What is the meaning of 'hardship' in a s 38 variation, and can this be linked to a s 39 extension of time?

DBCA Interpretation (Victoria Only)

This update is a case summary of Jolin Nominees Pty Ltd v Daniel Investments (Aust) Pty Ltd [2022] VSCA 209 (Jolin Nominees) and concerns Victoria only (other states and territories do not need to continue reading) and recommended reading for clients who are Victorian builders and who engage in domestic building work.

Factual background

Jolin Nominees concerns an appeal from the trial court and Victorian Civil and Administrative Tribunal (VCAT) regarding when a builder can recover the cost of variations to a domestic building contract and whether the time spent undertaking the variations is an extension of time (and therefore a reduction in liquidated damages for the owner) in accordance with ss 38 and 39 of the Domestic Building Contracts Act 1995 (Vic) (DBCA).

Jolin Nominees Pty Ltd (Owner) sought to have Daniel Investments (Aust) Pty Ltd (Builder) demolish a house and build six townhouses (Works). The Owner provided architectural plans and drawings with no detailed specifications but informed the Builder the specifications would be the same as a previous development the parties had worked on together in Craigieburn. The Builder provided the Owner with a quote for $1,471,420 (inclusive of GST). The parties then entered a standard form Victorian new homes contract construct for the Works only (Contract).

Issues and judgment

There were three issues that were determined by the Supreme Court of Victoria (SCV).

1. Construction of section 38(6)(b) of the DBCA

During the Works, the Owner requested several variations, which the Builder performed. However, neither party complied with the requirements of s 38 of the DBCA.

At VCAT, the Builder was successful in arguing it should be entitled to variation costs despite non-compliance with the statute because it would ‘suffer a significant or exceptional hardship’ and ‘it would not be unfair to the building owner for the builder to recover the money’ in accordance with s 38(6)(b) of the DBCA. ‘Hardship’ was outlined by VCAT and the trial judge to mean, for the purposes of s 38(6)(b), an assessment, having regard to all the circumstances, including the Builder’s financial situation at the time and profit margin on the Contract.

Examples of where the consequences of the Builder not being able to recover for a variation would be more significant, weighing in favour of the exception of ‘hardship’ applying, included:

• Steel lintels were installed in place of timber lintels, which had been specified in the garages.  This change was required by the engineer and was caused by errors in the architectural and engineer design, which was the responsibility of the Owner.
• A storm water pipe drain needed to be rerouted to comply with regulatory requirements.  It was not disputed that this change was caused by a defective design in the plans, which was the responsibility of the Owner.

VCAT’s reason for finding that the Builder was entitled to recover the costs of variation for both exceptions was due to ‘hardship’ to the Builder, because the amounts expended were significant, and allowing the costs of the variations was not ‘unfair’ to the Owner, as the Owner had the benefit of the variations.

The SCV rejected an argument from the Owner that ‘hardship’ as referenced in s 38(6)(b) of the DBCA requires compliance with a notice requirement or compliance by the Builder with s 38(3) or s 38 of the DBCA generally. Instead, SCV found that s 38(6)(b)(i) of the DBCA does not expressly link the ‘hardship’ to either the notice requirement or compliance with s 38(3) or s 38 more generally and the only requirement is that the hardship must be ‘significant or exceptional’.

The SCV decided that VCAT and the trial judge had not erred in striking the balance between the protection of the Owner and the protection of the Builder in their assessment of the variations.

2. Extension of time under s 39(c) of the DBCA

Since the Builder’s variation fell within the exception provided by s 38(6)(b) of the DBCA, VCAT determined that the Builder was entitled to an extension of time for completion of the Works under s 39(c) of the DBCA.

Section 39(c) provides that if plans and specifications in a major domestic building contract are varied in accordance with s 38, then the reference in the Contract to the completion date or to the number of days required to finish the work is to be read as a reference to the date, or the number of days ‘as adjusted to take account of the variation’.

The Owner argued there was no variation capable of raising s 39 of the DBCA, or alternatively, the Builder was required to comply with the requirements of s 38 of the DBCA.

SCV disagreed and found where VCAT was satisfied that the variation fell under the auspices of s 38(6)(b), then s 38(c) of the DBCA extends or adjusts completion date ‘to take account of the variation’ and the extension equates the length of time it takes or has taken to affect the variations.

3. Does clause 34 of the Contract preclude any extension of time under s 39(c) of the DBCA?

The SCV lastly rejected an argument from the Owner that clause 34 of the Contract required a written notice be given before s 39(c) of the DBCA could have effect.

The SCV reasoned that s 39(c) provides a complete answer to the consequences of when a favourable VCAT decision is made under s 38(6)(b) of the DBCA. Further, given the way the case was argued and decided before VCAT and the trial judge, and the way it was argued in the SCV, it was further decided by SCV unnecessary to determine the proper construction of clause 34 of the Contract.

Takeaways

Jolin Nominees is a reminder that variations performed by a builder at the request of an owner, otherwise than in compliance with s 38 of the DBCA will ordinarily enliven the exception of ‘hardship’ contained in s 38(6) of the DBCA under a construct only Contract where the variations arise from defects in the design of the architect or engineer, in circumstances where those designs are the owner’s responsibility.

Jolin Nominees further provides useful guidance on when 'hardship’ may give operation and effect to ss 38 and 39 of the DBCA such that where a builder proves entitlement to an exception to the requirements of s 38 of the DBCA, they will also be entitled to an adjustment to the date for completion under s 39 of the DBCA to reflect the time it takes to perform the variation.

The SCV also highlighted in Jolin Nominees that s 39 of the DBCA may be contracted out of (not falling into the mandatory provisions of the DBCA) and there could be disagreement between parties about the reasonableness of the delay under s 39 of the DBCA, but those were questions for another day.