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Residential Focus

03 June 2020

#Property & Real Estate

Christine Jones

Published by Christine Jones, Rebecca Weakley

Residential Focus

The preferred outcome: The Supreme Court considers the limits of s.48MA

Typically in residential building defects disputes, the owner has lost faith in the builder and will seek an award of damages representing the cost of rectification, whereas the builder, if the defects are found, will argue that a work order is appropriate, allowing it to rectify the defects itself (at lesser cost). The introduction of section 48MA of the Home Building Act 1989 (NSW) (Act) elevated the issue of a work order to a consideration which the Court or Tribunal is to have regard to as the preferred outcome.

Given the powers of the Tribunal under section 48O of the Act to make work orders and the availability of renewal proceedings in the Tribunal, section 48MA (the so-called preferred outcome) has always sat better, in conceptual and practical terms, with proceedings in the Tribunal.

In the recent decision of Ippolito v Cesco [2002] NSWSC 561, the NSW Supreme Court considered, among other issues, the application of section 48MA to proceedings before the Court.

Background

On 13 July 2011, the owner entered into a contract with the builder for the construction of a dual occupancy residential development in Willoughby (Development). Work on the Development commenced in September 2011.

Notice of practical completion of the first house was issued on 10 April 2014, and on 10 September 2014 the second house reached practical completion. The owner and his family occupied the first house since completion. The owner’s parents occupied the second house for around three years after its completion and thereafter the second house was rented.

The owner’s principal complaint related to water ingress, which, despite the builder’s prompt attempts to fix, continued. A report was prepared to which the builder responded. A demand was made to rectify the defects, temporary repairs were made by another builder to make the second house habitable for rental. The owner entered into rectification contracts based on the reports and additional defects were discovered during the course of rectification works.

In addition to the cost of rectification of the defects, there was a claim for lost rent and alternative accommodation.

Application of section 48MA

Section 48MA of the Act provides that a Court or Tribunal determining a building claim involving an allegation of defective residential building work or specialist building work by a party to the proceedings (Responsible Party) is to have regard to the principle that rectification of the defective work by the Responsible Party is the preferred outcome.

In considering this section of the Act, the Court noted that it was common ground that the section does not give the Court power to order the Responsible Party to undertake rectification work. Section 48O(1)(a) gives the Tribunal power to order that one party to the proceedings pay to the other a sum of money. Section 48O(1)(c)(i) gives the Tribunal power to order a party to proceedings to do any specified work or perform any specified service. In that context, the Court found that section 48MA was to be understood as saying that in deciding whether to make a monetary order or an order that certain work be performed, the Tribunal should give preference to orders of the latter type.

While the Court does have power to order specific performance of a building contract, there is normally a reluctance to do so because of the difficulties in formulating an appropriate order and the expectation that the order will require continual supervision by the Court. It is also generally accepted that an owner has an obligation to give a builder a reasonable opportunity to repair defective work, which is often explained as part of the owner’s obligation to mitigate his or her loss. However, the Court found that it was unclear whether and how section 48MA was intended to modify these principles.

The builder submitted that the Court could give effect to the principle stated in section 48MA of the Act in one of four ways:

  • first, the builder submitted that the Court could order rectification by ordering specific performance of clause M14 of the Contract, which relevantly provides that:
        • if there was any remaining defect or incomplete necessary work, the builder must promptly correct the defect or finalise the incomplete necessary work
        • the architect cannot give the first instruction to correct an outstanding defect after the end of the defects liability period.
  • second, the builder submitted that the Court could indicate which of the alleged defects have been made out and the rectification method that ought to be adopted, decline to award damages and adjourn the proceedings to allow the rectification work to be carried out
  • third, the builder submitted that the Court could remit the matter to the Tribunal which has power to make a rectification order in place of an order for the payment of money
  • and finally, the builder submitted that the Court could grant a mandatory injunction to require the builder to undertake rectification work in accordance with the order.

The Court rejected each path.

In relation to the builder’s first submission, the Court found that clause M of the contract was concerned with bringing the building works to completion. Clause M14 provided that the contractor must rectify defects which were notified by the architect or which were apparent to the contractor from observation during the defects liability period. No relevant instruction was given by the architect, and there was no evidence that any of the defects that it was now said that the builder should rectify were apparent to him by observation. The Court held that therefore, there was no basis for ordering specific performance of clause M14.

A further difficulty with an order for specific performance is that it ignored the nature of the owner’s claim, which was a claim for damages for breach of contract. The Court held that the owner was entitled to that relief as of right if he could make out that claim, and that section 48MA should not be interpreted as seeking to alter the position, as that would constitute a fundamental change in the law. At most, section 48MA should be interpreted as requiring the Court to give preference to a remedy of specific performance where one was sought.

The Court found that similar problems existed with the other alternatives proposed by the builder. The builder’s submission presupposed that he had a right to rectify defects and that he should be given an opportunity to exercise that right. But the Court held that was not the case. Rather, the owner had a right to claim damages for breach of contract and to an award of damages if that claim was made out. The Court held that it did not have discretion to refuse or delay that right, nor was it appropriate for the Court to refer the matter to the Tribunal when the matter has been heard in the Court and the owner had otherwise made out the facts that entitled him to the relief that he claimed.

The Court found that there was no basis on which it could substitute a remedy which the owner did not seek (a mandatory injunction) for one that he had sought. Further, the Court stated that it was difficult to see that a mandatory injunction would be granted, even if one were sought. The builder sought a restorative mandatory injunction, the purpose of which is to restore the injured party to the position that party was in before the wrongful conduct occurred. However, in this case, there was no question of restoration to a former position in order to undo the consequences of unlawful conduct. The Court held that the order that the builder sought was an order for specific performance of an obligation to rectify which did not exist.

The claim for alternative accommodation and lost rent

The Court held that both claims failed. In relation to the alternative accommodation claim, the Court found that there was no evidence that the owner and his family would need to move out of the first house while the rectification work was undertaken, as the inconvenience was not so great that it would be reasonable for them to move out. Similarly, the Court found that there was no evidence that the tenant would move out during the rectification work, although it was possible that he could seek a reduction in rent while work is carried out. However, the Court noted that during previous rectification works, the tenant did not move out or seek a reduction in rent. In any event, the Court held that a claim for lost rent could not be recoverable as damages because at the time the contract was entered into it was anticipated that the second house would be occupied by the owner’s parents, and it was not anticipated that it would be rented out. A claim for lost rent was not one that flowed naturally from the builder’s breach or one that ought reasonably to have been within the builder’s contemplation at the time the Contract was entered into so as to fall within the principles stated in Hadley v Baxendale (1854) 9 Exch 341.

Implications

Section 48MA has long been resented by owners, who will be encouraged by this decision, where possible (having regard to section 48K), to bring defects claims in the Courts, rather than the Tribunal and to narrowly draft the relief sought.

Authors: Christine Jones & Rebecca Weakley

In the media

Fears for 800,000 jobs as construction and tourism say there will be no economic 'snap back'
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HIA: Housing weighing heavily on economy
In a quarter that largely preceded the COVID-19 disruption, residential building activity chalked up the sixth consecutive quarterly contraction in the volume of building work done. The persistent credit squeeze throughout 2019 contributed to home building activity dropping back to levels last seen in 2014 (27 May 2020).  More...

RICS: What will industrialised construction mean for the future of work?
We are at an inflection point for the global construction industry. COVID-19 has disrupted operating conditions and brought extreme financial stress to construction firms in the short-term. However, it will also accelerate long-term change within our sector, making innovation essential to confronting longstanding issues such as lagging productivity growth (27 May 2020).  More...

Building Tomorrow’s Homes for the post-COVID economy
The ASBEC has called on Australian governments to build better homes and help Australia’s post-COVID economy. Tomorrow’s Homes, a new platform released today, explains that with Australia’s population forecast to reach 41 million people by 2050, we’ll need to build up to 197,000 homes each year (26 May 2020).  More... 

Construction industry demands stimulus as new projects drop off
As the economic fallout from the coronavirus crisis continues, there’s a new push from Australia’s construction industry for some much needed help (25 May 2020).  More...

Builders Call For $13 Billion Stimulus Action Plan
A $13.2 billion building and construction stimulus action will stimulate over $30 billion in new economic activity and create more than 100,000 new jobs across the economy according to new economic modelling commissioned by Master Builders Australia (25 May 2020).  More...

Engineers Australia releases COVID-19 recovery plan
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HIA: New Home Building to Contract in Second Half of 2020
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Published - articles, papers, reports

Australian Bureau of Statistics
27/05/2020 Construction Work Done, Australia, Preliminary, Mar 2020 (cat no. 8755.0)

Practice and courts

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Blackwattle Bay Precinct Planning commences
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NSW Planning Department: Have your say - Draft plans and policies

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Proposed amendments to the EP&A Regulation
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Building Information Modelling (BIM) for WHS management
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Cases

Jannis v Ant-Hassa Pty Ltd
1) The orders made on 10 October 2019 in application HB 19/26920 are set aside and the proceedings are remitted for rehearing by a differently constituted Tribunal.
ADMINISTRATIVE LAW – breach of procedural fairness - failure to allow party opportunity to cross-examine - error of law. Australian Consumer Law (NSW); Civil and Administrative Tribunal Act 2013 (NSW); Consumer, Trader and Tenancy Tribunal Act 2001 (NSW); Fair Trading Act 1987 (NSW); Home Building Act 1989 (NSW) Home Building Regulation 2014 (NSW)

Morrison v Moss (No. 4) [2020] NSWDC 243
COSTS – building and construction dispute – builder claim for non-payment – owner claim for defective works – operation of set-off – whether owner practically successful overall – whether conduct of builder warrants order for indemnity costs 

Nanevski Developments Pty Ltd v Slaveski [2020] NSWSC 617
CIVIL PROCEDURE — Pleadings — Form and content of pleading — Pleading material facts — Defects —Striking out — Tendency to cause prejudice, embarrassment or delay — Amendment — Late application for amendment. Civil Procedure Act 2005 (NSW), ss 56, 57, 58, 64; Civil Procedure Act 2010 (Vic) Competition and Consumer Act 2010 (Cth), Sch 2; Conveyancing Act 1919 (NSW), s 66G Home Building Act 1989 (NSW); Protection of the Environment Operations Act 1997 (NSW)

D Constructions Pty Ltd v Walsh [2020] NSWCATAP 91
(2) The appellant is to pay the respondents’ costs of the appeal as agreed or assessed in accordance with s 60(4)(b) of the NCAT Act.
COSTS – costs on appeal – appeal withdrawn by appellant without a hearing on the merits – principles applicable to costs where no hearing on the merits – withdrawal effectively a surrender
Civil and Administrative Tribunal Act 2013 (NSW), s 55(1)(a), 60; Civil and Administrative Tribunal Rules 2014 (NSW), rr 38, 38A

Cohen v Zanzoul trading as Uniq Building Group [2020] NSWSC 592
BUILDING AND CONSTRUCTION – residential building work – whether plaintiff principals repudiated their obligations under the contract – whether defendant builder thereby exonerated from any liability for defective work – accrued rights of parties
CONTRACTS – residential building work – whether plaintiff principals repudiated their obligations under the contract – whether defendant builder thereby exonerated from any liability for defective work – accrued rights of parties
RESTITUTION – whether restitution on the basis of a quantum meruit available where there is an enforceable contract and rights have accrued under that contract

Rockwall Homes Pty Ltd Ayoub [2020] NSWCATAP 87
APPEAL – costs - exercise of discretion to award costs under r 38(2) of the Civil and Administrative Tribunal Rules 2014 where proceedings are withdrawn – failure to prosecute appeal - contract with Minerva Khoury trading as Sungary Services to complete plumbing work on the site which had been commenced by another plumber.

In the matter of Glenvine Pty Limited [2020] NSWSC 642
CORPORATIONS — Application by voluntary administrator to adjourn winding up proceedings — proposed deed of company arrangement – transfer of company’s sole asset to wife — legitimacy of Family Court consent orders in issue — Whether in interests of creditors — Opposed by 96% of third party creditors by value — Adjournment application refused — Company wound up in insolvency.

Betta Build Group Pty Ltd v El Baba (No. 2) [2020] NSWDC 238
BUILDING AND CONSTRUCTION – referral of question of rectification costs for defective works to referee – whether referee’s approach should be wholly or partly adopted – whether referee denied natural justice by closing his mind to the Builders’ evidence and contentions – whether apprehended bias – whether referee failed to give adequate reasons for its findings

Disclaimer
The information in this publication is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavour to provide accurate and timely information, we do not guarantee that the information in this newsletter is accurate at the date it is received or that it will continue to be accurate in the future.

Christine Jones

Published by Christine Jones, Rebecca Weakley

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