Fenwick v Queensland Building Services Authority [2011] QCAT 39

CITATION: Fenwick v Queensland Building Services Authority [2011] QCAT 39 PARTIES: Mr Don Charles Fenwick v Queensland Building Services Authority APPLICATION NUMBER: QR165-08 MATTER TYPE: General administrative review matters HEARING DATE: On the papers HEARD AT: Brisbane DECISION OF: Barry Cotterell, Member DELIVERED ON: 7 February 2011 DELIVERED AT: Brisbane ORDERS MADE: 1. The decision of 27 June 2008 assessing the entitlement of the Applicant in respect of his claim under the statutory insurance scheme as being the sum of $ nil is set aside. 2. The Applicant is entitled to payment in the sum of $171,212 plus relocation costs of $5,000 and interest of $351.75 making a total of $176,563.75 in respect of his claim under the statutory insurance scheme. 3. The parties will file in the registry and exchange written submissions in relation to costs within 14 days of the date of this order and will state in those submissions whether they agree to the issue of costs being determined on the papers or whether they wish a date to be allocated for a costs hearing. CATCHWORDS : Review application – statutory insurance scheme – clauses 1.4 and 1.6 of the policy – clause 1.6 limitation – assessment of the reasonable cost of completing the contract – assessment at date of termination or when – method for assessing underpricing APPEARANCES and REPRESENTATION (if any): Decision on the papers -- 1 of 8 -- QR165-08 / Page 2 of 8 REASONS FOR DECISION The Application [1] This is an Application to review the Respondent’s decision dated 27 June 2008 to reject the Applicant’s claim for insurance made pursuant to the statutory insurance scheme administered by the Respondent (“the Decision”). [2] The Tribunal has jurisdiction to review the Decision by virtue of sections 86(1)(h) of the Queensland Building Services Authority Act 1991 (QId) (“the QBSA Act'') and Part 1, Division 3 of the Queensland Civil and Administrative Tribunal Act 2009 (QId) (“the QCAT Act''). Background [3] It is common ground that the history of the matter is as follows: (a) on 7 November 2007, the Applicant entered into a contract for building work (“the contract”) with a builder called Space Plus Additions Pty Ltd (“Space Plus”) and a policy of insurance was issued by the Respondent in relation to the Contract; (b) the price of the works as set out in the Contract was $309,000.00; (c) some work was performed by Space Plus between 13 November 2007 and 26 November 2007 and the Applicant claims to have paid a deposit of $15,450.00 and a further sum of $30,900.00 (totalling $46,350.00) to Space Plus in consideration of that work; (d) Space Plus was subsequently placed into liquidation; (e) the Contract was terminated by the Applicant on or about 17 December 2007. After receiving credit for the amount already paid to the Builder, the Applicant's remaining liability under the Contract was $262,650.00; (f) on or about 7 December 2007 a claim was made by the Applicant pursuant to the statutory insurance scheme; (g) the Respondent called tenders for the completion of the work which was left unfinished by Space Plus. Consequently, in February 2008, the Respondent sent a Scope of Works to each of: (i) Mehrtens Holdings Pty Ltd, (ii) JV Constructions Pty Ltd; and (iii) Newnham Constructions Pty Ltd; (h) the companies set out in paragraph (g) sent quotations to the Respondent for the work; (i) in May 2008, after receiving the quotes outlined, the Respondent sought advice from a company called Censeo Pty Ltd in relation to the issue of underpricing; (j) in or about May 2008, Censeo Pty Ltd retained a company called Northern Rivers Building Consulting Services Pty Ltd to prepare a report on the matters raised by the Respondent; (k) as a result of the quotations and the report of Mr Oke of Censeo Pty Ltd, the Respondent concluded that the works set out in the Contract had been underpriced; -- 2 of 8 -- QR165-08 / Page 3 of 8 (l) consequent on the Respondent accepting that there had been underpricing, the Respondent used the formula set out in the Decision to assess the Applicant's claim; and (m) as a result of the formula, the Respondent assessed the Applicant's claim at $ nil and made the Decision accordingly. Agreed Questions [4] The parties have submitted the following questions for determination by the Tribunal: (a) ‘’What is the date at which the reasonable cost of completion is to be assessed?” (b) “If the date determined pursuant to paragraph 1 is the date of termination of the contract can the tribunal accept that $491,362 is the reasonable cost of completion?’’ (c) ‘’What is the appropriate remedy?’’ The Legislation [5] There is no issue between the parties with regard to the Respondent’s establishment and its administering of the insurance scheme other than with regard to its refusal of the Applicant’s claim under that scheme in purported reliance on the Insurance Policy Conditions of the Policy. [6] The applicable ''Insurance Policy Conditions” as at date of contract, being 7 November 2007, is Edition 7. At page 4 of the Policy Conditions it is stated that: ''These 'policy conditions apply to residential construction work covered by the statutory insurance scheme for which a premium has been paid, a contract entered, or work commenced (whichever is the earliest) on or after 29 September 2006…’.” [7] The Clause in question is Clause 1.4 which states: “Amount of Payment Where Works Have Commenced Subject to Parts 4, 5 and 6 of this policy, where the contractor has commenced the contracted works, the amount of the payment is limited to the total of; (a) BSA'S assessment of the reasonable cost of completing the contract less the owner's remaining liability under the contract (exclusive of any amount by way of liquidated damages or damages for delay) at the date of termination of the contract; and (b) . ..” What is the date at which the reasonable cost of completion is to be assessed? [8] In relation to Clause 1.4, the Applicant submits that the “at the date of termination of the contract” applies to both the time of the “BSA'S assessment” and to the crystallisation of “the owner's remaining liability under the contract”. The Respondent submits that Clause 1.4 contains two concepts separated by “less” and that “at the date of termination of the contract” only relates to the crystallisation of the owner's remaining liability. -- 3 of 8 -- QR165-08 / Page 4 of 8 [9] The Tribunal finds that a plain reading of the Clause results in the Respondent’s submission being correct. [10] There are also other good reasons for the Respondent’s submission. Firstly, it is important that the contract be completed and in order to do so the Respondent has to assess “the reasonable cost of completing the contract”. The defaulting builder is no longer available for reasons which may not be known to the quoting builders and assessing the “reasonable cost of completing the contract” needs to take into account the fact that another builder will be undertaking the job. That builder will need to take into account contingencies such as rectification of the previous work as well as price movements or items overlooked by the previous builder. In order to protect the consumer, the “BSA'S assessment” should not be unnecessarily limited so that purpose of the insurance policy is not frustrated. [11] Secondly, there is a practical consideration as to why the “BSA'S assessment” should not be limited to “the date of termination of the contract”. This matter provides a perfect illustration of the problem faced by the respondent in assessing “the reasonable cost of completing the contract”. The building industry closes down over Christmas each year and does not recommence until late in January the next year. In early 2008, the Respondent drew up the scope of works and called tenders for completing the contract. While the Respondent, quite reasonably in the opinion of the Tribunal, required the tendering builders to use the contract’s prime cost and provisional sums, it was asking the tendering builders not for some academic cost figure but one which, in a competitive market, they would be prepared to rely upon for completing the contract assuming that the Respondent accepted the quote. The most likely scenario would be for the Respondent insurer to accept the lowest quote. [12] Therefore, in this matter the BSA'S assessment of the reasonable cost of completing the contract was carried out and the quotes of 8 March 2008 provided the basis for that assessment. Under normal circumstances the quote from JV Constructions of $365,000, being the lowest quote would have represented the BSA'S assessment of the reasonable cost of completing the contract. The Tribunal notes that Ms Burslem from the Respondent’s Insurance Division on 27 March 2008 referred the matter to Brisbane because it exceeded her delegation but recommended that the Applicant’s claim be approved. [13] The next exercise carried out by the Respondent, in the opinion of the Tribunal, did not relate to the “BSA'S assessment of the reasonable cost of completing the contract”. It appears that while initially the Respondent’s staff accepted the assessment, other staff decided to investigate the issue of underpricing which involves Clause 1.6. [14] Clause 1.6(a) of the Insurance Policy Conditions provides: "1.6 Limit on Right to Payment (a) Where in the opinion of BSA, the value of the contracted works to be undertaken clearly exceeds the price to be paid, BSA will reduce the amount payable under this Policy by the amount of that excess. (b) …” [15] It is not clear why the Respondent, having obtained the 8 March 2008 quotes then decided not to rely upon the lowest of them but to seek the assistance not of builders in a competitive tender process but of Censeo Pty Ltd from New South Wales. Mr David Oke, a licensed builder in both NSW and Queensland, who, according to the Applicant, conducts his business from Lennox Head was engaged by the Respondent and asked on 1 May 2008 “…Can you provide a $dollar value on –underpricing– how much it would cost to build the home at today’s market prices?” -- 4 of 8 -- QR165-08 / Page 5 of 8 [16] In the opinion of the Tribunal, this was not the appropriate question to ask as firstly it assumes underpricing had occurred but secondly asks for the value of it as at May 2008 and not November 2007 when the pricing occurred. Thirdly, the Tribunal considers that the quotes from three builders given on a competitive basis by builders prepared to perform the work for the quoted price and received on 8 March 2008 would be more reliable as the cost to build in October-November 2007 than Mr Oke’s mere estimate (he was not quoting to actually perform the work). [17] Mr Oke’s estimate on the basis of the Respondent’s instructions was $529,856 resulting in the underpricing figure of $220,856 referred to in the Decision. [18] In assessing the claim the Respondent allowed a 10% tolerance to work out the alleged underpricing as follows: Original Contract 309,000 Plus 10% Tolerance 30,900 Tolerance Total 339,900 Censeo Estimate 529,856 Less Tolerance Total 339,900 Adjusted underpricing 189,866 [19] Then to assess the claim the Respondent proceeded as follows: BSA Claim Approval • Lowest quote (JV Constructions Pty Ltd) 366,500 • Less Retention 262,650 • Total 103,850 • Less adjusted underpricing 189,866 • Claim Amount $ 0 [20] Whilst the Respondent may wish to use a tolerance to assess whether or not underpricing has occurred, it is the contract price which should be used to calculate the amount of the underpricing. In this regard, the Tribunal accepts the Respondent’s submission on this point. [21] The Tribunal finds that the date for assessment will usually be a date as soon as possible after the claim is made but the criteria must be based on the date when the BSA can assess the reasonable cost of completing the contract. For various reasons this might be sometime after the termination of the contract. [22] To assess the claim at June 2008 the Respondent should have proceeded as follows: BSA Claim Approval • Lowest quote (JV Constructions Pty Ltd) 366,500 • Less Retention 262,650 • Total 103,850 • Less adjusted underpricing 57,500 • Claim Amount $46,350 [23] Since 23 July 2008, when this review application was filed in the Commercial and Consumer Tribunal, it has very slowly moved through several stages of preparation for hearing, including a compulsory conference of experts in January 2010 where the experts were able to agree on the answers to three questions posed to them in relation to a Scotts Schedule. The experts’ answers were as follows: -- 5 of 8 -- QR165-08 / Page 6 of 8 Scotts Schedule ISSUE RESPONSE What would be considered a competitive Price or range of prices that a competent builder would have charged in October – November 2007 for the building work set out in the documents outlined in paragraph [3] to the statement of Sean Connolly filed herein (“The contracted work”) Range From $397,650 To $455,000 lf the price (or range of prices) arrived at in Question 1 is higher then (sic) the price contracted for by Spaceplus Additions Pty Ltd, by how much does the value of the work exceed the price to be paid to Spaceplus additions in October – November 2007. Range From $77,650 To $135,000 What would be considered the reasonable cost of completing the contracted work in March 2008. $491,362 [24] The Respondent conceded in its submissions to the Tribunal dated 4 March 2010 that the value of the underpricing was not properly worked out in coming to the Decision and that the Decision should not be affirmed (para 45). Therefore, the Decision of 27 June 2008 should be set aside. [25] The Respondent submitted that the Tribunal ought to disregard the calculation (of underpricing) set out in the Decision. The Respondent submitted that “only by comparing the Contract price to the low point of the range can underpricing be considered”. [26] The Tribunal accepts this submission but not the Respondent’s further suggestion that the Tribunal should use the lowest figure of the Experts’ range of prices from the Scotts Schedule being $397,650. The Tribunal finds that a more reliable figure is that of the actual quote to complete the contract provided by JV Constructions Pty Ltd of $366,500 submitted in March 2008. [27] The Tribunal considers that the Respondent acted appropriately in obtaining the three quotes from competing builders in February to March 2008 and finds that the Respondent should have used the lowest of these quotes if it wished to invoke Clause 1.6, as it was entitled to do, under the policy. The Tribunal finds that the Respondent led itself into error by obtaining the estimate from Censeo Pty Ltd on the basis firstly of its declared assumption of underpricing and secondly its erroneous instructions to Censeo Pty Ltd in May 2008 to estimate the “cost to build the home at today’s market prices”. October to November 2007 was the time to be used for estimating underpricing. [28] It is not in dispute, that the Tribunal is conducting a fresh hearing on the merits and can decide upon the basis of the evidence available. [29] However, the Respondent submits that the Tribunal should send the application back to the Respondent to allow it to call for fresh tenders and then to allow the Respondent to supervise the completing of the contract. The Applicant has submitted that the Tribunal should assess the claim on the basis of the quotes of March 2008. [30] The processing of this claim and the subsequent review application has been protracted and 2 years and 6 months has elapsed while the Applicant has been denied -- 6 of 8 -- QR165-08 / Page 7 of 8 the funds which the Tribunal assesses he was entitled to on 27 June 2008. The Tribunal can understand the Applicant’s concerns about the Tribunal referring the matter back to the Respondent which will result in inevitable delay even if the Respondent were to expedite the processing of the claim. The Applicant may also have legitimate concerns, based on the processing of the claim to date, that the Respondent may again not correctly assess his claim. [31] For these reasons, and based on the Applicant’s willingness to accept the Tribunal’s assessment of the claim based on the evidence filed in the Tribunal, the Tribunal considers that it is in the interests of justice that the claim be assessed and referred back to the Respondent with appropriate orders for payment. [32] In the opinion of the Tribunal, the Respondent should have assessed the Applicant’s claim using the method it advised the Applicant it was going to use, namely by using the lowest quote received. This would have resulted in the assessment of the underpricing as follows: Original Contract 309,000 Lowest quote (JV Constructions Pty Ltd) 366,500 Less Contract 309,000 Adjusted underpricing $57,500 [33] This accords with the Respondent’s submission as to methodology but not as to the amount used or the resulting value of the underpricing. In accordance with Clause 1.6, any amount to be paid to the Applicant is to be reduced by this amount. [34] The Tribunal determines that after all of this time and to avoid extra delay it is in the interests of justice that it make a decision as it is entitled to do on a fresh hearing of this matter. [35] In January 2010, the experts all agreed on a figure for completing the contract of $491,362. While that figure was assessed as at March 2008, it is the most reliable evidence available to the Tribunal and using its own knowledge of the industry, the Tribunal believes that this figure is more likely advantaging the Respondent than the Applicant. [36] Therefore, the Tribunal assesses the Applicant’s claim as follows: Applicant’s Claim • Cost of completing the contract 491,362 • Less Retention 262,650 • Total 228,712 • Less adjusted underpricing 57,500 • Claim Amount $171,212 [37] In addition to this amount the Applicant has claimed relocation costs of $17,714 but accepts that because of Clause 4.2 the maximum sum recoverable is $5,000. The Tribunal accepts that the sum of $5,000 should be paid. The Applicant has also claimed interest on this amount of $351.75 which the Tribunal accepts is payable. Orders [38] The Tribunal orders that: -- 7 of 8 -- QR165-08 / Page 8 of 8 1. The decision of 27 June 2008 assessing the entitlement of the Applicant in respect of his claim under the statutory insurance scheme as being the sum of $ nil is set aside. 2. The Applicant is entitled to payment in the sum of $171,212 plus relocation costs of $5,000 and interest of $351.75 making a total of $176,563.75 in respect of his claim under the statutory insurance scheme. 3. The parties will file in the registry and exchange written submissions in relation to costs within 14 days of the date of this order and will state in those submissions whether they agree to the issue of costs being determined on the papers or whether they wish a date to be allocated for a costs hearing. -- 8 of 8 --