If a Builder does not comply with the statutory requirements of a variation, is it still entitled to claim the variation monies and extension of time? In the recent decision by NIALL, SIFRIS and WALKER JJA (Victorian Supreme Court of Appeal) in Jolin Nominees v Daniel Investments (Aust) [2022] VSCA 209, it was recently upheld that a Builder can claim variation monies and time where it can show ‘significant or exceptional hardship’ under section s38(6)(a) of the Domestic Building Contracts Act.
On 30 September 2022, NIALL, SIFRIS and WALKER JJA dismissed the appeal of the earlier decision of VCAT.
The issue in dispute was whether a Builder can recover the cost of carrying out a variation to a domestic building contract, which was not requested in writing by the Owner. Then, if the Builder can recover, the second issue was whether the time for completion of the contract is extended to consider the time spent in undertaking the variation.
In this case, the Builder, Daniel Investments (Aust) Pty Ltd (‘the Builder’) entered into a HIA Victorian New Homes Contract, being a major domestic building contract (‘the Contract’), with the Owner, Jolin Nominees Pty Ltd (‘the Owner’).
During construction, the Owner requested a number of variations and the Builder carried out those variations. However, neither the Owner nor the Builder complied with the contractual or statutory notice provisions. Accordingly, the Builder could not recover any money in respect of the variations unless the exception in s38(6)(a) Domestic Building Contracts Act 1995 (‘DBCA’) was engaged by the Victorian Civil and Administrative Tribunal.
The Builder successfully argued before VCAT that it should be permitted to recover the variation costs under s38(6)(b) of the DBCA, because it would ‘suffer a significant or exceptional hardship by the operation of s38(6)(a)’, and that ‘it would not be unfair to the building Owner for the Builder to recover the money.’
The Owner appealed the decision from VCAT on a question of law under s148 of the Victorian Civil and Administrative Tribunal Act 1998 (‘VCAT Act’). It was held that VCAT erred in law and accordingly the appeal was allowed. The Judge’s reasoning to allow the appeal was that any error by VCAT in relation to clause 34 of the Contract was immaterial, because there was another, independent pathway to the same result, namely the operation of s39(c).
The appeal was granted on the following five (5) grounds:
- VCAT erred in finding that the Builder’s entitlement to an extension of time (and consequential change to the building period) was not conditional upon compliance with the notice requirements of clause 34.1 of the Contract.
- VCAT erred in finding that clause 34.0 governs the Builder’s entitlement to an extension of time absolute, whilst clause 34.1 and clause 34.2 amount to no more than a dispute resolution procedure and an incomplete one at that.
- VCAT erred in finding that s39 of the DBCA operates to extend the Builder’s completion date under the contract where there is a variation for which payment has been awarded under s38(6)(b) of the DBCA.
- VCAT erred in finding that the phrase ‘in accordance with’ in s39 of the DBCA encompasses not only variations where the Builder has complied with the notification requirement, but also variations where VCAT is satisfied that the Builder should be relieved of the harsh consequences of the Builder’s failure to comply with the notification requirements.
- VCAT erred in construing s38(6)(b) of the DBCA and should have found that the correct test for assessing hardship to the Builder pursuant to s38(6)(b)(i) requires consideration of the effect of the Builder being required to comply with the prescriptive requirements of sub-sections 38(1)–(5) of the DBCA before it is able to recover the cost of variations plus a reasonable profit.
Issue 1 – Construction of s38(6)(b) of the DBCA
The first issue, raised by grounds 5 of the appeal, in this case concerned the phrase ‘significant or exceptional hardship.’
The Owner contended that s38(6)(b) of the DBCA is of narrow compass and that it simply confines to hardship preventing the Builder from complying with the notice requirements, and that it does not extend to financial hardship because of the Builder’s inability to not recover money in respect of the variation.
The Court of Appeal rejected the Owner’s construction of s38(6)(b) of the DBCA. It was found that the Court of Appeal preferred the construction advanced by the Builder in that the text and content of s38(6)(b) does not compel such a narrow construction.
Simply, the question that should be considered is whether the prohibition on recovery would result in significant or exceptional hardship to the Builder, and that this could include financial hardship.
The Court of Appeal reasoned that this exception is a high bar, particularly given that the Builder is also required to establish that it would not be unfair to the Owner or the Builder to recover the money.
The circumstances in which the exception in s38(6)(b) operates, and the satisfaction required by VCAT, is not inconsistent with the consumer protection purpose of the legislation. Rather, the exception provides a balance between the protection of the Owner and the protection of the Builder. In finding this, at paragraph [48] Nettle, Gordon and Edelman JJ accepted that s38 has a protective purpose (as recognised in Mann v Paterson Constructions Pty Ltd (2019) 267 CLR 560):
The apparent purpose and legislative effect of these provisions is that a Builder shall not be permitted to recover any money in respect of Owner-initiated variations (other than for prime cost items and by way of provisional sums) except in accordance with these provisions. As such, they function as protective provisions, designed to prevent the kinds of problems likely to arise where domestic building contract variations are dealt with informally, as by oral request by an owner for a variation and compliance by the Builder without first agreeing with the Owner on the price and other consequences of giving effect to the variation; in particular, to avoid the surprises and consequent disputation likely to arise where plans and specifications under a major domestic building contract are varied without the degree of formality mandated by s38(1) and (2) or (3). Hence, subject to only one exception, they prohibit a Builder recovering any money in respect of Owner-initiated variations unless the required degree of formality has been observed. The one exception [to s38(6)(a)] reflects a legislative recognition that there can sometimes be instances of non-compliance which are in themselves exceptional or would result in the Builder suffering exceptional hardship and in which it is not unfair to require the Owner to pay a reasonable recompense for the variation, namely, the cost of the variation and a reasonable profit margin in accordance with s38(7).
Issue 2 – Consequential extension of time under s39(c) of the DBCA
The second issue, raised by grounds 3 and 4 of the appeal, concerns the operation of s39(c) of the DBCA.
The Owner argued that there was no variation capable of triggering s39 of the DBCA, or in the alternative if there was such a variation, s39 of the DBCA requires the Builder to comply with the requirements as set out in s38 of the DBCA, and that it was insufficient that VCAT had determined that the Builder was entitled to recover the cost of the variation under s38(6)(b) of the DBCA.
The Owner further argued that s39 of the DBCA is only applicable if the plans and specifications in a major domestic building contract are ‘varied in accordance with’ s38 of the DBCA. It is only then when the completion date or the number of days required to finish the work can be adjusted to take account of the variation.
The Court of Appeal confirmed that s39 of the DBCA is only engaged when there has been a variation to the plans or specifications, however rejected the Owner’s submission that s39 of the DBCA was not engaged because there was no variation.
The Court of Appeal is of the view that when s38(6)(b) of the DBCA is engaged, there would have to have been a variation to the plans or the specifications. Accordingly, a Builder is then entitled to seek recovery of its costs under s38(6) of the DBCA in respect of an Owner-initiated variation which the Builder has carried out. The Court of Appeal further explored that if the Builder did not comply with the statutory notice provisions, then it was prohibited by s38(5) of the DBCA from giving effect to the variation.
The Court of Appeal was satisfied that the s38(6)(b) of the DBCA exemption is application and as such the Builder was entitled to an extension of time for completion of the works under s39(c) of the DBCA.
Therefore grounds 3 and 4 were refused by the Court of Appeal.
Issue 3 – Does clause 34 of the contract preclude any extension of time
The third issue in this appeal was about extensions of time pursuant to clause 34 of the Contract which were raised by grounds 1 and 2 of the appeal.
The contractual notice procedure was not followed by the Builder. The issue is whether cl 34.0 had the consequence that the completion date was extended if one of the defined circumstances existed; or whether cl 34.0 was subject to cl 34.1, so that cl 34 as a whole only, provided for an extension of time if the notice procedure was followed by the Builder.
The Owner argued that, even if s39(c) of the DBCA was engaged, the Builder was required to comply with clause 34 of the Contract. The Court of Appeal rejected this contention. The Court of Appeal reasoned that non-compliance with clause 34 is the failure to give written notice however it does not have any impact on the operation of s39(c) of DBCA.
The Court of Appeal concluded it is unnecessary to determine the correct construction of clause 34 of the Contract, because an extension of time is available under s39(c) of the DBCA.
Key take away
It is not unusual for issues to arise from construction projects. Many domestic building disputes concern variations to the domestic building contract. This case highlighted that a Builder may be entitled to recover the cost of a variation and adjust the completion date of the construction project to take into account the variation, even if there is a failure to comply with statutory notice provisions on the basis of ‘significant or exceptional hardship’ (which may include the consequences of Builder’s inability to recover money).
The information provided is a case summary only. It should not be relied upon as legal advice or be used as a substitute for obtaining legal advice.
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