2022 has not started off the way most of us expected or hoped it would. With surging COVID cases and pressure continually placed on the construction industry, it’s easy to feel overwhelmed.

But rather than focus on the negativity of the current situation, we have decided to stay positive, focus on the things we can control and channel our energy into some exciting projects for 2022!

This year is already shaping up to be a busy one, with a lot of work being carried on from last year. Below is a snapshot into some of the areas we are working on:

• Unfortunately, 2021 saw many builders go into administration (whether voluntary or involuntary) which left some owners without a builder. We are assisting clients with their Domestic Building Insurance claims with VMIA and assisting clients negotiate new building contracts with new builders.
• Representing clients in both the Supreme Court, County Court, VCAT and DBDRV in relation to:
  • Building disputes relating to defective building works, slab movement, adequate site drainage. These cases are complex and involve large volumes of documents, expert evidence, witness statements by clients and/or their representatives/contractors. They are also very lengthy given the delays in the Courts and Tribunal at the moment, so during the process we assist clients consider reasonable settlement options.
  • 2021 was a difficult year for cashflow for many builders and this saw a rise in payment claim disputes, whether it is representing an owner
    against a builder who has wrongfully claimed a progress stage (as the staged works are not complete) or whether it’s representing a builder where the owner has not paid the progress claim. This may include where the owners have wrongfully taken possession of the property prior to payment and/or repudiated the contract by not complying with their contractual obligations.
• As many know, litigation is lengthy and expensive, therefore we facilitate negotiations and settlements between the parties where litigations is not a viable option. Each negotiated outcome depends on the facts and the parties’ appetite to settle.
• Sometimes builders (or third parties) may choose tobuy-back the property to avoid litigation, and wherethis is in the interest of all parties, we will negotiatesuch settlements, and now that we offerconveyancing services, we act as conveyancers toprepare the necessary contracts and documentationand finalise the settlement.
• Some clients are seeing 2022 as an opportunity togrow their business, and they are purchasing land tobuild a display home. We assist our clients byreviewing their display village contract of real estateand again as we now provide conveyancing services,we act as our client’s conveyancers to finalise thesettlement of the property.
• Building projects are complex and during theproject a client may wrongfully terminate thecontract (amounting to a repudiation of thecontract) or may issue an invalid notice. We providetimely advice to our clients to guide themthroughout the duration of their project. Likewise,we advise our clients and prepare the requirednotices for clients who wish to end contracts duringa project (or before the works have commenced) toensure the proper process is followed to avoid abreach of the contractual requirements. Our aim isto assist our clients manage their projects to avoidunnecessary litigation where possible.

• Pursuing claims by builders against contractors for recharges arising from the contractor’s defective workmanship or joining contractors to claims issued by owners. As builders may be liable to owners for generally up to a 10-year limitation period in Victoria, there needs to be accountability between the builders and their contractors and/or suppliers to ensure the risk allocation is fair and reasonable. Where a claim is brought against a builder, there may be some instances where such claims arise due to the workmanship of another party (eg, a plumber, registered building surveyor, concreter, carpenter etc). Whilst the builder is still liable for their own obligations under the contract and legislative requirements, we advise and assist builders (or other parties) consider what avenues are available to apportion to the liability in appropriate cases.
• 2022 is also a year where businesses are venturinginto new areas or extending current services, whichrequires us to assist our clients by helping themobtain trademarks on new logos, names or slogans.It is exciting to assist clients with their growth andadvise them along the way about procurementcontracts, terms and conditions, websites, andadvertising.

• Assisting clients respond to VBA investigations forbreaches of registration obligations or breaches oflegislation.

As we indicated at the end of last year, we haveintroduced two new areas – Conveyancing and Probate.This is largely due to Hannah Smith joining our firm.With the combination of Donna’s 10+ years’ experiencein conveyancing added with Hannah’s extensiveexperience, this is an area we can offer our clients.Likewise with probate, Hannah has practiced in probatelaw for many years so this will see a fuller serviceoffered to clients who engage Spectrum Lawyers &Consultants for their Wills.

So, although 2022 may not look exactly how weexpected it to, we are entering the new year with apositive mindset, and we are excited to be able to assistour clients in a broader spectrum of areas.

“We are excited to broadenour spectrum of services in2022.”

COVID has affected construction projects in more waysthan one – whether it be time delays due to lockdowns,shortage of trades or materials, workers in isolation orprice increases. All of which have had a huge impact ona company’s cashflow. It is common for our firm to beasked by builders how they can protect their profitmargins when entering into building contracts forprojects which may not start for some time.

Section 15 of the Domestic Building Contracts Act (DBCAct) prohibits a builder from having a cost escalationclause in a domestic building contract where the valueis less than $500,000. A ‘cost escalation clause’ asdefined by section 15 of the DBC Act is “a provision in acontract under which the contract price may beincreased to reflect increased costs of labour ormaterials or increased costs caused by delays incarrying out the work to be carried out under thecontract”. It is noted that this section does not apply togovernment taxes or charges or prime costs /provisional sums.

So, what can a builder do if they are faced with largeincreases as we’ve seen arising from COVID? How can abuilder protect their profit margin?

Can a builder issue a variation?

A true variation is a change to the plans orspecifications in the building contract. Therefore, if theonly change is a change to the price, this is a not a truevariation and an owner is now bound to accept thebuilder’s variation for increased costs. There are twoexceptions to this:

• The parties can agree to sign a variation, but thevariation should clearly acknowledge the agreementbetween the parties (and acknowledge that there isno change to the plans and specifications)
• Where a product is not available or the parties haveagreed to alter the plans and specifications, thenthe associated price increase can be changed byway of a variation. It is important to ensure that avariation notice is issued and signed in accordancewith the building contract Especially as s41(5) provides that if the contract isended under this provision, the builder is entitled to areasonable price for the works carried out under thecontract to date (but pursuant to subsection 6, no morethan you would have been entitled to recover under thecontract). The only question therefore is what is a‘reasonable price’, this may not be agreeable betweenthe parties and you are limited to the amounts as perthe contract and no more.

Are the items prime costs / provisional sum items?

Where the building contract properly allocates costs asprime cost and provisional sum items, the builder maybe entitled to charge the owners for increases in theactual costs. However, caution should be given as thereare strict requirements under both the DBC Act and thebuilding contract when costing prime costs /provisional sums and also when adjusting theseamounts, so it is important the builder strictly adheresto these requirements to be able to enforce any priceadjustments.

It is important to issue extensions of time

COVID has seen many delays due to lockdowns,difficulties in obtaining materials from overseas and ashortage of labour. It is therefore important that propernotices be issued for any delays. Whether a builderwishes to impose liquidated damages for the extensionof time or not (as the builder wants to stay friendly atthe beginning of the project), it is still important toextend the building period with a proper notice ofextension of time as soon as possible, to avoid having topay the owner liquidated damages at the end of theproject if the building period blows out. Also rememberthat some contracts permit extensions at thecommencement of works, so if the works are delayed incommencing, remember to get your EOT in.

Builders should also be mindful of section 41 of the DBCAct 1995 (Vic). This section permits an owner to end abuilding contract if the contract price increases by 15%or more where “the reason for the increased time orcost was something that could not have beenreasonably foreseen by the builder on the date thecontract was made” (s41(1)(b)). It is noted that, anyincrease does not include any amounts which “arise asa result of a prime cost item or a provisional sum orthat is caused by a variation made under s38.”

If the owner seeks to end the contract under s41 of theDBC Act, the “owner must give the builder a signednotice stating that the building owner is ending thecontract under this section and giving details of whythe contract is being ended.”

Sometimes a builder does want to bring the contract toan end, so this may be a good option (depending onthe circumstances).

Can a builder just end the contract because it is not financially viable for to continue?

Not necessarily – at least not without mutual consent.The building contract will set out the rights toterminate a contract. Usually, termination can onlyarise for breach of contract. Therefore, escalated costswould not be a right to end a contract, unless theparties both agree to bring the contract to an end. It isimportant to document any mutual ending of acontract by way of a terms of settlement, deed oragreement.

There are also some important considerations beforeentering into a building contract:

• Some builders are considering moving away fromthe standard fixed price building contracts andentering into Cost Plus Contracts. However, buildersshould note that a Cost Plus Contract may only beentered into where the value of the building worksis for $1 million or more.
• Look closely at your procurement contracts withyour suppliers. Try to lock in prices to avoid pricerises during a building contract (or find analternative supplier where possible).

It is common for Spectrum Lawyers to be engaged byeither the builder or the owners where the partiesacknowledge that the building works may be defective(that is, there is an argument that the building workswere not carried out in a proper and workmanlikemanner (clause 8(a)), and/or that the building workswere not carried out with reasonable care and skill(clause 8(d)). However, the dispute really arises becausethe scope of remediation cannot be agreed betweenthe parties.

This very issue was considered by the Victorian Civiland Administrative Tribunal at the end of 2021, in thecase of Lu and Tang v Metricon Homes Pty Ltd(Building and Property) [2021] VCAT 1359. This caserelated to the supply and installation of engineeredtimber flooring to the ground floor (of a two-storeyresidential dwelling). In this case the owners hadengaged Metricon Homes (the builder) to design andconstruct the two-storey dwelling and included in thecontract was the supply and installation of the timberflooring. The owners claimed that the flooring to theground floor was defective and pursued the builder fordamages totalling $155,413.20 on the basis that theowners wanted all of the floorboards on the groundfloor to be removed and replaced.

Whilst the Tribunal found that the builder hadbreached its statutory warranties (as contained insection 8 of the DBC Act 1995 (DBCA) and thosereplicated in the building contract), the Tribunal wasrequired to consider whether the replacement of all ofthe floorboards on the ground floor was necessary andreasonable to rectify the defective work. It is noted thatMetricon contended that peaking at the end of thefloorboards is a known risk where the home is leftunheated over the winter months. However, theTribunal did not accept this as no warnings had beenprovided to the owners by the builder at the time ofhandover. Further, Metricon also asserted that theowners had failed to mitigate their loss by refusing toaccept Metricon’s offer to re-sand and re-stain theflooring (and if they had accepted the offer the ownerswould not have incurred the cost of alternativeaccommodation and removal of furniture). The Tribunaldid not accept this argument as the Tribunal believedthat at the time the offer was made by Metricon (inmid-2019) the owners did not have any independentopinions about the merits of Metricon’s proposal.

The Tribunal found that replacing the entire groundfloor flooring was not necessary and reasonable butrather, the builder could in fact re-sand and re-stain asan appropriate remedy. Therefore the owners are notentitled to the cost of the full removal and replacementof the timber flooring on the ground floor as it isdisproportionate to the nature and extent of thedefective work. This decision, namely to consider the‘reasonable and necessary’ test can be found in manycases, to support the test of whether the rectificationworks (as defined in Bellgrove v Eldridge [1954] HCA 36)are:

• Necessary to produce conformity with the terms ofthe contract.
• The reasonable course to adopt in all thecircumstances.

In the decision of Senior Member Walker in ClaredonHomes Vic Pty Ltd v Zalega [2010] VCAT 1202, SeniorMember Walker summarised the decision in Ruxley,that suggests that account can be taken of thefollowing matters at least:

• Whether and to what extent the work, although notin conformity with the contract, is nonethelessserviceable.
• Whether and to what extent the defect has affectedthe value of the work or the building as a whole.
• The cost of rectification, the proportion that thebreach bears to the cost of rectification and whetherthe cost of rectification would be whollydisproportionate to the real damage suffered byreason of it.

“When discussingremediation scopes it isimportant to consider whatis necessary andreasonable.”

• The likelihood that, if rectification cost is awarded,the sum so ordered will actually be spent onrectification. Obviously, a successful plaintiff canspend his damages as he sees fit but this may be auseful indicator of whether the amount sought isgreater than the real loss suffered

Considering the above, VCAT ordered the builder to paythe amount of $28,913.81 to the owners as this was theappropriate remedy (which was reasonable andproportionate to the nature and extent of the defectivework) – the cost to re-sand and re-stain ($13,428.80),diminution in the life of the flooring ($13,841.61),accommodation for 6 days ($818.40) and furnitureremoval ($825.00).

Accordingly, it is important for parties to rememberwhen discussing remediation scopes with owners thatthey are only required to consider what is necessaryand reasonable and all communications should beframed in this manner. Whilst it may not always bepossible to convince an owner on what is necessary andreasonable, it will assist in mitigating your loss shouldyou find yourself in a dispute.

Spectrum Lawyers provide legal services with legal expertise across all areas of building & construction law.

Building and construction law

• To assist builders and/or owners efficiently resolve building disputes.
• Developing streamline procedures and training to manage the spectrum of challenges in today’s market.
• Advising consultants and contractors on their legal obligations under the Building Act and Building Regulations.
• Advising building surveyors on compliance issues.
• Debt recovery.
• Dispute resolution at private mediations, DBDRV, Tribunal and Courts.
• Reviewing building contracts and advising on rights and obligations.

Conveyancing

• Assisting clients with the purchase or sale of residential or commercial property.

General Counsel Services

• Reviewing and advising on procurement contracts and licenses.
• Advising on general business law and day-to-day business operation issues.
• Drafting policies.
• Reviewing and drafting polices and terms and conditions.
• Negotiating contractual documents.
• Providing training (contract law, Australian Consumer Law, advertising, warranty, etc.)

Probate, Wills and Powers of Attorney

• Administering estates.
• Drafting Wills and Powers of Attorney to protect your family and assets