The NSW Supreme Court in Oxford (NSW) Pty Ltd v KR Properties Global Pty Ltd t/as AK Properties Group ABN 62 971 068 965 [2023] NSWSC 343 (Oxford) has clarified and confirmed a number of principles in relation to the statutory duty of care in the Design and Building Practitioners Act 2020 (NSW) (DBP Act) and Hungerfords v Walker damages.
The Court held that:
Merely stating that a defect was present is not sufficient to found a breach of the duty contained in DBP Act s 37. The claimant must identify the specific risks that the builder was required to manage and the precautions that should have been taken to manage those risks
Damages for a breach of the duty in DBP Act s 37 are only available for defective works where there was a breach of the duty, not for incomplete works
Hungerfords v Walker damages may be available even if there is a liquidated damages clause in the building contract
For further information about the operation of the statutory duty of care in the DBP Act, see our previous article entitled “The Labyrinthine Design and Building Practitioners Act”.
Facts
The First and Second Defendants in Oxford (the Owners) had contracted the Plaintiff (the Builder) to construct a six-unit apartment building in Gerringong, NSW (the Contract). The Third and Fourth Defendants entered into a deed of guarantee with the Builder to guarantee that the Owners’ obligations under the Contract would be fulfilled.
On 20 March 2018, the Builder sent the Owners an email stating that the works were to be suspended on account of unpaid invoices. The Owners alleged that this suspension was contrary to the Contract.
From June to August 2018, the Builder resumed work on the building and completed works that the Court held were not “minor”. These included laying tiles in the units and on the balconies, installing joinery carcasses in most of the kitchens, building pergolas, and waterproofing works.
On 5 April 2019, the Owners purportedly terminated the Contract, which the Builders alleged was not permitted.
The Builder initially brought proceedings against the Defendants alleging that nine invoices remain unpaid and attempting to recover these amounts.
The Owners then brought a cross claim for contractual damages from the Builder for costs incurred to complete the works and to rectify defective works, and for Hungerfords v Walker damages for interest paid on borrowed sums due to the failure of the Builder to finish works by the date of practical completion stipulated in the Contract.
The Owners also brought a claim against Mr Kazzi, the sole director and shareholder of the Builder, for damages under the DBP Act s 37.
Construction of the Contract
Clauses 15.2 and 15.3 of the Contract stated that the Owners were to pay the contract price “progressively” following the “substantial completion of each stage”. There was tension between these provisions and the description of “Stage 9” listed in schedule 2 of the Contract, which is described as the “commencement of internal fit out including waterproofing, all ceramic tiling installed, interior and exterior painting completed” (our emphasis). The Court acknowledged these provisions were “awkward”. However, the Court held that the correct construction of these two clauses was that Stage 9 was only completed once the internal fit out had commenced and the waterproofing, all the ceramic tiling and the interior and exterior painting were completed.
The Court also held that payment for one stage could not be provided unless all previous stages were complete as the “stages” in the Contract were “intended to reflect the sequential completion of different aspects of the building”: Maples Winterview Pty Ltd v Liu & Anor [2015] ACTSC 58. This meant that the Builder was not entitled to payment for Stage 9 unless Stages 1-8 were complete even if the conditions listed in Stage 9 were satisfied.
The Builder’s Claim
The Builder claimed that the Owners had an obligation to pay nine outstanding invoices and the Owners’ failure to pay these invoices was a breach of the contract that provided the Builder a right to suspend the works. The Court found that the Owners did not have to pay any of the invoices and so the Builder was not permitted to suspend the works.
Some invoices claimed to be unpaid were in relation to works which had not been completed while others concerned works which were included in the Contract and were not “extra works” which required additional payment. The Court found that an invoice for “lift rectification works” had been paid while payment for completion of Stage 9 was not due as the works in Stage 8 as well as the required “ceramic tiling” and “painting” works listed in Stage 9 had not been completed.
In any event, by resuming works without providing notice to the Owners, the Builder had waived any entitlement to rely on their purported suspension of works on 20 March 2018.
The Owners’ Claim
The Builder accepted that much of the works on the building were incomplete and that some of the works completed were defective. The major defects included:
Construction of a retaining wall along a boundary using the Rediwall system rather than shotcrete as per the approved construction certificate plans
Boundary encroachments into neighbouring properties
Construction of the basement walls using the Rediwall system rather than concrete block work as per the approved construction certificate plans
Construction of the entry foyer below street level inconsistent with the approved construction certificate plans and which did not conform to Building Code of Australia (BCA) standards
Construction of the foyer, façade and roof that was not in accordance with the approved construction certificate plans and the development application
Defective wiring in the basement, with electrical cables and wiring left hanging out of walls and ceilings for a number of years
Concrete strength of the ground and first floor below the structural engineer’s standard
Failure to install fire-rated door jambs on basement and unit fire doors per the approved construction certificate plans and required under the BCA
Construction of the first-floor concrete slab contrary to structural engineering drawings
Pergolas constructed using materials that were not fit for purpose
Water and gas points were installed too close to balcony balustrades, which could enable children to climb and fall over the balcony
Failure to include flashings and weepholes in the double brick parapet walls to ensure that water did not leak into the building
Failure to design or construct wheelchair access to one of the units in the building
Failure to comply with some fire resistance requirements under the BCA
The Court left the parties to resolve the issues relating to the ‘minor defects’.
As the Builder failed to complete the works, completed some work defectively, and was not entitled to suspend the works when they purported to suspend the works, the Owners were entitled to terminate the contract.
Damages for Incomplete and Defective Works
The Court held that the Owners are entitled to damages to the value of the reasonable costs for completion of the works and rectification of the defective works. The Court accepted the Owners’ method of calculation of these costs by setting out all the invoices paid by the Owners “as much certainty and particularity must be insisted on … in … proof of damage, as is reasonable, having regard to the circumstances and to the nature of the acts themselves by which the damage is done”: Ratcliffe v Evans [1892] 2 QB 524.
However, the determination of damages for a breach of duty under the DBP Act only extends to the costs of rectifying the defective work which is the subject of the breach and does not extend to the reasonable costs of completing the incomplete work.
Purported Breach of the DBP Act Duty
The Court held that Mr Kazzi was a person subject to the statutory duty of care in DBP Act s 37. In Mr Kazzi’s affidavit, he stated that he “attended the Property on a weekly basis (about two to three times a week) to oversee the construction of the Building”. This meant that he had “substantive control over the carrying out of any work”: DBP Act s 36. Despite submissions to the contrary at the hearing, Mr Kazzi is a “person” for the purposes of the DBP Act, as per the decision in Boulus Constructions Pty Ltd v Warrumbungle Shire Council (No 2) [2022] NSWSC 1368.
An initial issue raised was the pleading of the case by the Owners as a failure by Mr Kazzi to “ensure”. All duties of care are discharged by the exercise of ‘reasonable care’, rather than a duty to “ensure”, and cannot impose a more stringent or onerous burden: Roads and Traffic Authority of NSW v Dederer (2007) 234 CLR 330. However, the Court held that what was alleged in the pleadings, in substance, was a breach of a duty to take reasonable care.
The decision in The Owners – Strata Plan No 87060 v Loulach Developments Pty Ltd (No 2) [2021] NSWSC 1068 makes it clear that where a plaintiff alleges a builder has breached a duty of care, the plaintiff must identify the specific risks that the builder was required to manage and the precautions that should have been taken to manage those risks. The plaintiff cannot simply to point to a defect and allege that the builder was required to take whatever precautions were needed to prevent that defect from arising. Establishing the ‘breach’ of a duty of care is an established principle in negligence which extends to the statutory duty of care in the DBP Act s 37.
The Court held that, in this case, the Owner identified, and the Builder accepted, many defects in the work which were caused by the Builder’s failure to carry out the building works in accordance with the approved construction certificate plans. However, this itself does not clearly elaborate how Mr Kazzi himself had personally breached his duty of care to the Owners.
Damages under the DBP Act
Even if the duty of care had been breached by Mr Kazzi, another issue in the case is the method by which the Owners calculated their supposed loss due to the defective building work. While the method used to calculate damages against the Builder was sufficient, the Owners were required to separate the costs of rectifying the Builder’s defective work, which would come under the duty of care in the DBP Act s 27, from the costs of completing the work that the Builder failed to complete, which would not come under the duty of care.
The Owners in the case merely relied on the allocation by Mr Mahedy, the architect of the development, to apportion percentages of each invoice as costs of completing incomplete work and costs of rectifying defects. For example, for a number of invoices from Shellharbour City Skip Bins, Mr Mahedy allocated 30% to incomplete work and 70% to rectification costs. There was little to no explanation given to these allocations. Rather, in some cases, Mr Mahedy simply asserted the allocations were based on his knowledge of the building works, including a sweeping statement that Mr Seage, the builder retained to complete and rectify the work, spent “significantly more” time and materials on rectification than completion. Despite Mr Mahedy having overseen the project and having detailed knowledge of the construction process, this was insufficient. The Owners had to prove the costs they incurred to rectify the defective works.
Hungerfords v Walker Damages
The Owners claimed damages for excess interest they incurred on loans they took out to fund the building works due to the works not being completed by the specified date for practical completion in the Contract. The Owners argued that these loans could not have been repaid until the sale of the apartments had been settled, which could not have been done until the defects had been rectified.
The Court found that the Builder was responsible for not meeting the date for practical completion. The Builder had wrongly constructed the foyer and stairway, leading to the need for an Environmental Planning and Assessment Act 1979 (NSW) s 96 application, but this application did not proceed due to the Builder’s wrongful suspension of the works.
Damages for interest were elaborated on by the High Court of Australia in Hungerfords v Walker (1989) 171 CLR 125.
An issue in contention was whether the entitlement for damages was abandoned due to the presence of a liquidated damages clause in the Contract. Clause 30.1 provided:
'If the building works do not reach practical completion by the end of the contract period the owner is entitled to liquidated damages in the sum specified in Item 13 of Schedule 1 for each working day after the end of the contract period to and including the earlier of;
a. the date of practical completion;
b. the date this contract is ended; or
c. the date the owner takes possession of the site or any part of the site.'
(our emphasis)
Item 13 of Schedule 1 of the Contract stated that the amount of liquidated damages was “$200 per working day calculated on a daily basis”.
The Court held that this clause did not prevent the Owners from claiming Hungerfords v Walker damages. There is a presumption that a contracting party does not intend to abandon any remedies for breach of the contract arising by operation of law unless there are clear words in the Contract: Gilbert-Ash (Northern) Ltd v Modern Engineering (Bristol) Ltd [1974] AC 689. There were “no unequivocal words” in the Contract to rebut this presumption.
The Court believed that the use of “entitled” in clause 30.1 indicates the entitlement to damages was in addition to, and not a substitute for, any right to damages arising under law.
The fact that the Builders were not aware that the Owners had taken out a loan to fund the development but found this out at a later date does not deny the claim for damages because the damages arise because “it is a foreseeable loss, necessarily within the contemplation of the parties, which is directly related to the defendant’s breach of contract or tort”: Hungerfords v Walker (1989) 171 CLR 125. As stated by the High Court of Australia in Hungerfords v Walker (1989) 171 CLR 125, these types of damages come under the first of the two types of damages mentioned in Hadley v Baxendale (1854) 156 ER 145, namely loss arising naturally and in the usual course of things from the breach of contract.
The onus is on the party suffering the loss to prove that such loss was sustained and the extent of any such loss: Pooraka Holdings Pty Ltd v Participation Nominees Pty Ltd & Ors (1991) 58 SASR 184.
The other issue is the date from which interest should run from. While there was no substantial building work done from January 2017, the Court found that the Owners let the matter drift for many months and thus held that interest should begin running from the date the Owners demanded the Builder resume work, which was 20 March 2019.
Conclusion
The decision in Oxford appears to limit the operation of the duty of care in the DBP Act s 37. Ordinary principles of negligence apply to this statutory duty so merely stating that a defect was present is not sufficient to found a breach of the duty. Any claimant must identify the specific risks that the builder was required to manage and the precautions that should have been taken to manage those risks. Damages for a breach of this duty are also only available for defective works as distinct from incomplete works.
The Court also confirmed that damages arising under law may be available even if there is a liquidated damages clause in the building contract.
The full judgment can be found here.
If you require any advice on the DBP Act, including if you have a potential claim under the DBP Act or have a claim made against you pursuant to the DBP Act, please do not hesitate to contact our expert lawyers. Our expert construction lawyers will be on hand to assist you.
The information contained in this article is general information only and not legal advice. The currency, accuracy and completeness of this article (and its contents) should be checked by obtaining independent legal advice before you take any action or otherwise rely upon its contents in any way.
Contributors: Valentina O'Regan & Harry Chen