Major projects & construction 5 Minute Fix 12

By the Major Project & Construction team

07 Jun 2018

Get your 5 Minute Fix of major projects and construction news. This issue: the pipeline for Queensland major projects, project finance, dispute resolution, and the latest in security of payment.

Queensland Major Projects Report: forecast is mostly positive, but funding troughs ahead

Three Queensland peak industry bodies have collaborated to produce the 2018 Queensland Major Projects Pipeline. The joint initiative by the Queensland Major Contractors Association, Construction Skills Queensland and Infrastructure Association of Queensland found that Queensland is coming out of the downturn following the end of the mining boom. The report highlights increasing levels of construction activity and major project work: a 58% growth in major project work with a similar forecast for 2018/2019. However, it cautions that this upsurge in activity cannot be sustained in the future without careful selection of viable infrastructure projects and alternative financing and funding solutions to meet infrastructure priorities.

Key findings of the report include:

  • 190 projects identified in the 2018 pipeline with a combined expenditure of $39.9 billion;
  • investment in road, rail, electricity and telecom sectors is driving Queensland's upsurge in major project work;
  • lower levels of privately funded infrastructure investment compared with previous years;
  • strong growth prospects for Northern Queensland's major infrastructure activity; and
  • Southern states still outperform Queensland in infrastructure funding and delivery.

Best intentions lay a perilous path – arbitrator as mediator

The uniform Commercial Arbitration legislation (CAA) allows an arbitrator to take on the role of mediator, but as Ku-ring-gai Council v Ichor Constructions Pty Ltd [2018] NSWSC 610 demonstrates, it is a perilous path that requires careful consideration and management by all parties.

Twelve days into the hearing of a dispute between the Council and Ichor, the arbitrator asked in an off the record discussion if the parties would consent to him putting forward a settlement proposal. They did, and a written consent for that to happen was signed on behalf of the parties. The arbitrator's proposal was presented, but rejected, and the conduct of the arbitration resumed. On the final day of the hearing, Ichor challenged the mandate of the arbitrator to have continued with the arbitration. It asserted that the written consent of the parties for the arbitrator to continue had not been obtained as required by section 27D(4) of the CAA, with the result that the arbitrator's appointment terminated by operation of section 27D(6).

The Council commenced court proceedings seeking orders that the arbitrator was entitled to proceed:

  1. Council submitted the arbitrator had not acted as a "mediator" and that what transpired did not constitute "mediation proceedings" under section 27D(4) (which would dispense with the need for written consent under that provision). McDougall J noted the CAA should be construed in a manner that promotes "simplicity and certainty of operation" and that the interpretation advanced by Council did not support such a construction. As what ensued was "non-arbitral in character", His Honour held the arbitrator had in fact acted as a mediator. 
  2. Was express written consent under section 27D(4) to the resumption of the arbitration required? Ichor argued that it was, whilst Council asserted the requisite consent could be inferred from the written transcript of the proceedings recording submissions made by the parties after the arbitration resumed. Citing once more the aim of promoting certainty in construing the CAA, His Honour referred to various provisions that allow parties to agree on something other than the default position prescribed in those provisions, for instance by the inclusion of such caveats as "unless otherwise agreed" or "are free to agree". His Honour noted that section 27D was not such a provision, that it required the consents under sections 27D(1) and (4) to be "embodied in the written consent of each party", and rejected Council's proposition that consent could be inferred.

So what's the take-out? In the fast-paced and often unpredictable conduct of arbitral proceedings, don't lose sight of the formal requirements of the CAA. 

Court confirms that beneficiaries must strictly comply with terms of performance securities

The smallest of deviations from the requirements stipulated for recourse to a security such as a bank guarantee can result in access to the security being refused.

In Santos Limited v BNP Paribas [2018] QSC 105, BNP Paribas refused to pay to Santos the amount of $55,000,000 under a bank guarantee that it had issued because the written demand given by Santos did not state that the person signing it was the authorised signatory of Santos Limited, as required on the face of the guarantee. Instead of referring to the signatory as "Authorised signatory of Santos Limited", the demand referred to the signatory by name and as "General Manager Development".

There was no suggestion that the signatory lacked the authority to sign the demand, and neither party claimed that a particular form of execution of the demand was required for the document to be binding. Rather, the issue in this case was a point of form. That is, by not expressly stating that the signatory was an Authorised signatory of Santos Limited as stated in the terms of the guarantee, the demand did not, in BNP Paribas' view, comply with the required form of the demand.

Justice Jackson of the Queensland Supreme Court agreed with BNP Paribas. He stated that, when construing a performance security, it is important to have regard to the commercial context in which such an instrument is issued. The purpose of the performance security is that it will be unconditionally payable by the financial institution to the beneficiary on the beneficiary making a complying demand. Behind the performance security, there will usually be an indemnity from a third party for any amount paid by the financial institution to the beneficiary. That indemnity will usually allow the financial institution to be indemnified on the financial institution making any payment to the beneficiary upon a complying demand. For the financial institution to be certain of recourse to the indemnity, it is therefore important that it is satisfied that any payment it makes is a complying demand, and the most certain way of doing that is for the financial institution to carefully consider whether any demand strictly complies with the requirements of the instrument for payment.

In this case, what may be seen as a minor variance to the demand meant that Santos Limited was unsuccessful in making a claim on the bank guarantee. It highlights that:

  • if a demand is being made under a bank guarantee, performance bond or similar instrument, strict compliance with all formalities and processes that are required to be followed in relation to that demand; and
  • when negotiating the form of bank guarantees, performance bonds or similar instruments, a simple form with as few compliance requirements as possible, will help avoid potentially being tripped up when seeking to make a demand on these. 

Low threshold for adjudicator's reasons

In overturning a decision of the Supreme Court, the New South Wales Court of Appeal has underscored the formidable challenges faced by parties seeking to establish jurisdictional error in adjudication determinations.

In Cockram Construction Ltd v Fulton Hogan Construction Pty Ltd [2018] NSWCA 107, the Court of Appeal allowed an appeal against the first instance decision which held that an adjudication determination under the Building and Construction Industry Security of Payment Act 1999 (NSW) was void for jurisdictional error because the adjudicator failed to give adequate reasons in support of her determination. Under section 22(3)(b) of the Act, a determination of an adjudicator is required to "include the reasons for the determination".

According to the New South Wales Court of Appeal, the Act requires only that reasons be given, not that they "be adequate according to any objective criterion".

Read more about this decision here.

Is that a second payment claim? According to the Victorian Supreme Court, there's no room for confusion

A recent decision of the Victorian Supreme Court is demonstrative of the fact that if you want to enliven rights under the security of payment scheme, there is little room for equivocation; your contract needs to be administered in a manner that effects compliance with the statutory regime.

In Valeo Construction Pty Ltd v Pentas Property Investments Pty Limited [2018] VSC 243, a contractor sought judgment in respect of a payment claim on the basis a responsive payment schedule had not issued within the prescribed period. While the payment claim was originally submitted on 28 February, the contractor purported to submit a revised version on 1 March. The contractor, however, did not clearly and unequivocally withdraw the earlier claim at the time it submitted the later, 1 March version. On this basis, Justice Digby held that the 1 March claim was a compliant payment claim under the Building and Construction Industry Security of Payment Act 2002 (Vic), that it had been served in respect of the same reference date as the 28 February claim and that, in consequence, section 14(8) of the Act had been contravened.

Read more about this decision here

East Coast vs West Coast: the national Review of Security of Payment Laws recommends harmony

The recent release of the Murray Review may be a first significant step towards a consistent national security of payment regime for the Australian construction industry. However, harmony may not come easily, as the various State and Territory stakeholders will need to grapple with some significant changes in order to implement the Review's recommendations.

Read more about the Review here.

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