CHELLEM and KULOWALL CONSTRUCTION PTY LTD

[2022] WASAT 95

JURISDICTION     :   STATE ADMINISTRATIVE TRIBUNAL

ACT: BUILDING SERVICES (COMPLAINT RESOLUTION AND ADMINISTRATION) ACT 2011 (WA)

CITATION:   CHELLEM and KULOWALL CONSTRUCTION PTY LTD [2022] WASAT 95

MEMBER:   MS KY LOH, MEMBER

MR P MARSHALL, SESSIONAL MEMBER

HEARD:   15 AUGUST 2022

DELIVERED          :   2 NOVEMBER 2022

FILE NO/S:   CC 199 of 2022

BETWEEN:   OBED CHELLEM

First Applicant

SHAZIA ALI

Second Applicant

AND

KULOWALL CONSTRUCTION PTY LTD

Respondent

Catchwords:

Building services complaint - Home Building Contract complaint - Whether builder entitled to increase contract price after laying slab - Whether contract was validly terminated - Whether owners entitled to compensation

Legislation:

Building Services (Complaint Resolution and Administration) Act 2011 (WA), s 5(2), s 41(2), s 41(2)(a)(ii), s 41(2)(d)(i), s 43
Home Building Contracts Act 1991 (WA), s 3, s 9, s 9(1), s 9(1)(a), s 9(2), s 9(2)(a)(i), s 9(2)(b)(i), s 17, s 25C, s 25C(2), Pt 2, Pt 3A, Sch 1, cl 2, cl 4, cl 5(1)

Result:

Application allowed

Category:    B

Representation:

Counsel:

First Applicant	:	In Person
Second Applicant	:	In Person
Respondent	:	Mr M Salman (as representative)

Solicitors:

First Applicant	:	N/A
Second Applicant	:	N/A
Respondent	:	N/A

Case(s) referred to in decision(s):

Nil

REASONS FOR DECISION OF THE TRIBUNAL:

Introduction

1. The owners of a block of land in Girarawheen, Mr Obed Chellem and Ms Shazia Shehnaz Ali, entered into a contract with Kulowall Construction Pty Ltd to build a double storey house on their land.

2. After the ground floor slab was poured, no further works were undertaken as the parties disagreed about an increase in contract price.

3. The builder relies on a provision in the contract which allows it to increase the contract price if a delay to the commencement of works of more than 45 days into the contract was caused by the owners, that being their failure to obtain finance in time.

4. The owners dispute that the builder raised this failure with them as the reason for the price increase, which was instead motivated by an increase in bricklaying costs.

5. The builder lodged a notice of cessation with the City of Wanneroo as a result of termination of the contract 'by mutual agreement', which the owners also dispute was their intention.

6. For reasons set out below, we are not satisfied that the contract was terminated, nor was any price increase valid under the contract.

7. The contract remains on foot, and the owners will be compensated for the loss of rental income and consequential losses due to the unlawful suspension of work by the builder.

Issue for determination

1. The primary issue for determination is whether a Home Building Work Contract (HBWC) remedy order is justified in the circumstances.

2. In considering the primary issue, the following secondary issues arise:

   1)whether the builder was entitled to increase the contract price as a matter of contract law and whether the builder has complied with the provisions of the Home Building Contracts Act 1991 (WA) (the ContractsAct)?

   2)whether the contract between the parties was validly terminated by mutual agreement or by the owners pursuant to the terms of the contract and/or the Contracts Act?

   3)whether the owners are entitled to compensation for any breach by the builder of the terms of the contract between them?

Background

1. The following background facts are not in dispute between the parties or are otherwise based on uncontentious documents.

2. The owners signed a contract with the builder dated 8 December 2020 to build a double storey residential dwelling on their land in Girrawheen.

3. Prior to signing that contract, the owners made the following payments to the builder:

   a)on 15 June 2020:  $1,500 for a 'initial deposit for 34 Burnham way, Girrawheen WA 6064 Ref:  Survey and planning process' (as stated in the builder's tax invoice);

   b)on 26 July 2020:  $4,500 for 'Deposit balance for Double Stor[e]y House' (as stated in the builder's tax invoice/receipt).

4. On 21 August 2020, an application for development approval was made to the City of Wanneroo.

5. On 16 October 2020, the application for development approval was approved by the City of Wanneroo.

6. On 23 February 2021, the owners received approval for finance for the construction works.

7. On 11 March 2021, indemnity insurance was issued in respect of the construction works by QBE.

8. On 15 March 2021, the builder submitted an application for a building permit to the City.

9. On 31 March 2021, a building permit was issued by the City.

10. On 7 April 2021, the owners paid to the builder $8,500 for 'deposit for 34 Burnham Way Girrawheen WA 6064', with that amount reflecting 'deposit already received on 26 Jun 2020' of $4,500 (as stated in the builder's tax invoice).

11. Earthworks commenced on 12 June 2021, with the foundation being poured on 22 June 2021 and the slab being laid on 23 June 2021.

12. On 24 June 2021, the owners paid to the builder the first progress payment of $38,000.

13. On 3 August 2021, the builder issued a notice of extension of time (for 20 working days) for completion of the construction works due to rain in July 2021.

14. Following discussions between the owners and the builder, the owners lodged a complaint against the builder with the Building Commissioner on 28 October 2021, seeking commencement of works on their property.

15. On 15 December 2021, the builder issued a second notice of extension of time (for 150 working days) for completion of the construction of works due to shortage of labour resulting from COVID­19 and state border closures.

16. On or about 10 January 2022, the builder responded to the owners' complaint to the effect that it will seek a price increase due to the works not commencing within 45 days of signing the contract 'due to labo[u]r and material shortage resulted from COVID-19 and state border closure', which was roughly estimated at around '$50,000 plus'.

17. On 14 January 2022, the builder sent the owners a letter attaching a builder's warranty certificate cancellation relating to 'termination [of the contract] by mutual agreement with effect from 14 January 2022 on the owner[s'] request'.

18. On 15 February 2022, the Building Commissioner sent the parties a notice of decision advising that he would refer the matter to the Tribunal.

19. On 16 February 2022, the builder emailed the owners asking what they intended to do with the matter being referred to the Tribunal, and outlined the following options:

    a)wait for the Tribunal to deal with this matter;

    b)cancel the contract and close the matter by mutual agreement;

    c)continue to build with the builder and it will raise a variation of around $70,000 for the extra cost increase due to COVID-19 and border closures.

20. On 17 February 2022, the Building Commissioner referred the complaint to the Tribunal.

21. On 23 February 2022, the builder lodged a notice of cessation with the City of Wanneroo, citing the date of cessation as 14 January 2022.

Owners' case and evidence

1. In their complaint to the Building Commissioner, the owners sought the commencement of work on the basis that the builder had refused to start work, contrary to the provisions of the contract which provides for practical completion of the works within the time specified in the contract.

2. They consider that the reason for the delay (which they were verbally advised was due to the cost of bricklaying being high) was unreasonable.

3. They also found the notices of extension of time unacceptable, and pursued their complaint before the Building Commissioner.

4. They challenge the builder's proposal to increase the contract price as this was a fixed price contract, as well as the builder's actions to terminate the contract.

5. The owners claim compensation for having to remove the slab laid by the builder, enter into a new contract with another builder at a higher price, and loss of rental income from their property.

6. They also claim reimbursement for all payments made to the builder, as well as the cost of temporary fencing, water and sewer charges, council rates, and bank interest.

7. The owners rely on the oral testimony of Mr Chellem and Mr Fabian Barzasi of FABuild Pty Ltd.

Mr Chellem

1. Mr Chellem gave oral testimony at the hearing.

2. He stated that he had agreed to an addendum of works on 19 July 2020 at which the contract price was negotiated.

3. He paid for the site survey ($1,500) and another payment of $4,500 before signing the 'fixed price' contract on 8 December 2020.

4. At no time did the builder's representatives ask whether the owners obtained finance approval, although he recalled telling one of them over the phone on 23 February 2021 about the finance approval.

5. Further, at no time prior to these proceedings did the builder's representative raise the issue about the owners' delay in receiving finance approval.

6. After the slab was poured, Mr Salman, the construction manager and director of the builder, told Mr Chellem that they will need two months to start the brickwork.

7. Mr Chellem disputed that he had been told in a conversation in June 2021 that there would be a price increase.

8. After the two months had passed, Mr Salman then stated in conversation to Mr Chellem that the cost of brickwork was high, and they could not start for a few more months.

9. On 13 October 2021, Mr Salman had again advised that bricklayer cost was too high and that he could not carry out works until the price dropped to $1.50.

10. Mr Chellem thought that the delay was unreasonable, so he made a formal complaint to the Building Commissioner.

11. When he received the first notice of extension from the builder, he did not know what to do with it.

12. When he received the second notice of extension, he advised the builder that the delay was not acceptable and that he would forward the notice to the Building Commissioner.

13. When the builder advised of its intention to increase the contract price, through its response to the owners' complaint, Mr Chellem was very upset, as they had a limited budget for the building project and could not afford the price increase.

14. He sought legal advice from Citizen's Advice Bureau to the effect that there were no benefits to cancelling the contract.

15. Mr Chellem enquired with Mr Kumar, the sales manager for the builder, as to the process of the notice of cessation, and decided not to terminate the contract.

16. When Messrs Salman and Kumar sent paperwork to Mr Chellem on or about 14 and 18 January 2022 about cancellation of the contract, he informed them that 'at no time we wanted to cancel the contract until [the] matter [was] resolved'.

17. He said that the builder had never given notice in writing of the intention to terminate the contract.

18. Mr Chellem was insistent during cross-examination that while he advised the builder's representatives that he might cancel the contract, he never told them that he wanted to cancel the contract.

Mr Barzasi

1. Mr Barzasi is a registered building contractor at FABuild Pty Ltd.

2. He confirms that he provided a base price quote for the construction of a home on 28 May 2022 based on the approved plans for the owners' property, on the assumption that the works would commence immediately.

Builder's case and evidence

1. The builder claims that it is entitled to increase the contract price as the owners had failed to obtain finance approval within the required time, which caused the delay in the works commencing within 45 days of the contract.

2. Whilst it concedes it did not give written notice that it intended to increase the contract price, nor did it specify the quantum of that increase, it verbally informed the owners of a price increase at a site meeting in June 2021.

3. The builder called two witnesses to give oral evidence - Mr Ravi Kumar and Mr Mohammad Salman.

Mr Kumar

1. Mr Kumar is in the builder's business development team.

2. Mr Kumar stated that after submitting their application for building approval, Mr Chellem gave instructions to modify the plans, and so there was a delay of a few extra weeks in obtaining the building permit approval.

3. Mr Kumar recalled that two weeks before the builder sent paperwork to Mr Chellem to cancel the contract, Mr Chellem had requested to 'settle things' and to cancel the contract because he had no trust in the builder and that he thought the builder would go bankrupt.

4. After he confirmed with Mr Chellem that he wanted to proceed with cancelling the contract a week later, Mr Kumar told Mr Salman about Mr Chellem's request, and Mr Salman prepared the paperwork and the notice of cessation.

Mr Salman

1. Mr Salman is an engineer and a registered building practitioner for the builder.

2. He has been a registered building practitioner for four or five years.

3. Mr Salman stated that there was a delay in seeking a building permit, which was a contributory factor in the delay in commencing works within the time required under the contract.

4. There were also delays in the building permit approval process due to Mr Chellem's requested changes to the approved plans relating to windows.

5. Mr Salman denied that the delay in the approval process was due to the builder's fault with submitting the wrong design for windows.

6. Mr Salmon stated that at the time the building permit was approved, there was a shortage of all trades with COVID-19 border closures, in particular, bricklayers.

7. Mr Salmon said that when he met Mr Chellem on site after the slab was poured in June 2021, he had told Mr Chellem about the increase in cost of bricklaying, and that he was not in a position to start bricklaying until the owners contributed to the cost.

8. He conceded that he did not specify what the price increase would be, but it would be around $1 or $2 per brick.

9. Mr Chellem told him that he would not 'pay a penny'.

10. Mr Salman stated that he did not provide an actual estimate of the price increase, as he would only have done so if Mr Chellem had agreed to the price variation.

11. Mr Salman conceded that he did not give notice in writing of the intention to increase the contract price when he was advised of the date of finance approval, nor at any point thereafter.

12. When Mr Salman issued the notice of cessation to the City, it was simply to inform the council that the builder was no longer working on the site, and he did not consider the notice of cessation as being the termination of the contract.

Legal Framework

1. The owners have made a complaint under s 5(2) of the Building Services (Complaint Resolution and Administration) Act 2011 (WA) (the Building Services Act) on the basis that the builder has breached its contract with the owner and/or provisions of Pt 2 of the Contracts Act, namely, by refusing to start work due to the increase in the price of brickworks.

Building Services Act - HBWC remedy order

1. Under s 43 of the Building Services Act, we may make a HBWC remedy order if satisfied that the order is justified.

2. Under s 41(2) of the Building Services Act, a HBWC remedy order relating to a breach of the contract consists of one or more specified orders, including:

   a)an order requiring any specified work to be done in the performance of the contract (s 41(2)(a)(ii));

   b)an order that a specified person pay specified compensation for loss or damage caused by any breach of the contract or of a provision of Pt 2 of the Contracts Act (s 41(2)(d)(i)).

Contracts Act

Home building work contract

1. A 'home building work contract' is, relevantly, a contract between a builder and an owner for the performance by the builder of 'home building work' (which includes construction of a dwelling): s 3 definitions of 'home building work contract' and 'home building work' of the Contracts Act.

Building permit approval

1. Under Pt 2 of the Contracts Act, there is implied in every contract a condition that specified events must occur within a certain timeframe, including that a building permit is granted within 45 working days from the date of the contract: s 9(1)(a) of the Contracts Act.

2. It is also implied in the contract that the builder will do all things reasonably necessary to be done, and the owner will do all things as may be required to be done, to ensure that the condition relating to those specified events is fulfilled: s 9(2)(a)(i) and s 9(2)(b)(i) of the Contracts Act.

3. Where the implied condition relating to specified events is not fulfilled, the consequences to, and the rights and remedies of, the parties are set out in Sch 1 to the Contracts Act.

4. Schedule 1 to the Contracts Act broadly outlines that a contract remains in force, notwithstanding the non-fulfilment of a condition in s 9(1) of the Contracts Act.

5. Relevantly, where such a condition is not fulfilled as a result of an owner solely failing to comply with his or her obligations under s 9(2) of the Contracts Act, a contract remains in force on the same terms and conditions until the parties agree otherwise: cl 2 of Sch 1 to the Contracts Act.

6. The continuation of a contract is subject to the right of a builder to issue a written notice increasing the contract price by a specified amount by a specified date, and the concomitant right of an owner to terminate the contract if such an increase exceeds 5% of the contract price: cl 4 of Sch 1 to the Contracts Act.

7. An owner also has a right to make a complaint under s 5(2) of the Building Services Act if the amount of the price increase notified is considered to be excessive or unjustified: cl 5(1) of Sch 1 to the Contracts Act.

Home indemnity insurance

1. Finally, there is a prohibition against a builder performing residential building work unless an owner has been furnished with, prior to a demand from the builder for any payment including any deposit payable under the contract, with a certificate of the home indemnity policy: s 25C(2) of the Contracts Act.

2. As s 25C of the Contracts Act is under Pt 3A of the Contracts Act, any breach of that provision cannot, on its own, be a basis for a claim under s 5(2) of the Building Services Act: see s 17 of the Contracts Act.

Contract between owners and builder

1. The relevant provisions under the contract between the owners and the builder are largely consistent with those under the Contracts Act.

Building permit approval, any breach of owner condition

1. For example, clause 2(a) of the contract provides that the contract is conditional on a building permit being issued in respect of the works within 45 days from the date of the contract.

2. Clause 2(c) and clause 2(d) of the contract replicates a builder's and an owner's obligation under the Contracts Act to ensure that the condition relating to the building permit is fulfilled, and where these are not met, clause 22 of the contract replicates Sch 1 to the Contracts Act in setting out the consequences to, and the rights and remedies of, the parties.

3. Indeed, clause 6(b) and clause 22(d) of the contract extends the effect of s 9 of the Contracts Act to, relevantly, any failure by an owner to comply with a condition imposed on him or her under the contract which has caused a delay in the commencement of works beyond 45 working days of the contract date.

4. Under such circumstances, a builder is entitled under clause 22(d)(i) of the contract to:

   a)increase the contract price by an amount set out in the notice; and

   b)specify when any increased amount is payable, which must be either:

   i)not later than 10 working days after the notice is given; or

   ii)at the time of the next progress payment.

5. Where a builder increases the contract price in accordance with clause 22(d)(i) of the contract by an amount that exceeds 5% of the contract price, an owner is entitled to terminate the contract in accordance with clause 17 of the contract within 10 working days after receipt of the notice of the price increase and is liable to compensate such builder for reasonable costs:  clause 22(d)(ii) of the contract.

6. Where an owner considers that the amount of the price increase is excessive or unjustified, he or she may apply to the Building Commissioner or the Tribunal within 10 working days after receipt of a notice under clause 22(d)(i) for a review of that amount:  clause 22(e) of the contract.

Finance approval

1. Under clause 3(c) of the contract, where an owner is to obtain finance to pay the contract price, he or she must give a builder written evidence that he or she has obtained finance within the period stated in item 4 of the schedule to the contract (stated as 45 working days from the date of the contract).

2. The failure to satisfy clause 3(c) of the contract entitles either party to terminate the contract immediately by notice in writing to the other:  clause 3(c)(iii) of the contract.

Home indemnity insurance, deposit

1. Clause 1(a) of the contract provides that a builder shall not perform any works nor make any demand for payment under the contract until it has given the owner a certificate that evidences the taking out of a home indemnity insurance policy in respect of the works.

Special condition

1. A special condition was inserted into the contract, which provides as follows:

   Due to limitations in the time frames for Federal Grants ($25,000) and WA State Government grant ($20,000), we are working our best towards to ensure clients to eligible for grants, at the same time we can not guarantee on any delays due to high demand in works or progress of works delays / limitations / restrictions in obtaining Home Indemnity Insurance from relevant authorities and causes client to not eligible for grant within the specified time limit. and client to ensure specified contract amount should be organized or can cancel the contract and liable for paying the penalties.  And also there is predictability of delay in construction works due to high demand of trade and client agrees and accepts.

Consideration

Secondary Issue 1 - variation to contract price

1. Whilst it is not in dispute that the owners failed to obtain finance approval within the requisite 45 days under clause 3(c) of the contract (that is, by 12 February 2021, discounting the three Australian public holidays between 8 December 2020 and 12 February 2021), neither party sought to exercise the right to immediately terminate by written notice under clause 3(c)(iii) of the contract.

2. The issue is then whether the builder is entitled to increase the contract price under clause 6(b) and clause 22(d)(i) of the contract as the failure to obtain finance approval has caused a delay in the commencement of the works beyond the requisite 45 days.

3. While Mr Salmon seems to suggest that the failure of the owners to obtain finance approval within 45 days has delayed the application for a building permit, Mr Chellem disputes this on the basis that the builder neither enquired about whether the owners had obtained finance approval nor raised any concerns about the delay in receiving finance approval.

4. It is not necessary to resolve this controversy, as the action by the builder in commencing construction works in June 2021 is, in our view, determinative of the question as to whether it is entitled to increase the contract price under the contract.

5. Where a condition precedent of a conditional contract is unfulfilled, a party needs to elect whether to affirm the contract or to terminate the contract.

6. A necessary construction of clause 6(c) and clause 22(d) of the contract (and indeed, s 9 of, and Sch 1 to, the Contracts Act) is that such an election needs to be made before a builder commences any work, on the basis that the commencement of works would compromise an owner's right to object to such price increase (either by terminating the contract or seeking a review) with some works already being commenced.

7. An owner should not be put in the precarious position (as the owners in this case clearly were) of having to respond to a price increase request by a builder with the uncertainty of what to do with a partly finished build if he or she did not agree to the price increase.

8. Further, we are also satisfied that even if the builder had the right to increase the contract price after commencement of works, it had failed to exercise that right as it did not provide written notice of the specific price increase, nor the time by which the price increase was to be paid, in accordance with clause 22(d) of the contract.

9. As such, we find that the builder was not entitled to increase the contract price, nor was there any valid exercise of any right to do so, under clause 22(d) of the contract.

Secondary Issue 2 - validity to termination

1. Whilst the parties disagree as to who wanted to terminate the contract, each party has given evidence that each did not intend for the contract to come to an end.

2. Neither has there been any formal written notice of termination issued by either party to indicate that there has been an exercise of any right of termination under the contract.

3. As such, we find that the contract remains on foot on the same terms and conditions.

4. We note that under clause 9(b)(ix) of the contract, the builder is entitled to an extension of time for completion of the works due to any delay in the continuation of the works caused by or resulting from proceedings before the Tribunal.

5. Further, under clause 9(b)(x) of the contract, the builder is entitled to an extension of time for completion of works due to any delay caused by proper investigation of proceedings before the Tribunal by the builder or the owners.

6. As a period of 254 working days have elapsed since 28 October 2021 to the date of this decision (2 November 2022), it seems to us that the builder will be entitled to issue a notice of extension of time by that period due to the delay caused by or resulting from, or due to the proper investigation of, proceedings before the Tribunal.

7. Finally, while it is questionable that any payment towards the deposit under the contract was paid by the owners prior to entry into the contract, there were no demands for payment made pursuant to the contract until after the certificate of home indemnity insurance policy was provided to the owners, and as such, there has been no breach of clause 1(a) of the contract.

Secondary Issue 3 - compensation

1. As the contract remains on foot, there is no basis for seeking compensation resulting from an increase in contract price in entering into a building contract with a new builder, nor for reimbursement for any amounts already paid to the builder under the contract.

2. As to the payments for water and sewer charges and council rates, these would have been incurred by the owners due to their proprietorship of the land, whether the builder had suspended works or not.

3. Interest charges on their bank loan would have continued to be incurred by the owners irrespective of whether the builder had suspended works, and is charged for as long as the bank loan remains outstanding.

4. We accept however that to the extent that the unlawful suspension of works had resulted in a lost opportunity to rent their home earlier, and that the owners had to secure their property themselves with temporary fencing whilst the builder suspended works, we will make an order that the builder pay the owners the amount of $9,115 comprising the cost of temporary fencing ($715) and loss of rental income ($8,400).

Conclusion

1. For the reasons stated above, we are satisfied that the builder was not entitled to increase the contract price, nor was there any valid exercise of any right to do so, under clause 22(d) of the contract.

2. We are also satisfied that the contract remains on foot.

3. Finally, we find that by reason of the purported exercise of the right to increase the contract price, and the unlawful suspension of works by the builder, the owners are entitled to compensation in the amount of $9,115.

Orders

The Tribunal orders:

1.The respondent is to complete the building works pursuant to the terms of the contract between the applicants and the respondent dated 8 December 2020.

2.The respondent is to pay the owners the sum of $9,115 as compensation for loss or damage caused by the builder's breach of the contract between the applicants and the respondent dated 8 December 2020.

I certify that the preceding paragraph(s) comprise the reasons for decision of the State Administrative Tribunal.

MS K Y Loh, MEMBER

2 NOVEMBER 2022