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

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.

 

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

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.

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

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

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

 

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

 

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

 

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

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

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

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

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

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

 

 

Corona virus and force majeure in construction contracts: Has your contract been immunised

While many were recovering from New Years’ celebrations, corona virus was starting to make its way into the headlines. For the last 2 months, corona virus has dominated the news with many people and businesses starting to feel its impact as borders are shut down and quarantines are imposed. At the time of writing, the World Health Organisation has reported that corona virus has spread to many parts of the world including Australia, North America and parts of Europe. With much of the corona outbreak concentrated to China, several businesses are starting to feel the economic impact. As the manufacturing hub of the world, China is responsible for much of the world’s imports. Further, as the corona virus spreads and causes further border shutdowns, it becomes harder for businesses to have certainty in knowing when they will be able to import or export their goods. With businesses having to meet their contractual deadlines, the uncertainty can create a real issue for some. Consequently, many businesses may be put into a position where they are unable perform their contractual obligations. This article focuses on the different ways a construction contract may deal with situations such as corona virus.

The clause typically suited to situations or events like the outbreak of corona virus is a force majeure clause. Force majeure means ‘superior force’ and commonly covers natural events such as earthquakes or unforeseeable and disruptive manmade events such as war and industrial strikes. In the Australian context, force majeure clauses are creatures of the contract. This means that they only exist by virtue of a contractual provision which allocates the risk between the parties. Further, Australian courts will interpret these clauses strictly, giving the clauses the minimum application available within the ordinary meaning of the provision. In the construction contract context, it is unusual to see a specific force majeure clause. By way of illustration, the Australian Standard contracts do not contain a standard force majeure clause. Therefore, it is up to the parties to amend and insert a specific force majeure provision into the contract if they wish to have a specific mechanism dealing with the risk arising from these types of events.

As many readers may be aware, at the core of construction contracts is the allocation of risk through program. Therefore, construction contracts may, by their very essence, be differentiated from non—construction contracts. For example, extension of time (EOT), delay costs and liquidated damages clauses assign time related risks between the parties. The definitions of qualifying causes of delay and compensable causes in the Australian Standard provide a mechanism to pass time and cost related risks from contractors or subcontractors to the developer or head contractor. Amending the definition of qualifying causes of delay to extend to force majeure events is one way a construction contract can account for circumstances such as the corona virus. The key difference between allowing relief through a force majeure clause and allowing an EOT for force majeure events is that an EOT provides a contractor or subcontractor protection against liquidated damages. This is differentiated from a force majeure clause which may generally limit a party’s liability under the contract.

Irrespective of the way force majeure events are incorporated into construction contracts, care must be taken in drafting these clauses. When getting into the force majeure territory, contractors and subcontractors need to make sure that the definition of ‘force majeure’ or ‘force majeure event’ is drafted clearly, but not too broadly. For example, stating that a subcontractor is entitled to an EOT for anything outside of their control may be clear, but too broad to specifically cover corona virus. However, stating that the subcontractor is entitled to an EOT for delays related to the corona virus may be clearly drafted, but it does not provide much further scope. The clause would not protect from outbreaks or re-emergence of SARS or other endemics, epidemics or pandemics. A balance must be reached between these two extremes and will depend on the specific project.

When drafting a force majeure clause, it is important to consider some broad points. Firstly, force majeure clauses are usually exhaustive in nature, meaning that only what is in the contract is covered. Secondly, the party affected by the force majeure event must not have caused or contributed to the event and will required to take all steps to overcome or mitigate its effects. There also needs to be a connection between the force majeure event and the performance of the contractual obligations. For instance, the mere occurrence of the corona virus is not sufficient to justify an EOT in all cases. It will only entitle relief from liquidated damages when the event has caused a delay. By including these conditions, a force majeure clause (whether in EOT form or specific clause form) will generally entitle a party to relief or suspension of their obligations under the contract.

A significant problem with force majeure events is that it can be difficult for parties to establish that they should be entitled to relief under the clause. For example, in relation to the mitigation element discussed above, a party is often required to show that it cannot fulfil its supply obligations. While a party may have its preferred third party supplier, the mere fact that supply is not available from this supplier will not justify force majeure relief. The parties are bound by their contractual deal and this remains the case even if the obligations become significantly more onerous or expensive to complete. However, if all of the supply of product X is unavailable, then a party should be entitled to relief under the relevant clause until the supply becomes available again.

If you or someone you may know is in need of advice on existing contracts or advice regarding the force majeure clause, please contact our office by phoning (02) 9248 3450 or by email at info@bradburylegal.com.au.

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.