Introduction

When a dispute over defective building work turns ugly, the owner is sometimes tempted to refuse the builder the opportunity of returning to rectify the defects.  There are risks in this course.  This update considers a recent NSW Supreme Court decision on the topic. [1]

If an owner engages a new builder to carry out rectification work, the new builder will be cautious on at least three accounts:

  • The new builder will be concerned that the old builder was incompetent, and therefore be cautious as to work that has been covered over. The caution might extend to requiring destructive testing, or to rebuilding work that was perhaps adequate in the first instance.
  • The new builder may also have concerns as to whether the owner is applying an exacting standard to the work, and whether they also will fail to measure up.
  • The third vexed issue is that of warranty: which of the builders will be liable if a defect later emerges in the construction?

Anecdotal evidence indicates it is not unusual for the new builder to charge around 30% above the cost the first builder says it would have incurred in rectifying and completing the work.

In general, owners should be very cautious when considering excluding the builder from the opportunity of rectifying defective work.

Recently, the New South Wales Supreme Court again looked at this issue.

The background story

An apartment block was completed at Ettalong by the Builder in late 2013.  The Owners Corporation (“the Owners”) noticed defects in February 2014 and engaged a licensed builder to inspect and report. In November 2014 a complaint was lodged with the NSW Department of Fair Trading.

In late January 2015, a subcontractor of the Builder began remedial work at the cost of the Builder, with the stated goal of completing all the remedial work by May 2015.  In March 2015, the site was inspected, and 30 remaining defects were identified. On a further inspection in May 2015, it was found that 19 of the 30 items had not been rectified.

The subcontractor performing the remedial work continued but when another inspection occurred in August 2015, even more defects were found, including that the ceiling spaces were not compliant with fire safety requirements.

The Owners gave the Builder a deadline of 18 August 2015 for a response, explaining how the rest of the defects would be fixed.  The deadline expired without a response.  On 19 August 2015, the Owners engaged lawyers. On 20 August 2015, the Builder wrote saying it was “organising for the defects to be rectified”. By then, the Owners had decided to exclude the Builder from the site.

Litigation commences

The dispute then entered litigation, with both parties engaging legal teams. Approximately 2 years after proceedings were commenced, on the first day of trial in Court, the Judge decided to refer the dispute to an expert determination, reserving the issue of legal costs for a later time.

Both the Owners and the Builder brought evidence from independent expert consultants to the expert determination. A conclave of the consultants resulted in the Owners reducing their claim to $1.442 million. The Builder’s consultant conceded defects to the value of $318k. The expert preferred the Owners’ evidence and awarded the Owners $1.282 million.

The only issue left for the Court was whether the Owners should get their legal costs paid by the Builder. The Builder said it should not have to pay legal costs because it had been continuing to offer to come back and rectify the work, but the Owners had refused it access to the site. The Owners said the Builder had been too slow and unwilling to rectify all of the defects.

The legal principles

In reaching its decision, the Court set out the following legal principles that are to be applied in these situations:

  • the overarching principle is that an owner is not entitled to recover losses attributable to its own unreasonable conduct;
  • in cases involving building contracts, the owner is required to give the builder an opportunity to minimise any damages the builder must pay by rectifying the defects, except where its refusal to give the builder that opportunity is reasonable or where the builder has repudiated the contract by refusing to conduct any repairs;
  • the question of what is reasonable depends on all the circumstances of the particular case – one relevant factor is what attempts the builder has made to repair the defects in the past and whether, in the light of the builder’s conduct, the owner has reasonably lost confidence in the willingness and ability of the builder to do the work;
  • it is for the builder to prove that the owner has acted unreasonably – it is not for the owner to prove that it acted reasonably; and
  • once a builder puts in issue the reasonableness of the owner’s conduct, all circumstances relevant to an objective assessment of the owner’s position become examinable.

In relation to this last point, the owner is not limited to reliance on facts or circumstances known at the time. The owner may also rely on facts which come to its attention afterwards that shed light on the builder’s conduct at the time.

Conduct and decision

In the saga that unfolded after the Builder was excluded from the site, the Builder’s lawyers took an aggressive approach when writing to the Owners’ lawyers.  In their letters they used phrases such as “blatant and false assertion as to the schedule of defective works” and described the claims as “appear to be a bogus claim”.

The Judge accepted the Owners had lost confidence in the Builder.  The Judge said that Builder had not, since their exclusion from the site, proposed a “workable scope of works”.  The Judge criticised the hyperbolic language used by the Builder’s lawyers describing it as “unnecessarily aggressive”.  The Judge noted the eventual proposal by the builder fell well short of work found by the expert to be required.

Ultimately, the Judge found that the Owners had not acted unreasonably in deciding to have the rectification works performed by another party.  On that basis, the Owners were awarded their costs.

Conclusion

The overarching principle that the builder has the right to rectify its own defective work remains unchallenged, even though in this instance the builder lost that right.

The owner must be shown by the builder to have acted unreasonably in making the decision to engage a new builder.

The builder’s efforts to rectify are a relevant consideration as is whether the owner has reasonably lost confidence in the willingness and ability of the builder.

Courts continue to frown upon lawyers who adopt an unnecessarily aggressive approach.  All letters written by lawyers should be viewed through the prism of the judge eventually presiding over a trial, even though all parties fervently hope to avoid the possibility.  An early letter describing an ultimately successful claim as “bogus” or “frivolous” would no doubt be cause for regret.

 

[1] The Owners – Strata Plan 89041 v Galyan Pty Ltd [2019] NSWSC 619

Read the article in BuildLaw Issue 37

About the Author
Tom Grace

Partner

Construction & Engineering, Commerical Dispute Resolution,
Environment and Planning, Administrative Law


Fenwick Elliott Grace

Australian law firm based in Adelaide and Darwin, specialising in
construction, energy and engineering law

 

Bought a house – got problems – no one wants to know?

Author: Hannah Stanley, Building Disputes Tribunal Registrar As a homeowner, discovering structural defects in your home is the last thing you want and most wonder where to go from there in terms of their rights and how to remedy the situation. The Courts are often a...

Assessing sums payable in the absence of a contract: Electrix Limited v The Fletcher Construction Company Limited [2020] NZHC 918

Authored by Michael Taylor, Joanna Trezise (Russell McVeagh), and Belinda Green (NZDRC) In a decision released on 6 May 2020, the High Court ordered The Fletcher Construction Company Limited to pay its subcontractor Electrix Limited about $7.5 million, plus GST and...

BuildLaw Issue 39

In this issue we look at the government guidelines for NZS3910:2013 contracts affected by Covid-19 Alert level 4 restrictions. We discuss adjudication injunctions caused by the virus and how they may help to provide some clarity to a rather cloudy area of law. We look...

BuildLaw Issue 38

December 2019 In this issue we look at a dispute over a home renovation contract that travelled all the way to the South Australian Supreme Court, highlighting the risks of not dealing with disputes promptly. We examine the ‘Emerald Book’ released earlier this year by...

Adjudication: calculating time over the Christmas period 2019-2020

What are the non-working days over the Christmas period this year?

The builder’s right to fix

Introduction When a dispute over defective building work turns ugly, the owner is sometimes tempted to refuse the builder the opportunity of returning to rectify the defects.  There are risks in this course.  This update considers a recent NSW Supreme Court decision...

The ‘collaborative’ future of construction and infrastructure procurement

Framework Contracting, that is well planned from the outset, can be an effective tool to deliver an entire programme of infrastructure with benefits for all sides. While it is simply one way to address resource constraints and the need for fair apportionment of risk...

Case In-Brief: Hybrid contracts and the payment provisions of the Construction Act

The Housing Grants, Construction and Regeneration Act 1998 (the Act) applies to “construction operations”. Where a contract relates to both “construction operations” and non-construction operations, the question arises of how payment mechanisms apply to construction...

BuildLaw Issue 37

October 2019 In this issue, we look at a NSW Supreme Court decision in White Constructions Pty Ltd v PBS Holdings Pty Ltd [2019] which found that the claimant, despite using an expert programmer, failed to sufficiently prove that a delay by the respondent caused delay...

The Supreme Court reinstatement is not a right that can be assigned

The Supreme Court has had the final say on the status of 'on sold' earthquake damaged properties insured by IAG at the time of the Canterbury earthquakes. In a judgment released yesterday, the Supreme Court by 3:2 majority, decided that owners of on sold properties...

Contractual appendices: ignore at your peril

Recently, a subcontractor in the UK was relieved of adverse ground conditions risk, despite contract amendments that sought to allocate that risk to the subcontractor- and it all hinged on an analysis of appendices to the contract. Appending documents to a contract...

New Government Procurement Rules Announced (4th Edition)

The 4th edition of the Government Procurement Rules (Rules) were published this month. They are the good practice standards for government procurement, and were last substantially revised in March 2015. The Rules apply to all public service departments, police,...

Building Law reforms: Raising the bar across the sector

By the Minister for Building and Construction, Jenny Salesa I’m proud of our building and construction industry, and the hard-working individuals that fill the wide and varied roles that make up the sector. It’s our fifth-largest industry by GDP and fourth-largest...

BuildLaw Issue 36

July 2019 In this issue we feature an article by the honourable Minister for Building and Construction, Jenny Salesa, with an invaluable insight on the proposed Building Law Reform Programme. In Case in Brief, Jeremy Glover makes a commentary on two recent...

BuildLaw Issue 35

April 2019 In this issue, we feature an article on the warning apartment owners may take from the recent Court of Appeal decision in Body Corporate S73368 v Otway. This decision creates some financial uncertainty for owners who could now be liable for repair costs to...

When can you go to Adjudication?

Under section 25 of the Act, any party to a construction contract is entitled to refer a dispute arising under that construction contract to adjudication except where the parties have agreed to refer disputes between them to arbitration and the arbitration is an...

Alliancing: what does the new NEC4 Alliance Contract have to offer?

By Claire King Fenwick Elliott LLPIn June 2018 the NEC published its first Alliance Contract “designed for use on major projects or programmes of work where longer-term collaborative ways of working are to be created”.[1] In this Insight we examine what is meant by...

BuildLaw Issue 34

December 2018 In this issue we investigate how the new retentions regime stacked up  in its first court case, in the Wellington High Court. We look at the new NEC4 Alliance Contract, trends in Asian leisure and hospitality, liquidated damages and receivables projects,...

Neutral Evaluation Revisited

by Royden Hindle [1] Neutral evaluation is a relatively little-used tool in the dispute resolution toolbox. Certainly, it has potential drawbacks: a party who is disappointed by an evaluator’s assessment may be slow to accept the outcome, while a party who feels...

A brief introduction to Adjudication

What is adjudication? Adjudication is a unique fast track statutory dispute resolution process or resolving building and construction disputes under the Act. It is the most commonly used dispute resolution process for resolving such disputes. Adjudication is quick and...

Initiating Adjudication: The Notice of Adjudication

Initiating Adjudication: Back to Basics   Part One: The Notice of Adjudication The preparation of the Notice of Adjudication is arguably the most important step in the Adjudication process under the Construction Contracts Act (the Act). It is that document...

Dispute Review Boards: a brief overview

Dispute Review Boards are known by many names. They are often referred to as Dispute Boards, Dispute Avoidance Boards, Dispute Adjudication Boards and Dispute Resolution Boards. Whatever their name, they have become a standard dispute...

Initiating Adjudication: Service of the Notice of Adjudication

Initiating Adjudication: Back to Basics   Part Two: Service of the Notice of Adjudication You have your Notice of Adjudication prepared, but what steps do you need to take to serve it? This note sets out in brief the requirements for service under the...

Initiating Adjudication: Appointing an Adjudicator

Initiating Adjudication: Back to Basics Part Three: Appointing an Adjudicator Following on from Part Two of our three-part series on initiating adjudication, in this note we briefly look at how to appoint an adjudicator under the Construction Contracts Act (the Act)....

BuildLaw Issue 33

November 2018 In this issue we feature delay analysis. We also look at challenging an adjudication determination in various jurisdictions, the perennial chestnut - who are the parties to the contract? force majeure clauses and causation, current problems besetting the...

BuildLaw Issue 32

June 2018 In this issue we feature 'no oral variation clauses in light of the recent UK Supreme Court decision in Rock Advertising v MWB. We also look at the Grenfell Tower Report and the suspension by MBIE of six CodeMark Certificates relating to ACPs, the...

Retentions – maxed out

Common retentions provisions in subcontracts may be unenforceable. In Maxcon Constructions Pty Ltd v Vadasz [2018] HCA 5, the High Court of Australia recently held that on its proper construction, the retention provisions in a subcontract that made...

BuildLaw Issue 31

March 2018 In this issue we feature the approach to judicial review of adjudicator's determinations taken by the courts in NSW and New Zealand. We also look at on-demand v conditional bonds, pitfalls of drafting a subsequent agreement on an underlying contract, the...

BuildLaw Issue 30

Dec 2017 In this issue we feature the Singapore Mataban case where the court confirms an adjudicator's decision to disregard an invalid payment response. We also look at the issue of non-conforming cladding that became notorious with the Grenfell Tower fire. Rebecca...

BuildLaw Issue 29

September 2017 In this issue we feature some of the challenges that are the hallmark of oral construction contracts. We also look at whether a duty of good faith applies to granting extensions of time, how final and binding is an expert determination, how not to amend...

BuildLaw Issue 28

June 2017 In this issue we feature natural justice and adjudications. We also look at representative defect claims and exclusion clauses, further amendments to the Arbitration Act, and the recent New Zealand Court of Appeals decisions in Ebert Construction v Sansom...

BuildLaw Issue 27

March 2017 In this issue we feature new changes to the Construction Contracts Act - the new statutory trust model for retentions which came into force on 31 March 2017 including the late introduction of a 'complying instrument' option as a means of protecting...

BuildLaw Issue 26

December 2016 In this issue we feature recent and imminent changes to the Construction Contracts Act - consultants included as from 1 September 2016 and a new statutory trust model for retentions comes into force on 31 March 2017. We also look at the 'Cinderella of...

BuildLaw Issue 25

September 2016 In this issue we feature "The Penalties Doctrine in International Construction Contracting: Where to from here?" - a paper delivered by Professor Doug Jones AO to the Society of Construction Law New Zealand Inc. in August of this year. We also feature a...

BuildLaw Issue 24

June 2016 In this issue we feature 'Judicial Remedies for Construction Defects: Common Law, Equity or Statute', a paper prepared by Philip Britton and delivered by Philip to the Society of Construction Law New Zealand Inc in March of this year. We also present...

BuildLaw Issue 23

March 2016 In this issue we feature construction professionals with two articles highlighting the risks associated with providing professional services and the standards society expects, and the law demands, of professionals, and a further article highlighting the...