Previously in this three-part luxury development series, we considered:
- matters which developers should consider during the pre-tender stage of luxury development projects, including developing a clear overall vision and design intent for the project
- the contracting phase of luxury development projects, including ensuring the contractual framework supports the developer's vision and limits the developer's risk exposure.
In the final part of this series, we discuss the management of works during the contract period and the ultimate delivery of luxury development projects.
Managing the construction work
As touched on in the previous parts of this series, the developer may elect to have varying levels of involvement in the progression of the works throughout the course of the project. Depending on the developer’s intended level of ongoing involvement in the works, it may be necessary to appoint a third party superintendent or principal’s representative to manage the progression of the works on the developer’s behalf.
In deciding what level of ongoing involvement is necessary (or appropriate) for a developer, it is worth considering the following:
- who is responsible for the day-to-day management of queries from the contractor? It is important that whoever is undertaking this task be wary of issuing any instructions to the contractor which may amount to a variation of the works under the contract
- in circumstances where the design was not finalised before the works commence, who will be responsible for confirming and approving design choices, including product selection and finishes? Are there any restrictions on when and how these decisions need to be finalised and communicated to the contractor so as to not unreasonably delay the works?
- who will be responsible for ensuring that the developer’s design intent is met and dealing with situations where the contractor is not meeting the required standard? It is important that any instructions given in respect of rectifying defective or substandard works are done in such a way that they do not come across as an instruction or direction to vary the works under the contract. To this end, it may be worthwhile to consider implementing ongoing, progressive independent reviews of the works to ensure they are being carried out in accordance with the required design and quality standards.
In circumstances where the developer elects to take an active role in the works, such as by sourcing materials or making ongoing decisions on site, the developer should be wary that, if these matters have not been appropriately accounted for in the contract, the developer could end up in a situation where their actions amount to a cause of delay or a variation to the contract.
Also, the developer should be aware that if the contract does not allow for changes in the programme or work sequence, any direction given to the contractor to accelerate certain works or complete works (including defect rectification works) out of sequence to complete certain residences for settlement purposes may result in the developer being liable for any time and/or costs incurred by the contractor as a result of the direction.
Rectifying defects and non-conforming works
Once the works are largely completed, the developer will have the opportunity (subject to the terms of the contract) to require the contractor to rectify any defective or non-conforming works. In a luxury development, the developer will want to have settlement occurring (and tenants moving in) as soon as possible after the works are completed. As such, it is important that the contractor on the project:
- rectify any defects to a high standard and in a timely manner
- be obligated to re-visit the site as necessary to rectify defects as they become apparent
- be obligated to work around any tenants or occupiers that have moved into the development before the rectification works occurring and/or being completed.
A contractor’s liability for rectifying defects may be affected by the capacity in which the contractor has been engaged and the nature of the contractor’s obligations under the contract as a whole. For example, the following factors may support a position that a contractor is not liable for defects if:
- the developer selects and pays subcontractors or suppliers directly
- the developer enters into contracts for works and materials either directly or by the contractor acting as an agent of the developer
- the contractor has no legal ability to require work to be performed or rectified by those engaged by the developer or to recover compensation for faulty work performed or materials supplied
- the contractor is being paid a fixed fee and does not receive a margin on the cost of labour or material.
It is therefore important that contracts for luxury developments clearly state the contractor’s obligations regarding the rectification of defects, including (if necessary) circumstances where the developer directly engages any subcontractors or suppliers.
Project delays and poor workmanship – what the courts say
It is also important to note that in circumstances where a contract does not include detailed drawings, plans or specifications (as we discussed in earlier parts of this series), any warranties provided by the contractor as to the nature and quality of the finished product may be limited in scope to what was known (and therefore able to be warranted) at the time the parties entered into the contract.
Developers should therefore be careful to ensure that the contract expressly and clearly describes the standard of work the contractor must deliver at completion. It is this standard of work that the works should be assessed against when considering defects. This is especially important if the standard wording of the contract refers to the relevant statutory warranties. Even in circumstances where both parties have discussed the construction of a ‘luxury development’ and the contractor has been engaged on the basis of a mutual understanding that the development is to be luxury in nature, if the contract does not expressly stipulate that ‘luxury’ workmanship and quality is required (and describes what ‘luxury’ means to the developer), the courts will not infer or imply a greater standard than that expressly stipulated in the contract.
To achieve that outcome, the developer would need to apply to the court for the equitable remedy of rectification of the contract. However, this requires the developer to prove on the balance of probabilities what the parties’ common intention was. While the United Kingdom has determined that the parties’ actual common intention is relevant for this remedy, this has not yet been applied in Australia, with the objective common intention of the parties still potentially the test here.
Failing that, and if the contract is otherwise silent as to the standard of work, the relevant standard of work will be that contained in the statutory warranties (i.e. reasonably fit for purpose), which will typically be well below that envisaged for a luxury development.
Finally, if a contractor simply does not complete its works to the standard required by the contract, developers should be aware that, even if it can be established that the contractor has breached the contract, the courts will not always award the amount necessary to rectify the works to the standard required under the contract. The courts generally apply a test of ‘necessity and reasonableness’ to determine whether awarding rectification damages or an award of damages for loss of amenity is more appropriate in the circumstances.
During this assessment, the court commonly takes into account the following factors:
- the degree of departure from the contractual requirements
- the impact on the functional utility, amenity and aesthetic appearance of the works
- the reason (commonly known to the parties) for which the breached requirement was included in the contract
- the practicality of rectifying the defective work, including the effects on third parties and whether the rectification works would detract from the peace, comfort and amenity of others
- whether or not the owner, developer or principal actually intends to carry out the rectification work
- the cost of the rectification work and whether that cost is disproportionate to:
- the value of the development or building and the contract price
- the reduction in commercial value of the development or building
- the effect of the departure on the functional utility, amenity and aesthetic appearance of the development or building.
- the contractor’s liability for the defect.
Below are some examples of situations where the courts have determined that rectification was unreasonable:
- a contractor had constructed a pool to a depth of six feet six inches, despite the home owner requesting the pool to be at a depth of seven feet six inches. The home owner had specifically requested this depth so he could dive into the pool safely. The court held that the cost of rectifying the pool was disproportionate to the loss actually suffered by the home owner, in circumstances where the pool could be used safely. The court also considered that the home owner was not necessarily intending to undertake the relevant rectification works (but rather, merely seeking payment of the rectification costs). The court held that despite the shallower depth being a failure to achieve the precise contractual objective, it was not a total failure. In the context of the whole scenario, it was more appropriately a lack of amenity giving rise to a general damages award
- a contractor was engaged to construct the framework for an apartment with high ceilings of 2,700mm. However, the ceiling, as constructed, was on average 48mm less than the height required in the contract. The court held that the degree of departure from the contract favoured an award of rectification, but in the greater context, rectification was considered inappropriate and unreasonable. In reaching this conclusion, the court considered:
- the effect that rectification would have on the building as a whole and other tenants
- the home owners paid for a luxury apartment, the premium elements of which included its location, views, architectural design, floor space and ceiling height. All but the ceiling height were delivered
- the loss of amenity against the price paid for the apartment
- defective building work in home units which had been sold and the owners were not asking for rectification work to be carried out. There was no evidence of reduction in the sale price and no intention to carry out the rectification work.
Costly (and arguably disproportionate) rectification has, however, been considered appropriate in certain circumstances where it can be shown that the rectification was necessary to achieve the intended purpose of the contract.
An example is where a contractor installed inferior or second-grade limestone cladding in a home renovation when the contract specifically required that ‘high quality’ limestone be installed. Despite the cost of the rectification works ($258,000.00) being arguably disproportionate to the value of the home ($1.7 million), the court determined that the home owner was entitled to the performance of the contract to achieve the contractual objective, irrespective of others views as to what may be aesthetically reasonable.
As can be seen from the above examples, what is considered reasonable will differ from case-to-case and will be wholly dependent on the circumstances of each individual scenario, including the contract as a whole, the extent to which the contractor has failed to deliver the works under the contract and the nature and extent of rectification works (including cost, time, safety, disruption, and overall added benefit).
The best way for developers to protect their interests throughout the life cycle of a luxury development is to ensure that they are armed with a contract which specifically reflects and accounts for the particular circumstances of their individual development.
Whilst it may not be possible to account for all of the unknowns that may arise throughout the life of a project, taking the time, pre-contract, to carefully consider and account for what is known at the time and how the developer envisages the project unfolding will not only minimise the risk of disputes arising but also work to ensure that the ultimate product delivered is in line with the developer’s luxury vision.