Construction Disputes: What’s Really in Your Best Interest?

Late last month, the Court of Appeal, in the case of Duffy Kennedy Pty Ltd v Galileo Miranda Nominee Pty Ltd [2020] NSWCA 25 reminded parties that when it comes to building and construction project disputes, it is imperative that parties take a commercial approach to dispute resolution. Parties should ensure their actions are proportionate to the circumstances at hand and that emotions are, as much as possible, checked at the door.

This case effectively, revolved around the decision of a party to suspend works which were almost complete, over a $177.40 unpaid interest claim. We take a look below at the circumstances, which are not themselves exceptionally uncommon, and how it resulted in almost 18 months of dispute resolution and litigation.

The Parties and the Project

On 18 April 2017, Duffy Kennedy Pty Ltd (Duffy Kennedy) entered into a Contract with Galileo Miranda Nominee Pty Ltd (Galileo) to Design and Construct, the Palisade, a residential apartment block in Sydney’s Sutherland Shire effectively consisting of two unit blocks, a car park and a pool.

The Contract was for a lump sum of just under $66 million and specified the date for Practical Completion as 18 February 2019.

The project was administered by Resource Co-Ordination Partnership Pty Ltd (RCP), being the Principal’s Representative. In the usual way, RCP’s role in the project was to decide upon, and certify contract elements such as extensions of time and relevantly, progress payment entitlements in accordance with the Building and Construction Industry Security of Payments Act 199 (NSW) (SoPA).

The Principal Certifying Authority, responsible for issuing certificates under the Environmental Planning and Assessment Act 1979 (NSW) was McKenzie Group Consulting (NSW) Pty Ltd (McKenzie).

The Facts

As is the case in many projects, the Practical Completion date was not met. Duffy Kennedy alleged that, as at the end of February 2019, about ‘99.9%’ of the works, by reference to the Contract sum, were complete, with the value of the remaining works to be about $56,000. In order to obtain the Occupation Certificate, McKenzie required:

• a ‘Penetration Schedule’ identifying each location within the project where pipes, wires or other services ‘penetrated’ structural walls, ceilings or floors of the building (of which there were hundreds); and
• The increase in the heights of the balustrades on four balconies to meet safety requirements of the Building Code of Australia.

Progress Claim

In this context, on 26 February 2019 Duffy Kennedy issued a Progress Claim to Galileo, claiming $1,010,161.72.

RCP issued a Payment Certificate and Payment Schedule in response on 12 March 2019, assessing the sum due was $293,984.42 (plus GST).

The parties did not dispute that payment was due on 19 March 2019. Galileo initiated an electronic payment on 22 March 2019, for the certified amount, which was received on 25 March 2019.

Despite s11(2) of the SoPA, there was no provision within the amount paid for interest. The outstanding interest, had any been owed, was $177.40.

Duffy Kennedy Notices to Suspend Works

On the basis that Galileo failed to include interest accounting for the late payment, Duffy Kennedy issued two notices to Galileo on 25 March 2019. Effectively, both sought to provide notice of Duffy Kennedy’s intention to suspend works.

The first notice was issued pursuant to s16(2)(b) of the SoPA. The second notice was issued under the terms of the Contract, which purportedly gave Duffy Kennedy the right to suspend works if the Principal defaulted in making any payment under the Contract.

Show Cause and Take-Out Notices

In response, on 29 March 2019, Galileo issued a Show Cause notice requiring Duffy Kennedy to show reasonable cause why Galileo should not exercise their contractual rights to terminate the contract or take the works out of the Contractor’s hands. Relevantly, the Show Cause notice was issued on Galileo letterhead and signed by both a representative of Galileo and of RCP.

Galileo and Duffy Kennedy held ‘without prejudice’ discussions to attempt to resolve the issues disputed between them, but were unable to reach an agreement.

The response to the Show Cause notice issued by Duffy Kennedy was deemed unsatisfactory by Galileo. A Take Out Notice was issued to Duffy Kennedy on 29 April 2019 by Galileo.

The Take Out Notice, pursuant to the Contract, required Duffy Kennedy to leave the site. The key contention in this respect was the completion of the ‘Penetration Schedule’ described above.

Return of Security

In response to the Take Out notices, Duffy Kennedy disputed the validity of the Take Out Notice, asserted the Take Out Notice was a repudiation of the Contract.

Duffy Kennedy argued that, as Galileo had repudiated the Contract, Galileo were required to return the bonds which has been provided as security for Duffy Kennedy’s obligations under the Contract.

The Supreme Court Proceedings

The Supreme Court Proceedings were initially commenced by Galileo, who sought to affirm the Contract and compel Duffy Kennedy to perform their obligations under the Contract following the Take Out Notice’. Duffy Kennedy Cross-Claimed and sought orders that Duffy Kennedy return the Security Bonds.

Decision

The first issue in dispute between was whether or not Duffy Kennedy had been entitled to suspend the works, for the failure of Galileo to pay $177.40 in interest on the ‘Certified Amount’ in the Payment Schedule. Failing this, did Duffy Kennedy have ‘reasonable cause’ to suspend works, acting in good faith on the basis that payment of the interest was not forthcoming.

The answer in the first instance was, put simply, no.

The decision highlighted that, in circumstances where a payment schedule has been issued, the SoPA requires payment of the ‘scheduled amount’. The Scheduled amount, in the absence of an adjudication determination or Court order, does not automatically include interest which is payable under s11(2) of the SoPA.

The Court went on to establish that in commercial contracts between parties, a business-like approach must be taken to the behaviour of the parties and to the construction of the parties’ rights and obligations. The Court made specific reference to the fact that the decision to suspend the works on the basis of a failure to pay $177.40 was, on an objective assessment of the circumstances disproportionate and therefore unreasonable.

The second issue was whether the Take Out Notice had been validly issued by RCP and whether Galileo had been entitled to retain the security to satisfy any costs incurred by Galileo in engaging other Contractors to Complete the works.

Among other considerations, the Court determined the Notices on Galileo letterhead could be validly issued by “RCP’. By way of the relevant RCP representative having reviewed and signed the documents, RCP had indicated their consent to the document’s contents, and have discharged their duties to act in good faith when making determinations on contractual issues.

The Court further found that parties conducting settlement discussions on a ‘without prejudice’ basis, are not precluded from using information disclosed within these meetings to inform commercial and contractual decisions.

The Appeal

Duffy Kennedy challenged the above decision, on the grounds that Judge in the first instance erred on the following issues:

• Duffy Kennedy were entitled to suspend the works pursuant to the SoPA;
• Duffy Kennedy had reasonable cause to suspend the works under the Contract;
• Galileo had been too involved in the issue of the Show Cause Notice, and the Show Cause Notice was not valid; and
• Galileo had been too involved in the issue of the Take Out Notice; and the Take Out Notice was not valid.

By way of a unanimous decision of the Court of Appeal, Duffy Kennedy failed on all grounds and the reasoning of the Supreme Court in the first instance was largely affirmed.

How Does this Affect Building and Construction Contracts?

Whilst it is not uncommon for building and construction projects to go awry, and for parties to get upset with one another, it is imperative that parties act with a level head and with commerciality, as opposed to emotions, in mind. Where possible, legal advice should be obtained early on, which can add a level of impartiality to dispute resolution discussions.

Parties should also take extra care to bear in mind that, when undertaking “without prejudice” settlement discussions, the other party may still able to use what you have said to inform their opinion or their next steps.

In this case, the decision to suspend works over unpaid interest claimed in the sum of $177.40, ultimately gave rise to the retention of security and a right to terminate the Contract.

The case highlights the fact that parties should take extra care when negotiating their rights in the Contract and should always ensure that the actions taken when exercising rights under contracts are proportionate and reasonable to the circumstances.

The above discussion is not intended to be legal advice, and readers should bear in mind that every case is different. If you or someone you know wants more information or needs help or advice, please contact us on 02 9248 3450 or email [email protected].