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Is the arbitration agreement “not applicable”?

In Gemcan Constructions Pty Ltd v Westbourne Grammar School [2020] VSC 429, Lyons J of the Victorian Supreme Court (VSC) was required to consider whether the terms of the contract contained a valid arbitration agreement within the meaning of s 7 of the Commercial Arbitration Act 2011 (Vic) (CAA). His Honour found that inserting the words “Not Applicable” or “N/A” into corresponding items of Annexure Part A in an otherwise unamended Australian Standard (AS) contract may not evince the necessary intention that relevant clauses do not otherwise apply.

The case not only provides insight into when the court will find that a binding arbitration agreement exists, but also suggests that caution is required at the time of drafting an AS contract.

The case is relevant Australia-wide concerning the application of the CAA because uniform legislation has been enacted in all Australian states and territories.

Facts

On or about 25 July 2016, Gemcan Constructions Pty Ltd (Gemcan) entered into a contract for works to take place at Westbourne Grammar School’s (WGS) Williamstown Campus in Victoria. The contract was a standard form AS 4000-1997 which included the usual:

  • AS 4000 -1997 General Conditions of Contract;
  • particulars at Annexure Part A; and
  • deletions, amendments and additions at Annexure Part B.

A dispute arose between the parties via the exchange of a payment claim and payment certificate issued under their contract. The value of the dispute was circa $1.4 million and included contract works claims, variations, other heads of additional cost, extensions of time, liquidated damages, interest and retention.

Clause 42 of the contract was the dispute resolution clause. Clause 42.2 provided that (inter alia):

If the dispute has not been resolved within 28 days of service of the notice of dispute, that dispute shall be and is hereby referred to arbitration.

Clause 42.3 then went on to provide:

If within a further 14 days the parties have not agreed upon an arbitrator, the arbitrator shall be nominated by the person in Item 32(a). The arbitration shall be conducted in accordance with the rules in Item 32(b).

However, Items 32(a) and 32(b) respectively in Annexure Part A were completed with the words “Not Applicable”.

As the dispute had not been resolved in the time specified in clause 42.2, Gemcan sought to refer the dispute to arbitration and put WGS on notice of its preferred arbitrator.

WGS responded disputing that there was an arbitration agreement in existence because by the parties completing Annexure Part A items with “Not Applicable”, the parties had evinced an intention that its disputes would not be referred to arbitration. If there was no valid arbitration agreement within the meaning of the CAAs, the CAA would not apply and WGS could not be forced to arbitrate.

WGS also disputed Gemcan’s choice of arbitrator, chiefly because he was around twice as expensive as WGS’s selection – a more junior barrister. Gemcan’s view was that its arbitrator was much more experienced in arbitrations generally and had greater legal expertise, as he was senior counsel.

Decision

Lyons J determined:

  • clause 42.2 of the contract constituted a valid agreement to refer the dispute to arbitration, so that the CAA applied; and
  • Gemcan’s arbitrator should be appointed pursuant to s 11 of the CAA.

Whether or not there has been a valid arbitration agreement is a precondition to the application of the CAA. Section 7 of the CAA provides the requirements for a valid arbitration agreement.

Lyons J held that an agreement to arbitrate was evident on the terms of the contract because:

  1. clause 42.2 is ‘clear and unambiguous in its terms’.[1] The last sentence of the standard-form clause evince a clear and objective intention that disputes arising under the clause are to be referred to arbitration if they are not resolved within 28 days of the notice of dispute issuing;
  2. the use of the words “Not Applicable” in Items 32(a) and (b) of Annexure Part A do not evince an intention to negate the referral to arbitration because they only refer back to clause 42.3, not clause 42.2. Clause 42.3 only provides for the procedural aspects of the arbitration, not the agreement to arbitrate itself. In the absence of an agreement regarding procedural aspects (including the arbitrator to be appointed and applicable rules, ss 11(3) and 19(2) of the CAA steps in to provide a mechanism for decisions to be made on those issues). Those procedural mechanisms ‘are not essential characteristics of an enforceable arbitration agreement[2];
  3. the parties could have used Annexure B to make necessary amendments to delete the offending words from clause 42.2, but they did not do so.

Further, Lyons J accepted Gemcan’s proposed arbitrator on the basis that the arbitration was:

  1. likely to be both factually and legally complex;
  2. significant in quantum (and thus the importance to the parties);
  3. likely to require clear and precise written reasons.

The arbitrator proposed by Gemcan was more expensive, however he had more experience in contested and complex arbitration decisions such that the choice was ‘likely to result in the arbitration being conducted in the most efficient way’.[3]

Take Home Tip

If you do not want your standard-form contract to refer you to arbitration, you must do more than insert “Not Applicable” into relevant Items in Annexure Part A. You must ensure that the General Conditions of Contract are correctly amended so that you are not forced into arbitration.

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.