The recent Court of Appeal decision of Imerva Corporation Pty Ltd v Kuna [2017] VSCA 168 (“Imerva v Kuna”) demonstrates how important it is for builders to comply strictly with the Domestic Building Contracts Act 1995 (“the DBCA”) and the Domestic Building Contracts Regulations 2017 (“the DBCR”) when using what the Master Builders New Homes and Home Improvements contracts refer to as Method B for progress payments.

Section 40 of the DBCA sets out what stages of building work a builder must adhere to and the percentage of the contract price that a builder is entitled to receive at each stage. The DBCA allows for the parties to agree that those stages and percentages do not apply, but they must comply with the requirements of the DBCR in order to make such an agreement valid.

When Imerva v Kuna was heard, regulation 12 of the DBCR stated that if using Method B, a warning in the manner set out in Form 1 must be signed by the building owner before signing the contract and an agreement in the manner set out in Form 2 must be included in the contract. As of 1 August 2017, the relevant regulation that governs progress payments is now regulation 13 and there is an added requirement that the owner and the builder must sign an agreement panel on the new Form 2 before signing the contract.

Facts

Imerva v Kuna dismissed an appeal against a Supreme Court decision which itself had dismissed an appeal of a Victorian Civil and Administrative Tribunal (“VCAT”) decision which determined that the owners had not agreed to use Method B. The builder entered into a major domestic building contract for the demolition of an existing house and to build two attached townhouses in its place. The parties agreed to use Method B progress payments and the contract was signed. The parties placed their initials at the bottom of each page. However, the owners did not sign in the designated signature box on Form 1.

Building commenced and the owners paid the first seven progress payments submitted by the builder in accordance with the Method B progress payments table in the contract. The builder then submitted a further three progress claims which the owners did not pay.

The owners subsequently purported to terminate the contract, alleging that there were defects with the building work. The builder commenced proceedings in VCAT for monies owed to it ($529,820.62). The owners issued a counterclaim for the refund of excess monies paid by them under the Method B progress claims as well as other costs to complete and rectify the works ($634,568.12).

Issues

The owners disputed that they had agreed to use Method B for progress payments. The principal issue before the Court of Appeal was whether there had been sufficient compliance with section 40 of the DBCA and, at the time of the hearing, regulation 12 of the DBCR.

The Court of Appeal upheld the decision of the Supreme Court of Victoria that owners must sign the acknowledgement on Form 1 declaring that they have read the warning that they are using an alternative method of progress payments to those set out in section 40 of the DBCA and thereby changing their legal rights. It was found that the owners’ initials in the bottom right-hand corner alone of Form 1 were not enough to show that the owners clearly understood that they were waiving their rights in this regard. The Court of Appeal found that whilst signing on the dotted line is not mandatory, the signature must be placed so that it can be reasonably deduced that the owner has understood the change in their legal rights.

The added confusion here was that the owner had also put their initials on the page containing the Method A option. The Court of Appeal found that the owner was simply accepting that the pages they initialed formed part of the contract.

The builder sought to rely on the legal principle of estoppel, arguing that the owners should be prevented from departing from a promise they made to the builder to use Method B as it would be unjust for them to do so. The Court of Appeal also upheld the Supreme Court of Victoria’s decision that the builder could not rely on the principle of estoppel because the builder had not complied with the DBCR.

What this means for our members

Whilst non-compliance with the DBCR means that a builder is not entitled to payment in accordance with the Method B sequence of payments, they may still be entitled to payments in accordance with the sequence of payments in Method A, albeit in this case a reduced amount. However, non-compliance with the DBCA and DBCR can result in significant penalties for builders.

Don’t get caught out

If using Method B for progress payments, our members must be sure that:

• The owner signs the acknowledgement on Form 1 before they sign the contract. This is to allow enough time for the owners to read and understand the warning that they are changing their legal rights and they are sure that different progress payments are necessary
• The builder and the owner sign the acceptance on Form 2 before signing the contract
• Do not just initial the pages containing Form 1 and Form 2. Whilst the signature does not need to be exactly on the lines contained in the signature panels, it must be near enough to the signature line so it could be reasonably construed that the intention was to sign there.

If you have any questions, please call the Master Builders Legal Department on (03) 9411 4548.