Sham building contracts for finance purposes

In the recent decision of Hutchings v Hope [2019] NSWCATAP 59, the NSW Civil and Administrative Tribunal Appeal Panel (Appeal Panel) set aside the decision of the Tribunal and remitted it for hearing by a differently constituted Tribunal. The Tribunal had found that the building contract was a sham.

Background

The owners and builder entered into:

  • an oral agreement to carry out residential building works on 25 February 2014, which allegedly included a term that the builder would charge an hourly rate of $85 plus GST
  • a fixed price building contract dated 21 May 2014 (written contract), with a contract price of $300,000.

The builder carried out the work and sought payment which exceeded $300,000. The owners refused to pay the excess over the value of the written contract, arguing that it was a fixed price contract. The builder commenced proceedings against the owners for the amount allegedly owing and the owners commenced proceedings against the builder for overpayment and defective works.

Tribunal’s decision

The Tribunal found that the written contract was a sham as it appeared to have been entered into solely for the purpose of obtaining bank finance for the works. Accordingly it was unenforceable. The Tribunal awarded the builder $120,145.14 on a quantum meruit basis, after deducting for the cost of rectifying defects.

Appeal Panel’s reasoning

In setting aside the decision, Appeal Panel reasoned that the Tribunal failed to consider:

  • a finding as to the alternative contract that was entered into and the terms of that contract
  • section 94 of the Home Building Act 1989 (NSW) (the Act) which prevents entitlement to quamtum meruit where there is a failure to insure
  • the evidence to support an offer, acceptance and consideration in the formation of the written contract.

The Appeal Panel made it clear that a case involving a sham is rare and requires a careful examination of the subjective intention of both parties. As the builder performed the building works, the Appeal Panel suggested that there was at the least an “inferred contract”, relied upon by the parties.

Implications

Parties should be aware that if there is an ulterior mutual purpose to the entering of contract, and the contract is deemed a sham, the contract may be rendered unenforceable. This has particularly onerous consequences for builders in terms of entitlement to payment for the work and exposure to disciplinary action. Owners should also consider how this type of activity would be viewed by their lender.

Author: Christine Jones

In the media

Why developers are delaying or abandoning half the apartments they planned to build The oversupply of apartments is starting to bite, with 40,000 jobs lost and abandoned projects piling up. But it's likely to get worse before it gets better (21 March 2019). More...

New industry body takes steps to make our buildings safer The Australian Balustrade Association (ABA) has been launched at a time when the construction industry is grappling over issues like the non-compliant use of flammable cladding and the cracking of the Opal Tower apartment block. The main purpose of this new national association is to prevent death or injury due to non-compliant, unsuitable or ageing balustrade installations (20 March 2019). More...

Two building companies collapse amid national housing downturn Two South Australian building companies have collapsed, and another is facing court action, as pressure from the national housing downturn continues (13 March 2019). More...

The less expensive way to reduce the fire risk of some cladding It took just 90 minutes for fire to race up 20 storeys of the Grenfell Tower, thanks to its combustible aluminium composite panels. But there are ways of making buildings safe — and not all involve completely replacing cladding (12 March 2019). More...

Housing investor loans sink to GFC levels The amount of credit provided to housing investors in January 2019 was lower than in any month since 2011,” said Master Builders Australia's Chief Economist, Shane Garrett. Excluding refinancing, investor lending fell by 4.1 per cent during January to $4.67 billion. This is the weakest monthly result since October 2011 (12 March 2019). More...

Engineers Australia: Events like Opal Tower are shaping the future of engineering The final report into the causes of the structural damage to Sydney’s Opal Tower says the damage could have been avoided if an engineers’ registration system was in place along with other key recommendations (11 March 2019). More...

PI ‘crisis’ as insurers retreat from cladding risk Insurers are pulling back from exclusion-free professional indemnity (PI) cover for building surveyors and fire engineers, sparking fears the construction industry could “grind to a halt” (11 March 2019). More...

Sydney launches challenge to diversify housing The City of Sydney has launched a challenge to develop innovative new ways to make Sydney’s housing more diverse and affordable. By encouraging new ways of thinking about housing across financing, management and design, the Alternative Housing Ideas Challenge aims to identify and develop new models to increase affordable housing supply (19 March 2019). More...

Western Sydney builder ordered to pay $45,000 for false representations A 27-year-old man from Tregear has been convicted after falsely representing himself as a licensed electrician and fraudulently passing off building works of others as his own. The NSW Fair Trading Commissioner, said Harrison deceitfully obtained a financial advantage of more than $12,000 from a customer in Woodcroft by falsely claiming that his company, Lushomes Pty Ltd, was the builder of a new home in Harrington Park (14 March 2019). More...

Central Coast building approvals buck expectations Building approvals on the Central Coast continued to buck expectations by rising further in January, reported the Housing Industry Association, the voice of Australia’s residential building industry (13 March 2019). More...

Published -articles, papers, reports

Planning for Australia’s future population Government of Australia: 20 March 2019 This strategy document considers population growth and regional development in Australia. Better population planning will help overcome capacity constraints and congestion pressures in Australia’s biggest cities. This will be a key focus of the government going forward with major investment in infrastructure right across Australia.

Australian Bureau of Statistics 14 March 2019 Industrial Disputes, Australia, Dec 2018 (cat no. 6321.0.55.001)

In practice and courts

ISCA: ISupply For Projects & Assets - The ISupply directory will give you access to suppliers that can help your project or asset achieve sustainability outcomes rewarded under the IS rating scheme. The directory links products and services to IS credits helping you identify suppliers that can meet your requirements (21 March 2019). More...

ABCC: Upcoming labour market testing audits The ABCC will soon be conducting a labour market testing audit campaign for employers covered by the Code for the Tendering and Performance of Building Work 2016 (Code) (12 March 2019). More...

ABCB reminder: NCC 2019 All three volumes of the NCC 2019 preview, as well as The Guide to Volume One, are now available to download. To get your copy, log into your NCC account through the NCC Online or create your NCC account and login to access. NCC 2019 will be adopted from 1 May 2019. If you’d like an overview of the key changes and dates, please check out the latest ABCB Connect article. More...

City of Sydney: Alternative Housing Idea Challenge The community will have the opportunity to provide feedback on the short-listed concepts as part of the City’s consultation to shape Sydney 2050. The Alternative Housing Ideas Challenge opened on Tuesday 26 March and close on Wednesday 8 May 2019. More...

New dates for Environmental Planning & Assessment Act updates Councils, certifiers and other industry practitioners have more time to implement some of the recent EP&A Act updates. Changes affect new provisions for building and subdivision certification, Local Strategic Planning Statements for councils in the Greater Sydney Region and Community Participation Plans.

Victoria

VBA: Practitioners urged to take due care when relying on CodeMark Certificates of Conformity The recent withdrawal of nine Certificates of Conformity issued under the CodeMark Scheme has again highlighted the need for practitioners to take due care when accepting Certificates as evidence of suitability (20 March 2019). More...

Cases

Allen v Wallace [2019] NSWCATAP 58 BUILDING AND CONSTRUCTION – Home Building – cost plus contract – repudiation – misleading and deceptive conduct – adequacy of reasons.

Hutchings v Hope [2019] NSWCATAP 59 CONTRACT LAW – Contract to do residential building work – Sham – Unenforceability of contract under Home Building Act 1989 – “just and equitable” to recover on a quantum meruit basis. ADMINISTRATIVE LAW – Adequacy of reasons – failure to provide analysis of evidence – failure to make relevant findings.

Long v Antoun’s Concrete Pumping Pty Ltd [2019] NSWCATAP 56 Appeal and leave to appeal from Consumer and Commercial Division-principles on appeal-held no appellable error demonstrated-leave to appeal refused and appeal dismissed – costs reserved. Civil and Administrative Tribunal Act 2013 (NSW); Australian Consumer Law; Home Building Act; Civil and Administrative Tribunal Rules 2014.

Cincotta v Russo [2019] NSWSC 272 Judgment for the plaintiff against the first defendant for damages to be assessed. CONTRACTS – Particular parties – principal and agent – undisclosed principal – building contract – where licensed supervisor contracted as agent for builder – identity of contracting parties – agent personally liable in circumstances where reasonable person in position of the parties would conclude agent was contracting party. Corporations Act 2001 (Cth); Home Building Act 1989 (NSW)

Petropoulos v CPD Holdings Pty Ltd [2019] NSWCATAP 53 COSTS – Appeal from first instance costs decision –where Appeal Panel partially set aside the first instance principal decision after the first instance costs decision had been made – where parties agreed that the issue of costs should be remitted to the Tribunal and re-determined in light of the Appeal Panel’s decision – whether Appeal Panel should address grounds of appeal or whether there was no utility in doing so. COSTS – Application for costs of the appeal from the first instance costs decision – whether appellant had been ‘successful’ on appeal – whether builder entitled to costs ‘wasted’ because homeowner withdrew ‘stay’ application. Home Building Act 1989 (NSW); Civil and Administrative Tribunal Act 2013 (NSW)

Petropoulos v CPD Holdings Pty Ltd [2019] NSWCATAP 54 COSTS – Costs on appeal – where homeowner successful on one ground of appeal – whether Tribunal should order that builder pay 100% of the homeowner’s costs – whether homeowner has failed on a separable issue – whether there are factors that militate against awarding 100% of homeowner’s costs. Civil and Administrative Tribunal Act 2013 (NSW); Home Building Act 1989 (NSW)

Castle Constructions Pty Ltd v N & R Younis Plumbing Pty Ltd [2019] NSWSC 225 BUILDING AND CONSTRUCTION – Construction contracts – Building and Construction Industry Security of Payment Act 1999 (NSW) – challenge to adjudication determination – entitlement to progress payment – whether payment claim supported by valid reference date – whether reference dates may arise following termination of the relevant contract – operation of ss 8(2)(a) and 8(2)(b) – whether existence of a reference date is a jurisdictional fact – whether validity of a termination is a jurisdictional fact – review of adjudication determination.

Icon Co (NSW) Pty Ltd v AMA Glass Facades Pty Ltd [2019] NSWSC 250 BUILDING AND CONSTRUCTION – Security of payment – where successive adjudicators expressed inconsistent findings as to proper construction of the building contract – subcontractor did not challenge second determination and instead resubmitted payment claim – contractor contended third determination void because construction issue determined by unchallenged second determination – subcontractor belatedly sought to challenge second determination by cross-summons.

The Owners - Strata Plan 87265 v Saaib [2019] NSWSC 289COSTS – Security for costs – relevant factors – impecuniosity – delay – risk of stultification – plaintiff’s impecuniosity attributable to the defendant’s conduct. COSTS – Security for costs – plaintiff strata corporation – liability of members.

Legislation

Code for the Tendering and Performance of Building Work Amendment (Exemptions) Instrument 2019 20/03/2019 - This instrument amends the Code for the Tendering and Performance of Building Work 2016 to vary the definition of ‘Commonwealth funded building work’ and to make other consequential amendments.

Building and Construction Industry (Improving Productivity) (Accreditation Scheme) Rules 2019 20/03/2019 - This instrument repeals and replaces the Fair Work (Building Industry—Accreditation Scheme) Regulation 2016, which prescribe the accreditation scheme for persons who wish to carry out Commonwealth funded building work for the purposes of subsection 43(1) of the Building and Construction Industry (Improving Productivity) Act 2016.