Effects of COVID-19-related shortages on Builder’s Obligations under a Domestic Building Contract

Builder's Obligations

A builder’s undertakings when providing services under a Domestic Building Contract in Victoria are set out in the Domestic Building Contracts Act 1995 (the Act), which includes broad warranties designed to protect building owners. These are required by law to be included in a domestic building contract, such as that produced by the Housing Industry Association (HIA). Further guarantees still are sourced from Australian Consumer Law. It is important to consider how these obligations may be impacted by a sudden supply chain breakdown as the result of the ongoing response to COVID-19.

Increasing delays in the delivery of building supplies and materials due to the ongoing COVID-19 Coronavirus threat raise potential issues for builders, who may not be able to meet their obligations under Victorian law if prevailing shortages continue or worsen.

The obligations most likely to be affected by supply shortages and the subject of this article are:

1. That Building Works will be carried out in accordance with the specifications set out in the contract; and

2. That Building Works must be completed by the end of the Building Period.

Plan and Specifications

It is an implied warranty of every domestic building contract in Victoria that the building work will be carried out in accordance with the plans and specifications set out in the contract. This creates issues where it becomes a practical impossibility to complete a contract as stipulated due to specific items being unavailable.

In these instances, a builder may simply elect to utilise the extension of time provisions (discussed below) until the requisite fixture becomes available. However, given the indefinite scope of delays and unprecedented level of disruption that may arise, this may prove unsatisfactory for both parties, with builders unable to claim payments for completion and building owners left with unfinished building works.

Where a replacement specification or appropriate amendment is available, which may differ in some way from those requirements originally specified under the contract, a builder can give the building owner a notice of a request to vary the specifications. If a building owner consents, the builder is then free to move forward with the plans as varied by that notice. When varying the specifications and plans in the contract, care should be had to comply with the specific requirements of section 37 of the Act and any further requirements set out in the building contract.

This is a useful workaround for the impending supply issues where the timeframe for their resolution is open-ended, as it is with COVID-19. It also assists building owners who are aware of the extent of any issues and are keen to have building work completed quickly. It also ensures that completion and payment can occur, rather than having the period for building works stretch out indefinitely, as dictated by an international situation beyond the control of either party.

Building Period

However, the solution above is only useful where both parties are willing to consider amendment and reasonable replacement materials and specifications are available. Where consent is not given or appropriate variations are similarly affected by production issues, a build may be faced with lengthy delays.

Under a standard building contract, a builder must calculate a Building Period within which works are to be completed. Such a calculation must include delays for weekends, public holidays, inclement weather and other reasonably foreseeable events. Failure to complete the building works within this timeframe may give rise to a claim for damages against a builder. It is therefore foreseeable that impending materials shortages arising from COVID-19-related supply issues impact upon builder’s ability to satisfy this obligation.

Section 32(1)(c) of the Act provides that in calculating the allowances provided for in a domestic building contract, a builder must make ‘an allowance for any other delays that is reasonable having regard to the nature of the contract.’ Where a builder may not feel comfortable giving an estimate as to the allowance under this section, they may rely on section 32(3), which provides that:

‘if it is not possible for a builder to adequately estimate the period of a particular likely delay for the purposes of subsection (1)(c), the builder may comply with that subsection with respect to that likely delay by identifying the likely cause of delay in the contract and stating in the contract that is it not possible to adequately estimate the period of delay.’

A prudent builder should seek to utilise this clause to cover any impending production chain issues stemming from COVID-19 when calculating the Building Period. This has the benefit of minimising the possibility of any potential dispute.

Such a measure may not be possible where a building contract was entered into before the scope of the production supply issues became readily apparent. In these instances, a builder could seek to rely on the allowances provided for in standard form contracts.

The standard form HIA Building Contract grants a builder the right to extend the Building Period where the building works are delayed due to:

· Civil commotion or industrial action affecting…the work of a manufacturer of supplier of materials; and

· Any other cause that is beyond the Builder’s control.

Other standard form contracts include similar provisions. Care should be had to review the extension of time provisions of any particular contract.

An argument could be put forth that the wide-ranging effects of coronavirus across the supply chain constitutes a ‘civil commotion’. Regardless, where those goods are not readily available due to circumstances beyond the builder’s control, they can generally seek to rely on an extension of time under a standard form building contract. This second approach would also be more easily provable were a dispute to arise, as a builder in these circumstances will be required to demonstrate that the cause of this delay is covered by the extension of time provisions.

A builder seeking to delay completion of works under the standard extension of time clause must ensure that they specifically comply with the particular notice requirements of their contract. A failure to satisfactorily comply with these provisions may preclude an extension of time being successfully achieved.

Conclusion

The capacity of builders to meet their obligations under the Domestic Building Contracts Act may be severely impacted by current and potentially escalating shortages of supplies due to the effects of COVID-19 on international production chains.

In the first instance, builder should seek to vary the plans and specifications of building work with the consent of the building owner where that options remains available to both parties. If consent is not forthcoming or appropriate replacements are not available, builders should consider appropriately amending the proposed building period or seeking an extension of time until supply of materials can be achieved.

If you require advice in relation to a domestic building contract as either a builder or a building owner, please do not hesitate to contact Eastern Bridge.