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Residential Focus

09 March 2022

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

Published by:

Nicholas Achurch

Residential Focus

Risk of economic deficit in lump sum contracts

In the context of rising material costs, much has been written lately on the risk to contractors of lump sum contracts. A recent decision, Aslan v Stepanoski [2022] NSWCA 24, demonstrates the flip side – the risk to owners of a bad bargain.

Background

In or about October 2014, the owners entered into a cost plus contract with the builder to build two residences on the owners’ land. In or about late 2014 or early 2015, the parties signed a lump sum contract in relation to the same works, in which payments were set out in stages with certain amounts payable upon the builder’s completion of those stages. The lump sum contract was executed on the basis that it applied retrospectively, in place of the cost plus contract.

As the works progressed, the builder issued a number of progress claims. On receipt of the third progress claim, the owners refused to make any further payments until they received invoices evidencing the builder’s expenses.

The builder issued a suspension notice, shortly after which, progress claim 3 was paid, excepting variation 3. The owners requested that the builder provide receipts to justify variation 3. The builder refused on the basis that the contract was a lump sum contract.

Progress claim 4 included a reiteration of variation 3, which remained unpaid. The owners demanded that the builder provide all quotes from subcontractors and suppliers, and receipts for all expenses to justify the progress claims to date. The owners raised other issues regarding progress and compliance with plans.

The builder suspended works, after being locked out of the site and a failure to pay progress claim 4. Progress claim 4 was subsequently paid, excepting variation 3.

In May 2016, the owners terminated the contract, purportedly in acceptance of the builder’s repudiation.

The appeal

The builder’s appeal concerned a number of findings, including that:

  • the builder had repudiated the contract
  • the owners were entitled to the amount of $452,667.80 in restitution for overpayments made by the owners to the builder.

The restitution claim

The court below had awarded restitution damages on the basis that the works completed were not to the value claimed by the builder, and as such, the owners had overpaid the builder, which overpayments the owners were entitled to recover.

On appeal, the court found that, when considering a lump sum contract, the value paid does not necessarily accord with the value of the work performed[1] and the builder’s contractual entitlement does not necessarily accord with the value of the work performed.[2]

A “bad bargain” will not necessarily disentitle a builder to payments under a lump sum contract. If there is a discrepancy in favour of a builder between the value of the work claimed and the price paid by an owner, then that is the owner’s contract risk.

The court held that when considering a restitution claim, the court must respect contractual regimes and allocation of risk.[3] This leaves a claim for defective or incomplete work as the mechanism for addressing deficiency in value.

Accordingly, the court set aside the damages award.

Takeaway

Owners are reminded that they bear a price risk in lump sum contracts with staged progress payments. The amounts owners are obligated to pay may not reflect the value of work that is completed at each stage, or even at completion. Owners should inform themselves of that risk.  

Where the value of the work performed is considered to be less than the price for that stage, an owner cannot simply depart from the contractual terms and seek to value the work on another basis.

Authors: Christine Jones & Nicholas Achurch

[1] See paragraph [70].
[2] See paragraph [88].
[3] See paragraph [89]; see also Mann v Paterson Constructions (2019) 267 CLR 560 at [14].

In the media

Are we only just beginning to see the cracks in the construction industry?
Financial strain has hit just about every industry during the pandemic, and while there’s been a number of buildings seen on the up and up, the requirements of self-isolation and the subsequent delays are being felt hard in the construction industry (7 March 2022).  More...

Labour and materials shortages push new house costs up 20 per cent
The average cost of a new detached house rose 19.6 per cent over the 12 months to January as inputs such as labour and materials surged in price, pointing to further pain for builders even as demand slows (4 March 2022).  More...

Building approvals fell sharply during Omicron outbreak
“Building approvals fell by a remarkable 27.9 per cent in January 2022, as Omicron disrupted the record boom in home building” stated HIA Economist Tom Devitt (3 March 2022).  More...

Probuild collapse shows construction’s vicious risk cycle
The collapse of Probuild which records show had $311.6 million-worth of trade-related liabilities last year, reveals the problems of a “broken system” in which large contractors with narrow profit margins carry all the risk for clients (1 March 2022).  More...

Australia facing a housing supply crunch
Australia could face a “concerning” housing shortfall of more than 160,000 homes over the next decade, according to new projections (28 February 2022).  More...

Published – articles, papers, reports

HIA – leaving frames exposed to the weather
Due to a range of current factors being experienced with material and supply challenges and recent floods a number of projects are experiencing construction delays and some timber frames are being left exposed to the weather for extended periods. This resource provides a guide on assessing and inspecting frames for damage. Read more here.

Australian Bureau of Statistics – building approvals, Australia
The seasonally adjusted estimate for total dwellings approved fell 27.9 per cent. Read more here.

Changes to workplace relations management plans form
The Australian Building and Construction Commission made changes to its WRMP form to ensure head contractors meet the obligations and requirements of the Code. Read more here.

Nine key takeaways from the latest digital construction report
Over 900 construction professionals gave their views. Here we pick out nine highlights we believe will continue to be relevant in 2022. Read more here.

Australian Bureau of Statistics – construction work done, Australia, preliminary
The value of total construction work done fell -0.4 per cent in the December quarter, in seasonally adjusted terms. Read more here.

Practice and courts

New course on how the PCA works
Our new continuing professional development course ‘How the PCA works’ focusses on ensuring practitioners are aware of volume three of the NCC and its use as the Plumbing Code of Australia. Read more here.

New heated water services course for the plumbing industry
Our new one-hour online continuing professional development course helps build an understanding of heated water services and the requirements of the Plumbing Code of Australia.

Cases

John McDonald Building Services Pty Ltd v Gusa [2022] NSWCATAP 60
APPEALS – procedural fairness – failure to have regard to a relevant consideration.
APPEALS – right of appeal – scope of right.
JURISDICTION – excess or lack of jurisdiction below – whether monetary jurisdictional limits of Tribunal pursuant to Fair Trading Act 1987 applicable to claims arising from building disputes – statutory interpretation.
EVIDENCE – where hearsay opinion evidence relied – whether procedural fairness requirements of admissibility satisfied.
BUILDING AND CONSTRUCTION – contract – termination – loss of right to terminate.
Civil and Administrative Tribunal Act 2013 (NSW); Competition and Consumer Act 2010 (Cth), Schedule 2 – Australian Consumer Law; Fair Trading Act 1987 (NSW); Home Building Act 1989 (NSW).

Renbar Constructions Pty Ltd v Sader; Sader v Renbar Constructions Pty Ltd [2022] NSWSC 172 (25 February 2022)
CONTRACTS – general contractual principles – construction – interpretation of critical terms of the contract – whether compliance with a contractual mechanism for claiming progress payments was a condition precedent to payment of the entire contract sum – implied terms – necessary to give business efficacy to the contract – contractor entitled to payment of unpaid contract sum on completion of work.
CONTRACTS – breach of contract – forms of breach – amount of damages calculated as a result of defective work and delay – whether defective work and 141 week delay amounted to “substantial” breaches – whether contract validly terminated.
BUILDING AND CONSTRUCTION – determination of the cost of construction of the work.
EQUITY – whether estoppel by convention available – no mutual assumption adopted – no sufficient detriment to party seeking estoppel – Home Building Act 1989 (NSW).

Aslan v Stepanoski [2022] NSWCA 24 (25 February 2022)
CONTRACTS – repudiation – whether the builder repudiated the lump sum contract – whether the builder’s claim for payment under the lump sum contract constituted repudiation – whether the builder’s “failure to resume work” constituted repudiatory conduct.
RESTITUTION – mistake – restitution of money paid by the owners to the builder – whether a comparison of sums paid under the lump sum contract with the value of the work completed revealed whether there had been an overpayment by the owners to the builder.
CIVIL PROCEDURE – owners sought leave to reopen case after judgment to tender additional evidence concerning loss – election had been made to claim damages on a particular basis – whether there were special circumstances that justified departure from the ordinary rule that a party is bound by the case that it conducts to judgment – Environmental Planning and Assessment Act 1979 (NSW), s 96.

Huang v The Owners Strata Plan 7632 t/as The Owners Strata Plan 7632 [2022] NSWSC 194
APPEAL – NCAT – leave to appeal – principles – appeal on question of law, with leave – leave refused – no issue of principle or of general importance – no error of law.
ADMINISTRATIVE LAW – jurisdiction of NCAT – strata titles – broad jurisdiction – importance of finality – alleged denial of procedural fairness – none disclosed.
STATUTORY INTERPRETATION – Strata Schemes Management Act 2015 (NSW) – common property – alteration of definition of boundary between lots – common property on upper surface of floor, inner surface of wall and under surface of ceiling – cosmetic work still on common property – rights and obligations of owners corporation.
Administrative Decisions Tribunal Act 1997 (NSW), Civil and Administrative Tribunal Act 2013 (NSW), Conveyancing (Strata Titles) Act 1961 (NSW), Strata Schemes (Freehold Development) Act 1973 (NSW), Strata Schemes Management Act 2015 (NSW).

Dieter v NSW Self Insurance Corporation [2022] NSWCATAP 52
APPEAL – HBCI insurance policy – exclusion – definition of developer – utmost good faith.
COSTS – special circumstances.
Civil and Administrative Tribunal Act 2013 (NSW); Civil and Administrative Tribunal Rules 2014 (NSW); Home Building Act 1989 (NSW); Home Building Regulation 2014 (NSW); Insurance Contracts Act 1984 (Cth); New South Wales Self Insurance Corporation Act 2004 (NSW).

Legislation

Bills introduced by NSW Government

COVID-19 and Other Legislation Amendment (Regulatory Reforms) Bill 2022
Retail Leases Act 1994 No 46; Strata Schemes Management Act 2015 No 50.

Passed by both Houses of NSW Parliament

Licensing and Registration (Uniform Procedures) Amendment Bill 2022
Home Building Act 1989 No 147; Home Building Regulation 2014 No 811; Design and Building Practitioners Regulation 2021 No 152.

Environmental planning instruments

State Environmental Planning Policy Amendment (Miscellaneous) 2022 (2022–72) LW 4 March 2022

Regulations and other miscellaneous instruments

Design and Building Practitioners Amendment (Miscellaneous) Regulation 2022 (2022–62) LW 2 March 2022

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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