For domestic building works in Victoria, must variation and extension of time claims be made in writing?

Background

The recent decision in Jolin Nominees Pty Ltd v Daniel Investments (Aust) Pty Ltd [2022] VSCA 209 involved a dispute over variations under a major domestic building contract and the consequences of variations which were not documented by the parties. The case is significant because it suggests that the failure of a builder to make variation and extension of time claims for domestic building works in writing by way of formal notice under the contract, may not prevent the builder from being entitled to time and cost relief. Of course, it is best practice that builders should make variation and extension of time claims in writing pursuant to the terms of the contract and the requirements of relevant legislation to mitigate the risk of disputes.

On 1 March 2015, Daniel Investments (Aust) Pty Ltd (Builder) and Jolin Nominees Pty Ltd (Owner) entered into a major domestic building contract by way of an HIA Victorian New Homes Contract (Contract). The date of practical completion was set at 12 months from the date of the Contract. The parties subsequently agreed to vary the completion date to 7 June 2016. Liquidated damages were fixed at $650 per week per unit.

Over the course of the construction, the Owner made a number of requests for variations which were not made in writing or documented as formal variation requests. The Builder carried out these requested variations but did not provide the Owner with the required notice regarding the estimated cost of the variations or a notice regarding seeking an extension of time for the date of completion.

On 20 March 2017, the works were completed. Following completion, a dispute arose between the parties. The Builder claimed the sum of $147,800 withheld by the Owner, in addition to an amount for additional work done for the variations. In response, the Owner denied the Builder’s claim and claimed 49 weeks’ liquidated damages of $159,900 for the delay in achieving completion.

The dispute on appeal largely concerned the application of sections 38(6)(b) and 39 of the Domestic Building Contracts Act 1995 (Vic) (the DBCA).

On appeal to the Supreme Court of Victoria Court of Appeal, the Owner’s appeal was dismissed and the Builder succeeded in arguing that it was entitled to recover money in respect of the variations under section 38(6)(b) and that section 39(c) operated to extend the completion date for the variations.

The meaning of “significant or exceptional hardship” – section 38(6)(b) of the DBCA

Section 38 of the DBCA sets out the procedure for a building owner wishing to make variations under a major domestic building contract. Section 38(6) establishes that a ‘builder is not entitled to recover any money in respect of a variation asked for by a building owner’ unless the builder has either:

1. complied with the notice requirements under the section 38(3); or
2. VCAT is satisfied that there are ‘exceptional circumstances or that the builder would suffer a significant or exceptional hardship’ and ‘that it would not be unfair to the building owner for the builder to recover the money’.

The Owner argued that the ‘hardship’ referred to in section 38(6) is confined to a hardship which would prevent the Builder from providing the requisite notice to the Owner under section 38 and excludes any broader analysis of any financial hardship arising from the Builder being unable to recover money in respect of the variation.

The Court rejected this argument, stating that on the plain wording of section 38(6) the hardship contemplated is ‘directed to the builder’s inability to recover any money’. The Court added that section 38(6)(b)(i) does not link the hardship to the notice requirement imposed by section 38(3) or to general compliance with section 38.

The outcome of this is that hardship within the meaning of section 38(6)(b)(i) is not confined to hardship which prevents the builder from giving written notice and can include financial hardship to the builder resulting from non-payment for the work done under the variation. As a result of this, the Court did not overturn the Supreme Court’s finding at first instance that the Builder was entitled to recover money in respect of the variations requested by the Owner.

Does a section 38(6) variation also result in an extension of time under section 39?

Under section 39(c) of the DBCA, the completion date of a project is to be adjusted to take into account a variation to a major domestic building contract made under with sections 37 to 38.

Sections 38(1)-(5) outline a procedure that is to be followed to validly vary a major domestic building contract. A variation carried out pursuant to that process is clearly a variation ‘in accordance with’ section 38. However, the issue in this case was whether VCAT allowing a builder to recover variation costs under section 38(6)(b) (where the variation procedure under section 38(1) to (5) was not followed) amounted to a variation in accordance with section 38, so as to enliven the operation of section 39(c) and provide the Builder with time relief.

The Owner argued that section 39 only operates where there has been a variation and that a variation will not have occurred when section 38(6)(b) is engaged. The Owner continued, that under section 38(6)(b) VCAT merely allows a builder to recover the cost of a variation and does nothing to authorise a variation.

The Court accepted that section 39 is only engaged where there has been a variation, but held that where section 38(6)(b) is engaged there will necessarily have been a variation ‘as a matter of fact’, as a builder is only entitled to seek recovery of its cost under section 38(6) in respect of an owner-initiated variation which the Builder carried out. The Court added that it would be ‘anomalous, to say the least’, that in circumstances where a builder is able to recover variation costs, that the builder is not entitled to an extension of time caused by the variation, and subsequently faces a claim of liquidated damages because of the delay caused by the variation, and that ‘[s]uch an outcome is unjust’ and ‘was not intended by the legislature’.

Accordingly, VCAT allowing a builder to recover money in respect of a variation under section 38(6)(b) does amount to a variation ‘in accordance with’ section 38 for the purposes of section 39, and in this case allowed the builder an extension of time to the date for completion pursuant to section 39(c).

In obiter, the Court added that the words ‘[u]nless the contrary intention appears’ at the beginning of section 39 may have the effect of allowing section 39 to be contracted out of, notwithstanding section 132 which prohibits contracting out of provisions of the DBCA. Therefore, section 39 of the DBCA may be contracted out of. However, the Court refused to express a concluded view on the meaning and effect of those words, as this was not an issue in the proceedings.

Did the contractual clauses regarding extensions of time prevent an extension of time under section 39(c)?

The final issue in this case was whether non-compliance with the clauses in the Contract relating to extensions of time prevented the granting of an extension of time available under section 39(c).

The Court found it unnecessary to determine the correct construction of the Contract’s extension of time clauses as they had no impact on the operation of section 39(c). The Court held that section 39(c) provides for ‘the consequences of a favourable VCAT decision under s 38(6)(b)’ and provides a complete answer to whether an extension of time is available. The Court held that an extension of time was available in this case, as set out above.

Key takeaways

The key takeaways from this decision include that:

1. Section 38(6)(b)(i) of the DBCA is not confined to hardships which prevent builders from giving written notice and can include financial hardships which would be incurred by a builder resulting from non-payment for the work done under the variation.
2. VCAT allowing a builder to recover money in respect of a variation under section 38(6)(b) does amount to a variation in accordance with section 38 for the purposes of section 39 of the DBCA. This entitles the builder to an extension of time for the completion date under section 39(c).
3. The operation of section 39 is not curtailed by a builder’s non-compliance with contractual provisions regarding the procedures for submitting extension of time claims. However, parties may be able to contract out of section 39, but this point of law is unsettled. Given this possibility, owners may wish to include a special condition in domestic building contracts which requires the builder to submit extension of time claims within a certain period of time after any variation or delay arises and which further provides a time-bar for the builder’s failure to do so (such that, notwithstanding section 39 of the DBCA, a builder is not entitled to any time relief / extension of time if the builder fails to submit such a claim within this timeframe).

Queries

If you require further information on the above, please contact the authors, or any member of our Building & Construction team.

Disclaimer

This information and contents of this publication, current as at the date of publication, is general in nature to offer assistance to Cornwalls’ clients, prospective clients and stakeholders and is for reference purposes only. It does not constitute legal or financial advice. If you are concerned about any topic covered, we recommend that you seek your own specific legal and financial advice before taking any action.