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Building and Construction Law News, January 2010

Independent Contractors need to take care
The recent case of Leighton Contractors v Fox concerned the "vicarious liability" of a head-contractor for the negligence of an independent sub-contractor.
Leighton Contractors was the main contractor on the relevant site, and contracted with Downview, a concreting contractor. Downview contracted in turn with Fox's employer. Fox was injured at work by an unsecured pipe while attending to cleaning the line. The system of work followed by Fox in performing the relevant tasks, particularly his employer's failure to secure the offending pipe, was inconsistent with "good practice".
Both Leighton and Downview, when pursued by Fox for breach of duty of care, argued that the law of negligence did not extend to the negligent acts of independent contractors.
On Appeal, the Court held that a Principal contractor will, in certain circumstances, come under a duty to take reasonable care in ensuring that a safe workplace and safe work systems are maintained by an independent contractor. Here, the Court followed the decision of Stevens v Brodribb Saw Milling Company Pty Limited (1986) 1 CLR 16. In the case at hand, this was held to mean that Leighton owed a broad duty to ensure that safe work practices were followed on site, and to do what could reasonably be expected of it to ensure that persons working on site had adequate training.
The court of Appeal suggested that the necessary OH & S training had not been provided, in that the training that had been provided did not include training in respect of concrete line cleaning pursuant to the relevant concreting industry code (the "pumping code").
In the High Court, however, it was held that Leighton's duty to provide OH & S induction training of the kind in question did not extend to the provision of training in specific processes such as line cleaning. The duty of Leighton as principal to provide a safe place and safe systems of work did not compel Leighton to provide training for subcontractors in their particular areas of expertise. A similar conclusion was reached in respect of Downview's liability.
This decision broadly points to the continued centrality of the general rule that a principal will not be vicariously liable for negligent acts of a subcontractor.
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Is a "Charging clause" under a construction contract valid?
Many construction contracts between builders and owners include a clause in which the owner agrees to "charge" the land the subject of the construction contract in favour of the builder for any unpaid amounts under the contract. The Home Building Act requires that any such charging clauses meet certain requirements including:

• the land to be charged is to be the land under the contract;
• the charge must be in favour of the builder's licence holder who is a party to the contract;
• the charge secures what is payable by the owner to the contractor only to the extent that a tribunal or court has made an order that that payment is payable;
• the party against whom the judgment or order is made must be a party to the contract and the registered proprietor of the land to be charged (see section 7D(3) of the Home Building Act).

It is important to note that a decision of the CTTT [the Consumer Trading and Tenancy Tribunal] (where many building and construction disputes are heard) is sufficient for the purposes of section 7D(3) to activate a charging clause (see Chateau Constructions (Aust) Ltd v Zepinic [2009] NSWSC 1339).
So where a contract contains a charging clause and all the requirements of 7D(3) of the Home Building Act are met, a builder will be entitled to a charge over the land. In order to secure a charge if the owner will not or cannot pay a builder should either;

• register a charge, which requires the consent and signature of the owner and consent of any registered mortgagee., or alternatively
• lodge a caveat to protect their interest

and seek an order for a judicial sale from the Supreme Court under section 103 of the Conveyancing Act.
Please contact us to discuss reviewing building or other contracts to ensure you are satisfactorily protected.
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A SHORT REVIEW OF THE Building and Construction Industry Security of Payment Act 1999

When does a contractor lose the right to begin proceedings under the Building and Construction Industry Security of Payment Act 1999, to recover a progress payment?

The Building and Construction Industry Security of Payment Act 1999 ("the Act") aims to provide builders and contractors with cashflow by providing a scheme for secure interim progress payments in a fast and efficient manner (in theory), while still allowing any dispute over those payments to be dealt with at a later time. The Act does not apply where the Owner/principal intends to live in the building as their principal place of residence, either at the time of completion or any time in the future. However, if the building work includes two or more separate residential dwellings (for example in the case of units) and the owner only intends to live in one of the dwellings, the Act will apply (see Shorten v David Hurst Constructions Pty Ltd (ACN 107 042 688) [2008] NSWCA 134)
Section 8 of the Act entitles a contractor to serve a progress claim on an Owner/principal in circumstances where the Construction Contract also allows for progress payments. Section 13 of the Act allows the contractor to serve a Payment Claim on a Principal, outlining the construction work for which the payment is sought and the amount of the progress payment. Section 14 allows a Principal to serve a Payment Schedule [a response to the Payment Claim] within a certain amount of time, stating the amount the Principal is willing to pay in relation to the Payment Claim. If these steps are all followed, then an application for adjudication of the Payment Claim may be made, with each party entitled to make representations to an adjudicator.
In the event that a Payment Schedule is not served by the Principal within the specified time of 10 days, then the contractor may elect to take two alternative routes to recovery of the amount owing. The contractor may either:

• Bring proceedings in the relevant State court (depending on the amount of the claim). In any such proceedings, the Principal will be limited in their defence. They may not, for example, defend the matter on the basis of defective work. They may defend the matter on the basis of the Act not applying, or improper service of a Payment Claim,

OR

• Make an application for adjudication.

It is important to note that the alternatives above are an either/or proposition and a contractor who makes an adjudication application is not entitled to bring proceedings in court for the same claim if the adjudication should fail or not be to their benefit. That is not to say that the contractor loses their rights in general, but rather only their specific rights under the Act. A contractor may still sue under the contract, for example, notwithstanding the result of adjudication. However, in such a case, the principal would be entitled to defend the proceedings on the basis of defects in workmanship.

The question invariably arises as to what is the critical step that results in a contractor losing their right to begin legal proceedings under the Act.

Under section 15 of the Act, the contractor, on the expiration of the time allowed for service of a Payment Schedule by the Principal, in circumstances where no Payment Schedule has been provided, may either make an adjudication application or begin proceedings. To make an adjudication application, the contractor must first serve a notice on the principal pursuant to section 17(2) of the Act, which notifies the principal of the contractor's intention to make an adjudication application and gives the principal a further 5 business days to supply a Payment Schedule.

It has been argued that the service of a 17(2) Notice constitutes an election to proceed to adjudication. If this is the case, then the service of a 17(2) Notice would mean that the contractor had lost the right to bring proceedings under the Act. In Rojo Building Pty Limited v Jillcris Pty Limited [2006] NSWSC 309, the contractor made an application for default judgement in proceedings commenced by virtue of section 15(2)(a)(i) of the Act, in circumstances where the contractor had initially served a Notice under 17(2) of the Act and had made an adjudication application. The contractor purported to withdraw the adjudication application before any decision by the adjudicator had been made. Justice Einstein held that once the principal Jillcris had received the 17(2) Notice, the contractor lost its right to begin proceedings in court under section 15(2)(i) of the Act. Justice Einstein further held that the contractors attempt to withdraw from the adjudication did not have the effect of reinstating those rights. Rojo sought to have the matter reopened before Justice McDougall, on the basis that Justice Einstein's decision was made on a motion for summary judgment. However, Justice McDougall refused to reopen the matter on the basis that the hearing before Justice Einstein had disposed of the matters in dispute between the parties.

Rojo appealed to the Court of Appeal and on appeal in Rojo Building Pty. Limited v. Jillcris Pty. Limited [2007] NSWCA 68, the Court of Appeal held that Justice McDougall erred in not reopening the matter. The Court said that Justice McDougall should have allowed a final hearing, giving Rojo the opportunity to challenge Justice Einstein's statutory interpretation. The matter was remitted to Justice McDougall for rehearing.
On the rehearing, in Rojo Building Pty Limited v Jillcris Pty Limited [2007] NSWSC 880, Justice McDougall said the following:
"The provision of a Notice under s 17(2)(a) gives the respondent (the Principal) a right: a further opportunity to provide a Payment Schedule. But neither the giving of a Notice under s 17(2)(a) nor (if it happens) the provision of a Payment Schedule under s 17(2)(b) constitutes the making of an adjudication application. The claimant is not bound to apply for adjudication after the Payment Schedule is provided. It may decide, for any number of reasons, not to press the dispute further. For the reasons that I have given, I express no view as to whether the claimant could retreat to the other statutory alternative given by s 15(2)(a)".
Interestingly, Justice McDougall was not prepared to say whether service of a Notice under section 17(2) followed by the provision of a Payment Schedule in response would restrict a claimant from adopting the alternative path of bringing proceedings in Court under the Act. He said that there was the suggestion that once there was a disputed claim, that is once a Payment Schedule is properly served, whether as a result of a Payment Claim or a 17(2) Notice, it would not be open to the claimant to begin proceedings in a Court under the Act, but rather only to make an adjudication application. He suggested that the legislature should attempt to make it clearer what the consequences would be of the service of a Payment Schedule in response to a 17(2) Notice.
However, Justice McDougall did say that the service of a Notice under 17(2) alone did not trigger the election referred to at 15(2)(a) of the Act and should not mean that the complainant contractor would automatically be barred from beginning proceedings under the Act. He said although the alternatives provide by 15(2) were inconsistent with one another, and that 15(2) does provide for the election of one or the other, the act of providing the Notice under 17(2) was not the act of the election.
While it is clear that Justice McDougall's view was that where a 17(2) Notice has been served but no Payment Schedule received, a claimant would be entitled to bring proceedings under the Act, it is less clear what the position would be where a Payment Schedule was served in response to a 17(2) Notice. Currently there are no bills before the NSW State Parliament to amend the Act. It may be the case that before too long the question will be before the Courts.
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Who can rely on the Building and Construction Industry Security of Payment Act 1999?
The provisions of the Act are available to anyone who undertakes to carry out construction work or who provides related goods and services. However, there are some restrictions.
One such restriction relates to the building of residential dwelling, as defined in the Home Building Act 1989. The Act does not apply to a construction contract between a contractor and an owner, where that owner proposes to reside in the building which is the subject of the contract. There are two issues in relation to this restriction that need to be pointed out:
Firstly, the restriction does not apply to contracts where an owner proposes to reside in only one part of the building the subject of the contract. This is particularly so in the case of units. If the owner proposes to reside in one unit being built as part of a block of ten, for example, then the construction contract will be subject to the Act and the contractor would be entitled to rely on the provisions of the Act. Shorten v David Hurst Constructions Pty Ltd (ACN 107 042 688) [2008] NSWCA 134, involved a construction contract between an owner and a contractor for 10 residential units where the owner proposed to reside in one of those units. Justice Nicholas at first instance, in deciding that the contract was subject to the Act, relied on the second reading speech of the bill which gave effect to the Act. In that speech, the Minister for Public Works and Services said that a slight anomaly in the original draft of the bill would allow a developer of 50 units to avoid the Act by proposing to reside in one of them. The minister said that, "This was never intended as an outcome and the amendment is designed to close this off" (Second Reading Speech, New South Wales Legislative Assembly, (Hansard), 8 September 1999, p 103). The decision of Justice Nicholas was affirmed on appeal (Shorten v David Hurst Constructions Pty Ltd (ACN 107 042 688) [2008] NSWCA 134).

Secondly, it would appear that a sub-contractor may rely on the provisions of the Act in relation to a contractor, even if the contractor cannot rely on the Act because the owner proposes to reside in the building the subject of the contract. In Shorten v David Hurst Constructions Pty Ltd (ACN 107 042 688) [2008] NSWCA 134, Judge of Appeal Bell said that "It is tolerably clear from the terms of s 7(2)(b) that its primary purpose is to exclude from the operation of the Security of Payment Act construction contracts for the carrying out of residential building work on premises in which the contracting party is or proposes to be resident". It is apparent that a contract that the owner who proposes to reside is not a party to, even if it is a sub-contract of a head contract which the owner is a party to, will be subject to the Act.