Get your 5 Minute Fix of major projects and construction news. This issue: latest updates to NSW security of payment legislation; further cladding reforms for Queensland; NSW Court of Appeal outlines when adjudicators' decisions will be invalid for lack of good faith; and is quantum meruit bound for the High Court?

NSW security of payment reforms

Significant changes to the Building and Construction Industry Security of Payment Act 1999 (NSW) (SOP Act) – including to compliance and enforcement – will soon be in force, following the recent passage of the Building and Construction Industry Security of Payment Amendment Bill 2018.

The amendments focus on compliance and enforcement and include more stringent payment timeframes, new liabilities and penalties for directors, reinstatement of requirements for endorsement and the ability for adjudication determinations affected by jurisdictional error to be set apart. The reintroduction of the requirement for payment claims to be endorsed under the legislation is in stark contrast with the position under Queensland's reforms – as of 17 December 2018, the requirement for payment claims to be endorsed under the legislation will be removed in Queensland.

Frank Bannon and Jack Fan explore these amendments in greater detail here.

Further cladding reform for Queensland

On 1 October, key cladding reforms commenced in Queensland compelling owners of private buildings considered "in-scope" to comply with a 3-stage process aimed at identifying and assessing the risk of combustible cladding. Since then, the Building (Cladding) Amendment Regulation 2018 has commenced. The Amendment Regulation reflects industry feedback and introduces minor amendments to the Building Regulation 2006 (Qld) to facilitate the implementation process. Of note:

  • existing agent agreements can now be accepted as proof of agency for meeting obligations under Part 4A of the Building Regulation 2006 (Qld);
  • the Queensland Building and Construction Commission may issue a notice directing the building owner to complete Part 2 of the cladding checklist if there is a reasonable suspicion that the information provided in Part 1 was misleading (this amendment provides consistency as a similar provision exists for issuing a notice to complete Part 3 of the cladding checklist); and
  • clarification that if one co-owner has complied with the provisions with Part 4A of the Building Regulation 2006 (Qld), it is taken that all owners have complied.

Allegations of a lack of good faith can be difficult to prove

In 5 Minute Fix 20, we reported on Goodwin Street Developments Pty Ltd v DSD Builders Pty Ltd [2018] NSWSC 1229, in which the Court was required to consider whether an adjudicator's decision was invalid due to a lack of good faith.

Justice McDougall considered the content of the obligation to act in good faith in the context of provisions of the Building and Construction Industry Security of Payment Act 1999 (NSW) (SOP Act) relating to the valuation of construction work. He noted that the obligation to exercise a statutory function in good faith requires that adjudicators turn their minds to, grapple with and form a view on, all matters that they are required to consider under the SOP Act. However, the NSW Court of Appeal, in Goodwin Street Developments Pty Ltd v DSD Builders Pty Ltd [2018] NSWCA 276 (20 November 2018), cautioned against adopting such a broad interpretation of "good faith" in a judicial review context.

The Court noted that "an allegation of bad faith on the part of a decision-maker is a serious matter involving personal fault and should not be made lightly" and held:

  • The obligation on adjudicators to act in good faith should not be treated as equivalent to an obligation to “grapple with” and form a view on all matters required to be considered. The Court observed that couching the content of the good faith obligation in the language adopted by Justice McDougall could significantly increase the volume of cases and “invites a slide into impermissible merit review”.
  • Although bad faith cannot be comprehensively defined, in this context it requires something comparable to “wilful blindness or conscious maladministration”. There was no evidence to support such a finding.

The day after the Court of Appeal's decision, Justice Stevenson dismissed with costs Goodwin’s application for the adjudication amount to remain in Court (Goodwin Street Developments Pty Ltd v DSD Builders Pty Ltd [2018] NSWSC 1791).

Is quantum meruit recovery bound for the High Court?

We've previously reported on the Victorian Court of Appeal’s decision in Mann v Paterson Constructions [2018] VSCA 231, the latest in a series in which the owners of two townhouses in Melbourne’s eastern suburbs have attempted to resist payment of their builder on a “quantum meruit” (essentially, “amount deserved”) basis where the owners had been found to have repudiated their building contract.

In a further development, the Court of Appeal handed down a judgment on 22 November 2018 (Mann v Paterson Constructions Pty Ltd [2018] VSCA 313), granting the owners a conditional stay on the original order of VCAT requiring them to pay the builder approximately $650,000 calculated on a quantum meruit basis, pending hearing and determination of the owner's special leave application to the High Court and any resultant appeal.

If special leave is granted, the High Court will have the opportunity to consider the vital construction law (and, broader contract law) issue of quantum meruit recovery. This issue will be of particular interest to parties involved in the construction industry. Contractors tend to view a quantum meruit claim as a kind of holy grail: the builder can claim to be paid "reasonable remuneration" for work carried out for the owner on the basis of the builder's actual costs plus a reasonable margin. In some instances, the amount recoverable on a quantum meruit basis may exceed the agreed contract price. Many owners will seek to include specific contract drafting that excludes recovery on a quantum meruit basis following the contractor's acceptance of the owner's repudiation of a building contract.

The Court of Appeal gave a glimpse of its view of whether the applicants were likely to succeed in obtaining special leave, saying that those prospects were “not insubstantial” in relation to the first ground (entitlement to sue on a quantum meruit basis) but “more doubtful in relation to the second [whether the contract price acts as a ceiling to the amount recoverable on a quantum meruit] and especially the third ground [application of s 38]”. In offering this glimpse, the Court did not provide any specific reasoning, though it should be remembered that, under section 35A of the Judiciary Act 1903 (Cth), the High Court is bound to look to factors going broadly to the importance of the case to the law of Australia.

Despite considerable academic debate and criticisms of the availability of quantum meruit as a remedy, it continues as part of the common law of Australia – at least until the High Court sees fit to revisit the issue. It remains to be seen whether the High Court will have the opportunity to consider the crucial issue of quantum meruit in 2019, 10 years after it declined to do so by refusing leave to appeal in Kane v Sopov. We will keep you informed of any further developments.

Legislative reforms at a glance

NSW Government agencies must get their internal procurement policies and processes ready now, following the recent passage of the Public Works and Procurement Amendment (Enforcement) Act 2018 (NSW). Once the Act commences, suppliers will have a statutory avenue of review for certain government procurements. Read our Alert to learn more.

It's official: the Modern Slavery Bill 2018 (Cth) has now passed the Australian Parliament and is likely to come into force in early 2019. Once in force, it will impose supply chain reporting obligations upon entities which have an annual consolidated revenue of at least $100 million.

Senate Economics References Committee tables unsparing report on non-conforming building products

Some three years after the Senate Economics References Committee was tasked with an inquiry into the issue of non-conforming building products, and after the release of three interim reports, the Committee has now tabled its final report, "Non-conforming building products: the need for a coherent and robust regulatory regime". In it, the Committee makes some thirteen recommendations calling for the adoption of meaningful, nationally consistent measures to address this serious public safety issue, including:

  • the State and Territory Governments adopt Queensland's Building and Construction Legislation (Non-conforming Building Products Chain of Responsibility and Other Matters) Amendment Act 2017 as "a model for best practice 'chain of responsibility'" oversight;
  • a mandatory third-party certification scheme for high-risk building products and a national register;
  • the establishment of a building information database providing a centralised source of documentation to enable regulators to more readily identify instances of non-conforming building products being installed; and
  • making all Australian Standards freely available.