Common law right to damages for defective building work could be ousted by DLP and final certificate mechanism

Parkview Constructions v Futuroscop finds DLP and final certificate mechanism is a code 6 min read

A single judge of the NSW Supreme Court has held that the defects liability period (the DLP) and final certificate mechanism in an AS4902-2000 contract is a code, effectively shutting out common law damages for the cost of rectifying non-latent defects. While many in the industry view DLP provisions as adding to common law rights, not removing them, the operation of the DLP and final certificate clause here did just that.

In this Insight, we analyse the decision³ and its application to all construction contracts with similar final certificate mechanisms.

Key takeaways

• While this decision concerns an AS4902-2000, the findings are relevant and have broad application to all forms of construction contracts that contain similar DLP and final certificate mechanisms.
• The decision also clarifies that 'conditional' certificates of practical completion are unlikely to have any effect – parties should take care when relying on them.
• During procurement, parties should consider expressly preserving a common law right to damages for all defects, and either carving the defects out of any final certificate mechanism or removing it altogether.
• During delivery, parties should carefully follow the defect notification procedure in their contracts, both before and during the DLP. They should also ensure that any ongoing defects are documented in a notice of dispute (or otherwise in accordance with the contract) following issuance of a final certificate of completion.
• Statutory warranties and duties may not be affected. Eg in New South Wales, parties will still be able to pursue claims for breaches of:
  • statutory warranties for residential building work under the Home Building Act 1989 (NSW); and
  • the statutory duty of care to owners under the Design and Building Practitioners Act 2020 (NSW) (recently held to apply to include building work on all classes of building – see our Insight).¹

Background

Futuroscop Enterprises Pty Ltd (the principal) engaged Parkview Constructions Pty Ltd (the contractor) to construct two buildings on a site near Sydney International Airport via an AS4902-2000 contract.

The contractor commenced proceedings to recover the security it provided, and, in response, the principal sought liquidated damages and common law damages for defective building work.

A number of key issues arose in the case, including:

• whether the application of the DLP and final certificate mechanism in the AS4902-2000 contract ousted the principal's right to claim common law damages for defective building work;
• whether two 'conditional' certificates of practical completion that had been issued – one for each building – comprised a certificate of practical completion under the contract; and
• whether the court can:
  • determine the date for practical completion where the superintendent contends it is yet to be achieved; and
  • ascertain liquidated damages where the superintendent has certified liquidated damages, albeit not in accordance with the contract.

DLP mechanisms may exclude common law damages for defective building work

How the DLP and final certificate mechanism operated

In this case, the DLP and final certificate mechanism operated so that:

• The superintendent could direct the contractor to rectify defects in its works for 12 months following practical completion. A new DLP would then run (for no longer than 12 months) in relation to any rectified work.
• If the contractor failed to rectify defects after receiving notice, the superintendent could give notice that the principal intended to have the subject work rectified by others.
• If the subject work was still not rectified following that notice, the principal could proceed with the rectification, and the superintendent would certify the costs incurred as due from the contractor. This right was expressed to be 'without prejudice to any other rights and remedies the Principal may have'.
• At the expiry of the last DLP, a final certificate evidencing the amounts finally due and payable between the principal and contractor was to be issued within 42 days.

The contract specified that the final certificate 'shall be conclusive evidence of accord and satisfaction, and in discharge of each party's obligations in connection with the subject matter of the contract' except for (among other exceptions):

• any defect or omission in the works that was not apparent at the end of the last DLP, or would not have been disclosed upon reasonable inspection at the time of the issue of the final certificate; and
• unresolved issues the subject of any notice of dispute under clause 42 of the contract, served before the seventh day after the issue of the final certificate.

The effect of the DLP and final certificate mechanism

The court held that:

• The clauses forming the DLP and final certificate mechanism (discussed above) combined to create a code governing the rights, obligations and liabilities of the parties as to defect rectification. Despite the ability to give directions being without prejudice to the principal's other rights, the final certificate operated as conclusive evidence of each party's liability as to patent defects.
• The effect of this code was to oust the principal's entitlement to common law damages for defective building work regarding patent defects (ie obvious or apparent defects that would have been disclosed upon a reasonable inspection) arising during the DLP, at the time of issue of the final certificate and were not otherwise disputed as part of the final certificate process.
• The contract did not contain detailed indemnities that suggested the principal was permitted to rely on its common law right to damages even if it had not complied with the contractual regime governing the notification and rectification of defects.²
• All of the defects notified by the principal in its Scott Schedule (some 382 items) served in the proceeding were apparent at the end of the DLP or reasonably identifiable at the date of the final certificate. Only 150 items were notified by the principal at the time of issuing the final certificate, meaning that the court only determined those items of defects at hearing in so far as they remained in dispute.

Conditional certificates and the court's power to determine practical completion and liquidated damages

The superintendent issued two 'conditional' certificates of practical completion during the project. The contract did not make provision for these certificates to be issued – instead, it only allowed the superintendent to:

• issue a certificate of practical completion; or
• give reasons for not doing so.

The court held that conditional certificates were without contractual effect. Those certificates did not demonstrate that the superintendent considered practical completion was achieved but, taken together, neither could they be read as reasons for not issuing a certificate.

Because the conditional certificates were ineffective, the superintendent had failed to carry out its function under the contract. In the circumstances, the contract allowed the court to:

• determine the date for practical completion; and
• ascertain liquidated damages,

despite any operative determination by the superintendent.

Next steps

When drafting contracts with a DLP and final certificate mechanism, owners should consider:

• expressly preserving a right to common law damages for all defects; and
• including a carve out for all defects, rather than just latent defects, in any final certificate procedure (if included). Alternatively, owners may wish to dispense with a final certificate procedure altogether.

Owners should also be proactive in identifying and responding to defects during the DLP, and should:

• carefully follow the defect notification procedure set out in their contract both before and during the DLP;
• ensure that thorough inspections are carried out and documented before the expiry of the DLP and, again, at the time of the final certificate; and
• ensure the superintendent issues directions to rectify promptly where defects are discovered.

Head contractors should also be vigilant of the operation of their DLP and final certificate mechanisms in so far as similar clauses may be included in their downstream subcontracts.

If you would like to discuss the issues raised in this Insight, please contact any of the people below