Arbitration Clauses in Home Building Contracts – Case Note

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In examining the application of section 7C of the Home Building Act 1999 (NSW) (Act) (prohibition on referral of disputes to arbitration), the NSW Supreme Court has determined that the prohibition does not extend to other types of alternative dispute resolution such as expert determination or mediation. The case of Cavasinni Constructions Pty Ltd v New South Wales Land and Housing Corporation [2014] NSWSC 1678 illustrates this principle.

Cavasinni Constructions Pty Ltd (Cavasinni) and New South Wales Land and Housing Corporation (NSWLHC) entered into a contract whereby Cavasinni would construct a block of 40 residential units and 2 retail units in Liverpool. 3 years into the project, NSWLHC issued a Show Cause notice to Cavasinni, who subsequently challenged the validity of the notice and purported to answer the queries within. However, NSWLHC proceeded to take over the works shortly
thereafter and engaged other contractors to complete the works.

Following this, the Superintendent issued a certificate regarding the costs of the works, including the new contractors, determining that Cavasinni owed NSWLHC $902,207. The day after the certificate was issued, NSWLHC did not believe Cavasinni’s response was reasonable, and called upon two bank guarantees that had been provided byCavasinni, for the sum of $525,211.08.

Cavasinni disputed the certificate, and requested that the dispute be submitted to the Superintendent, who in turn referred the matter to expert determination in accordance with the contract.

Cavasinni commenced the proceedings seeking relief with regards to the bank guarantees, while NSWLHC challenged the validity of the dispute resolution clause due to section 7C of the Act, which states: “[a] provision in a contract or other agreement that requires a dispute under the contract to be referred to arbitration is void.”

In his Judgment, his Honour Darke J interpreted section 7C quite strictly by explaining [at 20]:

“Section 7C is, in its terms, evidently directed only at provisions that require contractual disputes to be referred to arbitration. The section calls for the identification of a provision that bears that particular character. It is not directed at provisions that concern other forms of dispute resolution, such as mediation or expert determination.”

Importantly, his Honour qualified this statement by stating [at 19]:

“For the reasons which follow, it is my opinion that s 7C of the Home Building Act renders void only that part of clause 45.1 which provides that either party may require a dispute under the contract to be referred to arbitration.”

When entering into a contract that falls under the ambit of the Act, parties should ensure that any dispute resolution clause does not require the matter to be referred to arbitration.

Should the relevant clause mandate more than only arbitration, the clause will likely be severed to the extent that it requires arbitration, whilst the other dispute resolution alternatives remain available.

However, the clause will only be severable and not void in its entirety, if the severance will be relatively minor and the essential nature of the contract is not altered by any Court imposed amendment.

In practice, to avoid uncertainty, and the cost of a dispute, parties should avoid any notion of arbitration in dispute resolution clauses concerning contracts which are governed by the Act.

For further information, please do not hesitate to contact us.

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