Critical Path
October 2012

What to include in a Show Cause Notice

Nicole Whitby

In Dura (Aust) Constructions Pty Ltd v Hue Boutique Living Pty Ltd (No 3) [2012] VSC 99 the Victorian Supreme Court has recently provided guidance on both the required content of show cause notices under construction contracts and what a Principal must consider when evaluating whether cause has been shown by a Contractor responding to such a notice.

Facts

Hue Boutique Living Pty Ltd (Hue), the Principal, engaged Dura (Aust) Constructions Pty Ltd (Dura), the Contractor, under an AS 2124 - 1992 (the Contract), to build an apartment block in Richmond, Melbourne. Hue served 4 show cause notices on Dura under clause 44.2 of the Contract, alleging that Dura was in default by separate substantial breaches of the Contract and requiring Dura to show cause in writing why Hue should not exercise a right under the Contract to either take the works out of the hands of the Contractor or terminate the contract (if the Contractor fails to show reasonable cause by the time specified in the notice).

The allegations of substantial breach made against Dura were that, among other things, it had failed to:

1. proceed with the works with due expedition and without delay;
2. comply with directions of the superintendent; and
3. use the standard of materials or provide the standards of workmanship required by the Contract.

After evaluating Dura’s response, Hue did not accept that Dura had shown cause and served Dura with a notice under clause 44.4 of the Contract taking the whole of the remaining works out of Dura’s hands.

Arguments

Before Justice Dixon, Dura’s key argument was that the show cause notices were invalid on the basis that they were confusing and did not identify with sufficient detail the substantial breaches alleged. Dura contended that it was unreasonable of Hue to serve a notice that was “confusing, prolix and obtuse” and that, as a result, Hue had breached an implied term to act reasonably when giving notice to show cause under the Contract.

Decision

The Court found in favour of Hue and held that Dura had been in substantial breach of the Contract and that the show cause notices served by Hue were valid. Justice Dixon also found that when Hue gave notice to Dura taking the remaining works out of its hands, it had acted properly in accordance with the rights and obligations arising under the Contract.

Requirements of a valid Show Cause Notice

The Court found that the Contract required the Principal to name expressly the alleged substantial breach. It did not require the Principal to detail or particularise each matter constituting the default. His Honour referred with approval to an English case where it was held that a show cause notice must “direct the contractor’s mind to what is amiss”¹. The Court emphasised that the process of showing cause under clause 44 requires communication as opposed to rectification. In contrast, a notice to remedy default, which requires, for example, a contractor to rectify certain defects, would require a default notice to specify the precise details of each defect alleged. Justice Dixon drew a distinction between the level of detail required for “self-executing” default notices and show cause notices.²

Ultimately, His Honour held that imposing a requirement that Hue particularise each specific item in respect of which Dura failed to comply with directions of the Superintendent “put too highly the requirement, under clause 44.3(b), that the notice specify the alleged substantial breach”.³

Was there an implied term that Hue act reasonably in issuing a show cause notice?

The Court found it was unnecessary to imply the term to give business efficacy to the Contract. Instead, Hue was required to determine honestly whether the Contractor had committed a substantial breach of contract.

The approach taken by the Victorian Supreme Court differs to that of the New South Wales Supreme Court where an implied term of reasonableness has been found when the Principal is issuing a show cause notice.⁴

Evaluating the response

In assessing a Contractor’s response to a show cause notice, the Principal must make its decision honestly and in good faith but the decision cannot be set aside because it might be unreasonable or one which serves only the interests of the Principal.⁵

Here, there was no evidence to suggest that Hue had acted with improper purpose. The Court found that Hue had made an honest and careful determination that Dura had failed to show reasonable cause.

Conclusion

Following this decision, a show cause notice must comply with the requirements of the contract under which it is issued and convey to the reader what is amiss. An issuer does not need to provide detailed particulars of each matter constituting default. Importantly, the type of breach of contract and response to be given by the Contractor (including whether it is a notice to show cause, as opposed to a notice to rectify) will inform the level of the detail that is required.

Unlike New South Wales, in Victoria, AS2124-1992 contains no implied term of reasonableness when issuing a show cause notice or evaluating whether cause has been shown. Something principals and contractors with projects in each jurisdiction should bear in mind when issuing or responding to a show cause notice.

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Using Dispute Boards on PPPs

Luke van Grieken and James Morgan-Payler

Introduction

A number of recent and ongoing Australian PPP projects have and continue to face significant delays and financial distress. Notable examples include Victoria’s Ararat Prison and Desalination Plant projects. This sort of distress on PPP projects invariably leads to disputes and is, as a result, very damaging both for the individual projects and for the future of major public infrastructure projects more generally.

To assist in avoiding problems leading to disputes, we believe that governments should consider including dispute boards (DBs) on PPPs. For a number of years DBs have been used successfully in major projects in Queensland and NSW¹. In our view, DBs could also be helpful for PPPs, with the appropriate modifications to cater for the complex structure of these projects. Recently, this view has received support from the chair of Infrastructure NSW, Nick Greiner². 

In this article, we briefly explore how DBs could be used on PPP projects, including what DB models could be appropriate in a PPP context.

What are DBs?

A DB (also known as a “dispute resolution board” or “dispute avoidance board”) is a panel of one or three independent experts who have been engaged by the contracting parties to oversee the execution of the project. Its primary function is to prevent disputes, or where this is not possible at least assist the parties to achieve a quick, cost-effective and acceptable resolution. It does this by involving the relevant panel at an early stage, as real project participants and then ensuring appropriate engagement among the parties at an early stage when issues arise. DBs are particularly useful for projects which are complex, high risk or high profile. For this reason they are, at least in theory, well suited for large PPP projects. 

Much has been written on the benefits of DBs³, so this article will not repeat those benefits apart from noting the overwhelming evidence that DBs reduce the risk of dispute. However, it is important to note that DBs are intended to change the parties’ behaviour in a positive way, but they do not change the risk allocation between the parties. DBs are not another form of dispute resolution, but rather a structure put in place within a contracting model to actually deal with issues as they arise and to actively prevent conflicts from ever resulting in disputes.

How to use DBs in PPPs

In our opinion, the great benefit DBs would bring to PPP projects is their ability to encourage greater communication and collaborative behaviour between the parties without changing the commercial risk allocation and the contractual separation between the parties. Those who have lived through a distressed PPP project will have observed the lack of direct and open communication between the parties, particularly between the State entity and the builder. In our experience it is this communication which is needed to resolve issues quickly as they arise.

Key to government take up of DBs on PPPs is the preservation of its contractual separation from the builder and facilities management provider to ensure that the project company retains sole contractual responsibility for the design, construction, maintenance and financing of the project.

Accordingly, we propose a DB for PPPs which has a “roving” role between all of those parties and which can provide non-binding recommendations and advice at multiple levels. That is, one DB will sit across the entire PPP project and communicate with the government party, the project company, the builder and the services provider. We explore three key aspects of this proposed model in further detail below.

The nature of the DB’s “roving” role

The DB’s roving role would allow it to meet on a regular basis with representatives of each stakeholder at both a site operational level and a senior management level. At a minimum, the DB would hold formal meetings every three months. It would also receive copies of the monthly reports from the private parties as required under their respective contracts, which would typically include registers of notices, claims and disputes.

A party could also have private sessions with the DB to discuss any issue in confidence, without the content of those discussions being passed on to any other party. Given the importance of probity issues on PPP projects, appropriate probity obligations will need to be imposed on the panel.

DB will provide non-binding advice and recommendations

As the DB will be fully up-to-date with the issues and claims in relation to the project, it will be in an ideal position to focus the parties’ attention of the key matters to be resolved and to facilitate communication between the parties, without breaching confidences, to achieve such a resolution. It would be able to provide suggestions about ways to overcome roadblocks and suggest processes for avoiding disputes. Where a dispute cannot be avoided, if requested, the DB could hold hearings on and making non-binding recommendations in relation to disputes referred to it.

In our opinion, there are good reasons for the DB’s advice and recommendations to remain non-binding particularly within a PPP model.  In particular, this will ensure that the parties communicate openly and do not assume an adversarial approach to the DB. Further, this will ensure that the DB model does not undermine the integrity of the PPP structure and risk allocation.

Appointment of members

In our view, given the complexity of PPP projects, the DB should be appointed at the start of the project and have three members. One option is that the government and project company would each choose one board member, with those members then selecting the third member. Alternatively, the builder could appoint the third member.

Another option is that the government would provide a list of acceptable DB members from which the project company and builder can select the three members. In any case, the process for appointing members must be agreed by all parties so that they all have confidence in the DB’s role and authority to give advice and recommendations.

The authors also recognise the need to avoid adding layers of cost to PPPs, as those costs will ultimately need to be added to the financial model for the project. Fortunately, DBs are typically very cost effective when used on large projects. The base cost of the DBs in Australia is between 0.1% and 0.2% of the total project cost of a project over $100 million⁴. It is anticipated that the cost of the DB model for PPPs proposed above would fall within that cost range.

Whilst the DB model proposed above is one way that DBs could be included in PPPs, the authors recognise that there may be several possible alternatives. Further, as DBs have not to date been used in PPPs in Australia, other aspects of the DB model will also require further consideration before DBs are included in PPPs.

Conclusion

Given the evidence of the success of DBs in avoiding disputes on other major project structures, we believe that including DBs in future PPP projects is one of the most readily achievable and effective ways for governments to minimise problems in PPP projects. DBs could lead to less disputes, lower costs, fewer delays and greater confidence in the PPP market, all of which could ultimately provide better project outcomes and value for money for taxpayers.

This article has touched on one possible DB model for PPPs which could encourage real, positive behavioural changes without compromising the complex risk allocation and structure of PPP projects. Of course, there may be other DB models which are appropriate for PPPs.

Given the current difficulties being encountered on a number of PPP projects in Australia, it is our opinion that the timing is right to introduce an attitude change in the way PPP projects are delivered. The use of DBs is one tool to achieve this and to restore the confidence of all stakeholders in this important method of providing important public infrastructure.

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Supply Agreements at Sea – Submarine Telecommunications Cabling

Matthew Frazer

The significance of high-speed, cost effective and efficient international telecommunications networks needs little thought given our routine reliance on the internet for global communication and our increasing expectation for faster global information transfer.

In constructing these networks, the installation of submarine cables remain (with the improvements in technology) the solution of the telecommunications industry in bridging any seas or avoiding any land based restrictions in difficult territories.  This article highlights some of the legal issues that can arise for consideration in these submarine cable projects from a construction (design, supply and installation) perspective.

The context of such submarine cables is that almost all of Australia’s non-television related international capacity is in submarine cable networks and the industry sees that submarine fibre optic technology can provide this capacity both now and into the future.  Those in the telecommunications industry are also aware that fibre optic cable can be upgraded from its original configuration at a lower capacity cost compared to the capacity cost of a new cable, which has the effect that the economic life of each cable is extended.

Needless to say, the logistics and potential difficulties of carrying out installation works at sea and the need to use specialised ships means that the construction of submarine cable systems is a specialised area and there are a relatively small number of contractors worldwide with both the capability and experience to design, supply and install these systems. 

At a high level, the process involves planning and designing the system, achieving permitting requirements, carrying out a desktop study of the proposed cable route selection, carrying out the marine route survey and finalising the route selection, specifying appropriate cable for the route, manufacturing the cable, loading the cable onto the laying vessels, carrying out the installation both at sea and on land (such as the beach manholes and cable stations), final testing of the system and entering into maintenance agreements with cable repairers.  The step in the process of coordinating the cable route selection to marine route survey is considered significant in reducing the cost of supply, installation and maintenance of the system.

Submarine cables are most often procured under design, supply and installation agreements.  The drafting of conventional equipment design, supply and installation agreements generally raise similar issues across different industries and differing items of equipment.  However, some issues are very particular to a supply arrangement and can include issues such as the supplier’s limitation or exclusion of liability, the application and extent of indemnities, supplier warranties, insurance requirements, supplier performance security regime, transfer of title/risk and the payment regime.  While these issues would also arise for a submarine cable design, supply and installation agreement, the nature of these projects raises new issues peculiar to this industry.

Complying with permitting requirements is one of the most significant issues on any submarine cable project including during the planning, construction and operational phases.  As background to considering the issue of permitting, it is important to note that the laws that govern the installation of submarine cables in Australian waters and seas are split across territorial jurisdictions and international jurisdiction. 

Under the 1982 United Nations Convention on the Law of the Sea (“UNCLOS”), territorial seas and archipelagic waters come under the sovereignty of coastal nations while the high seas, exclusive economic zone and continental shelf fall outside the sovereignty of coastal States and are governed by the UNCLOS.  Under the UNCLOS, all States (and by extension, their nationals) have the right to lay submarine cables on the continental shelf (Article 79), in the high seas (Article 87), on the bed of the high seas beyond the continental shelf (Article 112) and in the exclusive economic zone (the economic maritime zone between the territorial sea and the high sea) (Article 58).  The number of jurisdictions that will be applicable to the passage of a submarine cable will obviously depend on the particular cable route, however the jurisdiction of at least two (often more) coastal States as well the UNCLOS will be invoked.

The permits and approvals that are required can be significant and range from facilities-based operator licences, system operating permits, protection-zone permits, work and building permits for land-based works, letters of no objection from owners and operators of other cables, pipelines and oil/gas concession block holders (of which the cable will cross), marine operating permits and many other operational and construction related permits.  The allocation of responsibility for procuring and maintaining permitting between the purchaser and the supplier needs to be carefully dealt with in the design, supply and installation agreement.  The laws of each coastal State that has its territorial seas or archipelagic waters traversed or where the cable lands, will usually be a significant jurisdictional source of these permitting requirements.

The application and duration of warranties (and reinstatement of warranties after repairs) as well as the design life of the system will naturally be a key issue that affects the commercial model.  The concerns of the purchaser in the quality of the system and of the supplier in its exposure to liability will naturally also be affected by the agreed warranty regime.

With the significant operating costs associated with laying vessels working at sea, cable installation works are conducted 24 hours a day on a shift work basis.  The exposure to harsh marine weather during that time can obviously affect the installation works and on that basis an unworkable weather concession for the supplier needs to be addressed in addition to more ‘ordinary’ force majeure events (these terms require careful and measurable definitions).  Where cables are installed near areas of known piracy activity, the security of the crew of the marine survey vessels and laying vessels will also be an installation and safety concern to be addressed.

The issue of liability for any loss or damage (including consequential loss) suffered by third party owners and operators of cables and pipelines that have been cut or damaged as a result of crossing works carried out in installation of a new submarine cable also needs to be addressed.  This is a key issue for the main design, supply and installation agreement as well as the crossing agreements between the cable owner and third party cable and pipeline owners and operators.

With every submarine cable project comes a completely different set of parameters and jurisdictions which would rarely be repeated in later projects.  This is particularly so given that the upgradability of the technology means that the capacity of routes can be improved into the future and therefore repeated submarine cable routes are not as frequent as the construction of new cable routes to meet particular new demands.  With this variability of parameters on submarine cable projects comes the need for robust due diligence and consideration of risk allocation between purchaser and supplier.

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Flexible work - recent developments on independent contractors

Stuart Kollmorgen and Diana Diaz

Most organisations today, including those in the building and construction industry, require flexibility in their workforce.

In addition to the core group of employees who are highly trained, skilled, committed and who are employed on a permanent basis, organisations increasingly rely on a peripheral workforce. These workers and businesses are no less important. They may or may not be employees of your organisation. They may have fewer skills, or more specific skills. They may be called up for projects, for one-off tasks, or at short notice.

This peripheral workforce, and in particular independent contractors, have come under the spotlight from a number of different directions in recent times.

Below are a number of recent developments that you should be aware of if you engage independent contractors.

Sham contracting

Employers that engage in "sham contracting" are at risk of hefty penalties under the Fair Work Act 2009 (currently $6,600 for individuals, and $33,000 for corporations).

A recent Fair Work Ombudsman investigation into a partially targeted sample of enterprises identified that most instances where employers had misclassified employees as independent contractors were not deliberate. However, some employers had either done so recklessly (with little or no thought as to whether the individuals were actually contractors), or deliberately, in order to circumvent paying employee-related entitlements.

Sham contracting provisions in the Fair Work Act 2009 prohibit conduct by an employer that purports to treat people who are really employees, as independent contractors, by:

• misrepresenting to an individual that an employment contract is an independent contractor arrangement (this does not apply if the employer proves that when the representation was made, it did not know and was not reckless as to whether the contract was an employment contract);
• dismissing, or threatening to dismiss employees, in order to engage them as independent contractors to perform the same or substantially the same work; and
• making false statements to persuade or influence an employee to enter into an independent contractor agreement under which the individual will perform the same or substantially the same work for the employer.

These provisions (and the penalties) also apply to persons who are "knowingly concerned" in the contraventions, such as directors and HR managers of the employer.

Fair Work Building & Construction – focus on sham contracting

On 1 June 2012, Fair Work Building & Construction (FWBC) replaced the Australian Building and Construction Commissioner (ABCC) as the building and construction industry IR watchdog.

In a recent speech to the Industrial Relations Society of Western Australia (IRSWA) State conference, Leigh Johns, Chief Executive of the FWBC, stated that the FWBC has a mandate to investigate and litigate across the full range of civil penalty breaches in the Fair Work Act, but that the FWBC’s focus will be on six key areas of concern; unprotected industrial action, freedom of association, coercion, right of entry, wage and entitlements, and sham contracting.

More generally, Johns stated that the FWBC intends to broaden the functions exercised previously by the ABCC, including by providing “advice, assistance and education about harmonious, productive and cooperative workplace relations in the building industry.”

Johns also stated that the FWBC will build on changes in its operating capability implemented by the ABCC, including by commissioning research into sham contracting recommended by the ABCC’s Sham Contracting Inquiry Report of December 2011. The aim of the research is to build an accurate picture of sham contracting in the building and construction industry. 

The report also recommends that the outcomes of the research be reviewed in order to consider matters such as whether legislative amendments to eliminate sham contracting in the building and construction industry would be effective. We will keep a watching brief on developments in this space.

Workers’ compensation changes in Victoria

Workers’ compensation is regulated by State law. The Accident Compensation Act 1985 (Vic) was amended last year to simplify the test applied to determine when an independent contractor is a "worker” for payroll premium calculation and entitlements in Victoria.

The old test for who is deemed a "worker" was almost identical to the test for payroll tax in Victoria. The new test requires principals to determine if the following three conditions apply:

• the provision of materials or equipment is not the principal object of the arrangement; and
• at least 80 per cent of the work is performed by the same individual; and
• at least 80 per cent of the contractor’s overall services income is earned from the principal during the financial year.

If the three conditions apply, then the independent contractor will be deemed to be a worker of the principal for that period. The new test may mean that your organisation has to ask more questions at the time that contractors are engaged.

An exemption applies where WorkSafe determines that, in providing services to the principal, the contractor is carrying on an “independent trade or business”. WorkSafe will consider a range of factors.

Taxable Payments Reporting

On 1 July 2012, Australian Tax Office (ATO) new reporting requirements commenced which impose reporting obligations on businesses in the building and construction industry that make payments to contractors for services. The new reporting system is similar to the Prescribed Payment System and obliges businesses in the industry to report payments by 21 July each financial year. The first report under the new system is due on 21 July 2013.

A Taxable Payments Annual Report needs to include the name, address and ABN of the contractor, as well as the gross amount paid to the contractor in that financial year, including GST. The information collected will then be used by the ATO for data matching purposes to ensure that contractors are paying the appropriate amount of tax.

Superannuation Guarantee Contributions (SGC)

Organisations have long been aware of the distinction between employees and contractors applied by the ATO in Superannuation Guarantee Ruling 2005/1. According to the Ruling, where an individual performs work for another party through an entity such as a company or trust, there is no employer-employee relationship between the individual and the other party for the purposes of SGC. This means that the principal is not liable for the SGC of any employees of the corporate independent contractor.

A 2011 case¹ appeared to cut across existing authorities on the issue of whether principals are liable for SGC, in particular, in instances where contractors are incorporated. The case considered whether, in a particular instance, individuals classed as independent contractors were employees of the principal for SGC purposes and decided, although some of these contractors operated as incorporated entities, the individuals carrying out the work were nevertheless common law employees of the principal, which consequently had SGC obligations in respect of the individuals.

Unsurprisingly, the outcome confused many. Although the case stopped short of calling the arrangements "shams", it did determine that once the totality of the relationship was considered (including consideration of whether the contractor was incorporated), that the relationship was in fact one of employer and employee.

Since that case, an ATO Decision Impact Statement confirmed that the ATO approach to interpretation and enforcement of a principal's SGC obligations has not changed, and that SGR 2005/1 will still be applied by the ATO.

However, it is also clear that Courts are increasingly willing to look behind the corporate veil to determine whether an individual is a contractor or an employee, and incorporation is treated as just one factor of the relationship that can be outweighed by other factors more suggestive of an employment relationship.

What should you do?

If you have not reviewed your contracting arrangements lately, it may be a good time to conduct a thorough review of the totality of the arrangements between your organisation and any contractors.

This is especially important for businesses that have long-term contractors, where it is possible that arrangements have changed over time to become closer to an employment relationship.

In light of the renewed focus on building industry participants, compliance with industrial relations law, including by the FWBC, it is important that industry participants review arrangements that may be of concern and employ a best practice approach to compliance.

Lastly, even though the first Taxable Payments Annual Report is not due until 21 July 2013, the reporting obligations will relate to a period that has already commenced. You should therefore have systems in place now to ensure that all relevant payments are recorded and easily accessible next year.

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Do the Security of Payment Acts Apply to Mining Activities?

Tom Heading

It is now relatively clear that the “mining exclusion” in each Security of Payment Act in Australia is narrower than most had previously expected.  In other words, the Security of Payment Acts are likely to apply to more activities in the mining industries (including oil and gas) than first thought.

Every Security of Payment Act in Australia contains exclusions for mining activities broadly along the same lines (Western Australia and the Northern Territory vary more significantly), namely (to adopt the wording from the Queensland Act):

• “the drilling for, or extraction of, oil or natural gas;” and
• “the extraction, whether by underground or surface working, of minerals, including tunnelling or boring, or constructing underground works, for that purpose.”

Before 2011, most thought that the intention of the carve-out was to remove from the operation of the Security of Payment Acts construction work carried out in the mining industry.

In a landmark decision, the Queensland Supreme Court in 2011¹ became the first Court in Australia to comment on this carve-out, and it did so with a narrow view.  In that case an adjudicator’s decision was made in favour of a subcontractor for works involved in the construction of a mine, including the construction of dams and drains, stripping, hauling, excavating and storing topsoil, and clearing and grubbing.  Because those works were not actually for the extraction of minerals (in this case coal), the Court held that Security of Payment Act applied.  The Court held:

“The exemption given by s 10(3)(b) is not expressed to apply to work done for the purpose of opening or as preparatory to operating a mine. The words used are much more limited than that. They focus purely on the process of extraction.” (emphasis added)

A later Queensland decision endorsed the decision referred to above.²

Interestingly, in Western Australia, a tribunal at the start of this year held that the construction of a desalination plant was for the direct purpose of extracting minerals (salt) and therefore the Western Australian Security of Payment Act did not apply.³

The upshot for participants in the mining industry, including oil and gas, is that Security of Payment claims will apply to works carried out in the mining industry subject to the narrow carve-out discussed above.  Although the three cases mentioned have each dealt with the extraction of minerals only, it is likely that a similar narrow view will be adopted in the oil and gas industries.  If anything, the wording of that carve-out is even narrower.

If you are seeking payment, consider carefully whether the mining exclusion applies.  You do not want a situation of running the adjudication gauntlet, being successful then spending the next year in Court defending a challenge to the decision.  You should do your due diligence at the start.

If you receive a payment claim do not assume that the mining exclusion will come to the rescue, because given its narrow focus there is a high likelihood it won’t.  Put in your payment schedule and assume that the Security of Payment Act applies.  You can include in your payment schedule that the payment claim is not valid because of the mining exclusion.  Do not expose yourself to unnecessary risk by not serving a payment schedule and relying solely on what is now recognised as a narrow mining exclusion.

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No duty of care owed to apartment owners

Owners Corporation Strata Plan 72535 v. Brookfield [2012] NSWSC 712

Brad Spiers

The Owners Corporation of a strata title development comprising 52 residential apartments and penthouses alleged that the builder (Brookfield) and developer (Hiltan) owed it, and breached, both warranties implied by the Home Building Act 1989 (NSW) (HB Act) and a common law duty of care. It sought damages for alleged breaches of those contractual and common law duties.

The defendants applied to have the following legal questions determined by the Court at a preliminary stage (so as to avoid the necessity of a full hearing if the questions were determined in their favour):

1. Whether the Owners Corporation was entitled to benefit from the statutory warranties implied under the HB Act against either Brookfield or Hiltan;
2. Whether either of Hiltan or Brookfield owed the Owners Corporation a duty of care.

In relation to the first question, Brookfield argued that the warranties contained at section 18B of the HB Act were not available to the Owners Corporation because the development was adapted for commercial use as tourist, holiday or overnight accommodation. 

Ultimately the presiding judge, Justice McDougall, rejected this submission, noting that the language of the statutory warranties suggested that the application of section 18B is to be determined at the time the contract was made. After considering the contract plans and specifications, his Honour concluded that the development was designed as a residential apartment complex and its 52 residential lots were designed for use as dwellings. The design & construct contract was, therefore, a contract to do residential building work and warranties were thus implied into it.

From a jurisprudential point of view, the more interesting aspect of the judgment was the Court’s rejection of the common law duty of care contended for by the Owners Corporation despite its finding that the complex was a residential development. Although the courts have been reluctant to formally acknowledge as much, the trend of previous decisions indicated a bias (although short of a “bright line”) in favour of duties in the residential context because the owners of dwellings are generally considered “vulnerable” to a builder’s want of reasonable care. 

Counsel for the Owners Corporation argued that the High Court in Bryan v. Maloney (1995) 182 CLR 609 (Bryan) recognised the existence of a duty of care between a builder and a subsequent owner of residential premises. Furthermore, relying on Woolcock Street Investments Pty Ltd v. CDG Pty Ltd (2004) 216 CLR 515 (Woolcock), counsel submitted that the Owners Corporation was “vulnerable” because the operation of the Strata Schemes Management Act 1996 (NSW) meant, in substance, that ownership of common property was foisted on it without any opportunity to consider whether or not to accept the burden of defective work and ongoing repair and maintenance.

For the defendants, it was argued that:

1. Bryan was of a special category and could be limited to its facts; and
2. Bryan and Woolcock made it clear that the analysis of the relationship between the original owner and builder must first be carried out: if no duty of care was found to exist within that relationship, then there could be no duty owed to subsequent owners. 

Justice McDougall held that neither Brookfield nor Hiltan owed the Owners Corporation a duty of care. He based his reasoning on three main points:

1. The fact that he had concluded that the Owners Corporation had the benefit of the statutory warranties pointed away from the imposition of a duty of care. His Honour said the Court should be slow to substitute its own judgment for that of the legislature where the legislature had considered, and made clear provision for, the extent of a builder’s liability to a subsequent owner.
2. The decision in Bryan depended on a conclusion that there was a sufficient relationship of proximity between the owner and builder to warrant the imposition of a duty of care. But the concept of proximity has since been discarded as the basis for imposing a duty of care (as per Woolcock).
3. In his Honour’s view, that there was no basis for finding that Brookfield owed a common law duty of care to Hiltan in the first instance because the parties had negotiated, on equal footing, a detailed contract in which each bargained for what it would give as the price for what it would receive. Applying Woolcock, there could be no subsequent conclusion that Brookfield owed the Owners Corporation a duty of care.

On the question of vulnerability, Justice McDougall said it was “questionable” whether the Owners Corporation should be considered as vulnerable in light of his conclusion that it benefited from the statutory warranties. However, he did not take the analysis any further and said this was a question for the legislature or a higher court. 

This decision leaves open the question of whether a duty should be imposed in circumstances where the statutory warranty regime is held not to apply and/or the facts support a conclusion of relative vulnerabilities within the initial contractual relationship.

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A high burden to displace an adjudicator’s decision

Grace McGuinness and Rachel Page

Section 46(3) of the Construction Contracts Act 2004 (WA) (CC Act) broadly provides that except by way of application to the State Administrative Tribunal, a decision or determination of an adjudicator cannot be appealed or reviewed.

While it is established that s 46(3) does not exclude judicial review, the WA Supreme Court decision in Cape Range Electrical Contractors v Austral Construction Pty Ltd [2012] WASC 304 affirms the court’s tendency to limit interference with the decision of an adjudicator.

Background

The case involved a payment dispute which arose from a subcontract for electrical works on a mine site in Western Australia. The subcontractor, Cape Range Electrical Contractors (Cape Range), sought leave to enforce an adjudicator’s determination in its favour. The head contractor, Austral Construction Pty Ltd (Austral), applied for declaratory relief to displace the decision on the basis that the adjudicator lacked the jurisdiction to make the determination and also that Austral had been denied procedural fairness by the adjudicator.

Jurisdictional error

In relation to the allegation of jurisdictional error, Pritchard J found that the relevant enquiry for him to make was whether the adjudicator had misconstrued the CC Act in concluding that the jurisdictional fact upon which he based his jurisdiction existed, and not whether the jurisdictional fact actually existed. His Honour said that to displace an adjudicator’s decision the court must find that the adjudicator’s conclusion that he or she had jurisdiction:

1. was so unreasonable that no reasonable decision maker would have reached that conclusion;

2. was reached by misconstruing the CC Act;

3. was made by taking into account irrelevant considerations or by failing to take into account relevant considerations; or

4. manifested serious irrationality or illogicality.

Pritchard J held that Austral had not established adequate grounds in this case and the adjudicator’s determination was enforced.

Procedural fairness

In respect of the challenge on the basis of procedural fairness, Austral relied on the adjudicator’s dismissal of its setoff claim arising under the contract to allege that the adjudicator had failed to consider relevant considerations. The court affirmed the adjudicator’s dismissal of the setoff claim, finding that it was within the adjudicator’s jurisdiction to find that the setoff considerations were not relevant to its decision.

Declaratory relief

Cape Range also submitted that any challenge to the validity of an adjudicator’s determination is excluded by s 46(3) unless it is made by a prerogative writ. Pritchard J rejected this and held that it was open for Austral to pursue any means by which a determination of an adjudicator may be reviewed, including by declaratory relief.

What you need to know

The case affirms the court’s tendency to limit interference with the decision of an adjudicator. When our clients are faced with an adverse determination, we would advise that they seriously weigh up pursuing final judgment in court against disputing the determination, given the potential wasted effort at this interim stage.

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Retail uses to be widely permitted in new Victorian planning zones

Tamara Brezzi

The most recently proposed reforms to the Business zones in Victorian planning schemes propose to consolidate the 5 current business zones (B1-B5) into 2 new zones, being the Commercial 1 and Commercial 2 zones.

As is the case with all schemes in Victoria, those zones will be the same irrespective of the municipality in which the zoned land is located. The essence of the reforms is that many of the previous prohibitions that concerned shops, supermarkets and bulky goods/restricted retail premises have been lifted.

The Commercial 1 Zone (C1Zone) will be a consolidation of the Business 1, 2 and 5 Zones. Within the new C1Zone, no permit will be required for any retail use or for accommodation uses (including dwellings) and there will no longer be any restriction on the use of land in that zone for office use. The proposed controls will free up uses in the C1Zone to facilitate the development of truly multi purpose activity centres/town centres that include offices and residential accommodation.

The Commercial 2 Zone (C2Zone) will be a consolidation of the Business 3 and 4 Zones. Within the C2Zone, permits will no longer be required to use land for a restricted retail premises (ie a bulky goods premises) and trade supplies, food and drink premises (cafe, restaurants etc) and cinema. Further, the maximum floor area restriction for office uses will be removed.

The most significant change though concerns the use of land for supermarkets in the new C2Zone in which a supermarket with a floor area of up to 2000m2 plus 500m2 of associated shops will no longer be prohibited on land that was in the Business 3 and 4 zones (usually land located outside of town/activity centres).

In addition to the introduction of the commercial zones, restrictions on the use of land for shops and offices in the Industrial 3 Zone have been reduced.
These zones are not yet introduced. The government is consulting concerning the detail of the zones. The government has appointed an Advisory Committee to consider the submissions made and to report to the government by the end of 2012.

There are interesting implications for established town centres and homemaker style centres.

The free market economists say there’s nothing to worry about and that the market will ensure that the amendments to the controls will not deliver any adverse planning outcomes. On the other hand, there are strong planning concerns that changes to the structure of urban form and particularly the role of the traditional town centre is something to be genuinely concerned about in respect of these reforms.

What is known is that the reforms will bring about different changes in different retail settings – the implications for an inner city strip shopping centre are different from Regional towns which are different again from middle – outer suburban locations or the Growth Areas. Indeed, it is possible that in the growth areas the former prohibitions on shops in Industrial 3 zones or Business 4 zones will be re-introduced by way of a schedule to the Urban Growth Zone in order to provide a new town centre with unrestricted opportunity to establish itself as a vibrant, active centre without risk of competition from a supermarket and speciality shops to be located on land that is outside of the designated activity centre.

The proposed reforms facilitate a new opportunity to apply for something that was previously prohibited. The question remains as to whether the planning system, the new controls and existing retail policies are sufficiently aligned to deliver the reasonable retail outcome – that is, a reasonable outcome that is not only driven by the retail economics evidence or blind faith in the market being capable of delivering good outcomes. There are many in the planning sector who are particularly concerned about a possible threat to activity centres and the deregulation of the distinction between restricted retail premises and shops. Inevitably the planning system has a role to play in tempering the two extremes of the debate. In fact, more responsibility is being delivered to the planning system as a consequence of these controls – much of what was previously prohibited now needs a permit – the planning permit application system will have greater opportunities to impose its own balance in the debate.

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