to enter into or you have a dispute with your Builder or the Owner of the property, contact our experienced Building and Construction Lawyers at Watson & Watson who can assist you.  Please contact Richard Watson Accredited Specialist in the stream of Building and Construction or his Personal Assistant Shereen Da Gloria to discuss your matter and seek appropriate advice sooner rather than later.

This is only a preliminary view and is not to be taken as legal advice without first contacting Watson & Watson Solicitors on 9221 6011