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Residential Focus

09 February 2022

#Property, Planning & Development, #Construction, Infrastructure & Projects

Published by:

Nicholas Achurch

Residential Focus

The director is (still) not the builder

Nothing strikes more fear in the hearts of directors than the prospect of the corporate veil being pierced, and one of the most frequently asked questions by owners when the builder is insolvent is “what about the director?”.

The recent decision in Zhang and Mills v JSW Property Projects Pty Ltd and Ors [2021] NSWDC 655 serves as a reminder that directors of incorporated builders do not assume contractual obligations simply because they are the human face of the company or have been personally “on the tools”.

Background  

In early 2016, the owners sought the assistance of a building company with the renovation of their residence. Their contact was the director of the building company.

In or about mid-2016, the owners and the director attended a site meeting to discuss the proposed renovation. During the meeting, the owners proposed renovation works that were more substantial than what had previously been discussed.

At a further site meeting, the owners expressed that they did not want to spend more than $500,000, which the director agreed may be possible.

The owners requested a quote for the proposed works, which was issued by the building company. The owners made a request to the director that their related corporate entity be invoiced for the works, which became the practice, the building company issuing invoices and the owners issuing remittances recording payments to the building company totalling $500,000. No written contract was entered into with the owners for the works.

From late March 2017, the parties’ relationship deteriorated. The owners asserted that they had been overcharged. The building company and its subcontractors left the site due to the owners’ refusal to make any further payments. In August 2018, the owners demolished the still incomplete property.

In 2019, the owners commenced proceedings against the building company, the director and the architect, seeking, among other things, the recovery of the amount paid.

In August 2019, the building company was deregistered at the instigation of ASIC. The owners made no attempt to continue the proceedings against the building company, and the proceedings against the architect were resolved. The director was then the last remaining defendant.

Claims against the director

The need to establish that the director was a party to any contract with the owners became crucial following the building company’s deregistration.

The owners claimed, among other things, that the director had breached the statutory warranties under section 18B of the Home Building Act 1989 (NSW) (Act).

The Court’s consideration of whether the director was a party

In considering the question of whether the director was a party to the contract, the Court reinforced that parties to a contract must be identified in accordance with the objective theory of contact, referring to Pethybridge v Stedikas Holdings Pty Ltd[1] and Harold R Finger & Co v Karellas Investments Pty Ltd[2] on this point. Subjective intentions (on which the owners overwhelmingly relied) are generally irrelevant.

The Court of Appeal in Pethybridge had left open the question of whether post-contractual communication may be considered when determining whether a contract had been formed with a particular party.

The Court considered a number of post-contractual inter partes communications to assist with identifying the parties to the contract with the owners. These communications included:

  • emails to the owners which included the building company’s logo
  • the quotation, which included the building company’s logo as well as contact and banking details of the building company, without any reference to the director
  • remittances issued by the owners’ related company, which referred to payments made to the building company, not the director.

In light of the evidence, the Court found it unlikely that a reasonable observer would infer that the director was a party to the contract and concluded that the parties did not intend that both the building company and the director would be parties to the contract. Ultimately, the Court found that the building company was the contracting party and the claim against the director must fail.

Commentary

Litigants with claims against insolvent building companies may eventually find a factual vehicle to visit those upon directors (absent a guarantee). Having no written contract would seem to be key and this should serve as a warning to directors of building companies to observe the discipline of entering into a contract in writing. If regulatory compliance (fines and disciplinary action) is not a sufficient reason, then asset protection may provide motivation, particularly having gone to the trouble of incorporating. As it was noted in Zhang, at [125]:

“This, after all, is why companies are incorporated. The raison d’etre of companies is to create a prima facie position whereby a director and shareholder is not personally liable for the liabilities, acts, and omissions of the company, with which they are associated.”

If you have any questions about this article, please contact us or send us your enquiry here.

Authors: Christine Jones & Nicholas Achurch

[1] [2007] NSWCA 154 at [54]–[58].
[2] [2015] NSWSC 354 at [79]–[86].

In the media

Home builders want more scope to raise prices
Home builders locked into loss-making fixed-price contracts are looking for ways to pass on costs that have risen as much as 30 per cent over the past year (13 January 2022).  More…

Timber imports responding to record housing demand
Shortages of timber have caused extended delays to house building over the last year and a half (3 February 2022).  More…

New incentive for low carbon timber
The Federal Government’s move to increase support for the use of low-carbon timber is good news for the building and construction sector and will support jobs and economic activity while reducing greenhouse emissions (4 February 2022).  More…

Owner occupiers drive record year in housing finance
Owner occupiers bounced back at the end of 2021 to produce the biggest year of home loans on record (1 February 2022).  More…

Scarcity of residential land sees prices surge
A significant increase in the price of land indicates that supply is not keeping pace with demand (21 January 2022).  More…

NCC 2022 preview and adoption dates
We would like practitioners to be aware of important dates for the release of NCC 2022, which include 9 May 2022 – preview available here (excluding energy efficiency and condensation) and 1 September 2022 – adoption by states and territories (8 February 2022).  More…

Reports

Australian Industry Skills Committee (Construction Industry) – 18 January 2022 update
This page provides high-level information and data on the Construction industry and its six main sectors. Read more here.

Class 2 building work: Registration requirements, exemptions and possible additional categories
The Design and Building Practitioners Regulation 2021 (the Regulation) identifies the requirements for head contractors to be successfully registered as a building practitioner under the Design and Building Practitioners Act 2020 to do Class 2 building work (1 February 2022). Read more here.

Industry Update – January 2022 edition
The Australian Building and Construction Commission has released its monthly industry update (January 2022). Read more here.

Cases

Bryson v The FPC (NSW) Pty Ltd [2021] NSWCATAP 415
APPEAL – whether leave to appeal should be granted – inadequate reasons – assessment of damages – whether allowance to be made for betterment – remittal of claim for variations. Civil & Administrative Tribunal Act 2013 (NSW); Home Building Act 1989 (NSW).

Burns v Hogg Constructions Pty Ltd [2021] NSWCATAP 417
BUILDING AND CONSTRUCTION – cost plus contract – repudiation by owner – measure of damages. Civil and Administrative Tribunal Act 2013 (NSW); Civil and Administrative Tribunal Rules (2014) (NSW); Home Building Act 1989 (NSW).

Douglas t/as D&C Pool and Landscape Creations v Luscombe [2021] NSWCATAP 403
HOME BUILDING – reasons for findings on expert evidence concerning aggregate size – no issue of principle. Civil and Administrative Tribunal Act 2013 (NSW); Civil and Administrative Tribunal Regulation 2013 (NSW); Civil and Administrative Tribunal Rules 2014 (NSW); Evidence Act 2005 (NSW); Home Building Act 1989 (NSW).

Gaskell v Nazha [2021] NSWCATAP 406
APPEAL – insurance proceeds for claim against builder – irrelevant consideration for costs against director – error of law – costs order varied. Australian Consumer Law; Civil and Administrative Tribunal Act 2013; Home Building Act 1989; Legal Profession Uniform Law Application Act 2014.

Lichaa v Boutros [2021] NSWCA 322
APPEALS – procedural fairness – failure to give reasons – adequacy of reasons – BUILDING AND CONSTRUCTION – contract – termination – repudiation – contract – damages – defects. Home Building Act 1989 (NSW); Suitors’ Fund Act 1951 (NSW); Uniform Civil Procedure Rules 2005 (NSW).

Lambros v Urbanlux Homes Pty Ltd (In Liq) [2021] NSWSC 1615
PRACTICE AND PROCEDURE – application for freezing order against third parties – whether plaintiff has a good arguable case against defendants now in liquidation and bankruptcy. Bankruptcy Act 1966 (Cth); Conveyancing Act 1919 (NSW); Corporations Act 2001 (Cth); Home Building Act 1989 (NSW); Uniform Civil Procedure Rules 2005 (NSW).

SafeWork NSW v Anthony Hanna; SafeWork NSW v Milia Hanna [2021] NSWDC 708
CRIMINAL LAW – prosecution – work health and safety – duty of persons undertaking business – risk of death or serious injury – SENTENCE – objective seriousness – mitigating factors – aggravating factors – plea of guilty – general deterrence – specific deterrence – previous convictions – appropriate sentence.
Crimes (Sentencing Procedure) Act 1999 (NSW); Fines Act 1996 (NSW); Home Building Act 1989 (NSW); Work Health and Safety Act 2011 (NSW).

Shivanbodhiselvan v Norwest Gateway Pty Ltd [2022] NSWCATAP 27
BULIDING AND CONSTRUCTION – failure to provide procedural fairness – Anshun estoppel – non question of principle – leave to appeal – decision not fair and equitable – decision against the weight of the evidence – no question of principle. Civil and Administrative Tribunal Act 2013 (NSW); Home Building Act 1989 (NSW).

Zhang and Mills v JSW Property Projects Pty Ltd [2021] NSWDC 655
CIVIL PROCEEDINGS – construction – renovation works on a residential property – no written contract – credit issues misleading and deceptive conduct – express representations – implied representations – representations by silence – reliance – loss not established. Civil Procedure Act 2005 (NSW); Competition and Consumer Act 2010 (Cth); Evidence Act 1995 (NSW); Home Building Act 1989 (NSW); Trade Practices Act 1974 (Cth).

Practice and courts

Possible reforms to the Bankruptcy system
In January 2021, the Australian Government undertook public consultation on possible changes to the bankruptcy system, to inform its ongoing response to address the impacts of the COVID-19 pandemic. Closes 25 February 2022. Read more here.

Legislation

Regulation and other miscellaneous instruments

Design and Building Practitioners Act 2020 (NSW)
Amended Sch 1 s 4A Time for lodging regulated designs and compliance declarations extending its application to developments occurring before 1 July 2023.
Amended Sch 1 s 4C Crown building project–staged provision of designs extending its application to developments occurring before 1 July 2023.

Government Sector Finance Legislation (Repeal and Amendment) Act 2018 (NSW)

Strata Schemes Management Amendment (Sustainability Infrastructure) Act 2021 No 1

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 article is accurate at the date it is received or that it will continue to be accurate in the future.

Published by:

Nicholas Achurch

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