KENNEDY CIVIL CONTRACTING PTY LTD (ADMINISTRATORS APPOINTED) v RICHARD CROOKES CONSTRUCTION PTY LTD; IN THE MATTER OF KENNEDY CIVIL CONTRACTING PTY LTD [2023] NSWSC 99

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This case concerns the issue of whether an insolvent company’s creditors are able to enter into a DOCA to recover payments that would have been lost upon entry into liquidation and, furthermore, whether this comes into a direct conflict with the Building and Construction Industry Security of Payment Act 1999 (SOP Act).

 

FACTS

On 1 November 2021 Kennedy Civil Contracting began the process of carrying out construction work on behalf of its principal Richard Crookes Construction. Following this, under the SOP Act, KCC served several payments claims to RCC. However, only some of these payment claims were responded to by RCC.

 

On 1 August 2022, administrators at KCC determined that they were “hopelessly insolvent”. Yet the decision was made on 29 September 2022 to pursue sections 15 and 16 of the SOP Act (which address the consequence of a failure of correct payments) in direct response to the RCC’s failure to make the correct payments, or payments at all. KCC then entered into a Deed of Company Arrangement (DOCA) as per Part 5.3 A of the Corporations Act in order to avoid liquidation.

 

In response to this action, on 9 November 2022 RCC claimed that this action by KCC was an abuse of process and sought that their DOCA be terminated. Despite this, on 10 November 2022, KCC entered into a ‘Holding DOCA’ in order to allow for the proceedings under SOP Act to continue, while simultaneously acknowledging that liquidation would occur at a later date.

ISSUE

The main issue before the Supreme Court was whether there was an abuse of process. The Supreme Court considered whether KCC’s decision to enter into the DOCA was being done in order to avoid operations of section 32B of the SOP Act which notes that the SOP Act does not apply to a construction company in liquidation (“A corporation in liquidation cannot serve a payment claim”).

HELD

The RCC argued that the entering into a DOCA for the purpose of avoiding section 32B of the SOP Act was, in fact, an improper purpose.

The Court found that the RCC’s argument was not valid as it did not draw on the correct authorities that noted DOCA’s use to circumvent the SOP Act, but rather the Corporations Act. Furthermore, Ball J considered that entering into a DOCA was to serve the purpose of giving the corporation the best chance of maximising returns. Hence, the Court found that the ‘Holding DOCA’ used by KCC remained within the scope of the SOP Act, therefore it did not need to be terminated.

 

Secondly, and relating to the first point here, it was held that no abuse of process had occurred in this matter due to the fact that KCC had appropriately used a ‘Holding DOCA’. This was critical in considering the scope of section 32B of the SOP Act in addition to preserving a company’s right to enforce payment claims.

TO CONSIDER

This case is highly significant as it considers the scope an application of section 32B of the SOP Act. Here, construction companies who are potentially facing hardship in terms of their cashflow now have a significant chance of being paid by their debtors if they enter into administration and should continue to submit valid payment claims under the SOP Act, notwithstanding that they may be entering into administration.

Engaging expert witnesses – practical advice

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Expert evidence often plays a crucial role in building disputes, either in identifying defects, valuing works, or providing other technical information. Expert witnesses take on the role of an independent observer, with an overriding duty to assist the Court impartially on matters relevant to their expertise.[1] Typically, an expert will deliver their opinion in a report, in response to stated questions.[2]

The procedural rules governing expert evidence and expert reports are set out in:

  • Part 31 Division 2 to the Uniform Civil Procedure Rules 2005 (NSW) (UCPR);
  • the Expert Witness Code of Conduct, found in Schedule 7 to the UCPR; and
  • NSW Civil and Administrative Tribunal (NCAT) Procedural Direction 3.
    (collectively, the Codes)

The Codes create various procedural requirements for expert reports, for example, that the report contain an acknowledgement that the expert has read and agrees to be bound by the code of conduct.[3] For a detailed overview of these requirements, see our article here.

A common issue engaging experts

We have noticed a common scenario when parties obtain expert evidence:

A party engages an expert to inspect and provide a preliminary report. The report does not comply with the Codes. Later, litigation commences, and the expert either:

  • prepares a second more thorough report which complies with the Codes; or
  • puts on an affidavit acknowledging that their first report will be bound by the Codes.

No problem, the expert has fulfilled their obligations under the Codes… right?

Not necessarily. This approach may result in non-compliance with the Codes, which leads to two risks:

  1. the Court may hold that the expert report is inadmissible; or
  2. the Court may admit the report but give it little weight due to concerns regarding the expert’s credibility.

The Court may hold that the expert report is inadmissible

Courts have a broad discretion whether to admit into evidence expert reports which have been prepared in the scenario outlined above. In Welker & Ors v Rinehart & Anor (No 6),[4] the respondent sought to rely on expert reports which did not comply with the UCPR Code. The experts were not provided with a copy of the Code until after they had prepared their reports, meaning the reports did not contain an acknowledgement that the experts had read and agreed to be bound by the Code. The experts subsequently filed affidavits swearing they had since read the Code and agreed for their earlier report to be bound by it.

Rule 31.23(3) of the UCPR provides that an expert report which does not comply with the Code may not be admitted into evidence unless the Court orders otherwise. Ball J considered whether there was substantial compliance with the Code by examining the circumstances in which the report was prepared.[5] His Honour noted that the Court has a broad discretion whether to admit expert reports, but held that these particular reports were inadmissible because they:

  • did not give evidence justifying the assumptions underlying the expressed opinions;
  • lacked reasoning to support the conclusions in the report; and
  • contained generalised assertions which did not reflect the expert’s area of expertise.[6]

Although the Court retains a discretion when applying rule 31.23(3), this judgment demonstrates that non-compliant expert reports prepared in the above scenario may be deemed inadmissible.

The Court may give the expert report little weight 

Even if the Court admits an expert report prepared in the above scenario, there is a serious risk that the Court will give the report little evidentiary weight. In Smith v Ulan Coal Mines Ltd,[7] Campbell J exercised the discretion under rule 31.23(3) to admit an expert report filed by the plaintiff which did not strictly comply with the UCPR Code. His Honour made the following remarks in relation to rule 31.23(3):

“[…] Where it appears that the expert in preparing the report has been guided by impartiality, independence from the parties and a motivation to assist the Court rather than the party retaining him, there will have been substantial compliance with the Code. However mere retrospective inclusion of the required acknowledgment in an amended report will not satisfy the requirements of the sub-rule unless it can be shown that there has been substantial compliance in the sense I have already discussed.”[8] (emphasis added)

Although the report was technically admissible, it was given little weight at the final hearing. Hoeben CJ noted that in relation to the expert’s evidence that “there was a tendency to favour the plaintiff in some of the responses”.[9] The plaintiff’s claim failed, in part because his Honour was “not persuaded on balance that the plaintiff has given accurate evidence”.[10]

If parties prepare expert reports in the above scenario, they risk the Court drawing similar conclusions about the reliability of their expert evidence. If experts are not aware of their obligations under the Code at the time of preparing the report, including their overarching duty to the Court, this may raise doubts as to the expert’s credibility, and as a result, the persuasiveness of the expert report. These doubts may adversely impact the outcome of the proceedings, even if the reports are technically admissible.

Obligations in NCAT

Finally, parties should be aware that these same risks may exist in NCAT proceedings. Although NCAT is not usually bound by rules of evidence,[11] the Tribunal may direct that expert reports must comply with the NCAT Code.  In McGrath v The Owners – Strata Plan No 13631,[12] the Tribunal made this direction in respect of two expert reports, and the applicant failed to comply. As a result, the Tribunal refused to admit part of one report and the entirety of the other report into evidence.[13] The judgment was upheld on appeal.[14] This decision serves as a warning – the same risks set out above may apply to parties seeking to file expert evidence in NCAT proceedings.

Take home tips

When engaging expert witnesses, parties must be careful to comply with the Codes – this is true even when only a preliminary report is required.  In other words, parties must ensure when an expert is engaged that:

  • the expert is familiar with the Codes; and
  • the Codes are at the forefront of the expert’s mind when any preliminary inspections, condition reports or investigations are carried out.

This is to ensure that the credibility of the expert is not compromised in any subsequent litigation.

Bradbury Legal has extensive knowledge of the procedural rules governing expert evidence. We can assist in engaging expert witnesses in a manner which will best protect a party’s position at trial. For specialist and tailored advice, please contact a member of our team by phone on (02) 9030 7400 or by email at info@bradburylegal.com.au.

[1] UCPR Schedule 7 clause 2.

[2] UCPR r 31.21, 31.23(4).

[3] UCPR r 31.23(3); UCPR Schedule 7 clause 3(b); NCAT Procedural Direction 3 clause 19(a).

[4] [2012] NSWSC 160.

[5] Welker & Ors v Rinehart & Anor (No 6) [2012] NSWSC 160, [35].

[6] Welker & Ors v Rinehart & Anor (No 6) [2012] NSWSC 160, [40]–[44].

[7] [2019] NSWSC 1263.

[8] Smith v Ulan Coal Mines Ltd [2019] NSWSC 1263, [11].

[9] Smith v Ulan Coal Mines Ltd (No 2) [2020] NSWSC 416, [160].

[10] Smith v Ulan Coal Mines Ltd (No 2) [2020] NSWSC 416, [188].

[11] Civil and Administrative Tribunal Act 2013 (NSW) s 38(2).

[12] [2021] NSWCATAP 167.

[13] McGrath v The Owners – Strata Plan No 13631 [2021] NSWCATAP 167, [3].

[14] McGrath v The Owners – Strata Plan No 13631 [2021] NSWCATAP 167, [87].

Architects and providing an opinion on probable cost

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In a recent decision by the NSW Court of Appeal, Morris v Leaney [2022] NSWCA 95 considered an architect’s duty to advise in the context of estimating renovation costs.

In this case, Mr Leaney, was engaged as an architect to design home renovations for Mr and Mrs Morris. The architect informed the homeowners that they would not be able to achieve their desired renovation scope within their set budget of $300,000.

The architect later provided an ‘opinion on probable cost’ based on a preliminary design that estimated the cost to complete these renovations to be $590,000 (ex GST). The homeowners subsequently revised their set budget to $600,000.

A builder was later engaged and advised that the cost of renovations would exceed $1,000,000. In order to reduce costs, the homeowners decided not to pursue the entirety of their initial renovation scope.

The renovations ultimately cost $780,000. However, the value of the house was only increased by $330,000.

The court held that the architect breached his duty to advise the homeowners on the likelihood of achieving their budget. The architect was expected to inform his clients should he have felt “unable or unqualified to give an accurate estimate of costs” and advise that they “obtain an estimate from a properly qualified professional”.

Nevertheless, the court was not satisfied that the homeowners would not have undertaken the renovations even in the event the architect had informed them that it was not possible to complete the renovations without exceeding the set budget of $600,000.

To Consider

This decision is a timely reminder to architects of the importance of adequately advising clients and, if an architect is unable to accurately estimate the costs of works, obtain estimates of costs by properly qualified professions. This is particularly relevant in the current construction climate where material costs have increased exponentially.

This is also reflected in the NSW Architects Code of Professional Conduct which requires an architect to advise on the likelihood of a client achieving their objectives, having regard to their budget and time requirements. Given a failure to satisfy this requirement can result in architects being liable for significant amounts claimed by clients (as well as legal costs in defending those claims), it is important that architects continually advise on costs as works progress and design changes occur.

Interpretation of commercial contracts in NSW

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The recent decision in Jabbcorp (NSW) Pty Ltd v Strathfield Golf Club [2020] NSWSC 1317 (and on appeal: [2021] NSWCA 154), highlights the importance of pre-contract negotiations and the precision with which parties must ensure their departures, qualifications and exclusions are carefully considered and clearly recorded in the contract to avoid disputes.

Facts

The Builder entered into a design and construct contract (amended AS 4902) with Strathfield Golf Club (Club) for construction works to build a new clubhouse, an access road and associated work for the total price of $23,400,730.

The Builder’s tender was negotiated and revised three times with each revision including several qualifications and reductions to meet the Club’s budget.

There were two key qualifications in the Builder’s scope of work:

  • all works required on the golf course and outside the construction boundary that may be a requirement of the DA consent are excluded; and
  • all utility works required have been allowed for within the construction boundary only, with the exception of the electrical substation.

Ultimately, the Builders’ final tender was accepted with a guaranteed maximum price of $22,250,000.

Over the course of the project, the Builder submitted numerous claims for variations, back charges and progress claims which were rejected by the Club and were the subject of this dispute.

Issue

The main issue before the Court was whether certain works were excluded from the Builder’s scope of work. This required an analysis of the definition of “excluded works” in the contract as well as the meaning of the phrase “construction boundary”.

First Decision

The Builder relied on a narrow interpretation of the words “construction boundary” to say that the boundary was much smaller than what was contended by the Club and that any works outside the boundary were excluded from its scope of work and therefore entitled it to a claim for variation. This interpretation was not based on the contract documents, but the Builder relied on pre-tender negotiations, which were not included in the contract.

In rejecting the Builder’s submissions, the Court relied on the following legal principles of contract interpretation:

  1. the starting point for contractual interpretation is that each clause in the contract is read in the context of the contract as a whole;
  2. it is necessary to ask what a reasonable businessperson would have understood those terms to mean;
  3. ordinarily, reference to the contract alone is sufficient, however, sometimes, reference to events, circumstances and things external to the contract is necessary to identify the commercial purpose and the proper construction where there is “constructional choice”;
  4. ambiguity is not a precondition to consideration of external circumstances in NSW. Evidence of the parties’ statements and actions reflecting their actual intentions and expectations is inadmissible;
  5. negotiations between the parties are not relevant to the correct construction of the contract, except to the extent that they shed light on the objective facts known to both parties; and
  6. post contractual conduct is not admissible to interpret the words of a written contract, however, subsequent conduct may be relevant in other ways, such as where it amounts to an admission in a question of fact.

On examining these principles, the Court concluded that no regard was to be had to the pre-tender negotiations and the exclusion was to be read in the context of the contract as a whole. As such, it was clear that the Builder’s scope of work included those works outside the footprint of the clubhouse and access road, particularly by reference to the principal’s project requirements. Therefore, the Builder’s claim for works outside the footprint of the clubhouse and access road, on the basis that they were excluded works, could not be supported.

The Court also considered the effect of the “entire agreement” clause which may modify the general principles. Generally, the purpose of such clauses is to exclude any extrinsic evidence in contractual interpretation, however, it still leaves the possibility of considering extrinsic material where the meaning of the words in the contract cannot be inferred solely from its terms because those terms are ambiguous.

Appeal

On appeal by the Builder, the NSW Court of Appeal re-affirmed the decision of the primary judge.

Take home tips

This decision provides a useful recap about the relevant principles of contractual interpretation and highlights the importance of seeking legal advice at the time of contract negotiation. This can ensure that the final contract properly defines all qualifications, departures and exclusions to avoid costly disputes in relation to variations.

If you are a builder preparing a tender for a project, ensure that you have negotiated the contract to reflect your risk appetite and the scope of work is clearly recorded. If there is any ambiguity as to the scope of work, or the contract generally, this should be discussed and preferably recorded in writing in a document which forms part of the contract.

 

10 things that residential builders need to get right

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1. Contracts – make sure they comply with the requirements under the Home Building Act (HBA)

The contracts should:

• comply with the contract requirements under the HBA if the builder is carrying out work with a value of $5,000 (including GST) and above, for example the contracts should be in writing, provide a sufficient description of the work etc. Its best to use the standard forms as they contain all of the required information;

• not just be a quote or a purchase order as they do not comply with the HBA requirements and the builder will be in breach of the HBA and unable to rely on the quote or purchase order to get paid when contracting directly with a homeowner. Of course, there are exceptions to these requirements in the case of any emergency work concerning a hazard or a safety issue;

• ensure that builders don’t exceed the maximum deposits and maximum progress payments;

• ensure that the works are clearly defined in terms of scope and price and that any ambiguity is resolved before the contract is signed; and

• make it clear that the contract price can change for variations, PC and provisional sums etc.

2. Licencing – don’t carry out any residential building work that the builder is not licenced to do

Builders must ensure:

• that all of its sub-contractors that carry out specialist work (and any sub-contractors that are required to be licenced) such as its water proofers, plumbers and electricians are appropriately licenced;

• that the entity which has entered into the contract with the homeowner is licenced to carry out the work. It is not good enough for a builder to engage a licenced sub-contractor to carry out the work, the entity entering into the contract has to be licenced to carry out the work; and

• that there are no restrictions on the licence if the builder is contracting directly with homeowners. We have seen too many times to count, instances where the entity in the contract does not hold an open licence to carry out the work and has a condition on the licence which says that the entity is not licenced to carry out works for which HBCF insurance is required, that is, work with a value of over $20,000.

3. Insurance – no insurance = big problems

Remember that:

• the entity which is entering into the contract must have its insurance in place including insurance under the Home Building Compensation Fund (HBCF) if the value of the work is $20,000 or over;

• it is a breach of the HBA to take any money from a homeowner (including a deposit) when a certificate of HBCF has not been provided to the homeowner; and

• if HBCF insurance is not in place, the builder is not entitled to make any claims for payment even on a quantum meruit basis, unless the Court or Tribunal considers it “just and equitable” for the builder to recover money in the absence of insurance. Also, if there are defects in the work carried out, it would be much harder to satisfy a Court or Tribunal that the builder should be paid and also, harder to obtain retrospective insurance.

4. Increases in the contract price/variations/PC and provisional sums

• ensure that the builder complies with the variation procedure in the contract.

All variations should be approved in writing by the homeowner including not only the approval to carry out the variation itself but also approval of the cost of the variation. No variations should commence until written approval has been obtained from the homeowner. By taking this simple step will avoid a lot of headaches down the track in terms of getting paid; and

• All PC and provisional sums should be based on firm estimates or quotations to limit any surprise and of course disputes.

5. Quality of sub-contractors – find the good ones

• find good quality sub-contractors and pay them well.

Most defect claims will come down to the quality of the work carried out by the builder’s sub-contractors and so it’s a worthwhile investment to have quality trades carrying out the works.

• good quality water proofers are in hot demand carrying out rectification work and it’s easy to see why given that most defect claims include water ingress issues caused by failed waterproofing in wet areas, balconies and planter boxes [we could have a whole section dedicated to why planter boxes may look good but are a nightmare for builders in terms of defect claims but that’s for another day].

6. Practical Completion – what does it mean?

• clearly define what practical completion is as this can be a point of contention between builders and homeowners as homeowners may be under a misapprehension of what practical completion actually means; and

• as a practical suggestion, ensure that the works are practically complete and all minor defects are rectified before the homeowner inspects as this will help to avoid the common dispute about when PC has been reached and the homeowner withholding the final progress claim because they are unhappy with the works. Remember the homeowner is buying “the dream” and expects that the house will be ready to occupy. It is better in the long run, in terms of cost and time, to try and meet that expectation if possible.

7. OC – clearly specify the builder’s obligations in relation to obtaining the OC?

• clearly specify in the contract what the builder’s obligations are in relation to providing the certificates and documents required in order to obtain the OC (which is usually the homeowner’s responsibility to obtain from Council or a private certifier) and also stipulate whether the builder has an ongoing obligation to assist the homeowner in obtaining the OC.

8. Claims by the builder – have the paperwork in order

• if the builder is making claims for the payment of money due under the contract, ensure that the contractual provisions are complied with concerning the builder’s entitlement to those moneys and that all supporting documentation is provided; and

• ensure that progress claims are not issued prematurely when the work the subject of the claim has not been completed (as this could be deemed to be a breach of the contract and a breach of the HBA).

9. Claims by homeowner – defects/incomplete work/negligence

• use the defences available under the HBA if the builder has been instructed to carry out works by the homeowner or a professional such as an architect or engineer, contrary to the builder’s advice. The builder must put any objection to carrying out any such works in writing to the homeowner;

• use every opportunity to rectify defects to limit the issues in dispute. There is no strategic advantage in delaying rectification in exchange for the payment of money as this will only end up in litigation as builders are liable to fix defects regardless of whether payment has been made; and

• any items not agreed can be resolved with the assistance of NSW Fair Trading, mediation or proceeding to a Court of Tribunal to determine as a last resort.

10. Keep up to date with the changes in legislation

By way of example, some of the recent changes (some of which apply to class 2 buildings only) include:

• From 10 June 2020, owners with defects will benefit from the statutory duty of care that applies to new buildings, and existing buildings where an economic loss first became apparent in the previous 10 years;

• From 1 September 2020, the NSW Building Commissioner will be able to stop an occupation certificate from being issued, order developers to rectify defective buildings, and issue stop work orders;

• From 1 March 2021, residential builders can rely upon the Building and Construction Industry Security of Payment Act (SOPA) and issue payment claims against homeowners. See our attached article here; and
• From 1 July 2021, there will be compulsory registration for practitioners involved in design and building work, including professional engineers

If you would like to discuss any of the above, please contact us.

One small stroke of a pen, one giant leap for legal procedure

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On 22 April 2020, the NSW government enacted the Electronic Transactions Amendment (COVID-19 Witnessing of Documents) Regulation 2020 (COVID-19 Regulation), which can found here.

Anyone who under NSW law must witness signatures for the documents below, take note: the signature may now be witnessed by audio visual link.

The COVID-19 Regulation affects witnesses of those signing documents, including:

  • a will;
  • a power of attorney or an enduring power of attorney;
  • a deed or agreement;
  • an enduring guardianship appointment;
  • an affidavit including annexures or exhibits; and
  • statutory declarations.

The regulations commenced on 22 April 2020, and this brave new world is expected to last for a minimum of six months.

The essential steps are as follows:

  1. The witness and the person making the statement must have a real time “audio visual link”; and
  2. The witness must observe the person signing the document in real time; and
  3. The witness must themselves sign the document as soon as practicable after the link; and
  4. The witness must endorse the document with a statement about the method of witnessing the signature, and state that it was witnessed in accordance with the Electronic Transactions Amendment (COVID-19 Witnessing of Documents) Regulation 2020.

The link must be audio and visual, and it must be “continuous and contemporaneous”. Video conferencing is the prime example.

A witness does not need to sign the same hard copy document. They can either (a) sign a separate counterpart, or (b) sign a scanned version of the document that they witnessed being signed. Whatever they choose, they would do well to carefully store all original copies of signed documents, and prepare a file note of the experience.

Readers should be aware that the COVID-19 Regulation does not change what actually needs to be signed and how it is to be signed. Certain documents, such as wills, have very particular requirements that still must be followed.

Nevertheless, another face-to-face process has been put on pause to keep society safe.

 

COVID Update – Environmental Planning and Assessment (COVID-19 Development – Construction Work Days) Order 2020

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Yesterday (April 2,2020), the Environment Planning and Assessment (COVID-19 Development – Construction Work Days) Order 2020 came into effect. The Order allows for building work and demolition work to be carried out on Saturdays, Sundays and public holidays, provided that the development is approved through development consent and continues to comply with all other conditions of the development consent. Further any work that is performed on a Saturday, Sunday or public holiday must:

  1. comply with the conditions of consent that restrict hours of work on any other day as if the condition applied to work on a Saturday, Sunday or public holiday;

 

  1. not involve the carrying out of rock breaking, rock hammering, sheet piling or similar activities during the weekend and public holiday work hours; and

 

  1. all feasible and reasonable measures are taken to minimise noise.

 

So what does this mean for the construction industry? Where a project is subject to development consent conditions that restrict the days of working to Monday to Friday, the Order allows for the approved working hours in the development consent to apply to weekends and public holidays. The purpose of this Order is to allow for construction sites to implement social distancing measures which may require smaller workforces on site but prevent or minimise loss of productivity by allowing works to be carried out on more days.

As a result, construction programs may need to be reconfigured to balance the slower rate of progressing the works due to social distancing and/or team splitting, any EOTs claimed and the greater number of days that can be worked.

The Order may also result in contractors and subcontractors being able to make a claim in relation to a change in legislative requirements under their contracts. This may result in entitlements for time or cost relief arising from complying with the Order and other government orders made in response to the COVID-19 outbreak.

If you need advice as to how this order affects your contractual obligations or are negotiating a contract, please contact us. We are committed to providing the highest quality of legal services at competitive prices to help you and your business get through these challenging times.

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

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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 info@bradburylegal.com.au.