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Prevailing in a “Battle of the Forms”

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 info@bradburylegal.com.au

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=

 

 

ADR Processes

 

ADR Processes: What are they and how do they work?

 

In many construction contracts, it is common to have a clause that deals with the process the parties will go through if a dispute arises. These clauses attempt to provide an alternative dispute resolution (ADR) process to litigating over every dispute that arises. While there are some disputes that are suited to being litigated (such as where a specific legal remedy is needed, the subject matter involves the legal rights of the parties or the issues are legally complex), many can be resolved through an ADR processes. ADR processes, if effective, can reduce the time and cost of disputes for parties.

 

This article discusses the different types of ADR processes and Part II will address some of the common pitfalls of ADR clauses that render these clauses unenforceable.

 

Types of ADR processes:

 

When it comes to construction disputes, there are several standard types of ADR processes. These include:

 

  • Negotiations between senior executives or authorised representatives;
  • Mediation;
  • Arbitration; and
  • Expert determination and appraisal.

 

Negotiations

 

Negotiation between senior executives is the most simple and informal dispute resolution process. The senior executives or authorised representatives meet and discuss the dispute that has arisen. Using their best endeavours, the authorised representatives can talk about how the dispute may be resolved and attempt and find any potential compromises. While the discussions may not necessarily resolve the dispute, it gives the parties a chance to hear the other side and understand the issues faced by the other party. This can help narrow the issues that are in dispute between the parties, saving significant time and money if the dispute escalates to litigation.

 

Mediation

 

The next step in the ADR ladder is mediation. Mediation is slightly more formal than negotiations between the parties’ authorised or senior representatives. This is because mediation involves appointing a third party (the mediator) to meet with the parties and work to resolve the dispute. The mediator will discuss the positions and interests of each party and try to find common ground on which the parties can agree and tries to help facilitate a resolution of the dispute.

 

One of the biggest benefits of mediation is the fact that it is so flexible in the resolutions that can be generated in response to a dispute. For instance, parties can find creative or unorthodox solutions to their problems which would not be available if the dispute were to be litigated. At mediation, the parties have the control over the resolution of the dispute and can work together to create a solution that is potentially more appropriate than a court order.

Arbitration

 

Arbitration is a common dispute resolution process in the building industry. Between commercial parties, arbitration can be an effective alternative to court because it operates much like a Court. The Commercial Arbitration Act 2010 (NSW) sets out the various matters relating to domestic commercial arbitrations including the arbitrator’s powers and the appeal process. The decisions of arbitrators are binding and the resulting awards can be enforced by the Courts.

 

Arbitrations can sometimes be as expensive and time consuming as litigation. This is because of several factors such as the cost of hiring an arbitrator and decisions are often appealed. However, some of the benefits of choosing arbitration include that it can be confidential and allows the parties to have more control over the rules and procedures that resolve the dispute. Subject to any overriding arbitration legislation or rules, the parties can essentially decide how they want the determination to run, how many arbitrators they want involved or any grounds of appeal.

 

Expert Determination

 

Another ADR process discussed in this article is expert determination. Expert determination can be binding, or non-binding (dependent on the rules of the particular expert agreement or contract that sends the parties in dispute into that forum). Unlike arbitration, there is no statutory framework for expert determination or appraisal. Therefore, it is the contract that will guide the expert and their decision. Using an expert to make a final and binding decision is useful, as the majority (if not all) building disputes will rely on expert evidence to determine issues such as program, defects or rectification costs.

 

Using non-binding expert determination can prevent or reduce the need for a court to consider these technical issues and can simplify the litigation process. A potential drawback for expert determination is that it can be very difficult to challenge. Provided the expert has understood the scope of their obligations and the issues they need to review, it often will not matter if the expert made a mistake, a gross over or under valuing or if irrelevant considerations were considered. As stated by the NSW Supreme Court in TX Australia Pty Limited v Broadcast Australia Pty Limited [2012], the fundamental question is whether the exercise performed by the expert in fact satisfies the terms of the contract.

 

It is not uncommon for a dispute resolution clause to have multiple different ADR processes available to the parties. For example, parties may be required to enter negotiations with each other and then must proceed to mediation or arbitration. Therefore, it is important to understand the aspects of each different ADR process so that you can choose the one most appropriate for your business. Each ADR process has its benefits and its drawbacks and will be more effective for certain types of disputes. In the Part II of this article, we will look at dome of the common pitfalls of ADR clauses. Particularly, how you ensure that the clause is enforceable, the key aspects of the ADR clause, and what are the common issues that arise when negotiating an ADR clause.

Contractual interpretation: What did we even agree upon?

It is the question as old as human trade and commerce: when we made that agreement, what did we mean?

This is a deceptively simple question. It may appear to parties with amicable relations that the meaning of a document is clear, but when a dispute opens up, what tends to happen is that each party will stretch every definition to suit its purposes.
As will become clear, courts are still grappling with difficult questions about how an agreement should be interpreted, and what evidence put forward by the parties can be considered to discern its meaning.
We consider some basic principles to do with contractual interpretation, and look at a recent example of the circumstances in which courts will look at negotiations between the parties and the effect this has on the meaning of the agreement.

Basic principles

Where there is a written contract between two parties that are legally represented and commercially experienced, the law will likely consider this contract to be the complete statement of their legal rights and obligations. In some cases, a contract may be both oral and in writing, but proving this is onerous.
As a result, where there is a dispute, the contract is the first thing that the lawyers and judges will consider. The contract is considered to reflect how the parties intended to allocate risk.
When looking at a contract, the court will assess and interpret the contract to give effect to what is called the objective intention of the parties. This is not what was actually in the minds of the parties. Rather, it is what a reasonable person, a third-party bystander, would understand the words or actions of the parties to show about the parties’ intention.
In the commercial context, this means the court will look at the words used in drafting the contract and determine what they mean to a reasonable businessperson informed about the circumstances of the case.

But wait there’s more

What is said above does not mean that the actions of the parties are irrelevant. Far from it.
In fact, it is sometimes necessary for courts to consider the surrounding circumstances of an agreement, so that they can determine what the intentions of the parties are with respect to what exactly constitutes the agreement and what its terms mean.
This might seem contrary to the court’s tradition of only looking at the contract. However, it will generally only be done when there is ambiguity in the words of the contract.
For example, in Toll (FGCT) Pty Ltd v Alphapharm Pty Ltd (2004) 219 CLR 165, the High Court stated that it is not what the parties think about their rights and obligations that govern contractual relations. Rather, it is the words and conduct of each party that would lead a reasonable person in the position of the other party to believe.
Ten years later, the High Court again commented on the use of evidence outside the contract in Electricity Generation Corporation v Woodside Energy Ltd (2014) 251 CLR 640. In this case, the High Court said that evidence of the parties’ actual (subjective) intentions is not relevant to construction. What is relevant is the evidence of surrounding circumstances known the parties.
External circumstances can be considered by the courts when interpreting contracts between disputing parties.

So how does this all work?

If courts are supposed to consider the contract as the full statement of the parties’ rights and obligations, but they are able to look at circumstances beyond the contract, how does a judge determine what is the agreement?
Firstly, the contract is still the primary document that is interpreted. The evidence considered by a court of what has been said or what has happened outside of the contract cannot be used to give the contract a meaning that is contrary to what the contract clearly states.
Put another way, evidence outside of the contract cannot be used to add to, vary or contradict the language of the written contract. This is the case no matter how unjust or inconvenient the written terms are. This makes sense, as effective relations depend on the meaning of an agreement being fixed and clear.
Permitting outside factors to change the meaning of a contract introduces significant uncertainty. As any businessperson will know, where there is uncertainty there is conflict. A party could for example attempt to impose its own view on the meaning of the document. External conduct is used to make the meaning of the contract clearer, not to change it. In practice, however, the line between these two can be very difficult to draw.
Secondly, matters outside of the contract become relevant only where there is ambiguity or more than one meaning in what is inside the contract. Words may have different meanings in different contexts, so the context is important in choosing the right interpretation.
To this end, courts may consider the commercial purpose of the contract, the market and industry in which it arose, and the factual background of the agreement. All of this can shed light onto what the parties “must have” intended when they drafted the contract.
It is important to note that courts will only consider outside circumstances that are known to both parties.
However, courts will only consider these factors if the meaning of the written document is not clear. Negotiations that occurred prior to the signing of the agreement are also rarely considered, for the simple reason that they do not often show what was agreed.

For example …

Cherry v Steele-Park [2017] NSWCA 295 was a case that turned on the meaning of a deed of guarantee. Specifically, whether this deed of guarantee required the guarantor to pay the damages that resulted from the failure of their company to complete a contract for sale of land. The guarantor argued that the deed only covered the amounts promised for extending the contract’s completion date. The difference was around $145,750.
The case appeared to challenge the principles talked about above.
The argument was around whether the meaning of term had to be ambiguous before a court would admit evidence outside of the contract to explain its meaning. What happens when a term that appears to have a plain meaning “becomes” ambiguous only when outside material is introduced?
The answer is that as long as the evidence is relevant as information about the genesis or purpose of the transaction, it can bear on the contractual language and can be considered. Then the court will make a conclusion about whether the written terms are clear or ambiguous.
In Cherry v Steele-Park, Cherry wanted to include in evidence emails exchanged between the parties, that represented negotiating positions that were communicated between the parties. (As a side note, it was important that both parties knew about these emails when entering the contract.)
The Court considered the emails. However, the case ultimately reinforces not challenges the conclusions talked about above. The interpretation of the clause given by the court ultimately did not bend to what was said in these emails.
Rather, the Court considered as primary the terms and the structure of the contract, including the definitions and the generality of their language. The interpretation put forward by Cherry was some but clearly not all of the guarantee.
The Court concluded that the emails did not defeat “the wide words in the Guarantee”. The emails showed that there may have been a commercial purpose to make a limited guarantee. However, this context could not overcome the content of the Guarantee. Or, as Leeming JA stated, “such context – even relatively powerful evidence of context such as the present – does not warrant doing the violence to the general language of the document executed by them that they require.”
It was in effect a warning, that regardless of how persuasive evidence of negotiations is, it will not limit or take away from what is stated in a contractual document.

Conclusion

Prevention is always better than the cure. In the early stages of a commercial agreement, a little expense given to ensuring a contract tabled between the parties truly expresses your intentions goes a long way to preventing protracted disputes.
Problems can arise even between parties with a great relationship, and as discussed, once a problem does arise courts will be very reluctant to look beyond the written document that was exchanged. What this written document says will be of paramount importance, so it is worth the extra attention.
If you or someone you know wants more information or needs help or advice, please contact us on +61 2 9248 3450 or email info@bradburylegal.com.au

The Parties’ Minds over Matter: terminated contract versus quantum meruit

The High Court of Australia has recently handed down a rare and significant judgment in the area of building and construction law.
A story that began with the construction of two townhouses in Victoria has led to the shaking of the foundations of the law around contract, repudiation and claiming a quantum meruit.
This decision affects the common situation in which a builder and a developer have a torn-up contract, and the builder is claiming payment for the work they started but were not able to finish.
We explore Mann v Paterson Constructions Pty Ltd [2019] HCA 32 below and provide an overview of the key takeaways from this ruling in relation to quantum meruit.
The High Court also considered some interpretation issues in relation to the Victorian Domestic Building Contract Act 1995. These are not considered here.

Quantum meruit

Before analysing the case, it is useful to outline what is a claim for quantum meruit.
A claim for quantum meruit, is a claim for a fair and reasonable sum for services rendered, where a developer requests and receives a benefit from a builder.
This is not a claim in contract, which is a claim by Party A to be given that which Party B promised or agreed to give.

Where a contract is still alive between the parties, a claim for quantum meruit is not permitted. Some of the situations in which a claim in quantum meruit may be brought include:
(a) a contract never existed between the parties;
(b) statute prevents a claim in contract, because for example the agreement was for residential building work but it was not in writing; or
(c) a contract was in existence but was void or unenforceable.

Case (c) above was the subject of Mann v Paterson Constructions. In this case, the contract was terminated, so it no longer applied between the parties.
An issue that has been plaguing courts for some time is the following: in a claim for quantum meruit, what if a “fair and reasonable sum” for services performed is greater than what the parties agreed to under the contract? Should the claim be limited to what was agreed to by the parties, even if that agreement was ripped up?
It was an inevitable prize fight between contract and quantum meruit, with a purse of several hundred thousand dollars at stake.

The facts

On 4 March 2014, Peter and Angela Mann (the Manns) entered into a Masters Builders Association domestic building contract (Contract) with Paterson Constructions Pty Ltd (Paterson). Under the Contract, Paterson was to build two double-storey townhouses in Blackburn, Victoria. The Manns were to pay Paterson the amount of $970,000 (incl. GST). During the performance of the Contract, the Manns requested 42 variations without giving the required written notice. Paterson performed these variations.
On 16 April 2015, a little over one year into the project, the relationship between the parties had deteriorated, primarily over claims that variations had been completed and had to be paid.
The Manns through their solicitors wrote to Paterson, stating that they considered the contract to have been repudiated by Paterson. Repudiation occurs where a party demonstrates that it is unwilling or unable to perform important parts of the contract. The Manns “accepted” this repudiation and said that they terminated the Contract.
Paterson denied that its conduct had been repudiatory. After some correspondence, Paterson claimed that the Manns’ purported termination was in fact repudiation by the Manns. Paterson said that as a result, it terminated the Contract.

The case history: from VCAT to the High Court
Paterson commenced proceedings in the Victorian Civil and Administrative Tribunal, seeking damages.
Senior Member Walker of VCAT found that the Manns had wrongfully repudiated the contract. Paterson was awarded damages on a quantum meruit. Once rectification of defects was considered, damages were $660,526.41.
The remarkable aspect of the ruling was that the damages awarded to Patterson for quantum meruit were much higher than the contract price that Paterson would have been entitled to had the Contract remained alive. Senior Member Walker was acutely aware of this, but considered the damages to be a fair and reasonable sum.
The Manns appealed first to the Supreme Court of Victoria, however Cavanough J dismissed the appeal. The Manns then appealed to the Court of Appeal.
The Manns argued that the decision-makers had made an error. They argued that the error was that the decision-makers had decided that where a contract is terminated, it is as though it never existed and, as a result, they did not have to consider the costs actually incurred by the builder carrying out the work or the discrepancy between the amount awarded and the contract price.
The Court of Appeal also dismissed this appeal, ruling that only the High Court could overturn a principle that was said to be well-established. Not to be swayed, the Manns embarked on this challenged and took their case to the High Court.

The High Court judgment

All seven judges allowed the appeal. After two unsuccessful appeals, the third and last appeal by the Manns was a success.
The seven judges accepted that the law as currently interpreted had to be corrected.
Three judges refused to allow a claim on a quantum meruit where a contract between the parties had been terminated.
The four other judges accepted that a claim for quantum meruit could be made in limited circumstances: where work was commenced but not completed at the time of termination. However, any claim for quantum meruit was limited by the contract price that was agreed to by the parties.
Where the contract required the principal to pay only once for the “entire” work and labour performed by the contractor, and the contract is terminated before completion, then the contractor will be able to claim for all of the work it completed on a quantum meruit. This is because at the time of termination, the contractor had not yet accrued the contractual “right” to be paid – it had not completed all of the work.
However, the situation was different for the case of the Manns. Under their Contract, the principal was required to pay separate sums upon completion of certain stages of the work and labour. Paterson had fully completed some of these stages, while there was at least one stage which remained incomplete at the time of termination.
The majority decided that for completed stages, these could only be claimed under the contract, and damages would be assessed by reference to the contract price. It was only the incomplete stage that could be claimed on a quantum meruit.
The other important finding by the majority was that the amount to be claimed on a quantum meruit should not in the ordinary case exceed a fair value calculated in accordance with the contract price. This judgment left open the possibility of exceptions, including for example where constant breaches by a principal resulted in a huge cost overrun by the builder.
The Court was at pains to point out that, where a contract is still alive between the parties, parties cannot claim on a quantum meruit for a reasonable sum for the services rendered. The parties made an agreement that is still enforceable. That is all that courts will enforce.
What the decision did not resolve was the common case where a contract provides for progress payments, which are made on account only and are not final entitlements. This issue might be before the superior courts before long.
Conclusion

In some very complicated and differing judgments, the High Court has given a lot of clarity to an issue that has clouded the minds of lawyers, tribunal members and judges alike.
Builders and developers should be aware that even if there is no contract, where work is requested by developer and completed by a contractor, there will be a good case for a claim for damages.
Where a contract existed between parties at some point, this will be a significant factor in calculating the amount of damages, even where it is terminated.
If you or someone you know wants more information or needs help or advice, please contact us on +61 2 9248 3450 or email info@bradburylegal.com.au

Expertly building evidence: Lessons learned from White Constructions

Case note: White Constructions Pty Ltd v PBS Holdings Pty Ltd [2019] NSWSC 1166

In White Constructions, Hammerschlag J considered the issue of delay damages. White Constructions was the property developer of a site in Kiama NSW. The development involved the development and subdivision of 100 lots and required design and installation of sewer infrastructure. These works required a s 73 Certificate issued by Sydney Water before subdivision could occur. White Constructions appointed the Defendants to assist with the design and approval works needed as part of the development and resulting subdivision. A substantial part of the judgment was devoted to the preparing and designing of the sewer designs and the approval of Sydney Water, including the different types of sewage systems, Sydney Water’s preference in relation to these systems, preparation of option reports and correspondence between the Superintendent, the Defendants and Sydney Water.

The discussions between Sydney Water, the Superintendent and the Defendants took considerable time. As a result, White Constructions alleged that the delay in coming to the approved sewage design caused White Constructions to be liable to their building contractor for delay damages. In arguing the substance of the dispute, the parties tendered complex expert evidence. As a result, the Court appointed an expert to assist in interpreting and assessing the expert evidence presented.

With the expert’s assistance, Hammerschlag J criticised the experts’ approach to determining the delays attributable to the sewage works. Both experts used methods derived from the United Kingdom Society of Construction Law, the Delay and Disruption Protocol (the Protocol) in analysing the delay. The Protocol identifies six different methods of delay analysis, but Hammerschlag J held that the inclusion of a delay analysis method in the Protocol does not necessarily mean it should be used. While the Protocol methods have been endorsed in other cases, the analysis of delay must pay close attention to the actual evidence of what was happening on the ground of the project. The delay analysis must show and prove that, on the balance of probabilities, the delay:
• played a role in delaying the project;
• how it delayed the project; and
• how much it delayed the project.

This approach is in line with the common law common-sense approach to causation which the High Court referred to in March v E&MH Stramare Pty Ltd (1991) 171 CLR 506.

A lot of value in White Constructions comes from Hammerschlag J’s analysis of what evidence is needed in cases where delay is alleged in construction matters. Firstly, the Court stated that close attention must be paid to the facts of the matter, rather than the opinion of experts. This evidence should not be general in nature, but specific in that it is able to precisely identify delays in the project. This evidence should be a contemporaneous record of the project. A classic example of this kind of evidence is a site diary which records the day to day of the project, as well as specific cause and effect of each delay.
• what works were undertaken/completed;
• the instructions received from the client;
• the delays/any complaints of delays and how they have affected other activities;
• which personnel were onsite; and
• any other relevant details

The Court found that it was important that the contemporaneous record identified which activities were adversely affected by the delays. For example, if the works of one contractor were delayed and, as a result, caused delay for another contractor, the site diary should record these details. Failing to record these details means that it is harder, if not near impossible, for parties to establish that there was in fact a causal link and adverse effect.

How does White Constructions impact a project?

White Constructions shows the importance of proper project documentation. Most importantly, the site diary, or similar contemporaneous document, should be the primary record of the specific of what is happening on site and how specific events affect different contractors. Proper record keeping, while it may be administratively burdensome, allows the Court to analyse and determine the proper entitlements of the parties if the project ever comes into dispute. While other evidence can be adduced in pursuit of proving delay, it runs the risk of being generalist in nature and not enough to prove the causal link of the delays.

The lessons learned in White Constructions may also have some application in respect of other delay related mechanisms under construction contracts. For example, a comprehensive site diary would also be useful in determining any claim for an EOT claim. However, it is important to note that these types of claims are largely determined by the contract and its processes for determining what is in fact an EOT. Nevertheless, contemporaneous records of what has happened and how this has affected the project is useful in establishing a claim by a party as to their entitlements.
Another important point that comes from White Constructions is ensuring experts are given the proper lay evidence to ensure that they can properly opine on the project. While it does not displace the role of lay evidence such as site diaries, it can assist in assisting the Court in considering and making appropriate decisions on what the parties are entitled to.

If you or someone you know wants more information or needs help or advice, please contact us on +61 2 9248 3450 or email info@bradburylegal.com.au.

What’s in a name?: The Supreme Court Reviews ambiguity in SoPA Payment Claims

Those who are familiar with the Building and Construction Industry Security of Payment Act 1999 (‘the Act’) will likely be aware that the provisions it contains are quite strict, and can leave parties out in the cold when they fail to comply with what are seemingly administrative oversights.

However, the overarching purpose of the Act is ultimately to keep money flowing through the construction system, aimed at ensuring those who perform building and construction works, or supply goods and services to construction projects are able to be paid.

The Supreme Court of New South Wales, in the recent decision of decision Modog Pty Ltd v ZS Constructions (Queenscliff) Pty Ltd [2019] NSWSC 1743 reminded parties of this fact when asked to turn its mind to issues of ambiguity in payment claims and whether a party could be allowed to have an adjudication determination quashed on the basis of technicalities.

The Facts

The facts of the case were reasonably clear and did not form a substantial component of the dispute between the parties. In September 2016, Modog Pty Ltd (‘Modog’) entered into a design and construct head contract with Wyndora 36 Pty Ltd (‘Wyndora’) for the development of senior living apartments at a property located along Wyndora Avenue in Freshwater. Modog then entered a sub-contract with ZS Constructions (Queenscliff) Pty Limited (ZS Queenscliff) for the demolition of the existing structure and the construction of the new seniors living complex, including apartments, basement parking and associated site works (‘the Sub-Contract’).

In March 2018, the Sub-contract was varied to engage ZS Queenscliff to provide Construction Management and procurement services, for which ZS Queenscliff would receive a project manager’s allowance, a contract administrator’s allowance and payments for subcontractors and suppliers to be made at the end of each month.

ZS Queenscliff was part of a wider group of entities, which also included ZS Constructions (Australia) Pty Ltd (‘ZS Australia’) and Zaarour Investments Pty Ltd had been engaged as the project manager for the project. Mr Christopher Zaarour was employed by ZS Queenscliff, was the director of ZS Constructions Pty Ltd and was the primary contact with Modog for the duration of the project.

The further sub-contracts on the project were administered by ZS Queenscliff, however invoices from sub-contractors had historically been issued to a mixture of Modog, Wyndora and ZS Australia, as opposed to ZS Queenscliff. During the course of the project, ZS Queenscliff and Modog adopted a progress payments process in which Mr Zaarour would, on behalf of ZS Queenscliff, prepare and email a payment summary sheet listing all amounts due for procurement and management services, as well as materials acquired, and work completed by trade contractors.

On 29 August 2019, Modog issued a Show Cause Notice to ZS Queenscliff and terminated the Sub-contract on 13 September 2019.

The Payment Claim and Adjudication

On 11 September 2019, ZS Queenscliff served a payment claim on Modog which was comprised of seven emails, from Mr Zaarour using an email signature from Zaarour Sleiman and containing a reference to ZS Australia in fine print at the bottom of the email.

The emails attached supporting invoices from suppliers, and followed the process adopted in earlier progress payments, where sub-contractors and suppliers had addressed their invoices to a mixture of the entities involved with the project, and not to ZS Queenscliff, who were issuing the payment claim.

The payment claim served on Modog was, as highlighted by the Court, unclear in the following respects:

  • It did not specifically assert that it was a progress payment claim under the Act;
  • It did not specify the reference date or refer to the clause within the contract upon which the progress payment was based;
  • It failed to ask Modog to pay ZS Queenscliff;
  • It did not include a total for the sum claimed, only determinable by a thorough review of the claims

Modog, in turn responded to the payment claim with payment schedules which certified the amount payable in respect of the Claim was nil.

The matter proceeded to an adjudication, where, on 23 October 2019, the adjudicator found in favour of ZS Queenscliff in the sum of $89,111.89 (GST incl.).

Modog challenged the decision of the adjudicator before the Supreme Court of Sydney, seeking orders that the Adjudication Determination of be deemed void, that the determination be quashed, and ancillary relief.

The Disputed Issues

At the hearing, Modog challenged the decision of the adjudicator on 3 primary grounds:

  • Whether the 11 September 2019 emails constituted a payment claim within the meaning of s13(1) of the Act;
  • If the emails did constitute a payment claim, whether the claim was sent by ZS Queenscliff as a person who was entitled to seek a determination for the purposes of s17 of the Act; and
  • Whether the Adjudicator has committed a jurisdictional error by allowing multiple payment claims in respect of a single reference date?

The Arguments, Decision and Reasoning

Issue 1: Was there a Payment Claim:

The argument advanced by Modog was effectively, ZS Queenscliff had not submitted a valid payment claim as they did not specifically demand payment from Modog (i.e.: did not say, Modog must pay ZS Queenscliff the sum of $X.). Modog relied on the fact that the invoices provided in support of the payment claim, were addressed to various entities, not ZS Queenscliff, and that ZS Queenscliff could not establish they were actually entitled to the money claimed for.

Modog argued that ZS Queenscliff had indicated invoices would be sent at a later time, which Modog was to pay as directed and that, pursuant to the Court’s decision in Quickway Constructions Pty Ltd v Electrical Energy Pty Ltd, ZS Queenscliff had not served a payment claim pursuant to clause 13(1) of the Act.

The counter argument raised by ZS Queenscliff relied upon the case of Icon Co NSW Pty Ltd v Australia Avenue Developments Pty Ltd [2018] to support their position that Modog had simply misunderstood the payment claim, and that this could not be a basis for quashing the adjudicator’s decision. ZS Queenscliff argued the fact that the invoices were addressed to other parties did not invalidate the payment claim as they were simply disbursements to be paid to suppliers.

Ultimately, the Court favoured the position raised by ZS Queenscliff, noting there is nothing within the Act that requires a payment claim to state the total of the sum claimed. The Court stated and that even if the invoices in support of the payment did require Modog to direct payment elsewhere, as long as ZS Queenscliff had an entitlement to the sum under the contract, this did not invalidate the payment claim itself.

Issue 2: Was the Payment Claim Sent by ZS Queenscliff?

Modog then raised the issue that, as the 11 September 2019 email enclosing the payment claim was sent by Mr. Zaarour, using an email signature that did not belong to ZS Queenscliff, and the only legal entity named in the email was ZS Australia, the payment claim had not been served by the appropriate entity for the purposes of s17 of the Act.

The counter argument raised by ZS Queenscliff was that these errors were irrelevant in light of the fact that the previous correspondence between the parties had been exchanged in much the same way, including when detailing the terms of the caries contract agreements, and the point was not taken at the contract negotiation stage.

The Court ultimately agreed again with ZS Queenscliff, making the point that not was not actually disputed that ZS Queenscliff was entitled to make the payment claim and made the determination that the email payment claim had simply been sent by Mr Zaarrour in his capacity as the project manager, on behalf of ZS Queenscliff.

Issue 3: Was there an issue with multiple emails being used to comprise the payment claim?

Finally, Modog sought to raise the point that multiple invoices had been served on them in the emails from ZS Queenscliff and that it was not open for ZS Queenscliff to seek to have all invoices adjudicated.

Relying on the decision of the court in Rail Corporations of NSW v Nebax Constructions [2012] NSWSC6, this point ultimately failed as well, on the basis that, when viewed in the context of the previous conduct between the parties, and the nature of the invoices supplied, Modog had been more accurately provided with one payment claim, and a number of invoices in support of the claim.

What does this decision mean?

This decision serves as a timely reminder to parties that the Building and Construction Industry Security of Payment Act 1999 (‘the Act’) is intended to allow money to flow through to sub-contractors. Parties should be mindful of this purpose when considering whether to attempt to argue a payment claim on the basis of a minor technicality or ambiguity.

If you or someone you know wants more information or needs help or advice in relation to NSW’s security of payment legislation (or any other state’s or territory’s equivalent), please contact us on (02) 9248 3450 or email info@bradburylegal.com.au.

See more! The superintendent and the principal

To those working at building sites, the term “superintendent” may seem as familiar and self-explanatory as “extension of time” or “practical completion”.

However, when disputes arise fine distinctions become important. Even experienced builders, just like experienced judges, have trouble working out what the superintendent is required to do in contentious times.

This is because the superintendent has multiple duties to different parties. They have the difficult job of navigating conflicting interests, and this becomes much harder when the relationship between the principal and contractor has deteriorated.

Although the precise duties of a superintendent will always depend on the terms of the contract, we will describe in general terms some obligations that participants in a building project must be aware of. We will also take a real-life case study to illustrate some of these points.

The role

Sometimes called “contract administrator” or “architect”, the superintendent’s precise role will vary as it is largely determined by the terms of the contract between the principal and the contractor. The parties may agree by contract to restrict or widen the superintendent’s functions, and courts will generally allow this.

However, there are a number of general commonalities to this role across different projects. In most cases, the superintendent has a dual role or function:

  1. On the one hand, the superintendent will often be the agent of the principal, and will perform functions on behalf of the principal such as issuing directions to the contractor, varying the scope, of works, making approvals, or receiving notices;
  2. On the other hand, the superintendent will often be responsible for certifying, assessing and valuing items under the contract, including progress claims, extension of time claims, liquidated damages, and practical completion.

The principal is required to ensure that for the second set of functions above, the superintendent act “honestly and fairly” (or otherwise, “reasonably and in good faith”).

Often this is an obligation to exercise impartial and independent judgment, and to reach a decision without taking improper considerations into account. They should afford procedural fairness to both parties, giving notice of the issues it is considering and allowing both parties to communicate to them their submissions.

In general, for these second set of functions, the interests of not only the Principal, but also those of the Contractor, must be considered. All too often, superintendents fail to understand their obligations of independence and this triggers court proceedings.

In practice, this dual role can be complicated. Superintendents are generally appointed by the principal. They are very often either a part of a firm consulting to the principal, or they are an employee of the principal. Even if there is no pressure exerted by the principal, they are paid by the principal. Exercising their judgment impartially in this context can be very challenging.

A superintendent is not a party to the contract. It is unlikely that they will themselves be the subject of court proceedings. However, their decisions may give rise to disputes as between the principal and contractor.

Case Study

The New South Wales Court of Appeal has given some guidance for what is considered appropriate action by a superintendent under a construction contract, in the case Peninsula Balmain Pty Ltd v Abigroup Contractors Pty Ltd [2002] NSWCA 211.

Peninsula and Abigroup entered into an AS2124 building contract. Abigroup sought payment of a progress claim. The following month, Peninsula issued a notice to Abigroup requiring Abigroup to show cause that a contractual right to terminate should not be exercised, and cross-claimed for liquidated damages under the contract.

In response, Abigroup moved to terminate the contract, claiming that Peninsula had breached the then Trade Practices Act (which has since integrated into the broader Australian Consumer Law), for failing to disclose an agency agreement for design and construction projects between Peninsula and the superintendent.

The Court considered the whether Peninsula contravened the Trade Practices Act for failing to disclose to Abigroup the agency agreement with the superintendent?

On appeal, Hodgson JA held:

“the superintendent is the owner’s agent in all matters only in a very loose sense, and that, when exercising certifying functions in respect of which the superintendent must act honestly and impartially, the superintendent is not acting as the owner’s agent, in the strict legal sense.”

The Court concluded that the superintendent is to exercise their power in the interests of both parties and, is to act honestly and impartially and not as an agent of the owner in undertaking certifying functions such as assessments of variations, delays and progress claims.

There was also an argument that the superintendent should have but failed to exercise its power to award an extension of time. It was common ground that Peninsula Balmain had caused delay, but that Abigroup had not applied for the extension of time or followed the proper procedure. However, the extension of time clause included a paragraph that read: “Notwithstanding that the Contractor is not entitled to an extension of time the Superintendent may at any time and from time to time before the issue of the Final Certificate by notice in writing to the Contractor extend the time for Practical Completion for any reason.”

Hodgson JA found that, even though Abigroup had not applied for the extension of time, “this power is one capable of being exercised in the interests both of the owner and the builder, and in my opinion the Superintendent is obliged to act honestly and impartially in deciding whether to exercise this power”. In the facts of the case, the finding was that if the superintendent had acted fairly and impartially, they would have awarded the extension of time. The date for practical completion was extended, and liquidated damages were reduced.

This ruling was dependent on the particular extension of time clause of the case, and the facts of the dispute. However, it powerfully reinforces the point that even though the superintendent is the agent of the principal, they are obliged to act honestly and fairly in discharging certain functions, unless the contract says otherwise.

Conclusion:

In conclusion, the role of a superintendent is very demanding and requires a high level of understanding of contract law, the responsibilities, the specifics of the project, and a high skill of identifying and managing conflicts. If you have any queries about your obligations under a construction contract, please contact us on +61 2 9248 3450 or email info@bradburylegal.com.au

 

 

Changes coming in October 2019

As we have covered in a previous article (see here), 2019 is the year of change for NSW’s security of payment legislation. In November 2018, the NSW Government passed the Building and Construction Industry Security of Payment Amendment Act 2018, which introduces significant amendments to the Building and Construction Industry Security of Payment Act 1999 (Act).

In July 2019 it was confirmed that these amendments would commence on 21 October 2019 (rather than in stages as previously speculated) and apply to prospectively to construction contracts entered in into after that date.

A more in-depth explanation of the amendments can be found in our previous article but as a refresher the key amendments to the Act are:

  • Officers from the Department of Finance, Services and Innovation have new powers to investigate, monitor and enforce compliance with the Act;
  • The concept of executive liability has been introduced, exposing directors and management to prosecution if a corporation commits an offence under the Act;
  • Tougher maximum penalties apply, especially in regards to failing to provide a supporting statement;
  • Jurisdictional errors made by adjudicators are reviewable by the Supreme Court (this confirms previous decisions of the courts);
  • Companies in liquidation can no longer serve a payment claim or seek to enforce them;
  • The reference date concept has been removed;
  • Payment claims must again state that they are made under the Act;
  • The due date for payment to subcontractors has been reduced to 20 business days (from 30 business days);
  • Residential owner-occupier exemptions in the Act have been removed; and
  • The threshold for retention moneys that must be held in a trust account has been reduced to $10 million.

What this means for you

As can be seen from the above, these new amendments are significant and wide ranging.  Parties involved in the NSW construction industry have just over one month to consider how these amendments will effect their business and construction contracts before they commence on 21 October 2019.

If you or someone you know wants more information or needs help or advice in relation to NSW’s security of payment legislation, please contact us on +61 (02) 9248 3450 or email info@bradburylegal.com.au.

I Fought the Law and I Won: construction contracts under SOPA

The New South Wales Supreme Court has delivered a judgment on an issue vital to any construction project: what is a construction contract under the Security of Payment Act (SOP Act)?

The respondent in an adjudication convinced the judge not to follow previous judgments on this point, so it is important that those involved in building stay up to date with this issue.

As the decision was about the unique Security of Payment Act regime, it will not directly apply to situations outside of SOP Act claims.

The ruling targets situations in which there is some understanding between two parties that construction work is to be done in exchange for remuneration, but where there is no clear oral or written contract spelling out the terms.

These cases sit right at the borderline of what the law will enforce and will not enforce. We discuss the case, where it sits among other similar cases, and what we can learn from it.

Case facts

The dispute was between two groups:

  • Timecon Pty Ltd (Timecon) which was the claimant; and
  • The unincorporated joint venture between Lend Lease Engineering Pty Ltd and Bouygues Construction Australia Pty Ltd (LLBJV), which were the respondents.

LLBJV was the principal contractor for the NorthConnex Project, which was constructing two nine kilometre road tunnels linking the M1 to the M2. The project involved excavation and tunnelling, which produces waste known as Virgin Excavated Natural Material (VENM), or “spoil”.

Throughout the project, LLBJV stored 201,700 tonnes of spoil at a site in Somersby, NSW. The site was owned by a company that had the same sole director as Timecon.

Timecon claimed that it entered into a contract or arrangement with LLBJV, for LLBJV to store the waste generated at the NorthConnex project at the Somersby site. Timecon claimed that such an arrangement was for $4.00 per tonne of spoil.

LLBJV claimed that there was no “construction contract”, or else that it had deposited the spoil at the site pursuant to a contract with another party, Laison Earthmoving Pty Ltd (Laison). Laison had been managing the site at the time.

At first instance in adjudication, Timecon had won an adjudication determination in its favour to the tune of $887,532.80 (incl. GST).

In the NSW Supreme Court review of this determination, LLBJV’s main argument was that the adjudicator had no jurisdiction to hear the matter, as there was no “construction contract” between the parties.

Key issues

The key issue was the definition of “construction contract”. The issue is clear cut when there is a written document signed by both parties that are involved in the adjudication, with construction work or goods being the subject matter.

More complicated is the situation in which one party has given to another party some measure of assurance or indication (often only verbal) that it will pay for such goods or services. How do you draw the line between negotiation and a construction contract?

Under the SOP Act in NSW, a construction contract is defined as:

a contract or other arrangement under which one party undertakes to carry out construction work, or to supply related goods and services, for another party.” (emphasis added)

All States and Territories except Western Australia and Northern Territory use this or a very similar definition, so the decision has wide implications.

Ball J found that before any other SOP Act questions can be asked, every claimant must ask themselves: is the arrangement “a legally binding obligation by which the claimant is entitled to be paid by the respondent for the services the claimant undertakes to provide”? (emphasis added)

The key part here was that to be able to use the SOP Act, there had to be a “legally binding obligation” for the respondent to pay for the work.

This did not necessarily have to be a contract. Though there are not many other examples, one is estoppel which if proven prevents businesspeople from going back on their word, even where there is no actual contract.

For Ball J, the rationale was that if Security of Payment regime could be used even where there was no underlying legal obligation to pay, then in all cases the claimant would have to later return the sum awarded by the adjudicator. His Honour considered that this cannot have been the intention of the SOP Act. It would also be difficult for adjudicators to draw the line between what types of non-legally binding arrangements were to be enforced, and which ones were not.

Back to the case

It was up to Timecon to prove that a contract or other legally enforceable arrangement was in place.

LLBJV and Timecon had exchanged some contractual documents, including a document called “Heads of Agreement” and a draft agreement that was sent “for review”. Both had left the price section blank. Later, LLBJV had even sent an execution copy of an agreement, which Timecon had not signed and returned.

Timecon pointed to a meeting at the Somersby site between a few of the interested parties. During this meeting, the director of Timecon gave the LLBJV representative a Heads of Agreement with the rates left blank. Someone proposed trialling the tipping of 50,000 tonnes of spoil at $4 per tonne.

Unfortunately for Timecon, Ball J was not satisfied with the director of Timecon’s presentation as a witness, as he had failed to address important points in his written evidence and gave evasive answers in person. His version of the meeting was disbelieved.

Moreover, the conduct of the parties subsequent to this meeting was not consistent with there being a legally enforceable arrangement. The director of Timecon had later sent emails asking if LLBJV was still interested in tipping spoil to the site, there had been an unexplained time gap between when an unsigned contract was finalised and when the deliveries of spoil took place.

There was also an issue that Timecon should have known that LLBJV had engaged another party, Laison, to perform the work.

As a separate issue, the tipping of spoil at the site was not construction work. Nor was it supply of related services, as it was not integral to construction work at the NorthConnex project. It was also not a “good”, as it was not a component of the relevant building, structure or work, and was not used in connection with carrying out construction work.

The decision of the adjudicator was void. Timecon walked away with nothing.

Conflicting authority

Unfortunately, this issue of what is a “construction contract” is not done and dusted. We may not know definitively how courts treat this issue until a Court of Appeal rules on this question.

This is because there have been three previous judgments that went the opposite direction and found that an arrangement that is not legally enforceable can still be the subject of adjudication.

Ball J acknowledged these cases, but did not consider them to be “binding”. His Honour’s interpretation was that these cases in fact concerned arrangements that were legal obligations. To the extent that they spoke to hypothetical situations, they were persuasive but not binding.

Upshots

One thing is common to all of these cases. They address the difficult situation in which Party A has made assurances or indications of some description to Party B that it will be paid, but there is no contract. This situation is right at the borders of when the SOP Act can be used and when it cannot be used.

The conflict in authority will make it difficult to predict how cases in the near future will end up. However, regardless of how the law is ultimately decided, there are a number of things that developers and builders can learn from Timecon v Lendlease Engineering to avoid being in this grey area.

The first regret of Timecon will be assuming that contractual documents will be “sorted” down the line. It had a chance to sign and return the contractual documents but failed to do so. This was apparently because it still had to test the capacities of the site to take spoil. However, this non-response led LLBJV to look elsewhere and no contract was signed.

Timecon’s failure to seal the deal or at least keep negotiations going was largely why it did not get the result it wanted. Do not let the agreement or understanding lapse and make it binding as soon as possible.

Further, Timecon should have documented everything. Numerous times, Ball J preferred LLBJV’s version of events thanks to other evidence corroborating their account. In other cases, where claimants have written records of their meetings with respondents, or contemporaneous emails that are consistent with their story, they have been able to convince judges that representations had been made to them about payment.

Being scrupulous about these will ensure that builders and contractors avoid the expensive and difficult-to-predict process of litigation.

If you or someone you know wants more information or needs help or advice, please contact us on +61 (2) 9248 3450 or email info@bradburylegal.com.au.