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Injunctions and bank guarantees: When can a contractor prevent a developer having recourse to bank guarantees or performance bonds?

Case: Uber Builders and Developers Pty Ltd v MIFA Pty Ltd [2020] VSC 596

One feature of construction contracts which is distinctive and unique from other types of contracts is the provision of security from the contractor to the principal. Commonly, security takes the form of retention monies or bank guarantees. The consequences of having recourse to bank guarantees can be serious for the party providing the security (the security provider). In September 2020, the Supreme Court of Victoria handed down a decision in relation to bank guarantees. The decision Uber Builders and Developers Pty Ltd v MIFA Pty Ltd [2020] VSC 596 (Uber), sets out a helpful summary of the principles in respect of bank guarantees, interlocutory hearings and recourse to bank guarantees.

The Facts

Uber Builders and Developers (Uber) sought an injunction preventing MIFA from calling on its bank guarantees. MIFA asserted that it was entitled to have recourse to the bank guarantee as the Superintendent had certified amounts as payable by Uber in respect of rectification costs for defective and incomplete work, liquidated damages, credit allowances and purported variations. As a result of non-payment by Uber of these amounts, MIFA sought to have recourse to the bank guarantees to recover the amounts certified against Uber. To prevent MIFA from having recourse to the bank guarantee, Uber sought interlocutory relief (lawyer jargon for an interim/immediate court order) that MIFA was not allowed to have recourse to the bank guarantee.

The Principles

Nichols J summarised the governing principles in respect of where interlocutory relief is sought to restrain the calling of a performance bond/bank guarantee that has been given under a contract. There principles are:

  1. The applicant for interlocutory relief must show there is a serious question to be tried. The applicant, in this case Uber, must show that there is sufficient reason to think that the applicant would be successful if the matter were to progress to a final hearing;

 

  1. The applicant must show that the ‘balance of convenience’ favours the granting of the injunction. This means that the court should take whichever course appears to carry the lowest risk of injustice should it be wrong in either granting pr not granting the injunction;

 

  1. The court must consider whether damages would be an inadequate remedy. This means that the court has to consider whether the applicant would suffer irreparable injury for which monetary compensation would not be an adequate option; and

 

  1. These questions and factors to consider must be considered together and not as isolated issues.

 

In the context of setting out these guiding principles, Nichols J set out some drafting considerations for security clauses in construction contracts. These are summarised below:

  • Purpose: Bank guarantee or performance bonds may be stipulated for two reasons.
    • The first is to provide security against the risk that the security holder will not recover a sum owing by the defaulting party. In this way, the security acts as a means of ensuring the principal or security holder can recover some money if an amount is payable to the principal/security holder.

 

  • The second is to allocate risk as to who will be out of pocket while a resolution of a dispute is pending. If the security is to allocate risk, then the party holding the security may have recourse, even if it turns out that the other party was not actually in default.

 

  • Conditions of Recourse: If the purpose of the security is to act as an interim allocation of risk, then it is important to consider in what circumstances the principal/security holder will be entitled to have recourse to the security. The parties may agree to allow the security holder to have recourse to the security pending a final determination, but this right should be limited to certain circumstances. For instance, the parties may agree that recourse to the security can only occur if notice is given and/or where the dispute relates to damage caused by the security provider to the works/the project and/or adjoining properties.

 

  • Conditions imposed by the Courts: Where there are no contractual conditions under the contract, the Courts will prevent a party from calling on security where the security holder acts fraudulently or unconscionably in calling on the security.

 

  • Interim Risk Allocation: If the security is intended to be an interim risk allocation tool, the security holder will be entitled to have recourse to the security even if it turns out that the other party was not in default, notwithstanding the existence of a genuine dispute and a serious issue to be tried as to underlying entitlements.

 

Interim Risks

So far, this article has discussed a lot about ‘interim risk allocation’ but what does this actually mean and when is it relevant? Throughout the projects, various issues (such as the valuation of variations and defective work) may arise and payments are generally made on account only. At the end of the contract, the Superintendent will generally issue the final certificate. The final certificate will determine if there has been any over or underpayment by the principal to the contractor, whether there are any liquidated damages, and any other interim issue (such as the valuation of defective work and variations). If a party does not agree with payments to be made under the final certificate, they are generally able to issue a notice of dispute under the contractual provisions or can commence proceedings in relation to the contract. In these circumstances, the interim risk is the amount certified under the final certificate and a final determination of the issue made pursuant to a Court or the dispute resolution process set out in the contract. As the dispute resolution process (whether it be Court, expert determination, arbitration, or another dispute resolution forum under the contract) can take substantial time to finally determine the issues, if the security is an interim risk allocation tool, the principal will be able to have recourse to the security until the matter is finally determined. If it turns out the final certificate was incorrect, this will not prevent the principal from having recourse to security. It will mean that the decision maker will generally order for the principal to make payment of however much they have been overpaid so that the parties’ entitlements are finalised and concluded.

Bringing it back to the case study, Uber, the Superintendent certified that an amount was payable by the contractor to the principal. The contractor disputed the amount that was payable and did not make payment as and when required by the final certificate. As a result, the principal was entitled to have recourse to the security once it had complied with the conditions of recourse under the contract. As these conditions were predominantly notice requirements, the principal was not prevented from having recourse to the security. If Uber had made payment of the final certificate amount and issued the notice of demand, it is arguable that MIFA would not have been able to have recourse to the security. This is because MIFA would not be able to claim that the amount in the final certificate remained unpaid. As a result, contractors are put in the difficult position of paying a disputed amount or the principal may have recourse to the security.

The Takeaways

Intention of the Security

Parties need to be clear about the intentions behind providing security. This can be achieved by drafting the purpose of the security into the security clause of the contract. If there is an intention for the security to be an interim risk allocation tool, it will be much easier for the security holder/principal to have recourse to the security. If the security is only to protect against the failure to pay a sum owing by a party, then the security holder will be able to have recourse to the security if the amount is not paid as and when required under the contract.

Conditions of Recourse

Conditions of recourse essentially mean the security holder promises that they will not have recourse to the security unless those conditions are met. If the parties agree on the circumstances where the security holder can or cannot have recourse to the security, this will bind the security holder irrespective of the terms of the bank guarantee. Typical conditions include where the principal is entitled to payment under the contract.

If the security provider seeks to prevent the security holder from having recourse to the security, the security holder (generally the principal) will be required to show that it has met and/or followed the contractual process.

It is important to note that some jurisdictions, such as Queensland, may impose restrictions on when a party can have recourse to security. For example, under the Queensland Building and Construction Commission Act 1991 (QLD) section 67J(1)-(2), a principal may use a security or retention amount only if they have given 28 days’ notice in writing to the contractor advising of the proposed use and the amount owed. In these jurisdictions, the additional conditions will be imposed in addition to with the conditions of recourse under the contract.

Interim amounts owed

The crux of the purpose of security comes to a head in circumstances where a party disputes the amount owed. For instance, when the Superintended issues that final certificate (as was the case in Uber). If the security clause is drafted to allow for the security to be an interim risk allocation tool, the principal will be entitled to have recourse to the security. This will mean that contractor holds the risk of being out of pocket until the matter is finally determined.

If you are a developer, a contractor or a subcontractor and you or someone you know needs advice in respect of whether it is possible to have recourse to security, please get in touch with the staff at Bradbury Legal. Alternatively, if you are in the process of drafting and negotiating a contract, including the clauses relating to security, Bradbury Legal is able to assist and help you know exactly what you are signing up to.

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

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

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

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

Key reforms of the 2020 Regulation include:

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

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

If you would like to discuss or would like any more information, please contact us at info@bradburylegal.com.au or (02) 9248 3450.

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

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

Facts

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

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

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

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

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

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

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

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

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

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

Decision

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

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

Stanley J held[4]:

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

 

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

His Honour stated:

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

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

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

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

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

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

Take Home Tips

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

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

[1] At [12].

[2] At [93].

[3] At [128].

[4] At [94].

[5] At [105].

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

[7] At [117].

Suspension of relief: take out notices, jurisdictional error and Security of Payment Act

In Parrwood Pty Ltd v Trinity Constructions (Aust) Pty Ltd, the Court confirmed that, for the purposes of the Building and Construction Industry Security of Payment Act 1999 (NSW) (SOPA), taking the work out of the hands of a contractor will not remove reference dates accrued before the take out notice is served, even if they are not actually used until after the take out notice is issued.

Although the facts were unusual and complicated, in the unique world of the SOPA they are not unheard of. This note is useful for parties considering whether:

  1. to issue a take out notice instead of a termination notice (particularly for NSW construction contracts entered into before 21 October 2019); or
  2. to withdraw an adjudication application in the event of jurisdictional error by an adjudicator on the first determination, to re-lodge before a new adjudicator.

The facts

The contractor was working under the principal in a residential building project. The contractor accrued reference dates on the 25th day of each month. The contract contained an AS standard clause where the contractor fails to show reasonable cause for its default:

“the Principal may by written notice to the Contractor:

(a) take out of the Contractor’s hands the whole or part of the work remaining to be completed and suspend payment until it becomes due and payable pursuant to subclause 39.6; or

(b) terminate the Contract.”

The parties fell into dispute and the principal asked the contractor to show cause.

Then:

  • on 25 August 2019, the monthly reference date for a SOPA claim came about;
  • on 3 September 2019, the principal issued a notice that took out of the contractor’s hands all of the work remaining to be completed, instead of terminating the contract; and
  • on 6 September 2019, the contractor issued a payment claim in the amount of $2,023,645.76. This payment claim was said to use the 25 August 2019 reference date.

In response, the principal scheduled “$Nil”.

The contractor applied for adjudication under the SOPA. The adjudicator declined to determine an amount that the contractor was owed (if any), finding the payment claim was invalid.

After it received the first adjudicator’s decision, the contractor “withdrew” its application, and made a second adjudication application. The contractor argued that the first adjudicator had failed to exercise his statutory function in declining to determine the amount owing. The second adjudicator considered the application and awarded over $400,000 to the contractor. The principal applied to the Supreme Court to set aside the second adjudication determination.

There were two broad issues that the Court was required to consider.

Suspension and payment claims

The first issue was what effect the take out notice had on the ability to issue payment claims.

The Court found that even though the payment claim was served after a take out notice, it was saved by the fact that it was served for a reference date occurring before the take out notice was made.

The outcome would have been different if the take out notice was served before the reference date. In this case, the contractor’s rights are suspended by the take out notice, and it cannot make a payment claim under the fast-track SOPA. It can, however, still make a claim under general law.

A take out notice cannot extinguish a right to make a payment claim that already exists.

Second Adjudication

Jurisdictional error

The second issue concerned the unusual circumstances in which a claimant may effectively redo its application.

The Court found that the first adjudicator had not made a ruling that, for example, the contractor was entitled to “$Nil”. Rather, the adjudicator had decided that, no matter what he thought about the facts, he could not determine any adjudicated amount (“I must decline therefore from determining …”).

The first adjudicator had failed to determine the amount of the progress payment (if any) to be paid, as required under section 22(1) of the SOPA. Therefore, the first purported determination was void.

Making a second application

Section 26(3) of the SOPA allows for a claimant to withdraw an application and make a new adjudication application, if the adjudicator accepts the application but then “fails to determine the application within the time allowed”. The claimant must withdraw and make the new application within five business days after it is entitled to withdraw the previous adjudication application.

This may occur where the adjudicator has made a jurisdictional error in failing to determine the application.

If the original decision is decided by a court to be valid (because there was no jurisdictional error), then the second application is wasted. However, if the original decision is declared void, then the second application may still be valid.

Conclusion

It pays to be aware of when reference dates arise, and when take out notices can and should be served. Principals concerned to issue effective take out notices should be mindful of existing reference dates which have or may accrue before that notice.

Claimants should be keenly aware of the existence of any jurisdictional error on the part of adjudicators. Such error may allow them to re-lodge an adjudication application.

 

 

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.

ADR Processes Part II

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

 

Factors that may make the clause void and unenforceable:

 

Precondition to Court or other legal action

 

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

 

Words or phrases to look out for:

 

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

 

Words or phrases that can prevent the clause being unenforceable:

 

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

 

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

 

Agreement to agree

 

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

 

Words or phrases to look out for:

 

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

 

Words or phrases that can prevent the clause being unenforceable:

 

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

 

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

 

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

 

Broad and unclear drafting

 

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

 

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

 

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

 

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

 

Important Considerations in ADR clauses

 

Scope of ADR power

 

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

 

Statutory Provisions

 

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

 

Binding or non-binding

 

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

 

Rights of appeal

 

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

 

 

Subcontractor Supporting Statements in the SoPA

It is commonly understood by participants within the building and construction industry that payment claims made by a head contractor under the Building and Construction Industry Security of Payment Act 1999 (NSW) (SoPA), are to be served with a supporting statement in respect of subcontractors.

The purpose of imposing this obligation on head contractors is clear and simple: to ensure payment of subcontractors is a priority. Ideally, the inherent insolvency risks will be passed ‘up the chain’ to head contractors and ultimately, to the developers who are often better placed to weather the consequences.

But, what happens when the Head Contractor does not comply with their supporting statement requirements under the SoPA? Does the developer still need to pay it?

This question has been the subject of some judicial deliberation, and has been answered with some finality in the recent case of TFM Epping Land Pty Ltd v Decon Australia Pty Ltd [2020] NSWCA 93.

The Parties

TFM Epping and Katoomba Residence Investments Pty Ltd (TFM), as the developer, engaged Decon Australia Pty Ltd (Decon) as the builder and head contractor to carry out building and construction works on a residential development located at Epping in Sydney’s North West.

The Facts

On 3 June 2019, Decon served on TFM a Progress Claim under the SoPA, seeking approximately $6.4 million (the Claim). The Claim included works carried out throughout project history, for which Decon had not previously been paid.

The supporting statement accompanying the Claim had referenced only one subcontractor that had completed works about 1 year prior to issuing the Claim and specified that the supporting statement applied for works undertaken between 27 June 2018 and 3 July 2018.

TFM did not, within the 10 days prescribed by SoPA, serve a Payment Schedule on Decon, and as a consequence, became liable to pay the full sum sought in the Claim. Payment was not made.

On 3 July 2019 Decon filed a Summons and Notice of Motion in the Supreme Court of New South Wales, both of which sought summary judgment in their favour, for the full amount of the Claim. Shortly after, TFM filed a response, challenging the validity and service of the Claim.

The Decision at First Instance and Issues on Appeal

It was the decision of the Court at first instance that the response filed by TFM did not raise triable issues and to find in favour of Decon. On appeal, TFB sought to challenge this decision.

TFM sought to challenge the decision at first instance on the following 3 grounds:

  1. The Claim was not valid as it had not been accompanied by a supporting statement as required under s13(7) of the SoPA;
  2. The Claim sought payment in respect of variations, which were not performed under the contract and ought to have been claims in quantum meruit; and
  3. The Claim was invalid as it was not made in respect of an available reference date.

The key argument on appeal was that the supporting statement served by Decon was defective for the following reasons:

  • It had not included a ‘list’ of the subcontractors, it had simply given details of one subcontractor; and
  • The dates for which the supporting statement applied did not align with the dates of the works which were the subject of the Claim.

On this Basis, TFM asserted there was an absence of a compliant supporting statement, which rendered the service of the Claim invalid. In the alternative, TFM asserted the Claim itself was invalid.

The Decision on Appeal

The Court found in favour of Decon on all 3 grounds and dismissed TFM’s appeal for the following reasons.

Supporting Statements

The critical document giving rise to the legal right to recover (and obligation to pay) a progress payment, is the payment claim. Despite the wording of s13(7) of the SoPA, the Court determined that it does not attach a condition to the nature or content of the payment claim itself.

In arriving at this Decision, the Court noted that s13(7) of the SoPA included within itself a penalty for parties that did not comply, in terms of a fine. The Court gave significant weight to the purpose of the SoPA, and noted that in circumstances where Parliament has not stated an intended consequence, the Court would be reluctant to imply one.

Variations

The Court found that it could be possible that the variations had not properly arisen under the contract, for example, if some procedural step had not been taken. However, if TFM were of this view, the Court determined it ought to have been raised in a payment schedule. The Court found that including the variation items in the Claim, even if they were disputed, did not render the Claim invalid.

In the present case, Decon had not formulated the variations as a claim for quantum meruit, but rather had stated them to be a claim for work undertaken under the Contract.

Takeaway

This case highlights the fact that the document giving rise to the right to recover (and obligation to pay) a progress payment is the progress claim itself.

A failure to provide a supporting statement in accordance with the SoPA will not invalidate a progress claim. However, head contractors should take a strong note of the reference to the penalty provisions within the SoPA, and should ensure strict compliance with their obligations when serving payment claims for progress payments.

The case also serves as a reminder to respondents that the Court system cannot be used as a ‘second chance’ forum to respond to payment claims. The Court has shown it will not hear matters which should have been raised by way of a payment schedule, and determined in the adjudication system.

As always, preventing problems with your payment claims and payment schedules is much easier (and cheaper) than fixing them. If you or someone you know wants more information or needs help or advice, please contact us on 02 9248 3450 or email info@bradburylegal.com.au.

Letter of Demand 101

Given the current economic climate, it is important more than ever for a business to ensure that they are able to receive payment for work carried out. This is particularly important for businesses in the construction industry as cashflow is the lifeblood of many construction companies, particularly subcontractors.

If an invoice remains unpaid past the due date for payment, one of the first steps would be to issue a letter of demand.

A letter of demand is a demand to get a third party to do a specific thing, or to cease doing a certain thing. However, in most instances, it is used to seek payment for debts due and payable.

A comprehensive letter of demand for an outstanding debt should include the following:

  1. Details of the arrangement/contract between the parties regarding the debt that is due and payable;

 

  1. Set out the amount owed and why it is owed;

 

  1. Provide a breakdown of the amount owed with any relevant supporting information;

 

  1. Provide a timeframe for the payment to be made, but in most instances should be a minimum of seven days; and

 

  1. The letter should clearly state what could happen if no response and no payment is received e.g. legal proceedings will be commenced.

The letter of demand should provide sufficient detail for the recipient to understand the claim that you have and why you have issued the letter of demand.

It is advisable to include a copy of the outstanding invoice, though it is not necessary. However, the added benefit of including the unpaid invoice is that issuing a letter of demand with the outstanding invoice will also start time ticking pursuant to the Security of Payment Act, in the event that you are entitled to issue a payment claim.

The courts generally do not require a letter of demand to be sent prior to commencing proceedings, however failing to issue a letter of demand prior to commencing proceedings may reduce the amount of legal costs you can claim should you be successful in the proceedings.

Whilst you do not need a lawyer to write a letter of demand, there are a number of benefits in having a lawyer draft and issue a letter of demand on their letterhead. In particular, it gives an indication to the recipient of the letter of demand that you are serious about pursuing the matter, and that you are willing to spend money in legal costs to obtain the item sought in the letter of demand. Further, seeking legal advice prior to issuing a letter of demand may assist you to understand your legal rights, and based on the legal advice, you might find that there are other potential actions or claims that could be pursued against the recipient of the letter of demand.

Bradbury Legal has issued many successful letters of demand in which our clients have obtained payment in full, even for claims exceeding $100,000.00. Though, each response will depend on the position of the recipient.

Once the letter of demand is issued, the recipient can:

  1. pay the money sought in the letter of demand in full;

 

  1. start a dialogue between the parties that could assist in reaching a settlement of the dispute; or

 

  1. not respond or dispute the claim.

 

Should you wish to pursue the matter further if there is no response and no payment received, you could:

  1. commence proceedings in a court or a tribunal; or

 

  1. prepare an adjudication application in accordance with the Security of Payment Act,

depending on your legal rights to do so.

If you require any assistance with any issues regarding debt recovery, or any other disputes which require a letter of demand, feel free to get in contact with Bradbury Legal on 02 9248 3450.

 

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