Construction Contract Dispute: Knowledge equals liability

On 1 April 2020, the Supreme Court of Queensland handed down its decision in Somerset Civil Pty Ltd v Sugarbag Road Pty Ltd [2020] QSC 203 (‘Somerset’).  Although the Court did not make a final determination on the construction contract in dispute, it left open the possibility that a principal may be liable to pay their builder where it knows (or ought to have known) that the builder was unlicensed. This is despite unlicensed work being unlawful under the Queensland Building and Construction Commission Act 1991.

Construction Contract in Dispute

In Somerset, the defendant opposed the relief sought by the plaintiff, on the basis that:

1. the plaintiff was not licensed to carry out building work pursuant to section 42 of the Queensland Building and Construction Commission Act 1991 (Qld) (‘QBCC Act’); and
2. any funds previously paid to the plaintiff by the defendant should be reclaimed, noting the works completed were unlicensed.

In response, the plaintiff alleged that the defendant knew, or ought to have known, that the plaintiff did not hold the requisite license to undertake the work outlined in the parties’ construction contract.

The Court’s view of the Construction Contract

The plaintiff relied on two grounds to prove the defendant was liable to pay for the contracted work, they argued that:

1. firstly, the defendant was reckless in having the knowledge to check and understand licensing issues but failing to check the licensing regime before entering the contract; or in the alternative,
2. regardless of the knowledge the defendant held, notwithstanding any licensing issues, they intended to pay the plaintiff for the work contracted.

The Court recognised the plaintiff’s argument that the defendant, who had chosen to engage the services of the plaintiff, was pari delicto (i.e. at equal fault), given the defendant was aware that the plaintiff was unlicensed. To that end, the defendant was not entitled to rely upon section 42(3) of the QBCC Act, which establishes that businesses conducting unlicensed building works are not entitled to receive payment under the QBCC Act.

The plaintiff proposed that the defendant, having knowledge the plaintiff was unlicensed, was careless in understanding the licensing issues. Their claim also alleged that the defendant failed to do their due diligence prior to entering into the contract. In short, the plaintiff attempted to establish that, irrespective of them not holding the requisite license, the defendant intended to retain and pay the plaintiff for the agreed works.

The application made by the plaintiff was ultimately struck out due to a lack of particulars, which the Court deemed were necessary to substantiate the plaintiff’s position (that is, that the defendant knew the plaintiff did not have the required license prior to entering into the parties’ building contract).

Whilst the plaintiff’s claim was not particularised in this case, the decision leaves open the possibility of ‘knowledge of unlicensed work’ being recognised as a legitimate defence before the court when it comes to recovering fees for a service. It essentially means that a party may be estopped from refusing to pay, merely on the basis that the builder was unlicensed. This is provided that the individual is ‘open eyed’ and informed when entering a construction contract.

Implications to Construction Contracts

The Court in Somerset was reluctant to make a decision regarding the defendant’s liability to the plaintiff. There are inherent risks associated with giving rise to too many rights under the QBCC act. As a result, the Court did not expressly condone the ability to undertake work without the requisite license.

The effect of the decision in Somerset was the recognition of a party’s underlying obligation to undertake due diligence prior to entering into a contract for services. It is a timely reminder for individuals entering into construction contracts to be wary of who they are contracting with. In any event, there may be a positive obligation imposed upon individuals or businesses to understand licensing requirements.

If you require advice about your construction contract or enforcing your legal rights against a contractor, contact us on 1300 749 709 to discuss your matter with a member of our litigation team.