Case Note: Ku-ring-gai Council v Chan [2017] NSWCA 226

By George Hayek- Director & Peter Bijjani- Lawyer

The New South Wales Court of Appeal, in the matter of Ku-ring-gai Council v Chan [2017] NSWCA 226, confirmed that a principal certifying authority (PCA) does not owe a duty of care to avoid pure economic loss to prospective purchasers of a property when issuing an Occupying Certificate (OC).  The judgment handed down by the Court confirms the duties of the PCA when issuing occupation certificates, which does not extend to ensuring that the works comply with the relevant approved plans nor that latent defects are identified or considered for the purposes of issuing the OC.

 

FACTS

Mr Acres and his former wife had owned a dwelling house in Wahroonga (Property) and had undertaken significant renovations and extension as owner-builder in 2008-09.  The works included to construct an extension to the Property whereby Ku-ring-gai Council (Council) were retained as the PCA under the Environmental and Planning and Assessment Act 1979 (NSW) and Mitchell Howes Civil of Structural Engineers Pty Ltd (ME) to prepare the structural drawings and from time to time to undertake inspections of the works as they progressed.

 

THE DEFECTS

Council issued an Occupation Certificate (OC) for the property to Mr Acres even though the works were exhibited a number of structurally defects at the time of the OC, including:

  1. Defective construction of the lower ground floor;
  2. Defective construction of lower ground block walls;
  3. Defective construction of ground floor structural framing;
  4. Defective construction of the ground floor external walls;
  5. Defective construction of ground floor structural steel framing; and
  6. Defective construction of roof framing.

The subsequent owners of the Property upon the sale of the Property by Mr Acres and his wife, Ms Chan and Mr Cox (CC), first inspected the property on 27 March 2010 and obtained a pre-inspection report, which contained a general warning as to the inspection being a “visual inspection only”.

The Property was subsequently purchased by CC in 2010 pursuant to a standard contract of sale, which contained the standard form agreement and 18 special conditions. One of the special conditions included a clause that provided that CC were purchasing the property subject to all defects latent or patent and as a result of their own inquiries and inspection and not as a result of representations made by or on behalf of the vendors.  

Subsequent to the purchase, the defects became apparent and that the structural defects could not have been discovered based on a visual inspection.

THE CLAIM

CC commenced proceedings against Mr Acres for a breach of the statutory warranties pursuant to the Home Building Act 1989 (NSW) (HBA), PCA and ME for a breach of their duty or care to the subsequent owners.

 

PRIMARY JUDGEMENT

The Supreme Court found that the claim by CC was for pure economic loss and therefore foreseeability of that loss was insufficient to establish a duty of care. The Supreme Court required that CC had to establish vulnerability on the part of CC.  In order to determine vulnerability, CC needed to show that they relied on the conduct of the PCA and the PCA assumed the reasonability. In that regard, the Court found that CC relied on the PCA to exercise care when issuing the final OC, PCA were aware of such reliance and had a responsibility to successors in title to certify the work.

Accordingly, it was established that the PCA owed CC a duty of care while performing its inspection to identify defects and if defects are found not to issue the OC.  The Court also determined that Mr Acres was to be indemnified in full by the PCA Council, as a result of the PCA’s negligence when issuing the OC.

APPEAL

The PCA sought to appeal the Supreme Court’s decision to the NSW Court of Appeal on the following basis:

  1. The Supreme Court erred and a duty of care was not owed to CC by the PCA; and
  2. The Supreme Court erred and a the PCA should not be required to indemnify Mr Acres.

The NSW Court of Appeal, the Court agreed that CC needed to establish vulnerability. However, the Court of Appeal found that CC did not in fact establish vulnerability for the following reasons:

  1. CC were not reliant on the OC issued by the PCA;
  2. The terms within the OC do not amount to a certification that building works will not contain defects, latent or structural or that works comply with the development approved consent and plans;
  3. The responsibility to ensure that building work is administered within the conditions of the development consent falls upon the owner or the other person having benefit of the building work. The function of the PCA is regulatory, which includes authorising an OC and certify that the works comply with the relevant rules under the Building Code of Australia;
  4. The CC had the benefit of statutory warranties against Mr Acres and therefore were not vulnerable; and
  5. The CC were able to protect themselves by negotiating the terms of the purchase and therefore were not vulnerable.

It was held by the Court of Appeal that the PCA had no liability to indemnify Mr Acres as the PCA had not undertaken to supervise compliance as part of their retainer.

CONSIDERATIONS

 

A PCA cannot be held responsible for certifying building works that contain latent defects or whether the relevant building works are compliant with relevant conditions set out in the development consent and approved plans. In order for CC to have been successful CC had to establish that it was vulnerable to the PCA, which in this case, the intervening sale contract and the availability of the implied statutory warranties under section 18B of the HBA, ensured that CC was not vulnerable to the PCA.

The Personal Property Security Act 2009 (PPSA)

The Personal Property Security Act 2009 (PPSA), is a regime to secure an interest in personal property.

What is Personal Property?

Personal property is any property, including, goods, plant and equipment except for land and its fixtures.

What is a Security Interest?

A security interest is any interest in personal property created by an agreement to secure payment or performance of an obligation, without regard to the form of the transaction or the identity of the person who has title to the property. A security interest may exist without regard to ownership and can be granted over property without the owner’s consent. Some agreements such as leases or bailments of goods are deemed Security Interests. These are commonly known as PPS Leases.

What is a Security Agreement?

The Security Interest attaches to the property because of a written agreement, which creates the contractual obligation, usually governing the use of the property, that is being secured. The security interest cannot exist unless it is created by a written agreement and once created by that agreement, title and location of the goods is of little relevance.

What is a PPS Lease?

A PPS Lease is a lease or an agreement for the hire or lease of goods, including plant and equipment, that have a term of more than 12 months or for serial numbered goods, a term of more than 90 days. Under a PPS Lease the Lessor is the Secured Party and the Lessee is the Grantor of the security interest. If a security interest exists then that interest must be perfected prior to becoming enforceable.

Why do we perfect a Security Interest?

A security interest must be perfected by either:

  • Registration;
  • Possession; or
  • Control.

In most cases, goods are out on hire or leased and therefore out of the possession and control of the owner. In such circumstances, the only method to perfect the security interest is to register the interest on the Personal Property and Security Register (PPSR).

Perfection is essential to ensure priority over other interests and ensure that the security is enforceable upon insolvency.

If the security interest remains unperfected, even though there may be title to the goods, upon liquidation the goods vest with the lessee and the goods become part of any disposal in liquidation.

For example: A is a civil contractor that leases or contracts for civil works with B on terms that include A’s plant and equipment contracted out on either a dry or wet hire basis. The contract between A and B includes terms for retention of title or the bailment of goods. The contract between A and B is a PPS Lease and therefore a deemed secured interest is created. If A’s interest in the goods, plant or equipment are not perfected by registration, upon B’s liquidation, A’s equipment may become the assets of B for the purposes of liquidation even though title never passed from A to B. A would gain a windfall and B would become lower in the order of priority relative to A’s other creditors.

What is Collateral?

Collateral is the “goods” the subject of the secured interest but only become collateral from the time the secured interest is created.

How do we perfect a Security Interest by Registration?

The issue of perfection becomes essential when the equipment is scattered across Australia, on multiple sites performing works, which renders the goods no longer within the owners control or possession.

The security interest must be registered to perfect the interest and ensure that title takes priority in liquidation. Registering such interests can be completed online by setting up an account at www.ppsr.gov.au.

When creating a registration of a secured interest, you will need the following:

  • Details of the Collateral (goods, plant or equipment):
  • Details of the Grantor (the lessee of the collateral); and
  • Details of the Secured Party (Owner of the collateral).

(Note: Grantors and Secured Parties must be parties to a written agreement that creates an obligation between the parties in respect of the use of the goods)

Who has priority?

Perfection by control will prevail over any other type of perfection. Perfected security has priority over unperfected security. Perfected security has priority over later perfected security.

Competing unperfected security have priority according to the order of attachment (the earlier agreement in time creating the obligation to pay or perform prevails).

Frequently asked questions in respect of perfection by registration:

  1. What is transitional versus non-transitional?

The PPSA commenced on 12 January 2012. If a secured interest was created prior to the PPSA, the PPSA cannot alter the priority of that secured interest.

  1. What if the term of hire or lease over serial numbered goods is less than 90 days or the term of hire or lease over other goods is less than 12 months, does a security interest exist?

The 90 days or 12 month rule is only relevant to determining whether an agreement is a PPS Lease and therefore a deemed security interest. If the hire or lease is less than 12 months or 90 days then it will not be a PPS Lease. However, if it is not a PPS lease there may still be a secured interest. For non-PPS Leases, you must determine if the agreement creates a secured interest and if so registration is required. 

  1. Do you need to register all plant, equipment and goods?

Yes. It is highly recommended that all goods that leave the title holders control and possession are registered.

  1. If so, how do you describe the goods on the register?

Where possible the PPSR website will assist in this regard, for items such as motor vehicles the process is simple. However, for goods of a different or general nature, it is necessary to provide as many details to identify the goods as possible and preferably by a unique serial number for each item. It is prudent to create serial numbers or a coding system uniquely associated to the secured party.

  1. Do you need to register each time goods or equipment move to various third-party sites?

The secured interest is attached to the agreement that creates the subject matter to which the goods relate. Accordingly, while equipment may move around many sites, if that item remains on lease or hire under the same agreement or PPS Lease then the secured interest requires only one registration.

Accordingly, registration of a secured interest would need to be created on each occasion the item in question becomes the subject of a new agreement for hire or lease.

  1. Is the secured interest enforceable on a third party (ie not the grantor) where the grantor then on-leases (subleases) or passes on possession and or control of the goods leased from the secured party?

The security interest will continue to be enforceable over the registered goods but not in all circumstances. For example: if A is the secured party and it leases goods to B and B then leases or uses the goods under contract on C’s project. If C becomes insolvent, A’s secured interest will continue to have priority. In some cases, if B leases or disposes of the goods as part of its ordinary course of business then A may lose its secured interest.

It is prudent that A imposes an obligation on B to create a secured interest and perfect any such interest as part of any contract between B and C.

What to do now!

Have a specialist construction lawyer review your contracts, ensure that the appropriate clauses are in place and train your staff on procedures for PPSA registrations.

As a sponsor of CCF, we are committed to providing our service to all members. If you would like to discuss or need legal advice, give George Hayek a call on (02) 9642 7748 or email at admin@harringtonlawyers.com.au

Liquidated Damages and Delay…all in a Day’s Work!

We can all say that we have had our fair share of heated discussions about delay and EOT’s.

Whether you’re a small builder or a major civil contractor, liquidated damages, extension of time (EOT) and delay are always controversial topics.

 

Liquidated Damages, Penalty or Compensation?

Liquidated damages are back charged when there is a delay to the programme critical path for practical completion. Usually, the contract allows for a pre-estimated and agreed sum of money in the form of a fixed day rate for every day that delay occurs. The day rate can only be an estimate because it is agreed at the time of entering into a contract, for delays that may occur in the future.

 

As the rate for liquidated damages seek to estimate loss into the future, it is essential that the estimate for liquidated damages is not regarded as penalising a contractor but rather is a genuine estimate of compensation for the other parties’ loss at the time of contract, in the event of delay.

The 2016 High Court decision in Paciocco v Australia and New Zealand Banking Group Ltd [2016] HCA 28, the Court found that to decide whether the rate for liquidated damages is a genuine pre-estimate of future loss and therefore not a penalty, the relevant question is whether the agreed sum is out of all proportion to the interests of the party seeking its payment. If the question is answered “yes” then it is a penalty and not enforceable. Of course, the question does not come without its own set of unanswered practical questions, which are asked by many contractors in the civil industry.   

Prior to Paciocco, it was considered by some that a liquidated damages clause could only cover losses which were recoverable for a breach of contract. However, it is now clear that loss attributable to a party’s interests may include items of loss that could be suffered, even if they would be considered too remote to be recoverable by way of damages for breach of contract. For example, in a contract for a civil project, the Government, in addition to losses that it may suffer in the ordinary course of contract damages, has interest in protecting against losses caused by:

  • additional costs incurred by the Government or the intended users or beneficiaries of the project;
  • loss of, or delay in realising benefits for the community;
  • lost productivity in the economy generally; and
  • damage to reputation of Government.

Accordingly, when negotiating liquidated damages for your projects at tender, do not hesitate to query how the estimated rate for liquidated damages is calculated and what is included as potential loss for delay. This will provide you with a better understanding of the basis for the rate proposed and allow you to challenge it early in the negotiations to ensure that the figure is a true representation of the other party’s future loss in the event of delay. This is especially important when dealing with a government project that may have specific expectations, which attract project specific liabilities in the event of delay.

 

EOT and Delay Notices

Ensuring you comply with time limits for the provision of notices under a contract is a must when seeking to avoid the risk of losing your rights to claims such as EOTs.

 

A decision in a recent Western Australian Supreme Court case, reinforces the strict obligations on contractors to comply with the terms of a contract with respect to issuing notices under the contract.

The case involved a subcontract between a major contractor and their subcontractor on a civil project to upgrade and extend a wharf. The subcontractor made delay claims against the head contractor, however, it failed to issue notices of delay in accordance with the strict requirements of the subcontract. These clauses in the contract were a condition precedent to the subcontractor being able to make an EOT claim.

The Court accepted that the subcontractor was delayed by the head contractor and that the head contractor was made fully aware of those delays but the Court denied the claims on the basis that the subcontractor had not complied with the notice requirements under the subcontract.

Accordingly, the cardinal rule to take away is that regardless of how harsh the terms of a contract may be, it is essential that the terms of a contract are followed as the risk of loss for not doing so may be harsher. Simply proving that the other party was made aware of your claims is not sufficient, notification must accord strictly with the contract.

It is critical that you understand the contract and maintain adequate contract administration practices so that your notices are submitted on time and in accordance with the terms of the contract.

What to do now!

Having a specialist construction lawyer to review your contract at tender and assist you during contract administration is of value in order to avoid the common pitfalls which may be experienced later in the project.

 

As a sponsor of CCF, we are committed to providing our best service to all members of the CFF, Australia wide. If you have a question or would like to discuss your current projects, give us a call on (02) 9642 7748 or email at admin@harirngtonlawyers.com.au and we will get back to you.

 

George Hayek

Director

Harrington Lawyers