Australia: Corrs High Vis: Episode 15 - Defective building materials

In our latest Corrs High Vis podcast Andrew McCormack and Martin Byres discuss the practical steps to be taken when it comes to defective building materials with Jaclyn Smith. Corrs High Vis tackles the issues that matter in the construction industry. The podcast series, brought to you by Corrs Construction team, offers analysis and insights to help you make smarter decisions.

These podcasts do not provide legal or other advice. Obtain legal or other professional advice as required.

TEXT VERSION

Jaclyn Smith: Commentator – Construction

Andrew McCormack: Corrs Chambers Westgarth – Partner, Brisbane

Martin Byres: Corrs Chambers Westgarth – Special Counsel, Brisbane

Jaclyn: Hello and welcome to High Vis, the Corrs Chambers Westgarth Construction podcast. My name is Jaclyn Smith and I am a Senior Associate in the construction team.

Today I am joined by two of my colleagues. We have Andrew McCormack, a Partner in our Brisbane office, and Martin Byres, a Special Counsel also based in our Brisbane office.

In today's episode I will be speaking with Andrew and Martin about the topical issue of defective building materials, including some developments specifically in Victoria and Queensland. We will also look at some of the more practical steps that you can take if you encounter defective building materials on your project, and what kind of remedies are available in these circumstances.

Andrew, if I can come to you first, there has been quite a lot of attention recently on the issue of non-compliant building products.

ANDREW: Yes Jaclyn, that's right. The Victorian Government recently announced the establishment of a cladding taskforce to consider how it could speed up cladding identification and testing in Victoria and take action to address the critical issue that cladding can pose to fire safety. More broadly, the Senate Economic References Committee has also been undertaking an enquiry into non-conforming building products, again with a focus on cladding building materials.

JACLYN: There have been some proposed amendments to the Queensland Building & Construction Commission Act. Who in the industry needs to pay the most attention to these amendments?

ANDREW: There is proposed new legislation in Queensland that will establish a chain of responsibility placing duties on all supply chain participants to ensure the building products are fit for purpose. Parties at every stage of the supply chain and importantly their executive officers should be aware of these proposed changes.

JACLYN: Andrew, can you step us through what some of the amendments are and what they are trying to achieve?

ANDREW: The key objectives of this new legislation are firstly to make all building supply chain participants responsible to ensure that non-conforming building products are not used in Queensland. Importantly, the legislation also extends the ambit of disciplinary action that can be taken by the regulator. Broadly the changes fall into two categories. Firstly the imposition of new duties and secondly, the creation of new offences.

JACLYN: I see. So who are the new duties being imposed upon and what are the scope of these duties?

ANDREW: Well the Bill will implement one primary duty which is applicable to all participants in the supply chain as well as a range of additional duties that are specific to certain roles within the supply chain. If we turn first to the primary duty, the primary duty is that each person involved in the supply chain must ensure, insofar as is reasonably practicable, the building product is not a non-conforming building product. The exact scope of this primary duty will be dependent upon where that duty falls in terms of each stage of the supply chain.

In addition to this primary duty there are also additional duties which operate in conjunction with that overarching primary duty. Additional duties apply to designers, manufacturers, importers and suppliers as well as installers of building products.

Designers of products must ensure so far as is reasonably practicable that if they give the design to another person who is going to give effect to it, that that design is accompanied by the required information for the product. Now interestingly reasonably practicable is not defined in the legislation and therefore would be subject to interpretation of the court in each set of particular circumstances. The definition of required information is included in the proposed legislation and this includes information about the suitability of the product, instructions about how the product must be associated with the building and instructions about how the product is to be used. In a similar vein manufacturers, importers or suppliers of a building product must also ensure that a product is accompanied by the required information that I referred to a few months ago for that particular product before it is given to another person.

Installers of building products must ensure that the owner of the building is given information about the product prescribed by the regulations. Now the legislation is silent on whether the installer will be at fault if they simply forward the information received from someone further up the supply chain if that information is ultimately inadequate or insufficient. In other words, it is not currently clear whether an installer would discharge their duty by simply passing on the information from their supplier or whether they have an independent duty to consider the quality of that information before they provide it to the owner of the building.

Now one of the critical changes proposed by this legislation is the imposition of an additional duty on executive officers, that is directors, company secretaries of companies involved in the building supply chain. Executive officers will need to exercise due diligence to ensure that the company complies with its duty. If an executive officer breaches his duty, he can be convicted of an offence and that can be the case whether or not the company has in fact been convicted of an offence itself.

JACLYN: In relation to the second key change proposed by the amendments that you've just talked about, the creation of new offences, can you tell us a little bit more about what this actually involves?

ANDREW: Well Jaclyn the amending legislation will introduce a number of new offences. These include an offence with a maximum penalty of 1,000 penalty points if a person breaches one of the new duties. It is also an offence, again with a maximum of a 1,000 penalty points, for a person to make representations about the intended use of a product that does not comply with the requirements for representations prescribed in the regulations.

There is also going to be a new duty imposed on all persons in the chain of responsibility to notify the regulator which in Queensland is the QBCC of any notifiable incidents. A notifiable incident is a death, serious injury or an incident that exposes a person to serious injury or illness.

A breach of this reporting obligation will also carry a penalty currently proposed to be 100 penalty units. For those who may be interested, a penalty unit in Queensland is currently $121.90.

JACLYN: Martin if we turn to you now, what can you do if you discover that your contractor has not installed the product for example a particular brand and type of flooring that is stipulated in your building contract?

MARTIN: Well the starting point and speaking generally is that that is likely to give rise to a breach of contract. Breach of contract usually comes about in one of several ways. First, you might have a failure to perform on time or at all. Secondly, and relevant to the question I've been asked, is failure to perform to an agreed standard or specification. Thirdly, you can have a refusal or an inability to perform before the time for performance has arisen.

The first two types of actual breach that I have just mentioned measure performance against the terms of the contract. So wherever the performance is not strictly in accordance with the contract, you will have a breach.

The third type of breach I've just mentioned is known in legal parlance as anticipatory breach. At the time of an anticipatory breach, if it amounts to a repudiation of the contract, the innocent party may terminate the contract but anticipatory breach is outside the scope of what I am going to talk about today.

In some circumstances the right to terminate a contract will arise where there is a contractual stipulation or a clause expressly conferring the right to terminate or if there is a breach or a repudiation giving rise to the right to terminate under the common law. If a right to terminate has arisen at common law, the innocent party may also have a right to terminate pursuant to a clause in the contract and unless there is an implied or express agreement to the contrary, a contractual right to terminate for breach won't displace any right of termination which arises by operation of the common law.

So if a right to terminate arises, the innocent party needs to decide whether to elect to affirm the contract and then claim damages for the particular breach and in that instance, it may also be necessary to claim specific performance or an injunction to compel the other party to continue to perform or the innocent party might elect to terminate the contract and claim what is known as loss of bargain damages.

Construction contracts however will usually specify quality and material and those requirements are typically and contractually binding specifications. Construction contracts also typically have generally applicable warranties as to workmanship and materials and breach of these is usually what is known as a defect or defective work. As a general principle, defects in the work or defective work will not entitle the principal to terminate the building contract.

JACLYN: Martin, if you discover that your contractor has not installed the product stipulated in your building contract, will that amount to a defect or defective work under the contract or some other breach of contract? If this is so, what are your rights?

MARTIN: Well to answer the first part of your question, it can amount to a defect or defective work depending on whether and if so how the contract defines defect or defective work. It is not uncommon for building contracts to contain an express obligation of fitness for the purpose. But if it doesn't, a warranty for fitness for purpose may be implied under statute or under the common law.

As to implication by statute, each Australian State has its own sale of goods act which contains a provision in which implies a term that goods or materials, in the case of a building contract, must be reasonably fit for the purpose for which they were bought provided of course that purpose was made known to the supplier and the customer relied on the supplier's skill. The obligation might also arise under the Australian Consumer Law which replaced the Trade Practices Act a few years ago.

There are also obligations imposed by legislation which cannot be contracted out of which could be breached if the materials used are not in accordance with Australian Standards or the Building Code. In some instances, parties will not agree on whether a particular product was defective or work was defective or did not meet the requirements of the contract. So in that situation it is often necessary to obtain expert evidence to demonstrate the point and support the argument. As to what your rights are in that situation, as the principal you could typically invite the contractor to rectify the defect or defective work or you could accept the defective work and retain the right to sue for damages or you could have a third party rectify the defect and sue for damages. I am currently involved in a case where neither of the first alternatives I have just mentioned were viable options and because the contractor had no intention of undertaking the rectification work, my client had to have a third party rectify the defect or defective work and we are currently suing the contractor for damages.

JACLYN: Now Martin, if rectification is required to be carried out and you are entitled to recover damages from the contractor, how might those damages typically be calculated?

MARTIN: Well put simply, the damages should put the wrong or the innocent party in the position they would have been in had the breach of contract not occurred and the contract had been properly performed. So if a building contract is breached in the manner we are talking about, the damages available for the wronged or innocent party could include the cost of labour and material to remedy the breach of contract and what is known as consequential loss. But the claim must be reasonable and it must arise as a direct consequence of or be caused by the breach of contract and it must be within the contemplation of both parties to the contract. So put another way, it must be proved that the loss is reasonably closely linked to the breach or what is known in legal parlance as not being too remote.

In the case I am currently involved in, my client is suing the contractor for the costs actually incurred in carrying out the necessary rectification works and these include principal contractor costs and sub-contractor costs and equipment hire costs.

As to the consequential loss, my client is claiming store staff costs being wages paid to staff involved in the removal and storing of equipment while the floor rectification works were carried out and it is also claiming loss net profits from the closure of the premises for the period during which the floor rectification works were carried out.

The final comment I would make is the party claiming damages must also prove the amount of the loss they are claiming. So it is very important for the innocent party to also keep adequate documentation to ensure there is sufficient evidence to support any claim for damages. So there I am talking about things like quotes, tax invoices, receipts and so forth.

JACLYN: Thank you to both Andrew and Martin for joining me today and to our listeners, we hope you will join us next time for the next episode for Corrs High Vis.

This podcast is for reference purposes only. It does not constitute legal advice and should not be relied upon as such and you should always obtain legal advice about your specific circumstances.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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