Sunshine East Pty Ltd v CBEM Holdings Pty Ltd [2023] NSWSC 744

Andrew Hales  |  Jessica Nesbit  |  Heidi Knights

Key takeout

A residential builder may still be entitled to payment under the Building and Construction Industry Security of Payment Act 1999 (NSW) (SOP Act) despite not holding the requisite homeowners warranty insurance or maintaining a contractor licence.

The SOP Act is powerful legislation that prevails in circumstances where a party may attempt to circumvent an otherwise valid claim. 

Facts

Sunshine East Pty Ltd (owner) engaged ASY Construction Pty Ltd (construction manager) to manage the design and construction of various residential works under a construction management contract.  The contract did not require the construction manager to undertake any residential building work within the meaning of the Home Building Act 1989 (NSW) only to coordinate and oversee the works.  As such the construction manager was not required to be licensed or to hold homeowners warranty insurance.  Despite this the construction manager procured a policy of insurance for the amount of its construction management fee and provided evidence of this to the owner.

The owner and the construction manager entered into a trade contract with CBEM Holdings Pty Ltd (contractor) for the civil and stormwater works component of the project. The trade contract was in the form published by the Master Builders Association for use in conjunction with a contract management agreement. The lump sum price was specified as $1,611,078 and expressly excluded insurance.  In contravention of the Home Building Act, the contractor entered into the trade contract without holding a contractor licence.

The contractor served a payment claim under the trade contract in the amount of $420,952 and the owner failed to pay any part of the claim and did not provide a payment schedule as required under the SOP Act.

The contractor commenced proceedings in the District Court to recover the claimed amount from the owner as a debt due. Summary judgment was entered against the owner for the entire amount claimed. The District Court held that there was no triable defence irrespective of the insurance and licensing issues raised by the owner.

The owner appealed to the Supreme Court of NSW.

Decision  

The Supreme Court dismissed the owner’s appeal and discharged the stay of execution of judgment of the District Court.

The Court held that there was no serious issue to be tried with respect to the owner’s liability to pay the contractor in circumstances where the contractor did not hold a contractor licence or performed residential building work without having homeowners warranty insurance.

Insurance

Under sections 92 and 99 of the Home Building Act, any person carrying out residential building work must hold insurance against a failure, due to insolvency, death or disappearance of the contractor, to complete the work or to rectify a breach of statutory warranties in respect of the work. Under s 94(1) of the Home Building Act if a contract for insurance is not in force, a contractor is not entitled to recover money in respect of that work under any other right of action. Despite this, the Home Building Act also provides (s 94(1A)) that if a court or tribunal considers it just and equitable, a contractor, notwithstanding the absence of the required contract of insurance, may be entitled to recover money in respect of that work on a quantum meruit basis.

The court held that there was a strong case for the District Court to exercise its jurisdiction under s 94(1A) and allow a quantum merit on grounds of justice and equity as, based on the terms of the trade contract, the contractor would have reasonably understood that the owner or its construction manager would procure the required insurance. This understanding also aligned with the terms of the construction management contract.

The Court considered that the evidence had suggested that the owner was not concerned about the contractor’s inability to obtain homeowners warranty insurance, as it did not want to incur the premium cost in the first place. The Court stated that the owner was now ‘acting discreditably and disingenuously in seeking to resist an obligation to pay’ upon the basis of an absence of insurance cover.

The Court also held that pursuant to s 32 of the SOP Act, the summary judgment in the District Court did not prevent the owner from disputing, in another proceeding, the contractor’s entitlement to a quantum meruit under s 94(1A) or how much that quantum should be.

Licence

Section 4 of the Home Building Act provides that a person must not contract to do residential building work without a contractor licence. Under section 10 of the Home Building Act, if a person contravenes s 4 the person is not entitled to damages or to enforce any other remedy in respect of a breach of contract, and the contract is unenforceable. 

The owner contended that section 10 rendered the trade contract unenforceable and deprived the contractor of any remedy for the owner’s failure to pay the progress claim. The contractor submitted that the denial of remedies under section 10 did not extend so far as to bar recovery of a statutory debt pursuant to the SOP Act.  The contractor relied on Brodyn Pty Ltd v Davenport [2004] NSWCA 394 which held that:

• the civil consequences for an unlicensed contractor for its breach of s 4 of the Home Building Act are those set out in s 10 of the Home Building Act; and
• the remedy given by the SOP Act is not in the nature of damages or any other remedy in respect of breach of contract and is instead a statutory remedy.  

The Court could not distinguish the Brodyn decision and found that a statutory claim could be made in respect of the progress claim, despite the consequences set out in s 10 of the Home Building Act.