In our latest Corrs High Vis podcast, David Hastie, Lachlan Tassell and Wayne Jocic discuss three recent cases concerning rectification, delay and the assessment of damages and unlicensed building work.
Corrs High Vis is a series of podcasts, offering insight and analysis into the Australian construction industry. Presented by Corrs Chambers Westgarth, it considers the issues that really matter to professionals in this ever-evolving industry.
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David Hastie, Senior Associate, Projects,
Wayne Jocic, Consultant, Melbourne Office
Lachlan Tassell, Senior Associate, Brisbane Office
David Hastie -Hello and welcome to our final Corrs High Vis for 2020. My name is David Hastie, Senior Associate in Corrs' Projects Practice Group and I'm joined by Corrs Consultant, Wayne Jocic and Senior Associate Lachlan Tassell from Corrs' Brisbane office.
We are looking at three interesting cases for you today. First I'll be looking at the decision of the Federal Court in Icon Co (NSW) Pty Ltd v Liberty Mutual Insurance which deals with the fallout from an insurance point of view from the well-publicised Opal Tower development in Sydney.
Secondly, Wayne will discuss the Victorian Court of Appeal decision in Leeda Projects Pty Ltd v Zeng, which is an interesting decision considering delay and the difficulties that can arise concerning the assessment of damages.
Finally, Lachlan will look at the Queensland Court of Appeal decision in Chapel of Angels Pty Ltd v Hennessy Building Pty Ltd, which considers questions around unlicensed building work, reasonable remuneration and the availability of quantum meruit.
But as I flagged I'll kick off. So the case that I'll be discussing today as I've flagged is Icon Co v Liberty Mutual which was heard by the Federal Court of Australia. This is a case that I'm sure we have all heard about – frankly for all the wrong reasons.
In late 2015 Icon Co was contracted to design and construct the 37 storey high rise Opal Tower in Sydney for a contract sum of let's call it roughly $150 million.
Construction commenced in late 2015 and PC was achieved in August 2018. However, within the 12 month DLP what happened was we started seeing major cracks being identified within wall panels, floor slabs and hobs on level 3 of the Opal Tower building. What this led to was essentially $31 million in rectification costs incurred by Icon to remedy these particular defects that I've just flagged.
Now where this particular dispute is interesting is that Icon was insured with Liberty Specialty Markets and QBE Underwriting Limited. However, given the nature of the defects both Liberty and QBE refused to indemnify Icon. So the question before the Court, and what the Court had to ultimately determine, was whether the equitable remedy of rectification can operate to correct a document – in this case insurance policies that don't accurately reflect the bargain between the contracting parties.
Justice Michael Lee in this particular instance held that it can be, however the important takeaway here is that rectification requires clear and convincing proof.
Now in this dispute Icon commenced proceedings against Liberty and QBE and effectively there were two heads of claim. The first was against Liberty, and there were three subsets of this particular claim. The first was a run off claim, the second a statutory extension of coverage claim, and the third a rectification claim. The claim that Icon Co brought against QBE was a lot more streamlined and that was that Icon sought a declaration that the defects were in connection with as I quote a "product" as defined by the QBE policy.
But I'll begin with the claims that Icon Co brought against Liberty. So with regards to the first claim being the run off claim, Justice Lee held that this particular claim required examination of extrinsic evidence and what this led the court to find was that in light of the parties' commercial positions His Honour held that Icon could not reasonably have expected the Liberty policy to continue throughout the defects liability period unless it was expressly represented that that would be the case.
Here based on the extrinsic evidence that was not the case. This position was clear as Icon had failed to expressly request run off cover and nor did it provide a list of contracts requiring such cover. So this particular claim failed.
The second claim that Icon brought against Liberty was the statutory extension of coverage claim. Now here Icon argued that declarations and endorsements made in relation to the Liberty policy gave rise to a new project-specific policy. Now Icon argued that Liberty had failed to provide notice of the expiry of its policy, therefore Liberty was required to indemnify it under section 58 of the Insurance Contracts Act. However His Honour again rejected this particular argument, on the basis again that endorsements are to be treated as variations to the existing agreement and further Icon had failed – and this is the important point – Icon had failed to adduce any evidence to prove that such project specific policies were usual to renew.
The third claim that Icon brought against Liberty was a rectification claim. Now here they had a bit more success. Justice Lee held that there was a common intention between the parties that the Liberty policy would provide insurance for the project until the completion of the DLP, even if the annual period of insurance had expired.
Now His Honour concluded that the Liberty policy was to be rectified by the inclusion of a further document which was an annexure to the policy. His Honour noted that project-specific certificates of insurance and emails between the parties were compelling evidence of the parties' common intention, as references to the DLP were frequent in the evidence that was adduced. Now this was reinforced by the fact that Liberty was unable to point to any communication expressly excluding the DLP from the negotiations between the parties.
Finally, we turn our attention to the QBE claim. Now again, I said this was a more straightforward claim and the court thought so as well. Justice Lee held that the project and its constituent parts satisfied both the plain English definition of "product" and the defined term in the QBE policy, given that the project was able to be supplied, installed, manufactured or erected. Now as the defects were in connection with the particular product as defined in the policy Icon succeeded in its claim against QBE.
Wayne, I'll throw to you.
Wayne Jocic -The case I would like to talk about today is called Leeda Projects, and the case was decided in the Court of Appeal, Supreme Court of Victoria a few months ago. This is a real end of year special – it's a fascinating case. One of the really nice things about it is that the principal legal issue is constraint. It's about the assessment of damages for breach of contract.
Now I think the really interesting thing about that is that the principle is one that a primary school student could memorise – so the idea is that the plaintiff should be put in the position that they would have been in had the contracts been fully performed. A primary school student could remember that, but when you have to apply that principle from Robinson v Harman, we see that very experienced appellant judges differ in the approach. So that's the great issue in Leeda Projects. It allows us to explore how we assess damages for breach of contract.
The really nice thing I think about this case is that the facts are absolutely fascinating. They go back to about 2011 when the plaintiff bought the entire level 87 of Eureka Tower in Melbourne – a very well-known substantial tower – and so the idea was that the plaintiffs would use part of that area as a private art gallery. They had a very well-known contemporary Chinese art museum that they were planning to put there and there were also going to be some residential aspects – a couple of bedrooms, kitchens and so on.
So they bought in 2011; 2013 they entered into a fitout contract – a standard construction contract and the contract sum was give or take $1.2 million. Now the critical thing to understand here is that that contract did not include a time for completion, and as a result it didn't include any liquidated damages or anything like that.
So the first issue that we have here is 'when do they have to complete?', and the law has little problem in supplying an implied term that they must complete within a reasonable time. So that I think is fairly easy to deal with, it is fairly easy to work out for a court to decide whether that reasonable time has passed. If it ha,s then the plaintiff is entitled to damages.
Fine, but how do we assess the damages? So as I said, Robinson v Harman tells us really easily we are simply trying to put the plaintiff in the position they would have been in had the contract been fully performed. But how precisely do you measure the quantum?
Now let me give you a couple of arguments that were raised at various points, in different courts and tribunals in this case. The one possibility is maybe you're focusing on is the loss of use and enjoyment. In that case perhaps you could think about the rental value of the property, or maybe you could think about wasted expenditure so they had to pay Owner's Corporation fees, those sorts of things – that's one approach.
Another approach is maybe look at damages for disappointment, inconvenience, vexation, those sorts of things, that's another conceivable approach.
Another approach would be to think about actual loss of income. So if you are going to be receiving money because people wanted to exhibit art there, for example, you could point to those things. So they are very different ways of measuring the loss that the court is trying to compensate for.
So this gets to the Court of Appeal, three highly respected judges giving separate judgments. All of them agree that the plaintiffs are entitled to more than nominal damages. But how do we assess that?
So what Your Honours accept is that this is quite an unusual situation, and I suppose the distinguishing feature here is that the plaintiffs weren't really trying to use the 87th level of Eureka Tower as an income generating project but they weren't planning to live there permanently either. They might be there occasionally here and there, but they weren't going to be living there as a rule. That makes it quite complex.
Now the reasoning is really curious – in this case their Honours relied on comparisons drawing on Maritime Law, and so this is the nearest similar treatment because you're thinking about a primary focus on the costs that have been incurred. Things like Owner's Corporations fee, council rates, electricity, water charges, all those things you accept I think are reasonably foreseeable consequences of the breach through lack of completion.
So the ideas that the compensation here, the damages reflecting the cost of owning the property, so it's not about the rent foregone or those sorts of things. They are simply looking at those costs arising from ownership in the period between when the works should have been completed, and when they were. So in many respects it is not the most obvious way of assessing damages.
So that then leads to the follow up question which is "Is this a general principle?" Now on this point we have a split in the Court, so on the one hand Justice Kaye suggests that where you have the property that's only intended for personal use and it's made unavailable because of a breach of contract, the fitout works are still going on then the general principle according to Justice Kaye is that you would be awarding damages in this way reflecting the costs of owning the property in that period.
Now the other two judges in the Court of Appeal, Justices McLeish and Tate, shy away from that conclusion and they say that there are too few cases to be so firm in saying that this is a general principle, and they emphasise that this is something that would need to be assessed on the facts of each of the cases and with respect I think there is a lot to be said for that view – that the curious facts here lead to what is perhaps a surprising remedy.
So just to remind you the critical point here is the fitout works are late, everybody accepts that.
The plaintiffs can't use their own property, that's breach of contract. But how do we measure the damages on these facts? At least the Court of Appeal tells us that what we do is look to the damages assessed on the basis of the costs of owning the property so Owner's Corporation fees, council rates, electricity those sorts of things.
So again, a really important reminder about the practical complexity of assessing damages for breach of contract. Easy to state the general principle, very hard to apply it particularly with interesting facts like this.
David Hastie - Many thanks for that Wayne. Lachlan I'll now throw to you – can you tell us about the Chapel of Angels v Hennessy Building decision?
Lachlan Tassell - Thanks David. So Chapel of Angels is a case that considers the remuneration payable for unlicensed and licensed building works. So in this case Chapel of Angels engaged Hennessy Building to construct a wedding chapel, a car park and some other ancillary works at Montville here in Queensland.
Hennessy held two licences being a builder/low rise licence and a carpentry licence. Now during the course of the works the parties fell into dispute. The Chapel of Angels re-took possession of the site and refused to pay any amounts claimed by Hennessy as at that date.
Chapel of Angels then initiated proceedings in the District Court of Queensland seeking various relief including restitution of all monies paid under the Contract, on the basis that Hennessy did not have the appropriate licence class to construct the chapel, which was a class 9B type B building being a two storey building. Hennessy defended that claim, and they counter-claimed for the reasonable remuneration under section 42 of the QBCC Act or alternatively on the basis of a quantum meruit.
At first instance Judge Porter determined that Hennessy did not have the appropriate licence class to build the chapel, but it was licenced to complete a substantial part of the chapel works, the carpark and the external works. Nonetheless on the basis that some of those works fell outside of Hennessy's licences Judge Porter ordered the Chapel of Angels was entitled to recover all payments that had been made to Hennessy, which was approximately $632,000.00.
However in assessing Hennessy's counterclaim for reasonable remuneration under the QBCC Act Judge Porter accepted Hennessy's expert evidence, and ordered Chapel of Angels to pay approximately $700,000.00 to Hennessy.
Now Chapel of Angels wasn't happy with that decision, so they ultimately appealed to the Queensland Court of Appeal. However its application was filed four months late, so in dealing with the application for leave to appeal the Court of Appeal had to consider whether there were reasonable prospects of the appeal and whether there was good reason for the delay in filing its application.
Now ultimately the Court of Appeal held that leave should not be given, on the basis that the appeal had limited merit and that there wasn't a good reason for that delay in filing that notice of appeal. Now in coming to that decision the Court of Appeal provided some very useful commentary on the prohibition against unlicensed building work, and that reasonable remuneration mechanism for unlicensed works under section 42 subsection 4 of the QBCC Act.
David Hastie - So that's interesting Lachlan. So what did the Court of Appeal have to say about the reasonable remuneration mechanism?
Lachlan Tassell - So as I said earlier, at first instance the District Court found that most of the works performed under the Contract fell within Hennessy's building licence classes however a small portion did not. So I think the key issue here is how works are to be priced when only a small portion of those works are unlicensed, and how the reasonable remuneration mechanism in the QBCC Act ought to apply.
Now in considering those issues the Court of Appeal went to the history of the particular section of the Act which provided that prohibition, and recognised that in its previous iterations the prohibition was such that a contractor had no entitlement under contract or otherwise to recover remuneration if it performs any works which were unlicensed. That position changed under the Act in about 1999, and the introduction of the reasonable remuneration mechanism was found.
Now as to the extent to which the reasonable remuneration mechanism applies, the Court of Appeal said that subsections 42(3) and 42(4) of the QBCC Act are concerned with the building work actually performed outside the scope of the builder's licences. The Court of Appeal said at paragraph 53 that in this kind of case the building contract is unenforceable by the contractor in relation to the unlicensed work. Whereas in this case, and as is commonly the case, the promise to carry out the unlicensed work is not severable from the balance of the contract the Contractor is unable to enforce the contracts at all so any non contractual right the Contractor may have to recover reasonable remuneration for the unlicensed work is restricted by section 42(4) and the Contractor is exposed to prosecution for an offence for contravening at least one of the two prohibitions in section 42(1).
From the consumer's perspective the results of this construction also do not seem obviously unreasonable. The consumer may be found liable to pay reasonable remuneration not limited in accordance with section 42(4) are only in relation to the benefit the consumer has obtained as a result of the Contractor carrying out building work for which it held a licence of the appropriate class and the consumer will benefit from the limits in section 42(4) in respect of any work for which the contractor did not hold a licence of the appropriate class.
So the Court of Appeal's reasoning suggests that if the promise to pay for the unlicensed works is severable from the promise to pay for the licenced works under the contract that reasonable remuneration mechanism in section 42(4) of the QBCC Act will only apply to the unlicensed works and the contract will remain enforceable in relation to the licenced works. If on the other hand, as we've seen in this decision, the licensed works cannot be severed from the unlicensed works the reasonable remuneration mechanism will apply to both.
David Hastie - My name is David Hastie, thanks for listening. We look forward to you joining us in 2021.
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