CASE STUDIES

Allegations of defects and backcharges

CLIENT
Structural Steel Contractor (“Subcontractor”)

OTHER PARTY
Head contractor (“Head Contractor”)

CONTRACT
Construction of an extension to a high school in Melbourne

PAYMENT CLAIM
$173,922.63 including GST

CONCLUSION
1. Variations are claimable if the contract provisions for variations are followed. If an instruction to complete a variation is given, the head contractor is liable for the cost.

2. Backcharges are based on the contract sum and it is important to engage an independent quantity surveyor to confirm costs. Actual costs cannot be relied upon when applying backcharges.

BACKGROUND
The Subcontractor issued a payment claim for $173,922.63 including GST. The Head Contractor issued a payment schedule for $98,482.09 including GST.

After the Adjudication proceedings commenced, $53,905.50 including GST was paid by the Head Contractor. This left $120,017.13 outstanding before the adjudication determination.

The adjudication determination ordered that the Head Contractor pay $104,188.90 to the Subcontractor and penalty interest was also awarded.

Cost to complete remaining works (the Head Contractor had taken works out of the hands of the Subcontractor and completed it with other contractors).

1.1 VARIOUS VARIATIONS WERE IN DISPUTE
One variation in dispute involved the Head Contractor instructing the Subcoontractor to change from holding down bolts to chemset connections. The Head Contractor refused the variation request and the Subcontractor supplied the chemsets for the Head Contractor to install.

Subsequently, a land surveyor confirmed that the chemsets were incorrectly installed. The Head Contractor instructed the Subcontractor to rectify these defects and incurred a variation of $3,205.00. Despite refusing the costs of the variation, the Head Contractor instructed that the Subcontractor proceed with any required rectification of chemset studs. The adjudicator determined that the Head Contractor provided clear instructions to carry out the variation works and therefore is liable for the cost.

1.2 VARIOUS BACKCHARGES WERE IN DISPUTE
The erection of a bus shelter was added to the Contract. The agreed price for the erection of the bus shelter was the difference between the quote and the Contract, being $8,500+GST. In a previous adjudication application, an independent quantity surveyor was engaged and valued the re-erection of the bus shed at $6,100 + GST. The Head Contractor claimed that its actual costs were $16,166.24 +GST. The adjudicator limited the backcharge to $6,100+GST.

Letter of demand

CLIENT
Timber Flooring Contractor (“Subcontractor”)

OTHER PARTY
Head contractor (“Head Contractor”)

CONTACT
Installation of Jarrah flooring to new dwelling

PAYMENT CLAIM
$8,840.50 including GST

OUTSTANDING AMOUNT
$2,210.00

The Subcontractor was contracted for the supply and installation of Jarrah flooring. The Head Contractor made payment for supply. After completion, the Head Contractor failed to respond with a time for payment.

The payment claim was not monitored and the claim could not be pursued under the Security of Payment legislation.

A letter of demand was sent to the Head Contractor demanding payment. Payment was made within 1 hour.

Security of payment technicalities, service

CLIENT
Structural Steel Contractor (“Subcontractor”)

OTHER PARTY
Head contractor (“Head Contractor”)

CONTRACT
Construction of a large grocery chain in Melbourne

PAYMENT CLAIM
$249,723.52 including GST

PAYMENT SCHEDULE
$110,884.50

ADJUDICATION AWARD
$249,723.52 including GST

BACKGROUND
The contract was for the steel detailing, supply and installation of structural steel for a commercial shopping centre.

The Head Contractor had been engaged using a design and construct contract with the developer.

The design changes required to complete the project resulted in numerous variations. The Head Contractor refused to award variations requested by the Subcontractor. Under the contract, the Subcontractor was legally required to complete all variations.

The Subcontractor made an adjudication application on the final claim.

The Head Contractor claimed that email service was not effective service.

The Adjudicator quoted Justice Vikery in Metacorp Australia Pty Ltdv Andeco Construction Group Pty Ltd & Ors [2010] VSC 199: Service under section 14(1) of the Act may include delivery into the possession of the intended recipient, by whatever means, which may be taken to be effected upon receipt of the document by that person.”

Further, section 13A of the Electronic Transactions (Victoria) Act 2000 (Vic) provides that the time of receipt of an electronic communication is the time when the electronic communication becomes capable of being retrieved by the addressee.

Accordingly, in reliance of the postal service, the Head Contractor delivered its adjudication response out of time.

CONCLUSION
Carefully review timeframes. Always serve notices using multiple methods, i.e. fax, email and/or registered post.

Negotiations regarding variations

CLIENT
Rigging Contractor (“Subcontractor”)

OTHER PARTY
Head contractor (“Head Contractor”)

CONTRACT
Contract to install structural steel to a recreational facility in Melbourne

PAYMENT CLAIM
$80,434.76 including GST

PAYMENT SCHEDULE
$46,141.00

The Head contractor withheld $80,343.76 for the recreational facility and withheld $61,055.54 on another job that was already completed.

The initial payment schedule stated the payment proposed was $46,141.00.

The difference related to a combination of variations. However, the Head Contractor used the large sum of money withheld to try to force a discount on the variations.

Through facilitated negotiation and initial notices under the Security of Payment Act, LPF altered the bargaining position and gained the advantage. An amicable solution was reached and payment was made by the Head Contractor within a week.

CONCLUSION
If a Head Contractor is instructing the completion of a considerable number of variations, carefully document instructions. The Security of Payment Act can be used to get the head contractor to the negotiating table. After variations exceed 10% of the contract sum, claims under the Security of Payment Act are more challenging.

Withholding payment, defects and litigation

CLIENT
Tiling Contractor (“Subcontractor”)

OTHER PARTY
Head contractor (“Head Contractor”)

CONTRACT
Install paving on pedestals based on a square metre rate

PAYMENT CLAIM
$31,530.37 including GST

PAYMENT SCHEDULE
Not provided

ADJUDICATION AWARD
$31,530.37 including GST, penalty interest and adjudication costs

The tiling contractor entered into a contract to install paving on pedestals.

After the contract was signed, the Head Contractor altered the construction method from the standard pedestal paving system to a modified pedestal steel joist paving system. The Subcontractor expressed concerns about the modified pedestal steel joist paving system including:
• The area is non-trafficable for 2 days
• Once the pavers are fixed, it is difficult to remove if access to drains are required
• The process being extremely time consuming
• Quality cannot be guaranteed, especially the uniformity of pavers installed.

The Head Contractor signed a letter stating that he would assume the risk of defects resulting from the modified system.

After the installation of the pavers, numerous trades walked over the pavers due to concerns about the schedule.

Significant defects resulted. Tiling was not uniform, the tiles were lipping, gaps in tiling were not even etc.

The Head Contractor stated that it was backcharging the Subcontractor $38,559.40 including GST and therefore would not pay the final claim.

LPF made an adjudication application on behalf of the Subcontractor.

In the Adjudicator’s determination, he stated that the Head Contractor could not lodge an adjudication response as it had not provided a valid payment schedule within time. The Adjudicator accepted LPF’s submissions about work completed and defects.

After the Head Contractor paid the adjudication award to the Subcontractor, the Head Contractor initiated a VCAT case alleging defects.

The Subcontractor paid $15,000.00 to settle the case.

CONCLUSION
As a Subcontractor, if a method of construction will result in defects, it is advisable to refuse to proceed using the proposed construction method. A Subcontractor is assumed to be an expert in their field.

Breach of contract, misleading and deceptive conduct, director's personal liability

CLIENT
Residential Building Company (“Head Contractor”)

OTHER PARTY
Kitchen contractor (“Subcontractor”)

CONTRACT
Supply and install of kitchen and bathroom joinery

BREACH OF CONTRACT DAMAGES
$50,680.00 including GST

COURT ORDER
$50,680.00 including GST, Interest of $472.09 and Costs $1,769.50

The Subcontractor approached the Head Contractor claiming that it had successfully completed numerous kitchen and bathroom projects. It had one of its representatives explain in detail how the quality and timeframe could be adhered to.

The kitchen supply was delayed almost 2 months.

Once the kitchen and bathroom joinery did arrive onsite, it was apparent that there were numerous significant defects including chips, discolouration, doors being unable to be opened and missing joinery.

After 4 weeks of attempting to install the joinery, the kitchen contractor was unable to complete despite continued promises.

Under this contract, time is of the essence and LPF assisted the Head Contractor in legally terminating the contract. An independent building consultant was engaged to produce a detailed defects report.

A claim was made in the Magistrate’s Court against the Subcontractor and the directors personally. The claim was $50,680.00 for breach of contract and misleading and deceptive conduct. The Head Contractor obtained default judgment due to the Subcontractor’s failure to file a defence. The Subcontractor applied for a rehearing and the matter is now before the Magistrates’ Court.

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