Corrs High Vis: Episode 45 – Corrs Projects Update Q3 2020

David Hastie – Senior Associate – Corrs Chambers Westgarth
Wayne Jocic – Consultant – Corrs Chambers Westgarth
James Arklay – Senior Associate – Corrs Chambers Westgarth

David Hastie – Hello and welcome to Corrs High Vis. My name is David Hastie, Senior Associate in Corrs’ Projects Practice team and I’m joined today by Corrs consultant, Wayne Jocic, and Senior Associate, James Arklay from Corrs’ Brisbane office.

We are looking at three interesting cases for you today. I’ll be looking at the decision of the Victorian Supreme Court in the case of Adcon Vic Pty Ltd v Icon Co, which deals with questions pertaining to performance bonds, injunctions and indemnity costs.

Wayne will discuss the South Australian decision of Tincknell v Duthy Homes, which deals with claims resembling frankly a hamburger with the lot but more importantly and specifically, rectification damages and the application of the prevention principle; and finally James will stay close to home discussing the Queensland Supreme Court’s decision in Galaxy Developments v Civil Contractors, which considers late adjudication determinations and licences for building work, but I will kick off.

In the Adcon and Icon Co decision the key takeaways were that a party seeking injunctive relief must clearly establish that there is a serious issue to be tried and that the balance of convenience favours the granting of the injunction. Now these fundamental requirements apply to an injunction restraining a party from calling on a performance bond. What should also be noted that should a plaintiff fail to establish these fundamental elements it does open itself up for indemnity costs to be awarded against it as was actually the case in this particular decision.

Now to the facts.

The head contractor in this particular dispute was Icon Co and it engaged Adcon under a concrete and formed subcontract. Now Adcon gave Icon Co two performance bonds as security, so nothing controversial there. Now as it played out, Adcon’s performance was delayed and the superintendent certified just under $1.4 million in liquidated damages against it. Now Icon Co called upon the security. Adcon commenced proceedings to restrain Icon Co from having recourse to the first of the two performance bonds. However, at this point in time, it should also be noted and this is quite central and important to the facts in this particular case that Adcon had already been unsuccessful in an earlier injunctive application to prevent Icon Co from having recourse to the second performance bond.

Now to establish an entitlement to injunctive relief a plaintiff must demonstrate the following. That, firstly, there is a serious question to be tried and secondly, that the balance of convenience favours the granting of that particular injunction sought. Importantly here, Adcon claimed that the serious issue to be tried was whether Icon Co’s actions in calling or attempting to call on the first performance bond were unconscionable under sections 20 and 21 of the Australian Consumer Law. As such, and this is important, Adcon argued the following.

Firstly, that the subcontract obliged Icon Co to release the first performance bond within 14 days of practical completion being achieved.

Secondly, the superintendent had implicitly recognised that practical completion had been reached by rejecting four of Adcon’s claims for extensions of time on the basis that they concerned a period post-dating practical completion – a controversial argument that one.

Thirdly, Icon Co did not release the first guarantee within 14 days and subsequently, Adcon argued that the superintendent had not revised its decision to reject Adcon’s extension of time claims or given evidence to support Icon Co’s case.

Now the court’s finding. Justice Digby in this particular case addressed each of the claims in turn and frankly, found that none of them were persuasive. In response to the first argument, the court held that the subcontract gave the superintendent a number of powers one of which was the power to certify practical completion. Now until the superintendent had issued the certificate of practical completion, Adcon simply had not achieved practical completion of the works despite its claims that it had. The court was also not convinced that the superintendent’s rejection of Adcon’s EOT claims had the effect of recognising practical completion. Rather, the court gave weight to the superintendent’s evidence which expressly refuted this. The court also gave weight to the superintendent’s evidence that Adcon’s EOT claims were non-compliant. Since practical completion had not been achieved, Icon Co obviously then was not obliged to release the first performance bond as Adcon had argued.

Now the second argument was whether the balance of convenience favoured the granting of the injunction by the court. Now the court simply was satisfied that there was no serious issue to be tried so it was not necessary to make a finding regarding the balance of convenience. However, one thing the court did note was that Adcon had relied on the very same arguments advanced in support of its argument for injunctive relief in its earlier application which the court had already determined to be unconvincing.

So, what was the outcome here? I’m sure you’re not surprised that in this particular later application, Icon Co sought indemnity costs on the basis of two offers that it had made to Adcon in which Icon Co agreed to accept a tender of the sum secured in lieu of having recourse to the first performance bond. Now in assessing the costs application the court considered firstly Icon Co’s offers, Adcon’s inability to identify a serious issue to be tried and finally the fact that Adcon sought frankly to reopen and re‑agitate the claims already ventilated in its earlier application. So based on this the court awarded indemnity costs in favour of Icon Co.

So Wayne, I’ll now throw to you if you could tell our listeners a bit about the decision in Tincknell and Duthy Homes, which is a recent case from the Full Court of the Supreme Court of South Australia.

Wayne Jocic – Thanks David. So Tincknell v Duthy Homes is quite a case. It’s a case that arises out of the construction of a very fancy house in South Australia and as is often the case with this sort of domestic construction the case raises all sorts of issues. So, I’m not going to get into all the detail about all the alleged defective work but it’s helpful just to give you a bit of a sense of the colour of this case.

So the parties started out in the District Court. The builder, Duthy Homes, was suing for the final progress claim. Now, in response, the owners Tincknells claimed for costs of rectification – lots and lots of defects. They claimed for late performance, they claimed for pain and suffering, they claimed under section 52 of the old Trade Practices Act.

This is one of those cases that has effectively every claim you could imagine, but by the time it got to the Full Court of the Supreme Court the issues had narrowed a bit and I think before getting into the detail, I just want to say this is a case that just reinforces how significant the core issues in construction law are. They’re the ones that recur all the time, and quite often you can state these rules succinctly but actually applying them for the subtlety of that application is often a bit trickier.

So the first issue I want to deal with are one of the very big ones in this case related to how you assess damages for defective work. So here there were various defects in relation to problems with protection, there were termites, termite protection, there were problems with waterproofing, but essentially the owners were saying we should be compensated for this defective work as though the work had been repaired and damages should be assessed on the cost of rectification, and that’s consistent of course with High Court authority with cases like Bellgrove and Eldridge and the Tabcorp case.

So the Full Court applied those High Court cases absolutely orthodox, no concern about the law there, but of course you have to remember buried in those cases is the idea that the default measure is that if it’s defective work the plaintiff will receive the cost of rectification, but that’s subject to that being a reasonable course to adopt. And here the Full Court, consistent with the District Court judge, decided that that wasn’t a reasonable course to adopt.

So, again, a restatement of the High Court principle which we often see but something that we creepingly see in the cases, we see it here, we saw it in the Full Court of South Australia a few years ago in Stone v Chapel. We see the courts are awarding some alternative remedy. Now this happens with the Tincknells here. There was a problem because they actually hadn’t argued, for example, for the diminution in value as a result of the defective work. So it just shows you can’t take for granted that the courts are going to award rectification costs for defective work. Those are the first of the big issues in this case.

David Hastie – So that was the first issue, Wayne, and I understand the second major issue is our old friend ‘the prevention principle’. Can you tell us a bit more about that?

Wayne Jocic – Yes that’s right David. So in addition to dealing with rectification damages the second big issue in this case relates to delay and in particular, the prevention principle. I have to say the first time I read this case, I was scratching my head until I realised this a domestic building contract and the only way you can understand this case is to understand it doesn’t work like most commercial building contracts.

So there are a few things that are missing. In fact, it doesn’t seem there was any liquidated damages regime and beyond that there wasn’t any unilateral right for the owners or the superintendent to extend time under this contract.

So they’re important complications in understanding this case. So essentially construction is late, the builder argues that the prevention principle should apply because some of the delays were caused by the owners.

Now the difficulty for the builders was that they hadn’t actually put in an extension of time claim to try and deal with those acts of prevention, and so the builder’s argument there failed. Now I would just say there’s a complication in this area, because if there is actually a unilateral right to extend time then there are some quite tricky questions. This is something that was raised in a case that we discussed here previously with Probuild and DDI case, Court of Appeal case from 2017.

So this is not the end point, but the decision in Tincknell was there was no unilateral right to extend time. The builder did not put in the claim for an extension of time, and therefore was not able to take advantage of any potential acts of prevention leading to the application of prevention principle.

So you might think that is the end of the story, but a complication here even though performance is late, is that the owners themselves got into trouble. In fact so much trouble that they weren’t awarded delay damages because there was no evidence that they would actually have moved in had the house been completed in a timely fashion. So they weren’t able to show general law damages.

So this is a case that, on the face of it has fairly everyday facts, there are everyday problems with defective work or allegations of that, progress is late, nothing new about these things, but what you can see is this sort of everyday set of facts generates really interesting questions about rectification damages and here the Full Court says consistent with High Court authority they still have the ability not to award rectification damages where it wouldn’t be a reasonable course to adopt to award rectification damages, and then the second issue of course dealing with delay in the prevention principle reinforcing the point that at least where there is no unilateral right to extend time, if the builder doesn’t seek an extension of time for active prevention, then they won’t be able to enliven the prevention principle on that basis. So that’s quite a bit of law to come out of the case dealing with a house in South Australia.

David Hastie – Many thanks for that Wayne, now James I’ll throw to you can you tell us about the Galaxy Development v Civil Contractors case?

James Arklay – No problem David. The case concerned a subdivision development near the Gold Coast in Queensland. The landowner engaged a contractor to carry out civil works which largely consisted of bulk earthworks, but over the total contract sum of about $1.3 million a very small component about $37,000 consisted of what the court called ‘the bus stop works’.

The bus stop works involved very briefly removing a prefabricated metal shelter with a bench seat attached to it on one side of the road, and after constructing the pavement on that side of the road replacing it, removing and reinstating a U-shaped piece of metal that was beside the shelter on that side of the street and was being used as a bike rack; and on the other side of the street removing a simple metal garden style seat fixed to the footpath next to a pole with a bus stop sign on it and refixing it later once the new concrete pavement had been created.

The contractor held a Queensland Building and Construction Commission or QBCC licence in the class of ‘builder restricted to structural landscaping’. The permitted scope under the licensing includes the preparation, fabrication and erection of carports, decking, fences, prefabricated sheds, retaining walls and structures and other work.

Now the contractor made a claim for a progress payment which was disputed by the owner and progressed to adjudication under the Queensland Security of Payment legislation. An adjudicator was appointed who released a decision determining that about $1.3 million was payable to the contractor, but the decision was released five days later than it was due under the Act, so the owner applied to the Supreme Court of Queensland seeking to have the decision declared void for two reasons:

First the decision was late, and secondly the contractor was not appropriately licensed to carry out the bus stop work – meaning the construction contract was void and the contractor could not recover payment under it or use the Security of Payment Act. I should pause and give a very brief introduction to the licensing regime in the QBCC Act at this point.

Under section 42 of that Act, a person must not carry out or undertake to carry out by, for example entering into a contract to perform building work (which is very broadly defined), unless the person holds a contractor’s licence of the appropriate class under the Act. A person who contravenes that section commits an offence, and is not entitled to any monetary or other consideration for doing so subject to very limited exceptions.

Now it appears from the decision that the parties accepted that unless the contractor could show that its licence was an appropriate one for the work that it had undertaken to carry out and in fact carried out, or that the work that it had carried out was subject to a licensing exemption under the QBCC Act, it could not recover payment under the contract for any of its work and the adjudicator’s decision was void.

David Hastie – Okay James thanks for that and what was the outcome in the case?

James Arklay – Well on the lateness argument, the Court found that the decision was indeed void because it was delivered late. As a consequence the adjudicator was not entitled to any fees. The Court also distinguished Victoria and New South Wales authorities which suggested that a late determination by an adjudicator can be valid in certain circumstances, finding that under the Queensland Act timing is mandatory and a late decision is void.

Now the licensing argument was not strictly required to be determined because of the way in which the lateness argument was determined, but the Court did so anyway because it had been fully argued by the parties and on the licensing point the Court found that the work that was done in relation to the prefabricated metal shelter was within the scope of the contractor’s licence. However the bike rack and bus stop seat fell outside it and no other licensing exception was found by the Court to apply to it.

That said, the Court described the result of the case in the second last paragraph of its reasons as one that may be correct in law, but is absurd in reality. The contractor was licensed to demolish, move and reassemble a prefabricated bus shelter but not licensed to carry out the same actions in relation to the much simpler structures of a freestanding bus seat and bike rack.

The Court concluded by saying ‘I invite renewed attention of the legislature to the need for establishing a rational and fair law in relation to recovery of payment under contracts to perform building works’ – some interesting comments there.

David Hastie – And finally any key takeaways James?

James Arklay – Well contractors, subcontractors and those who engage them to perform building work in Queensland, which as I’ve said before is very broadly defined, need to consider carefully their proposed scopes of work and whether or not the licensing regime applies to it.

As this case demonstrates, the application of that regime can at times lead to counter-intuitive results. The exemptions to the licensing regime are very technical and again can produce interesting results and need to be carefully analysed by those who perform building work in this State.

Now there were two final points that I just wanted to note. The first is that an appeal has been filed against this decision so we will need to see what the outcome of that appeal is before the Queensland Court of Appeal.

The second point is that the Queensland parliament has recently passed an amendment to the QBCC Act which when it takes effect will remove the exemption that currently applies under the Act to head contractors who do not themselves hold QBCC licences in the class required to carry out certain work so long as the engage subcontractors who are appropriately licensed to carry out that work. So it’s a very good time for contractors in Queensland to consider the types of work that they routinely perform, whether or not that work falls within the definition of QBCC Act ‘building work’. If it does, what sort of licence might apply to it and whether they hold that licence.

As the outcome is Galaxy developments shows the consequences of miscalculating those questions can be severe.

David Hastie – James, Wayne, thanks very much for your time today and to all our listeners thanks again for tuning in. This has been Corrs High Vis.

This podcast is for reference purposes only. It does not constitute legal advice and should not be relied upon as such. You should always obtain legal advice about your specific circumstances.