Key Point
- The Home Building Act (NSW) 1989's prohibition on unlicensed contractors performing "specialist work" could capture unsuspecting commercial contractors, even if the work is performed by a licensed subcontractor.
Under section 4 of the Home Building Act (NSW) 1989, a contractor who "contracts to do" residential or specialist building work without an appropriate licence cannot enforce its contract against other parties.
In the context of residential building work, the words "contracts to do" have been interpreted broadly, even extending in some circumstances to situations where the work is physically performed by a licensed subcontractor. As a result, there is a risk that unlicensed construction contractors whose obligations include a specialist work component could also be prevented from enforcing their contracts. As the possibility of recovering on a quantum meruit is unlikely to accurately reflect the bargain between the parties, contractors should be aware of the risk when negotiating contracts.
"Contracting to do" work
Section 4 of the Act requires that a person must not "contract to do" any residential building or specialist work without an appropriate licence. Without a licence a person will be unable to enforce their contract and foregoes their right to damages or any other remedy for breach of contract by the other party.
There is some authority that it may be open to an unlicensed contractor who is precluded from enforcing their contract to make an alternative claim on a quantum meruit basis for the fair value of the work, though this is not ideal as it may not accurately reflect the bargain between the parties.
"Specialist work" includes plumbing, gas fitting and electrical wiring work, and any air-conditioning or refrigeration work as defined by the Home Building Regulation (NSW) 2004. Whether a person has "contracted to do" specialist work depends on the of drafting of the contract. For residential building work (which most of the case law covers), the courts appear to have interpreted section 4 as prohibiting the making of a contractual arrangement to perform the work, rather than the performance of the work itself (which is dealt with in a different division of the Act).
A party may be interpreted as "contracting to do" work in contravention of the Act if its obligations under the contract include the performance of specialist work, even if the contract clearly contemplates that it will not physically perform such work itself. In Casa Maria Properties Pty Ltd v Trend Properties Pty Ltd [1998] NSWCA 53 the NSW Court of Appeal found that the development manager in a joint venture to strata, develop and sell a block of flats in King's Cross had contracted to do residential building work by agreeing to co-ordinate and supervise residential renovations, despite expressly warranting that it would engage a licensed builder to carry out the work. Although not ultimately decided on this issue, the case demonstrates that, unless it is excluded by the Regulation, a party may be in breach of the Act if it is under an obligation to co-ordinate or supervise specialist work.
Similarly, an unlicensed party will be in breach of it subcontracts its specialist work obligations to a licensed subcontractor.
The "general contractor" exemption
If a contractor can be classified as a "general contractor", and the specialist work (none of which may be residential building work) is only part of that contractor's work under the contract, an exemption applies (see clause 14(2) of the Regulation). A "general contractor" is defined as a contractor with a business that has a principal object of supplying goods or services that are not for specialist work but may incidentally involve doing specialist work.
Although there been no judicial or academic interpretation of the term "general contractor", there do not appear to be any licensing requirements applicable to general contractors under the Act or the Regulation.
The risk for developers
Large construction companies frequently rely on the "general contractor" exemption, but it is less clear whether it would assist a developer in a joint venture arrangement, as these are typically special purpose vehicles set up on a one-off, project-specific basis. They are unlikely to be considered to "carry on a business" for the purposes of the exemption in clause 14(2).
The risk for developers in these circumstances is illustrated by the case of Midori v Newkarna BC 9402498. In that case, the parties entered into a development deed where Midori agreed to construct four residential units on land belonging to Newkarna. Midori was to fund the construction of the works, and in consideration of an option payment, receive two of the completed units; Newkarna was to receive the other two. Midori did not hold a residential building licence.
Midori substantially completed the development and made the option payment. It sought specific performance of Newkarna's obligations under the Development Deed and the Option Deed. Newkarna alleged that Midori had contravened the Building Services Corporation Act 1989 (BSCA), (the equivalent of the current Home Building Act), and claimed that the contracts were unenforceable.
The Development Deed contained a number of express provisions requiring Midori to "carry out" the works (which both parties agreed were residential building work under the BSCA). The deed also made it clear that the parties' joint intention was for Midori to enter into a separate building contract with a licensed builder who would physically perform the works. The court held that this did not detract from the effect of the "clear contractual provisions" that Midori had "contracted to do the residential building work". As a result, Midori could not enforce the Development Deed (although Midori was entitled to enforce the Option Deed as it was not itself a contract to do residential building work).
Implications
To minimise the risk of being unable to enforce their bargain, construction contractors, and in particular, special purpose vehicles, should consider:
- Does the project involve "specialist work" as defined by the Act?
- If it does, does the contractor hold a licence to carry out specialist work?
- If not, could the contractor's obligations under the contract be interpreted as "contracting to do" specialist work? (Note that it will not be enough for the contractor to simply subcontract its specialist work obligations).
- Could the contractor be exempted as a "general contractor" under the Regulation?
Rather than placing a blanket obligation on the contractor to carry out the entirety of the construction works, and then requiring that any specialist work be carried out by a licensed third party, a possible solution might be to expressly carve any specialist work obligations out of the "works" which the contractor is contractually responsible for performing, and then to put in place a separate arrangement which guarantees the performance of any specialist work by a licensed contractor. However, care would need to be taken when drafting such provisions as a court may nonetheless interpret the unlicensed contractor as having "contracted to do" the specialist work.
If the project does involve specialist work, and the contractor is unlicensed, it may need to consider how its obligations can be expressed so as to avoid the potentially draconian consequences of sections 4 and 10 of the Act. This is particularly important where the contractor is a special purpose vehicle.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
