Tag Archive for: dispute resolution

Implied Contractual Terms for Payment

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You hire a builder to demolish and rebuild your house under a “cost plus” contract, meaning you are obligated to pay the builder’s costs plus a 10% margin. To make sure you know what you are paying for, you ensure the contract requires detailed and itemised invoices with every progress payment claim raised by the builder. The builder has one year to complete the house. What would you do when the builder goes over $1 million and 3 years past budget? Would you decline to pay progress payments which did not comply with the contract, because they lacked the itemised costing?

 

This was the case in Renbar Constructions Pty Ltd v Sader [2022] NSWSC 172. The Court considered whether the builder, Renbar Constructions, was entitled to recover the balance of the building costs incurred in performance of the contract. The Court also considered how much in damages the owner, Dr Sader, would be entitled to for defects, and the significant delay to the completion of construction.

In total the builder raised sixteen progress claims, a dozen of which were paid by the owner despite the progress payment claims being non-compliant with the contract, which required detailed costing. Later, a dispute arose about the true cost and value of the building works, the lengthy delay, and defects with the building works.

The Court found a gap in the contract. On one hand, the contract required the owner to pay the “price of the building works in the manner and at the times stated in the contract”. On the other hand, it required the owner to pay “progressively as claimed” by the builder; claims which needed to be accompanied by invoices for building materials and other documents to entitle the builder to payment. The gap in the contract was found in the circumstances of the case— the owner was obligated to pay for the building works, but the builder was not entitled to payment until a progress claim was issued. Did the contract entitle the builder to payment when the payment claims did not comply with the contract requirements?

The Court found that the contract must have had an implied term that required the owner to pay the price for the building work done within a reasonable time, even though no valid progress payment claims were issued by the builder. The Court may infer that an implied contractual term exists if it is fair, obvious, clear, necessary to give business efficacy to the contract, and not in contradiction with other terms of the contract.

Consequently, Dr Sader could not rely on the lack of a valid progress payment claim as a defence against payment of the balance of the price for the building works. Sader could (and did) claim damages for the building defects and delay as a breach of contract.

Litigation for construction matters can be costly and unpredictable. But this risk can be minimised with the clear and careful drafting of contracts although, as this case shows, even standard form contracts can result in disputes. If it seems a project is becoming contentious, it may be worthwhile to engage legal assistance sooner rather than later to understand your rights and obligations, and before a costly dispute arises.

You win sum, you lose sum (but it’s still a sum)

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Some construction contracts provide that expert determinations (or other alternative dispute processes) will be considered “final and binding” unless the claim or determination is excluded or carved-out.

In the matter of CPB Contractors Pty Ltd v Transport for NSW [2021] NSWSC 537, the New South Wales Supreme Court considered an expert determination clause which precluded litigation in respect of the determination, unless it:

  1. Did not involve a sum of money; or
  2. Required one party to pay the other an amount in excess of $500,000.[i]

The decision in this case was that one party was not entitled to any further payment for the Works.  Did the determination “involve” paying a sum of money?

Facts

Transport for NSW (“Transport”) engaged CPB Contractors (“CPB”) to carry out road widening works. Transport issued CPB instructions to remove excess spoil from one location to another (“Works”).

The determination concerned CPB’s entitlement to payment for the Works. Transport contended (and paid CPB) on a “Dayworks” basis which equated to $1.4 million. CPB contended that it was entitled to be paid for the Works in accordance with a schedule of rates (“Rates”) which equated to $11.4 million.

The Honourable Robert McDougall QC (“Expert”) determined that CPB was not entitled to any further payment for the Works (“Determination”).

CPB sought to litigate its claims, seeking payment in accordance with the Rates. Transport sought a stay. Transport pointed to clause 71 of the relevant GC21 Contract, arguing that the Determination was final and binding.

CPB contended that it was free to litigate the claims for the Works for two reasons.

The first was that the Expert made no determination for the purposes of the Contract.  CPB submitted there is a “deficiency or error” in the Determination, meaning it was not “a determination in accordance with the contract”.  These errors were said to include a “plainly incorrect” answer to a question referred to determination[ii], a failure to give reasons as required by the contract[iii] and a failure to answer a question at all[iv].  The first ground was specific to the facts of the case.

The second reason was that the Determination (to the extent it was a valid determination under the contract) did not “involve paying a sum of money”.

On this issue, CPB submitted that the question is what the Determination itself is and not the “matters for determination” involve.  It was argued that a determination that no money is payable is in effect a dismissal or rejection of that claim.  CPB submitted that such a decision does not and cannot involve “paying” a sum of money.

Decision

Transport’s application for a stay was granted.  CPB was precluded from litigating on the claims.

On the first ground, Stevenson J found that the Determination did not contain a deficiency or error.  The Expert’s Determination complied with the contractual requirements.

On the second ground, Stevenson J concluded that a determination dismissing a claim for money does “involve” “paying a sum of money” in the sense that it deals with the claim that, if successful, would have resulted in the paying of a sum of money; and rejects that claim.[v] The focus is not on the amount to be paid pursuant to the determination, but on the nature of the determination – i.e. whether it “involves”, in the sense of “concern” paying a sum of money.[vi] This is distinguished from a distinct category of determinations that are not in respect of money claims, such as a dispute about the construction of the contractual terms.[vii]

Therefore, in finding that the Determination did “involve the paying of sum of money”, the exception to the preclusion of litigation did not apply.

Take home tips

Dispute resolution clauses are often overlooked by parties in a contract negotiation. This case highlights that parties should carefully consider the types of disputes or claims that may be captured by a binding alternative dispute resolution process.  Parties should draft clear carve-outs from an otherwise final and binding dispute resolution clause if they wish to have recourse to the courts.

For carve-outs involving sums, consider whether the monetary thresholds are arbitrary or considered by reference to the whole of the contract sum.  Also consider whether it is the value of the claim that is of importance, or the value of the determination.

If parties wish to preserve the right to apply to the courts concerning the interpretation of a contractual term, for example, it would be prudent for the dispute resolution clause to reserve the right for an application for declaratory relief or contain a carve-out in relation to claims or disputes not involving or concerning payment of a sum.

[i] At [26] – [27].

[ii] At [47].

[iii] At [58].

[iv] At [66].

[v] At [91].

[vi] At [92].

[vii] At [94].

Spring is here and so is the Building and Construction Industry Security of Payment Regulation 2020

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On 1 September 2020, the Building and Construction Industry Security of Payment Regulation 2020 commenced (2020 Regulation) repealing the 2008 Regulation.

The 2020 Regulation will provide the legislative support and administrative detail for the operation of the Building and Construction Industry Security of Payment Act 1999 (NSW) (Act) as provided by the amendments which commenced on 21 October 2019. These amendments came about to address poor payment practices and the high incidence of insolvencies in the building and construction industry and also, to facilitate prompt payment, preserve cash flow and resolve disputes quickly and efficiently.

The 2020 Regulation is not retrospective and will not apply to contracts entered into prior to its commencement date.

Key reforms of the 2020 Regulation include:

  • removing the annual reporting requirements for trust accounts to NSW Fair Trading,
  • introducing a requirement for head contractors to keep a ledger for retention money held in relation to each subcontractor and provide the subcontractor with a copy of a ledger at least once every 3 months or longer period of 6 months if agreed in writing, and also to provide trust account records to subcontractors if their money is held in trust,
  • supporting statements are only required for subcontractors or suppliers directly engaged by the head contractor,
  • removing owner occupier construction contracts as a prescribed class of construction contract to which the Act does not apply, and
  • introducing qualifications and eligibility requirements for adjudicators to improve the quality of adjudication determinations under the Act.  The eligibility requirements include either a degree or diploma in a relevant specified field with at least 5 years’ experience, or at least 10 years’ experience in a relevant specified field.  The continuing professional development requirements for adjudicators will commence on 1 September 2021.

Of particular note, the project value threshold (value of the head contractor’s contract with the principal) for retention money trust account requirements will not be reduced from $20 million to $10 million as previously foreshadowed. The existing threshold will remain. Perhaps, given the current climate, it was considered too much of an administrative burden on head contractors who are already dealing with the pressures of delivering projects during Covid. A copy of the 2020 Regulation is  here.

If you would like to discuss or would like any more information, please contact us at [email protected] or (02) 9248 3450.

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Contractors – don’t use Dropbox if you want to get paid!

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In Wärtsilä Australia Pty Ltd (ACN 003 736 892) v Primero Group Ltd (ACN 139 964 045) & Ors [2020] SASC 162, a contractor has failed to recoup $15M because it tried to submit completion reports via Dropbox link.  This is adds to the line of authorities which caution reliance on cloud-based technologies for issuing documents, whether under contract or statute.

Facts

Primero Group Ltd (Primero) contracted with Wärtsilä Australia Pty Ltd (Wärtsilä) to perform civil, mechanical and electrical works and supply tanks for the construction of the Barker Inlet power station on Torrens Island in South Australia.

The contract provided the following requirements for ‘SW Completion’:

‘(2) the tests, inspections and communications required by this subcontract (including Schedule 3) to have been carried out before SW Completion have been carried out, passed and the results of the tests, inspections and commissioning provided to [Wärtsilä]

…

(8) the completed quality assurance documentation … is available for inspection by [Wärtsilä] at the Facility Land’ (emphasis added)

Primero emailed Wärtsilä on 28 February 2020 a Dropbox link to the documents.  Yet Wärtsilä was unable to access the documents via the link until 2 March 2020.

On 2 March 2020, Primero served a payment claim under s 13 of the Building and Construction Industry Security of Payment Act 2009 (SA) in the amount of $85,751,118 (excluding GST).  On 10 March 2020, Wärtsilä responded with a payment schedule which scheduled “nil” but also stated that the payment claim was invalid as it was not supported by a reference date.

Primero proceeded to adjudication and the adjudicator determined Primero’s payment claim was valid, awarding $15,269,674.30 (excluding GST).  Key to the adjudicator’s determination was that the payment claim was supported by a reference date of 28 February 2020.  Wärtsilä made an application to the Supreme Court for an order quashing the adjudication determination.

The parties agreed that if SW Completion under the contract had not occurred on 28 February 2020 the adjudicator’s determination was invalid.[1]

Primero argued that it had provided the documents and made them available for inspection by sending the email.

Primero also contended that the Electronic Communications Act 2000 (SA) (ECA) permitted the contractual obligation for the provision of the documents to be satisfied by electronic communication.  Under s 8 of the ECA, the time of receipt of an electronic communication was when it is ‘capable of being retrieved by the addressee’.

Decision

Sending a Dropbox link to the documents was not sufficient for SW Completion.  On 28 February 2020, Primero had emailed the link to Wärtsilä, but Wärtsilä was unable to completely download the documents.[2]

Accordingly, the adjudication determination was quashed because it was not made with reference to a valid payment claim.[3]  The $15M award to Primero was nullified.

Stanley J held[4]:

  1. in relation to SW Completion item (2), ‘the provision of the hyperlink merely provided a means by which Wärtsilä was permitted to download the documents stored in the cloud. Until it did so, those documents had not been provided.’

 

  1. in relation to SW Completion item (8), ‘the hyperlink did not amount to making the documents available for inspection… because until all the documents were downloaded, they were not capable of being inspected at the facility land.’

His Honour stated:

‘a common sense and businesslike construction of the contractual requirements that the documents be provided and are available for inspection necessarily requires that the documents were capable of being downloaded on 28 February 2020. I find they were not.’[5]

Stanley J applied a Queensland case Conveyor & General Engineering v Basetec Services & Anor [2015] 1 Qd R 265 (Conveyor) and a Federal Court case Clarke v Australian Computer Society Inc [2019] FCA 2175 (Clarke), which went to the point that a document could not itself be considered to be “left at” or “sent” to an intended recipient if an email containing a link to the document was sent to that recipient.[6]  To summarise, it is only the email itself which is sent or transmitted, not the document housed on the cloud server.

The ECA did not apply to the communication to solve the problem for Primero because[7]:

‘Both s 8 and s 10 prescribe circumstances that condition the operation of those provisions. Those circumstances include: first, that at the time the information is given by means of electronic communication, it was reasonable to expect that the information would be readily accessible so as to be useable for subsequent reference; and second, that the person to whom the information is required to be given consents to the information being given by means of an electronic communication.’

His Honour held that Conveyor and Clarke stood as authority for the proposition that the provision of the documents by hyperlink did not constitute an “electronic communication” for the purposes for the ECA.

This point is highly relevant to because the relevant legislation governing electronic transmissions and communications are modelled off uniform Commonwealth legislation (Electronic Transactions Act 1999 (Cth)) and have largely consistent provisions.

Take Home Tips

It is important to consider closely whether the terms of your contract allow you to submit completion documents (or other documents) via a Dropbox link.  If the contract uses words like “provide”, “send”, “make available”, etc, it is unlikely that merely providing a link to those documents will satisfy the obligation unless and until the documents are actually downloaded or accessed in full by the intended recipient.  This can be difficult to prove.

It is unlikely that you will be able to fall back on the relevant electronic communications or transactions legislation in your jurisdiction because the provision of the link will not be considered an “electronic communication” of the document itself.  Strict compliance with the contract and statute (particularly in the realm of security of payment) is always required.

[1] At [12].

[2] At [93].

[3] At [128].

[4] At [94].

[5] At [105].

[6] At [98] to [101].

[7] At [117].

A Downer of a decision: The importance of articulating adjudication submissions

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In Diona Pty Ltd v Downer EDI Works Pty Ltd [2020] NSWSC 480 (Diona), the Supreme Court considered an application to set aside an Adjudicator’s Determination for failure to consider the terms of the contract as required by s 22(2)(b) of the Building and Construction Industry Security of Payment Act 1999 (the SOP Act).

Key takeaway:

  • It is important to ensure that adjudication submissions clearly articulate all relevant arguments and contractual provisions. Unclear, poorly framed or ambiguous submissions can be costly.
  • An adjudicator’s decision will not be declared void simply because it contains what one party considers to be an error or failure by the adjudicator to expressly address all arguments made in parties’ submissions.
  • Lawyers can be useful to assist in preparing an adjudication application and response. Having prepared and responded to numerous security of payment claims, the lawyers at Bradbury Legal are experts at ensuring your arguments are clearly articulated.

 

Background

Diona Pty Ltd (Diona) entered into a subcontract with Downer EDI Works Pty Ltd (Downer), for Downer to provide works in relation to safety upgrades on the Great Western Highway, Blackheath. Downer proceeded to adjudication on a payment claim under the SOP Act. On 16 April 2020, the relevant Adjudicator determined that Downer was entitled to a progress payment of $430,990.13 (Determination).

Diona made an application to the Supreme Court, seeking a declaration that the Determination was void and an injunction preventing Downer from requesting an adjudication certificate or filing the adjudication certificate as a judgment debt. Diona contended that the Adjudicator had incorrectly awarded a set off claim by Downer, in response to Diona’s liquidated damages claim, in the amount of $30,000 on account of two extension of time claims (EOT Claims).

Diona argued that the Adjudicator had not fulfilled the requirements of s 22(2)(b) of the SOP Act because the Adjudicator had failed to give any reference to, or consideration of, Diona’s contention in its adjudication response submissions that Downer was not entitled to these extensions of time, due to the operation of a time bar in the contract.

 

Did the Adjudicator consider the time bars?

The central question was whether the Adjudicator considered the provisions of the contract. Under section 22(2)(b) SOP Act, an adjudicator must consider the provisions of the construction contract.

To determine if the Adjudicator did consider the contractual provisions, especially those containing the time bar, the Court looked at the submissions made by both parties and the Adjudicator’s determination.

The Court noted that Downer had ‘devoted a number of pages to its contentions concerning extension of time and, in particular, its asserted entitlement to EOT 18 and EOT 21’. This was contrasted with Diona’s submissions, the Court found did not properly engage with Downer’s EOT Claims. Diona’s submissions stated:

‘Determinations of claims for…extension of time…by Diona are final and cannot be disturbed except by raising a Claim under the Contract, see relevant clauses of the Subcontract.’

The Court highlighted a part of the Adjudicator’s reasons which stated:

‘The Act at section 22(2)(b) requires the adjudicator to consider the provisions of the construction contract when making the determination’

Having regard to the Adjudicator’s express reference to s 22(2)(b) of the SOP Act, the Court stated that there were several reasons why the Adjudicator did not refer to the dispute clause in the Determination. Firstly, the Adjudicator may have felt that Diona did not properly articulate and develop the time bar argument. Alternatively, the Adjudicator may have misunderstood the submissions. The Court concluded that:

‘The Adjudicator may have come to the wrong decision about Dower’s entitlement to EOT 18 and EOT 21. But that, without more, is not a basis to set aside the set aside the determination.’

The argument that Diona sought to raise, while potentially valid, was not properly articulated. Therefore, it could not be inferred that the Adjudicator had failed to consider the provisions of the subcontract as required by s 22(2)(b) of the SOP Act.

 

So what?

The significance of this case is that it shows that what appear to be errors or failures to consider an argument by an adjudicator will not always result in a basis to set aside the adjudicator’s determination. The adjudicator’s decision can be rough and ready, provided the adjudicator makes their decision in accordance with the SOP Act. Payments made under SOP Act are on account only and may be determined on a final basis at a later stage.

 

A tale of two Acts

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Last week the NSW Parliament passed two significant pieces of legislation for the construction industry. The first, passed on Tuesday 3 June 2020, was the Design and Building Practitioners Bill 2019 (at the time of writing, awaiting assent). The second, passed on 4 June 2020, was the Residential Apartment Buildings (Compliance and Enforcement Powers) Bill 2020 (which will commence on 1 September 2020).

Design and Building Practitioners Act 2020 (the DBP Act)

The DBP Act sets up a legislative regime which regulates design practitioners who provide designs for certain types of building works.

The DBP Act introduces a number of new regulatory provisions in relation to:

  • obligations of design practitioners, principal design practitioners and building practitioners;
  • restrictions on carrying out of professional engineering work and specialist work;
  • introduction of a statutory duty of care in favour of owners corporations and associations; and
  • registration, disciplinary action, investigations and enforcement decisions in relation to design practitioners

Important definitions:

The Act introduces several new terms into the law in order to set up the regulatory framework. The most notable definitions are set out below:

Building element means:

  • fire safety systems for a building within the meaning of the Building Code of Australia;
  • waterproofing;
  • an internal or external load-bearing component of a building that is essential to the stability of the building or a part of it;
  • a component of a building that is part of the building enclosure;
  • those aspects of the mechanical, plumbing and electrical services for a building that are required to achieve compliance with the Building Code of Australia;
  • other things prescribed by the regulations.

Design compliance declaration means a declaration as to whether or not:

  • a regulated design prepared for building work complies with the requirements of the Building Code of Australia;
  • the design complies with other applicable requirements prescribed by the regulations;
  • other standards, codes or requirements have been applied in preparing the design.

Essentially, the design compliance declaration confirms that the design practitioner has complied their obligations at law and under contract.

Regulated designs means:

  • a design that is prepared for a building element for building work;
  • a design that is prepared for a performance solution for building work (including a building element); or
  • any other design of a class prescribed by the regulations that is prepared for building work.

Being an incredibly broad definition means that anyone that provides design services, such as engineers, architects and other design consultants, will likely be covered by the DBP Act and therefore subject to its requirements.

Compliance declarations

The DBP Act requires a registered design practitioner and principal design practitioners to provide a compliance declaration to a person if:

  • the practitioner provides the person with a regulated design prepared by the practitioner; and
  • the design is in a form suitable for use by that person or another person in connection with building work.

Failure to comply with the compliance declaration provisions by registered design practitioners can result in fines of up to $165,000 for corporations and $55,000 for other persons. However, if a person makes a design compliance declaration that the person knows to be false or misleading, they could face a fine of up to $220,000, two years imprisonment, or both.

Duty of Care

The DBP Act imposes a duty of care on persons who carry out construction work to exercise reasonable care to avoid economic loss caused by defects:

  • in or related to a building for which the work is done; and
  • arising from the construction work.

The legislation states that this duty of care is owed to each owner of the land that the construction work is carried out. The duty of care also owed to all subsequent owners of the land.

The consequence of this provision is that builders and developers may end up having a duty of care in respect of defects for up to 6 years from the date that the loss was suffered. Builders will also want to consider these potential liabilities in conjunction with the 10 year limitation period for defective building work under the Environmental Protection and Assessment Act. The 10 year period for defective building work commences from the date of completion.

Other things to note with the statutory duty of care:

  • it cannot be delegated;
  • it cannot be contracted out of;
  • it operates in addition to the statutory warranties in the Home Building Act.

Practical considerations:

  • Like the Environmental Protection and Assessment Act, the DBP Act relies on the Regulations to give form and substance to many of the operative provisions of the DBP Act. At the time of writing, the Regulations for the DBP Act were not available for review.
  • Design professionals and head contractors will need to update their insurances to ensure they are compliant with the new provisions and duties of design professionals.
  • Builders and others that engage in construction work will now have a much greater duty of care to the land owners.

Residential Apartment Buildings (Compliance and Enforcement Powers) Act 2020 (the RAB Act)

The RAB Act is more restricted in its application, applying only to residential apartment buildings. The purpose of this legislation is to prevent developers from carrying out building work that might result in serious defects to building work or result in significant harm or loss to the public, current occupiers and future occupiers of the building.

Notification for intended completion

From 1 September 2020, developers will be required to provide the Secretary of the Department of Customer Service a notification that they expect completion to occur and an occupation certificate issued within 6 – 12 months from the application. The Secretary is given the ability to make orders prohibiting the issue of an occupation certificate in relation to residential apartment buildings and may prevent the registration of a strata plan for a strata scheme in certain circumstances.

Investigations

The RAB Act authorises the following people to carry out investigations:

  • Building Commission;
  • an employee of the Department of Customer Service;
  • investigators under the Fair Trading Act 1979;
  • a council investigation officer under the Environmental Planning and Assessment Act 1979; and
  • a person set out in the regulations of the RAB Act.

These authorised officers are given various information gathering powers including being able to request information or records from persons where it is connected with an authorised purpose. Further, an authorised officer is able to enter premises without the need for a search warrant and will be able to undertake actions including:

  • examine and inspect any thing;
  • take and remove samples of a thing;
  • take photographs or other recordings that the authorised officer considers necessary;
  • copy of any records; and
  • seize a thing that the authorised officer has reasonable grounds for believing is connected with an offence against the RAB Act or its regulations or a serious defect in a building.

These powers are extensive and serious. Builders and developers should be seek legal advice. The Secretary for Customer Service is also empowered to issue stop work orders and rectification orders. Failure to comply with these orders may result the Secretary taking any action necessary or convenient to ensure the order is complied with. The cost of these actions are then able to be recovered by the Secretary.

Practical considerations:

  • Developers are required to give at least 6 months’ notice (but no more than 12 months) before an application is made for an occupation certificate.
  • Developers and builders should seek legal advice as to their rights in respect of the RAB Act. The powers of the authorised officers are extensive and the consequences for breach are serious.

Summary

The DBP Act and the RAB Act represent a major regulatory change from the NSW Parliament which will have serious consequences for building professionals. While these legislative reforms are aimed at promoting confidence in the building industry in light of developments such as Mascot Towers and Opal Tower, they radically shift the current status quo for building professionals. Those who carry out building work, from consultants and designers to builders and developers should seek specific legal advice as to where they stand in respect to these new legislative regimes.

Case article – Brolton Group Pty Ltd v Hanson Construction Materials Pty Ltd

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In Brolton Group Pty Ltd v Hanson Construction Materials Pty Ltd [2020] NSWCA 63 (Brolton), the NSW Court of Appeal considered the jurisdictional and procedural fairness grounds of an adjudicator’s determination.

Background

Brolton was contracted by Hanson to build a quarry processing plant at Bass Point. The parties agreed on a guaranteed maximum price of $85 million (excluding GST) in which Brolton was entitled to claim monthly progress payments on the last Tuesday of each month. Hanson claimed liquidated damages and the contract was eventually terminated on 3 October 2018. In August 2019, Brolton served a payment claim on Hanson. The payment claim claimed work up to September 2018 as well as interest on unpaid amounts to August 2019. The adjudicator determined in favour of Brolton, issuing an adjudication amount of $2,877,052.75. Hanson challenged the decision in the Supreme Court, with the Supreme Court finding in favour of Hanson. This resulted in the appeal by Brolton to the NSW Court of Appeal.

The Court’s decision

Brolton raised two main grounds of appeal. The first and most pertinent issue, concerning jurisdiction, centred predominantly on the availability of a reference date on which Brolton could make its payment claim.
Importance of jurisdiction and the trouble of jurisdictional error
Under the Building and Construction Industry Security of Payment Act 1999 (NSW) (SOP Act) section 22, an adjudicator is given the statutory authority to determine the amount of a progress payment, the date on which such amount became payable and the rate of interest payable on any such amount. The importance of section 22 is that it sets out the jurisdiction of an adjudicator. As the saying goes, with great power comes great responsibility. While the adjudicator is given the power to make these determinations, section 22 sets out the limited factors that the adjudicator can consider. These are the responsibility components of the adjudicator’s determination. Two of the relevant factors to consider in Brolton was the provisions of the SOP Act and the payment claim.
While adjudicators are given the power to make determinations, they can only do so in certain circumstances or if there are specified preconditions. In the legal world, this is called a ‘jurisdictional fact’. As Gleeson JA described in Brolton (at paragraph 28), the term jurisdictional fact is used to describe ‘any precondition which a statute requires to exist in order for the decision-maker to embark on the decision-making process’. Jurisdictional facts fall into two types:

1. The existence of an identified state of affairs; or
2. A state of satisfaction of the decision-maker as to an identified state of affairs.

A jurisdictional fact gives a decision-maker the power to make the decision. If it exists, then an adjudicator can make a determination. In this way, the reference date activates the adjudicators powers to make a determination under the SOP Act.
Under the SOP Act, a claimant is only able to make a payment claim when there is a reference date under the construction contract. Therefore, the existence of a reference date is a jurisdictional fact that falls into the first category. This is because the existence or non-existence of a reference date is objective and does not depend on whether the adjudicator is satisfied that a reference date exists. Where an adjudicator exercises its power, but the jurisdictional fact does not actually exist, the adjudicator has made a jurisdictional error..
Getting back to the case, in submitting its payment claim, Brolton claimed in its adjudication submissions that the reference dates for August 2018 and September 2018 were available for the payment claim. Hanson also contended that the September 2018 reference date was available for the progress payment. However, the adjudicator ‘went rogue’ and determined that the reference date was in fact 23 October 2018. There were a few issues with this. Firstly, the 23 October 2018 was not the last Tuesday of the month (which in fact was 30 October 2018). Secondly, the contract had been terminated on 3 October 2018, meaning no further reference dates arose. As the clause entitling Brolton to a progress payment did not continue beyond the termination of the contract, the adjudicator had made a jurisdictional error. The reference date the adjudicator relied on did not exist, and therefore the determination was void and the $2.8 million decision was overturned (as if it had never been made).

Although Hanson succeeded on the first issue, the Court was still minded to consider the second issue on appeal. The second issue concerned the procedural fairness of the adjudicator’s decision. Like jurisdiction, procedural fairness is a legal term that has important consequences for adjudication determinations. Procedural fairness is an aspect of natural justice, a foundational legal principal that sets the standards of how people are to exercise their authority. The concept of procedural fairness means the process in which a decision is made should be just. Procedural fairness requires that parties have the right or opportunity to have their case heard by the decision-maker. If there is a substantial denial of natural justice, the decision-maker’s determination will be void. In this case, the issue of procedural fairness arose because the adjudicator determined that the relevant reference date was a date not submitted by either party. Brolton argued that while procedural fairness was denied to the parties, it was immaterial and should not void the adjudicator’s decision. The Court found that the findings by the adjudicator were a material breach of procedural fairness and therefore there was a breach of natural justice.

Take-away points

While this article has discussed a few technical legal concepts, the main take away points from Brolton are that:
• A progress payment must be linked to a specific reference date. If an adjudicator incorrectly attributes a payment claim to a reference date which does not exist, the determination will be void.
• It is not enough that another reference date is available for the payment claim to be linked to. If the adjudicator goes rogue and determines a reference date not submitted by the parties, the decision will be void.
• Claimants should identify and make it abundantly clear the relevant reference date to which a payment claim relates and make submissions in the adjudication application as to what the relevant reference date is.
• Reference dates are essential for an adjudicator to make a determination. A failure by the adjudicator to appropriately determine a reference date can have dire consequences to claimants.
• Note: The recent amendments to the NSW SOP Act have eliminated the post-termination payment claim issue. Section 13(1C) now states that for construction contracts that have been terminated, a payment claim may be served on and from the date of termination. This change will only apply to contracts entered into after 21 October 2019.

ADR Processes Part II

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This article is Part II of our article on ADR process. In this article, we will be covering the common pitfalls of ADR clauses. In Part I, we discussed the different types of ADR processes that are common in construction law matters. You can find Part I of our article HERE. While there are benefits to ADR processes, the drafting of dispute resolution clauses can sometimes result in the clause being void and unenforceable. Alternatively, there are times where the drafting of the dispute resolution clause means parties are left with a result under the contract which is unfair or unjust in the relevant circumstances. Often dispute resolution clauses are thrown into a contract without the parties giving much thought or consideration as to its enforceability or suitability to the circumstances. The following matters are pitfalls you should consider when you are drafting a dispute resolution clause.

 

Factors that may make the clause void and unenforceable:

 

Precondition to Court or other legal action

 

One of the biggest problems with ADR clauses arises when they set compliance with the ADR process as a pre-condition to seeking any court relief. This is problematic because it attempts to prevent the parties from approaching the Court when it has jurisdiction. If not properly drafted, these types of clauses can make the dispute resolution term unenforceable.

 

Words or phrases to look out for:

 

‘The parties must not seek any court orders until the parties have attended mediation.’

 

Words or phrases that can prevent the clause being unenforceable:

 

‘Nothing in this clause X prevents the parties from seeking urgent or injunctive relief from the Court.’

 

The key difference between these clauses is that the first tries to remove the jurisdiction of the Court by preventing the parties from seeking any relief from the Court until after the ADR processes have been complied with. This can result in some of the parties’ legal rights being wrongly enforced under the contract. For example, in cases where one party seeks to have recourse to security and the other party disputes this, the ADR process mechanisms may be too slow in resolving this dispute. Therefore, it is appropriate for the Court to be able to order urgent or injunctive relief to prevent recourse to the security. The parties can still have the underlying dispute proceed to the elected ADR process, but the security providing party may be able to (in the interim) prevent recourse where it is contested that the other party is not entitled to the benefit of that security.

 

Agreement to agree

 

A dispute resolution clause will be unenforceable if it is void for uncertainty. This often happens when there is an agreement to agree in a clause. For example, if a contract provides that the parties must agree on a matter and the parties are unable to reach an agreement, where do the parties stand in respect of their contractual duties? In the context of a dispute resolution clause, this can occur when the parties are required to agree on the form of the dispute process, or the appropriate body to determine the dispute or the rules that are to be applied to determine the dispute.

 

Words or phrases to look out for:

 

‘The parties must agree on an expert’ or ‘the parties must agree on the form of dispute process’

 

Words or phrases that can prevent the clause being unenforceable:

 

‘The parties must agree on an expert. If the parties cannot agree, the expert shall be appointed or administered by the [for example] Australian Disputes Centre.’

 

The important difference between the two clauses is the second has a mechanism for resolving the uncertainty. If the parties cannot agree on which expert should be appointed, the clause provides for a third party to appoint or determine who the expert will be. Obviously, when nominating a third party to make the decision, it is important to confirm that the third party can and will appoint a dispute resolution professional.

 

Time frames should also be included as part of these clauses to avoid uncertainty. For example, a clause may state that parties are given 14 days to meet together to discuss the dispute before it proceeds to mediation. Without the 14 day timeframe, there is no clear indicator of when the parties are to engage in their dispute resolution process. A deeming mechanism should also be included to account for when the parties simply do not comply with the dispute resolution process. For instance, if the parties do not meet within 14 days, then the dispute should be automatically referred to mediation, or expert determination (as per the next tier of the agreed dispute resolution process) or simply allowed to proceed to litigation.

 

Broad and unclear drafting

 

The last pitfall of dispute resolution clauses discussed in this article is broad and/or unclear drafting. As a general problem with contracts, broad and/or unclear drafting can result in less certainty in the obligations between the parties. In the context of a dispute resolution clause, unclear drafting may occur in any of the following circumstances:

 

  • where there is not a clear process for a dispute to be resolved;
  • where the scope of the ADR powers and what can they determine is not defined;
  • where the rules that guide the ADR process are not clearly referenced; and
  • when can parties appeal the decision.

 

The consequence of broad and/or unclear drafting is that when a dispute arises, further disputes may occur when it comes time to interpret the clause. If a Court considers that the clause is uncertain and is unable to be properly interpreted, it may be held that the clause is void for uncertainty.

 

To assist with some of the considerations that arise with broad or unclear drafting, the next section of this article gives commentary on some of the considerations of ADR clauses so as to ensure your clause is suited to the parties and properly drafted.

 

Important Considerations in ADR clauses

 

Scope of ADR power

 

A dispute resolution clause can be customised by the parties. One way that parties can customise their dispute resolution clause is by determining what types of dispute will be resolved in which ways. For example, the parties may agree that technical matters to do with the scope of works or variations are unsuited to a determination by a legal professional. In such technical matters, the Courts will often have to consider expert reports from both parties, including any updates and responses from the experts. Even after considering the expert reports, the Court may nevertheless be unequipped or unsuitable to determine exactly what the correct outcome is or should be. Methods such as expert appraisal or expert determination can be effective ways of the parties reducing their costs and ensuring an appropriate resolution of the dispute. If this method is agreed by the parties, it is important to clearly set out exactly which disputes are to be resolved in which way. For example, the dispute resolution clause may state that any dispute involving a disputed variation or defective work that hinges on a technical interpretation must be resolved through expert determination. Accordingly, such a clause would also express that any dispute that hinges on legal interpretation be directed to a court of competent jurisdiction.

 

Statutory Provisions

 

When drafting a dispute resolution clause, it is important to consider whether there are any statutory provisions that may impact on the operation of the clause. For example, the Home Building Act 1989 (NSW) prevents the use of arbitration in some contracts for residential building work. In Victoria, the Building and Construction Industry Security of Payment Act 2002 (VIC) has an intricate regime for claimable variations in high value contracts (being contracts with a consideration over $5,000,000). These statutory provisions can have significant impacts on the clauses chosen by the parties. Further, while the Home Building Act prohibits the use of arbitration, the Victorian Security of Payment Act has consequences for the parties depending on the type of resolution used. It is important then to consider the statutory provisions and what their effects may be.

 

Binding or non-binding

 

A major consideration that parties should think about is whether to have the dispute resolution process as a binding or non-binding method. The Courts have generally held that where parties agree to a binding dispute resolution process, they will be unable to appeal the determination. While there may be circumstances where the parties can appeal to have the determination overturned, as a general rule, parties should expect to be bound by the decision. Therefore, parties should consider when they want to be bound by the decision of the dispute resolution professional.

 

Rights of appeal

 

While the process may be binding, the parties may agree to allow for appeal rights in the dispute resolution clause. For example, the parties may agree that a decision can be appealed where a party claims there has been a manifest error of law or where the amount in dispute exceeds a specified threshold. These mechanisms are interesting ways that parties can customise their dispute process and ensure that they are satisfied with the way any potential disputes will play out. It is important to consider any cost implications with appeal rights. While parties may not wish to be bound by a decision in certain circumstances, appeal rights may inevitably lead to higher costs in resolving a dispute.

 

 

Coronavirus (COVID-19) and Construction Contracts: What are your options?

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Coronavirus (COVID19) and the construction industry: What are your options?

We recently published an article about how construction contracts can incorporate concepts of force majeure events. A copy of our article can be found here.

As the disruptions of corona virus begin to become more extensive with government mandates coming into effect, we believe it’s important for those in the construction industry to have a quick reference guide as to their options or important things to think about.

 

Pre-contract: Tendering, negotiating and drafting of contract
Force Majeure clause ·         Manages the relationship between the parties where there has been an ‘Act of God’ or other similar severely disrupting event

·         Depends on the contractual definition of the term

·         Generally, suspends the obligations until the force majeure event has concludes

·         Important to consider when the parties’ obligations will resume – what will indicate the end of the force majeure event
Scope of Works and mitigation of supply chain risk ·         Where possible, alternative supply or materials should be specified in the scope of works with pre-agreed variation prices
Extensions of Time ·         Can include force majeure event as a qualifying cause of delay

·         What circumstances can the contractor or subcontractor seek an EOT?

·         Generally appropriate for an EOT to be granted where there is suspension of works, variation, act, omission or breach of the other party, force majeure events and/or industrial action occurring across the relevant state or territory

·         Are there any duties to mitigate the delay which are a precondition to receiving an EOT
Delay Costs and/or damages ·         Does the contract provide for any delay costs or damages?

·         What are the circumstances that the contractor or subcontractor is entitled to costs and are there any relevant caps?
Legislative Provisions ·         How are the change in legislative requirement provisions worded?

·         Consider the definition of legislative requirement (and/or equivalent and related definitions)

·         Consider whether legislative provisions should include a carve out for where there is a change in the legislative requirements in relation to COVID19. Given the uncertainty around how the government will proceed, it is difficult to predict how the legislative regimes or executive orders will change as the response to COVID changes and adapts
Labour and Key Personnel ·         Are there any key personnel of the contractor or the subcontractor that should be specifically identified?

·         Are there specific measures the Principal/Contractor want to specifically implement? Examples may include split teams
Security ·         Consider what types of security will protect against insolvency risk of contractors or subcontractors – Parent guarantee, retention monies, material security and/or bank guarantees

·         Consider circumstances where there may be recourse to the security such as where a party becomes insolvent or there are defective works that require rectification

·         Consider Principal security for payment if there are any solvency concerns
Insurance ·         Principals should consider whether there are suitable insurance policies to protect from any delays to the works or any consequences that the delays may have at the end of the project

·         For example, Principals may wish to discuss delay in start-up insurance with their insurance broker
Warranty deeds and defects ·         Principals may wish to require warranty deeds from the subcontractors to insure against any insolvency risk from contractors and to allow for any defects to be rectified independent of the contractor
Financial capacity of the tenders ·         When assessing potential contractors, Principals should consider the financial capacity of contractors and whether there are any solvency concerns and if there are any parent companies that can provide guarantees
Project deadlines ·         What deadlines are imposed by related contracts such as sale of land for off the plan properties

·         How long are the deadlines and timeframes of the project? Can they be extended to account for coronavirus
Contract structures ·         Profit/cost-saving sharing models of contract or guaranteed maximum price may be considered by Principals to minimise cost exposure of contracts that may be affected by coronavirus (such as supply chain risk)
Contract administration
Extension of time ·         Principals and Superintendents generally have the power to issue an EOT even when a claim may not be made by the Contractor. While they are not obliged to use this power for the benefit of the contractor, there may be practical and goodwill benefits in using these powers

·         Contractors should seek legal advice in terms of the relevant EOT clause and whether they have a right to seek an EOT or what other options are available to them under the contract
Suspension ·         Suspension is generally a grounds for an EOT

·         Consider who bears the cost of suspension under the contract

·         Is there a right for the contractor to claim any suspension costs or costs associated
Change to legislative requirements ·         In the event of government mandated shutdown, there is likely going to be claims for legislative changes. These will largely depend on the wording of the clauses, who bears the risk on legislative changes and the form of the government shut down

·         Other considerations include whether construction work is considered an essential service and to what extent
Variations ·         Where there is a supply chain breakdown due to closed borders, there may be claims for variations being made by Principals or Contractors to allow the project to continue

·         Variations will be linked to the scope of work and whether there are alternatives that can be sourced
Payments ·         Principals may wish to change payment terms to accommodate contractors or subcontractors

·         As the effects of coronavirus move throughout the economy, there will undoubtedly be businesses that struggle and become insolvent. Where possible, Principals may want to consider changing milestone payments or frequency of payment claims to assist contractors’ cashflows

·         Any agreement between the Principal and relevant contractor should be evidenced in writing
Acceleration ·         If there is relatively small amount of work left, Principals may consider giving directions to accelerate

·         While this may increase the cost of the project, the Principal may be able to ensure the project is completed before shutdowns come into effect
Employment ·         Employment law advice should be sought about how to manage employee relationships while projects are on hold by reason of coronavirus
Teams and social distancing ·         Head contractors may wish to implement policies that flow down the contracting chain in relation to splitting teams and social distancing where possible
Other arrangements agreed between the parties ·         Sometimes the best changes are those made between the parties and not from the lawyers

·         However, even where this is the case, ensure that such agreements are evidenced in writing and you seek legal advice on the impacts of the agreement and whether there are any potential consequences that you may not have considered
Other issues
Financiers ·         In many developments, there may be a financier involved and different obligations that arise under these loans and security documents

·         Principals should consider their obligations to notify their financier(s) where appropriate
Other stakeholders ·         There may be a range of other stakeholders that may have an interest in the construction contracts

·         It is important to manage these aspects of the development to reduce or eliminate any potential problems later on
Dispute resolution
SOPA claims ·         At the time of writing, there have been no changes to the strict deadlines imposed on submitting and responding to payment claims under the NSW Security of Payment legislation

·         SOPA is a contractor friendly forum, allowing for money to flow down the contracting chain

·         SOPA claims can be challenged on jurisdictional grounds or can be settled at the end of the contract if there has been an overpayment
Alternative dispute resolutions ·         Many alternative dispute resolution professionals are not taking new appointments. This can create a delay in parties complying with the relevant dispute resolution clauses

·         Parties may consider teleconferences or videoconferences to resolve disputes, rather than physically meeting
Courts ·         Many courts are operating via videoconferencing, with physical appearances limited

·         The court process may have more delays than usual as judges and parties adjust to the temporary measures of case management

·         Where a party is seeking urgent injunctive or other relief, it is important to seek legal advice as soon as possible to ensure that an application can be made efficiently and protect your interests
Contract termination ·         If you are seeking to terminate the contract it is important to terminate in accordance with the contractual provisions and to consider any common law rights or duties in relation to termination

·         Those seeking to terminate where the counterparty has become insolvent will also need to be aware of the recent insolvency changes and the restrictions on terminating pursuant to insolvency

 

 

Prevailing in a “Battle of the Forms”

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Late last year Bradbury Legal was successful in representing its client in the case of Samios Plumbing Pty Ltd v John R Keith (QLD) Pty Ltd [2019] QDC 237 (29 November 2019). The case related to a “Battle of the Forms” where the Court found that our client’s terms and conditions governed the relationship between the parties for the supply of goods, rather than the purported terms and conditions of the other party.

The Facts

Samios Plumbing Pty Ltd (Samios) sent John R Keith (QLD) Pty Ltd (JRK) their standard credit application form used to establish a credit facility. This was not an offer capable of acceptance but an invitation to treat. In February 2010, JRK sent a facsimile to Samios enclosing a cover letter, Samios’ completed credit application form as amended by JRK’s financial controller and JRK’s standard terms and conditions.

Samios’ credit application included the sentence “All goods shall be sold in accordance with the “STANDARD TERMS AND CONDITIONS” as outlined on the purchase Invoice”. This sentence was struck out and initialled by JRK’s financial controller.

Later that month, JRK received a letter from Samios stating that its credit application had been approved and JRK subsequently placed orders.

JRK contended that the credit application (accompanied by JRK’s standard terms and conditions) was an offer to enter into an agreement for the future supply of goods on credit. The amendment to Samios’ credit application meant that JRK’s offer excluded Samios’ standard terms and conditions and substituted them with JRK’s standard terms and conditions. As such, JRK argued that Samios’ letter accepted that offer and all goods supplied by Samios were subject to JRK’s standard terms and conditions.

Samios denied that the credit application was an offer to enter into such an agreement. It contended that the credit application was a request that Samios extend credit to JRK for future orders and that each purchase order from JRK was a separate offer to purchase goods. For this reason, Samios contended that all goods were supplied with a delivery docket that referred to its standard terms and conditions available on its website and that JRK accepted each offer by taking delivery of the goods.

Decision

Barlow QC of the District Court of Queensland found that:

  • it was clear from JRK sending the credit application to Samios with its standard terms and conditions that it was an offer by JRK to enter into a contract for the provision of credit for the purchase of goods in the future;
  • by striking out Samios’ term that all purchases be made on Samios’ terms and conditions and including a copy of JRK’s own terms and conditions, JRK was offering to enter into a credit agreement on its own terms and conditions;
  • Samios’ letter approving JRK’s credit application, clearly conveyed to any reasonable business person, that Samios was accepting JRK’s offer to contract on the terms stated (i.e. JRK’s standard terms and conditions); and
  • thus, the credit agreement between JRK and Samios governed the terms of all subsequent orders and supplies of goods between the parties.

His Honour also considered Samios’ submission that the provision of a delivery docket with each order which made reference to Samios’ terms and conditions constituted an offer to supply goods on those terms. His Honour determined that the delivery dockets were not an offer to enter into a contract on Samios’ terms and conditions. Rather, as JRK’s orders were made using its own purchase order form and included a copy of JRK’s standard terms and conditions, by Samios’ conduct in delivering the goods in accordance with the purchase orders, Samios’ accepted JRK’s standard terms and conditions as governing the purchase order.

Key Takeaways

The scenario described above is not uncommon. Another example of where a ‘Battle of the Forms’ can arise is where a party provides a quotation that is subject to its standard terms and conditions and then the other party provides a purchase order stating that its own standard terms and conditions apply.

To avoid the ambiguity that these scenarios create and to minimise the chances of being involved in a costly dispute, it is important that it is clear which terms and conditions govern the relationship between the parties. The case law demonstrates that if parties proceed without agreeing on which terms and conditions apply, usually it will be determined that the last terms and conditions to be exchanged govern the relationship. While in these circumstances there is no express acceptance by a party of the offer of the terms provided by the other party, the court can find that there has been acceptance by conduct.

A worthwhile consideration if you are entering into an ongoing relationship that will involve multiple transactions is an “umbrella” or “master” agreement that sets out the terms and conditions that will apply to the future orders and supplies.

If you or someone you know wants more information or needs help or advice about avoiding a “Battle of the Forms”, please contact us on +61 2 9248 3450 or email [email protected]

A copy of the case can be found here:

http://www.austlii.edu.au/cgi-bin/viewdoc/au/cases/qld/QDC/2019/237.html?context=1;query=john%20r%20keith;mask_path=