17 August 2022
#Construction, Infrastructure & Projects, #Property, Planning & Development
Previously in this three-part luxury development series, we considered:
In the final part of this series, we discuss the management of works during the contract period and the ultimate delivery of luxury development projects.
As touched on in the previous parts of this series, the developer may elect to have varying levels of involvement in the progression of the works throughout the course of the project. Depending on the developer’s intended level of ongoing involvement in the works, it may be necessary to appoint a third party superintendent or principal’s representative to manage the progression of the works on the developer’s behalf.
In deciding what level of ongoing involvement is necessary (or appropriate) for a developer, it is worth considering the following:
In circumstances where the developer elects to take an active role in the works, such as by sourcing materials or making ongoing decisions on site, the developer should be wary that, if these matters have not been appropriately accounted for in the contract, the developer could end up in a situation where their actions amount to a cause of delay or a variation to the contract.
Also, the developer should be aware that if the contract does not allow for changes in the programme or work sequence, any direction given to the contractor to accelerate certain works or complete works (including defect rectification works) out of sequence to complete certain residences for settlement purposes may result in the developer being liable for any time and/or costs incurred by the contractor as a result of the direction.
Once the works are largely completed, the developer will have the opportunity (subject to the terms of the contract) to require the contractor to rectify any defective or non-conforming works. In a luxury development, the developer will want to have settlement occurring (and tenants moving in) as soon as possible after the works are completed. As such, it is important that the contractor on the project:
A contractor’s liability for rectifying defects may be affected by the capacity in which the contractor has been engaged and the nature of the contractor’s obligations under the contract as a whole. For example, the following factors may support a position that a contractor is not liable for defects if:
It is therefore important that contracts for luxury developments clearly state the contractor’s obligations regarding the rectification of defects, including (if necessary) circumstances where the developer directly engages any subcontractors or suppliers.
It is also important to note that in circumstances where a contract does not include detailed drawings, plans or specifications (as we discussed in earlier parts of this series), any warranties provided by the contractor as to the nature and quality of the finished product may be limited in scope to what was known (and therefore able to be warranted) at the time the parties entered into the contract.
Developers should therefore be careful to ensure that the contract expressly and clearly describes the standard of work the contractor must deliver at completion. It is this standard of work that the works should be assessed against when considering defects. This is especially important if the standard wording of the contract refers to the relevant statutory warranties. Even in circumstances where both parties have discussed the construction of a ‘luxury development’ and the contractor has been engaged on the basis of a mutual understanding that the development is to be luxury in nature, if the contract does not expressly stipulate that ‘luxury’ workmanship and quality is required (and describes what ‘luxury’ means to the developer), the courts will not infer or imply a greater standard than that expressly stipulated in the contract.
To achieve that outcome, the developer would need to apply to the court for the equitable remedy of rectification of the contract. However, this requires the developer to prove on the balance of probabilities what the parties’ common intention was. While the United Kingdom has determined that the parties’ actual common intention is relevant for this remedy, this has not yet been applied in Australia, with the objective common intention of the parties still potentially the test here.
Failing that, and if the contract is otherwise silent as to the standard of work, the relevant standard of work will be that contained in the statutory warranties (i.e. reasonably fit for purpose), which will typically be well below that envisaged for a luxury development.
Finally, if a contractor simply does not complete its works to the standard required by the contract, developers should be aware that, even if it can be established that the contractor has breached the contract, the courts will not always award the amount necessary to rectify the works to the standard required under the contract. The courts generally apply a test of ‘necessity and reasonableness’ to determine whether awarding rectification damages or an award of damages for loss of amenity is more appropriate in the circumstances.
During this assessment, the court commonly takes into account the following factors:
Below are some examples of situations where the courts have determined that rectification was unreasonable:
Costly (and arguably disproportionate) rectification has, however, been considered appropriate in certain circumstances where it can be shown that the rectification was necessary to achieve the intended purpose of the contract.
An example is where a contractor installed inferior or second-grade limestone cladding in a home renovation when the contract specifically required that ‘high quality’ limestone be installed. Despite the cost of the rectification works ($258,000.00) being arguably disproportionate to the value of the home ($1.7 million), the court determined that the home owner was entitled to the performance of the contract to achieve the contractual objective, irrespective of others views as to what may be aesthetically reasonable.
As can be seen from the above examples, what is considered reasonable will differ from case-to-case and will be wholly dependent on the circumstances of each individual scenario, including the contract as a whole, the extent to which the contractor has failed to deliver the works under the contract and the nature and extent of rectification works (including cost, time, safety, disruption, and overall added benefit).
The best way for developers to protect their interests throughout the life cycle of a luxury development is to ensure that they are armed with a contract which specifically reflects and accounts for the particular circumstances of their individual development.
Whilst it may not be possible to account for all of the unknowns that may arise throughout the life of a project, taking the time, pre-contract, to carefully consider and account for what is known at the time and how the developer envisages the project unfolding will not only minimise the risk of disputes arising but also work to ensure that the ultimate product delivered is in line with the developer’s luxury vision.
If you require assistance with either contracting for a luxury development or understanding your rights and obligations in connection with a luxury development, please get in touch by contacting us below or by sending in your enquiry here.
Authors: Kirsty Smith & Tarin Olsen
 FSHC Group Ltd v Glas Trust Corporation Ltd  Ch 365;  EWCA Civ 1361.
 Ruxley Electronics & Construction Ltd v Forsyth (1996) 1 AC 344.
 Stone v Chappel  SASCFC 72.
 Westpoint Management Ltd v Chocolate Factory Apartments Ltd  NSWCA 253
 Willshee v Westcourt Ltd  WASCA 87.
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.