Three fundamentals of any construction project – building product safety, defects and termination – are set to change under new legislation in 2018.
Here’s what you need to know:
Non-Compliant Building Products
The Building Products (Safety) Act 2017 passed through parliament in late 2017 and will commence on a date yet to be proclaimed. The Act is part of the NSW Government’s response to concerns about the safety risks arising from the use of non-conforming building products and is similar to legislation being enacted in other states of Australia following the London Grenfell Tower fire and the Lacrosse fire in Melbourne.
The Department of Fair Trading is the primary authority tasked with enforcement of the legislation which enables the Fair Trading Commissioner to:
- investigate and ban the use of unsafe building products;
- issue affected building notices on affected buildings;
- issue rectification orders; and
- issue penalties for non-compliance.
The provisions of the Act have wide ranging implications in that:
- builders and developers may be liable for rectification of banned products even if they were installed before they were banned;
- the legislation will apply to both residential and commercial construction;
- the use of a non-conforming product will become a major defect under the statutory warranty provisions of the Home Building Act 1989 which imposes a 6-year warranty period; and
- registers of affected buildings will be maintained and disclosure will be required where buildings are sold.
To limit the risks associated with the use of non-complying building products, builders and developers should ensure that they have in place appropriate systems to ensure products are compliant under Australian standards and for the use to which the product is being put. This is especially relevant where other parties are providing the products.
Contracts should also be amended to include provisions for compliance with the Act.
NSW Building Defects Bonds Scheme for Strata Developments
From 1 January 2018, new contracts for strata developments of 4 storeys or more are subject to the Building Defects Bonds Scheme under Part 11 of the Strata Schemes Management Act 2015 (NSW).
Key features of the scheme:
- Developers must lodge a bank guarantee or other bond for 2% of the contract price, with the NSW Department of Finance, Services and Innovation (DFSI)
- Following completion, developers must engage an independent building inspector to provide staged defects reports over 2 years
- If the original builder or developer fail to rectify the identified defects, the Owners Corporation may call on the developer’s bond to meet the rectification costs
- Developers can recover the lost value from the party liable to the developer for the defective work
Implications of the scheme:
- Developers should allow for the bond and inspections, in their project costs, timelines, investment information and finance arrangements
- Affected construction contracts should provide for extended security and defects liability periods, which are consistent with the scheme
Although this will extend security and defects liability period obligations for contractors, the scheme may assist to identify and resolve any genuine defects at an early stage.
The statutory right for contractors to reasonably enter a property for rectification of building work after completion is an important development in the rights of contractors of residential building work.
Useful information on the scheme for all parties is available from NSW Fair Trading: https://www.fairtrading.nsw.gov.au/Tenants_and_home_owners/Strata_schemes/
Termination for Insolvency
From 1 July 2018, clauses allowing suspension or termination of a contract due to one party being in financial distress but not yet insolvent i.e. a managing controller or administrator has been appointed, will be ineffective.
Changes to the Corporations Act 2001 (Cth) place a stay on contractual rights against companies in the pre-insolvency period.
Rights that will be stayed in that period include:
- Modification of the contract
- Calling on security
- Step in and ‘take out’ rights
- Suspension of works
- Termination of contract
The changes are designed to increase the opportunity for companies to trade out of financial distress.
While it is not possible to ‘contract out’ of the stay, the changes will not affect existing contracts and in some circumstances the stay can be lifted:
- By agreement between the administrators and the enforcing party
- By order of the court where it is in the interests of justice
Termination rights arising from circumstances other than pre-insolvency events, will remain effective. The right to terminate for breach, non-performance, or for convenience will remain available.
The new laws have the potential to create havoc with construction delays where a contractor or subcontractor is not in a financial position to progress the works, but the head contractor is not allowed to take over performance of the works during the pre-insolvency period.
It will be important for all parties to:
- Undertake due diligence into the financial health of contracting parties both prior to and during the contract
- Obtain adequate security for performance of the contract, with a right to have recourse to the security to compensate for delay costs and damages after a company trades out of financial distress or falls into receivership or liquidation
- Ensure that contractual rights to set-off, take out, suspend or terminate for breach or for convenience are available, in addition to direct payment to subcontractors
Please Kelvin Keane (firstname.lastname@example.org) if you require advice or compliance assistance.
This publication is © Nexus Law Group and is for general guidance only. Legal advice should be sought before taking action in relation to any specific issues.