When the Brick Hits the Fan

WHEN THE BRICK HITS THE FAN

The forecast impending downturn in residential development places stress on all participants in the construction industry as the good times may not continue forever.

Quantity Surveyors are well advised to revisit the scope and breadth of their responsibilities in the preparation of progress certificates, particularly as it is anticipated that greater reliance will be placed on their expertise when “the brick hits the fan”.

We have reviewed three cases which provide valuable guidance to Quantity Surveyors in carrying out their duties.

THE DUTY OF CARE

In the case of a Quantity Surveying firm v Cosmarnan Constructions P/L & 3 Ors [2003] NSWCA 66 revised, the New South Wales Court of Appeal dismissed an appeal by a bank-appointed Quantity Surveyor against a trial court ruling awarding $665,025 in damages against the Quantity Surveyor.

In that case, the Quantity Surveyor was appointed by a joint venture to certify the correctness of progress claims submitted by the builder carrying out the joint venture’s residential development project.

The Quantity Surveyor’s appointment was contained in the loan facility obtained by the joint venture partners and worded in this manner:

“Bank approved Quantity Surveyor is to confirm contract price, time frame and approve all drawdowns of the facility. Quantity Surveyor is also to confirm that minimum of $750,000 in equity has been applied to the development prior to the initial drawdown of the facility. A list of bank approved Quantity Surveyors is attached for your information.”

It appears that the project experienced unexpected delays and ultimately the builder was unable to complete the same, although it progressively made claims for works carried out. It further appears that not only was the work incomplete, the works carried out were defective and those that were not were subjected to extensive vandalism.

The joint venture partners sued the Quantity Surveyor in the District Court both for breach of contract and in negligence.

On the matter of tort, they asserted that that the Quantity Surveyor negligently misrepresented both the degree of completion of the works and the quality of the workmanship of the building work that had been completed every time the Quantity Surveyor certified as to the correctness of a progress report.

They gave evidence that they relied on the Quantity Surveyor certificates for purposes of presenting the relevant progress reports to their financier for payment and that the Quantity Surveyor breached its duty of care to the joint venturers in this regard when it:

(1) stated in each of its progress reports that: ‘The standard of workmanship is reasonable at this stage and poses no financial concern to the project. The quality of workmanship achieved to-date is not seen to adversely affect the market price of the Development’ in circumstances where there was substantiated unworkmanlike work and faulty work on the site; and

(2) failed to observe and/or to report to the joint venturers that there were faults and defective workmanship in the building work to enable them to hold back an appropriate sum from progress claims on account of such faulty building work and defective workmanship.

The issue therefore was whether the Quantity Surveyor’s statement in each of its progress reports constituted negligence.

The trial judge relied on the testimony of the expert presented by the joint venturers, who opined that the true extent of completion of the works was 75% instead of the 95% indicated by the Quantity Surveyor in its progress report.

The trial judge therefore held that the Quantity Surveyor had indeed been negligent and awarded damages.

The New South Wales Court of Appeal upheld the trial judge’s findings and ruled that:

(1) the joint venturers relied upon the Quantity Surveyor to exercise at least reasonable care in the inspection and verification of the progress of building work before expressing the opinions in its various progress reports;

(2) the expert evidence presented at trial showed that the progress certified by the Quantity Surveyor as having been achieved had not occurred;

(3) the joint venturers’ reliance on the Quantity Surveyor’s expertise was established and the assessment of damages was proper.

The Quantity Surveyor would have been better advised to require supporting certificates as to completion and quality from specialist consultants, architects and engineers on a regular basis.

NEGLIGENT VALUATIONS

The case of LM Investment Management Limited (In Liquidation) (Receivers appointed) v a Quantity Surveying firm [2015] NSWSC 1902 highlights how troublesome negligent variations could be for Quantity Surveyors.

This case involved a mixed warehouse and office complex development subject of the usual interrelated agreements such as a loan agreement between the developer and its financier for the project funding, a building contract between the developer and the builder, and a tripartite builder’s side deed executed between the financier, developer and builder.

The Quantity Surveyor was engaged by the financier by way of a letter-agreement which required the Quantity Surveyor to ‘administer the loan agreement’ by way of preparing assessments of each progress claim. The engagement further stated that the Quantity Surveyor’s monthly progress reports ‘will be the basis of the [financier’s] advances under first mortgage funding’ and that the Quantity Surveyor ‘must assess the value of information provided by the [developer and builder] and, based on this assessment, provide an independent estimate and monthly reports’.

It appears that the development was substantially delayed and, after finding that the value of the project on completion had been significantly reduced, the financier refused to provide further funding. The project was eventually discontinued by the builder for non-payment and the developer was placed into liquidation.

Both the financier and the developer sued the Quantity Surveyor claiming that the Quantity Surveyor reports overvalued the work that had been done particularly certain trade works. They sued under the then Section 52 of the Trade Practices Act 1974 (Cth) for misleading conduct, for breach of contract and for breach of the Quantity Surveyor’s duty of care.

The plaintiffs claimed damages amounting to the difference between the amounts advanced by the financier to pay the builder and the amounts that the Quantity Surveyor ought to have recommended on the basis that they would not have advanced the additional amounts but for the Quantity Surveyor’s recommendations.

The issue before the court was whether the Quantity Surveyor performed its duties in accordance with widely accepted competent professional practice.

The court found on the basis of expert evidence that the Quantity Surveyor’s reports were critical to the financier’s drawdown approval process and that Quantity Surveyor failed to perform its obligations in the valuation of the original budget in progress recommendations and that, whilst the site inspections were carried out satisfactorily, the process of converting this information into a reasonable recommended payment was not completed satisfactorily.

Noting that:

(1) the Quantity Surveyor was a firm of expert Quantity Surveyors

(2) engaged by the financier for the express purpose of providing advice in relation to matters within its area of expertise

(3) on terms that made it clear that the financier would rely on its advice in approving drawdowns on the loan facility,

the court held there was little doubt that the Quantity Surveyor breached its contractual and tortious duties to the financier, and also contravened Section 52 of the Trade Practices Act 1974 (Cth).

The court therefore awarded damages in the amount of the difference between what was lent under the loan facility and what would have been lent had the Quantity Surveyor not engaged in wrongful conduct.

According to Ball J at [64]:

“In Australia, it is well established that where a lender advances money on the basis of a negligent valuation or misleading or deceptive conduct, the lender is entitled to recover the difference between what was lent and what would have been lent on the true value of the property. If the transaction would not have proceeded at all, generally speaking, the lender is entitled to recover the whole loss that it suffers from the transaction: see Kenny & Good Pty Limited v MGICA (1992) Limited [1999] HCA 25; (1999) 199 CLR 413.”

ERRONEOUS VALUATIONS

In Rockdale City Council v Calibre Construction [2015] NSWSC 1980, a consent authority council sued a builder to recover unpaid contribution towards the construction of a dedicated access road in accordance with the parties’ Works-in-Kind Agreement executed as part of a development consent for a multi-storey residential development.

The builder disputed the claim on the basis that the council’s Quantity Surveyor overstated the balance of the contribution due to the council by understating the credit to which the builder was entitled, being its costs for constructing a holding tank under the proposed road, ripping up of surface paving, excavation and disposal of spoil.

In determining the amount of contribution to which the council was entitled, the court had occasion to determine whether the Quantity Surveyor’s report fulfilled the requirements of a Quantity Surveyor’s determination of the ‘estimated cost of construction of the new access road’ as specified under the parties’ Works-in- Kind Agreement.

In considering the scope of the Quantity Surveyor’s brief, the court found that ‘construction of the new access road’, for which the Quantity Surveyor’s determination was sought, embraces so much of the ripping up of surface paving and so much of the excavation and removal and tipping of materials as was necessary for the placement of a roadway, and that this extent of works was inherently and unavoidably a part of the construction of the road such that the parties must have intended that it be costed as part of the Quantity Surveyor’s determination.

But the court found that the Quantity Surveyor omitted these elements in its costing based on its erroneous interpretation that these costs were part of building the holding tank, and not part of the “estimated cost of construction of the road”. The court therefore ruled that the council was not entitled to this portion of its claim.

Notably, the court stated at [89-90]:“This is not a case where the Quantity Surveyor has merely made an error in the discretionary judgment which the parties agreed he should be entitled to exercise. Rather, he has failed to undertake his contractually appointed task because he has failed altogether to estimate the cost of a significant aspect of the road construction….”

It however appears that the court considered the parties responsible for the Quantity Surveyor’s error for their failure to clearly define the scope of the Quantity Surveyor work, by commenting that:

Per Fagan J at [90]:

“…That is a clear indication that the task of the appointed expert was limited to estimating cost for given works. A Quantity Surveyor would not be expected to have the qualifications appropriate to discriminate between the work which should be regarded as part of the road and that which should be seen as part of constructing the tank.”

SUMMARY

These cases highlight several important aspects for a Quantity Surveyor.

Firstly, the wording of the Quantity Surveyor’s appointment must be clear and capable of practical implementation. It should be noted that the appointment above was for the Quantity Surveyor to ‘approve all drawdowns of the facility’. This obligation appears overbroad and creates a wider-than-intended assurance on the part of a Quantity Surveyor in the course of certifying progress and payments.

A separate and carefully crafted agreement that clearly delineates the scope of the Quantity Surveyor’s responsibilities should also be executed between a Quantity Surveyor and its clients to avoid the situation, that arose above, where the contract governing the discharge of the Quantity Surveyor was established under a clause in the loan facility documents.

A Quantity Surveyor should also be alert to any restrictions contained in its appointment which may operate to hinder or prevent the Quantity Surveyor from properly performing its functions.

In view of the significant weight placed by industry players on the expertise of Quantity Surveyors, and the consequences of a breach by them of their duty of care to their clients,

it is prudent practice for a Quantity Surveyor to ensure that its consultancy agreements or contracts are thoroughly reviewed and that the standard wordings of their progress certificates do not inadvertently provide assurances that are wider than required under their appointment.

Quantity Surveyors should insist on proper scoping in drafting their briefs to ensure that their duties are clearly defined and to avoid situations where their determinations are disputed or where negligence is asserted against them by providing appropriate qualifications to their reports.

This article has been written by Doyles Construction Lawyers. For further information about this topic or if you have any questions in relation to this article, contact doyles@ doylesconstructionlawyers.com