Major projects & construction 5 Minute Fix 59

By The Major Projects & Construction Team
17 Aug 2020
Get your 5 Minute Fix of major projects and construction news. This issue: priority infrastructure projects identified by Infrastructure Australia; no default measure of delay damages for breach of construction contract; payment rights accrued as at a "reference date" (prior to works being taken away from contractor) remain enforceable; implied duty to co-operate; conditions precedent required to be satisfied in sequence, postponing obligation to commence construction works; and nominal liquidated damages ($1 per working day) held not to exclude right to delay damages.


Infrastructure Australia updates its Priority List, highlights importance of infrastructure projects to economic recovery

Infrastructure Australia has this month published an update to its February 2020 Infrastructure Priority List. The List identifies nationally significant infrastructure proposals and acts as a guide to government in directing investment to projects that deliver economic and social benefits.

The mid-year update is a first for Infrastructure Australia, but has been released in recognition of the crucial role that infrastructure investment will play in the recovery of Australia's economy from this year's environmental disasters and now, the COVID-19 health crisis.

The List identifies 12 new infrastructure proposals and updates four others to bring the current tally of identified nationally significant proposals to 155. The new proposals include:

  • in New South Wales:
    • the M12 Motorway as a High Priority Project, with pressure on existing transport networks anticipated to increase due to population growth in Western Sydney and the impacts of other planned projects such as the Western Sydney Airport; and
    • the Port Botany Rail Line Duplication and Cabramatta Passing Loop, to increase containerised rail freight capacity and help reduce road congestion;
  • in Queensland, a Priority Initiative for regional road network safety improvements, to address road fatalities and support regional economies; and
  • in Western Australia, two new priority METRONET projects, including a new rail corridor between Morley and Ellenbrook, also to address rapid population growth.

The List update highlights the importance of initiatives being progressed quickly, particularly in the current environment, and of ensuring a pipeline of nationally significant infrastructure investments is maintained. It does note, however, that there are "many uncertainties regarding the long-term impact of the COVID-19 pandemic on infrastructure use."

VSCA rules against default measure of damages for breach of building contract due to delay

In Leeda Projects Pty Ltd v Zeng [2020] VSCA 192, a full bench of the Victorian Court of Appeal refused to apply the common assumption of commercial rental value as the default measure of damages for breach of a building contract due to delay.

Zeng engaged Leeda Projects to perform fitout works in her apartment on the 87th floor of Melbourne's Eureka Tower. The apartment was to be used as a private art gallery and occasionally a private residence. Zeng owned a number of properties in Melbourne that were used for residential purposes.

While the contract did not specify a date for completion, it was held that works were not completed within a reasonable time (the implied date for completion). Zeng claimed damages for breach of contract, however the question brought on appeal was the appropriate measure of damages for breach.

VCAT awarded nominal damages for breach as Zeng did not intend to permanently reside at or lease out the property. On appeal to the Supreme Court, Zeng was awarded substantial damages calculated by reference to the property's commercial rental value for the period of the delay. This determination applied notional rent as the measure of damages for loss of use of a premises.

However, the trial decision was overturned in the Victorian Court of Appeal. The Court of Appeal found no persuasive authority to apply notional rental value as a default position for the assessment of damages for breach due to delay in a building contract.

Instead, the Court held that Zeng was only entitled to damages for wasted expenditure associated with ownership (namely council rates, owners' corporation fees and utility charges). Kaye JA considered that such a measure was appropriate for all cases where real property intended only for personal use is made unavailable due to breach of contract. McLeish JA and Tate JA held that no general measure of damages can be applied due to the unique nature of real property.

SOP Act: accrued right to submit a progress claim survives works being taken away from contractor

In Parrwood Pty Ltd v Trinity Constructions (Aust) Pty Ltd [2020] NSWCA 172, the contractor's accrued entitlement to submit a progress claim in respect of an earlier "reference date" was unaltered by the principal subsequently taking the works away from the contractor.

The principal under a construction contract exercised its contractual right to take the work out of the contractor's hands on 3 September 2019. The contractor did not dispute this exercise of rights. Three days later, on 6 September 2019, the contractor served a payment claim in respect of works up to 25 August 2019. This was the applicable "reference date" under the Building and Construction Industry Security of Payment Act 1999 (NSW) (SOP Act). The principal's response to the payment claim was to serve a payment schedule stating the scheduled amount as “NIL”.

Under the SOP Act an adjudicator must determine the amount of the progress payment (if any) to be paid by the principal to the contractor. However, in this case the adjudicator did not assess the amount to be paid, but instead determined that the contractor was not entitled to payment at all, as a result of the valid removal of the work from the contractor.

The Court of Appeal held that the adjudicator had failed to carry-out its legislative function by failing to determine the adjudicated amount as "Nil". Instead, the adjudicator's reasons demonstrated that he did not determine the adjudicated amount at all. This was described as "clear a case as one might find of misconception of function amounting to jurisdictional error".

As to the principal's argument that the contractor was not entitled to make the progress claim at all, the Court determined that nothing in the contract, and no exercise of powers under the contract thereafter, could extinguish the right to submit a progress payment by an accrued "reference date" (being 25 August 2019). This can be distinguished from cases where the applicable "reference date" accrued after the contractor's rights under contract were suspended.

A tale of two implied terms: term implied in fact trumped by inconsistent express term, but implied duty to cooperate provides remedy

In Adaz Nominees Pty Ltd v Castleway Pty Ltd [2020] VSCA 201, the Victorian Court of Appeal considered principles of interpretation and implied terms relevant to commercial contracts.

Castleway Pty Ltd provided services to the TPC Group (TPC). Castleway was entitled to payment of a service fee that was to be calculated as a percentage of TPC’s annual taxable income. TPC made a donation of $20 million to a charity, which reduced its annual taxable income and the amount of the service fee. Castleway claimed that its service fee should not be reduced as a result of the donation, on the basis of terms implied in fact or by law.

At trial the primary judge held that, by implication of fact, the service fee could only be reduced by expenses incurred in the ordinary course of TPC’s business. However, the Court of Appeal overturned this decision, on the grounds that it would contradict an express term that required the calculation of the service fee by reference to annual taxable income.

The Court of Appeal further considered whether Castleway was entitled to a greater service fee by implication of law on the basis that TPC had a duty to cooperate and provide Castleway the benefit of the contract. Whelan JA and Riordan AJA held that TPC breached an implied duty to cooperate by making the donation which deprived Castleway of “a substantial part of its remuneration” and “seriously undermined … the benefit for which Castleway had contracted”. In dissent McLeish JA held that TPC had not breached its duty to cooperate because it fulfilled its fundamental contractual promise to pay Castleway a service fee, and the contract did not otherwise require TPC to maximise profits or the service fee.

Conditions precedent not satisfied in sequence by principal, so contractor not obliged to perform works

In One Pro Baulkham Hills Pty Ltd v Ming Tian Real Property Pty Ltd [2020] NSWSC 1043, the NSW Supreme Court held that conditions precedent to a notice to proceed with construction works had not been met, such that the contractor was not in breach when it failed to undertake the "work under contract".

Under the contract the contractor was not permitted to commence the work under contract until the principal had issued a notice to proceed. Pursuant to another clause, the contractor was under no obligation to perform any of the work under contract until such time as the following conditions precedent had been satisfied: the principal had secured project financing, the principal was entitled to make a draw on the financing and a notice to proceed had been issued by the principal. It was held that these conditions precedent applied to performance of the contract, not the formation of the contract.

On the facts, the conditions precedent were not satisfied. It was held that each of the conditions precedent were sequential. This meant that the final condition, that the principal must issue a notice to proceed, could not be satisfied until the preceding conditions (including an entitlement to draw on project financing) were also satisfied. The sequential nature of the conditions were held to be for the benefit of both parties. The object was to "ensure that the Principal was not obliged to incur the expense of having the Contractor embark on the Work Under Contract and the Contractor was not obliged to take the risk of embarking on that work until such time as the Principal’s funding is in place and available to be drawn down". The contrary interpretation would have put the contractor at risk, if the principal issued a notice to proceed but no project finance was available to pay for the work under contract performed by the contractor.

The principal issued a purported notice to proceed at a time when a draw on project financing was not yet available. It followed that the notice to proceed was not effective, all conditions precedent to performance were not satisfied and therefore the contractor was not obliged to carry out work under contract.

Nominal liquidated damages ($1 per working day) opens door to claim for further delay damages for breach

The case of Cappello v Hammond & Simonds NSW Pty Ltd [2020] NSWSC 1021 concerned a construction contract under which the first defendant agreed to undertake renovation works. This matter involved numerous claims and counterclaims. Of particular interest was the determination of the following issues:

  • if the contract was validly terminated, whether the contractor could recover the outstanding balance of an issued invoice and payment for work performed but not invoiced before termination;
  • the effect of a liquidated damages regime that set a nominal amount of $1 owed to the contractor for each working day of delay; and
  • whether the principal could claim damages amounting to a decrease in the market value of the property that occurred as a result of those delays.

First, it was held that under the terms of the cost-plus contract, upon issue of an invoice by the contractor the plaintiffs were liable to pay, unless the principal could establish that the works were not performed or were not required under the contract. Therefore, the contractor was not required prove its claim on a quantum meruit basis. It was, however, not entitled to payment for work not the subject of an invoice, as there was insufficient evidence of what this work entailed and its contractual value.

The second and third issues listed above are interrelated. Ultimately, it was held that the liquidated damages regime did not exclude the principal's right to claim further delay damages for breach of contract. However, on the evidence, it was apparent that the plaintiffs were responsible for a substantial part of the delay and no further delay damages were awarded.

It was recognised that where parties choose to make provision for the payment of liquidated damages they are generally to be taken as excluding a right to claim general damages. However, the very low rate of liquidated damages ($1 per working day of delay) led Bell J to consider whether the parties had objectively intended to either exclude the operation of the liquidated damages regime, or potentially to exclude the right to recover delay damages altogether. In doing so, his Honour held that the liquidated damages clause in this case did not provide an exclusive remedy for delay as this interpretation would have rendered the clause void by section 18G of the Home Building Act 1989 (NSW). Relying on Wentworth Shire Council v Bemax Resources Ltd [2013] NSWSC 1047, his Honour departed from the general principle and held that the nominal value showed that the parties did not intend to provide a substantive contractual right to liquidated damages and intended to permit a further claim for delay damages for breach.

In relation to the damages claimed, decrease in market value during the period of delay was found to be too remote and therefore not recoverable as damages for breach of contract. The decrease in market value allegedly caused by a compulsory acquisition was not a risk present at the time the contract was entered into and therefore, the loss was neither a natural consequence of the delay, or in the contemplation of the parties at the time the contract was entered into (cf Hadley v Baxendale (1854) 9 Ex 341).

Clayton Utz communications are intended to provide commentary and general information. They should not be relied upon as legal advice. Formal legal advice should be sought in particular transactions or on matters of interest arising from this communication. Persons listed may not be admitted in all States and Territories.