Major projects & construction 5 Minute Fix 48


05 Mar 2020

Get your 5 Minute Fix of major projects and construction news. This issue: we look at the risks of contract novation mid-project, security of payment decisions involving suspension rights and building licences, recent judicial guidance on "good faith" and the "prevention principle" and Victoria set to reform the recycling industry.

WA Supreme Court considers key legal issues in construction disputes: "Good faith" and "no hindering" obligations and the "prevention principle"

In Mirvac (WA) Pty Ltd v Binningup Nominees Pty Ltd [2020] WASC 28, Justice Archer delivered a lengthy and complex judgment that considers an array of issues.  Consideration was given to several commonly-occurring subjects: the obligations to co-operate; the obligation to act in "good faith" and the "prevention principle".

Binningup owned a large area of land. It entered into development agreements with Mirvac under which Mirvac was both a contractor and financier of the project. While the parties intended that the project would result in the formation of a long term relationship, it soured within six years with each accusing the other of repudiating the development agreements. Mirvac sued to recover money lent to Binningup, and was ultimately awarded compensation exceeding $54 million.

  • Good faith obligations: Binningup relied on an express term of a Services Agreement that required Mirvac to act in good faith when preparing and submitting budgets to project control meetings (PCG). It was alleged that it would be a breach for Mirvac to subsequently reject, in PCG meetings, budgets that it had itself prepared, thereby triggering a deadlock process leading eventually to early termination of the contract. Justice Archer disagreed.

    It was held that preparing budgets requires an objective analysis of the projected cost of pursuing a proposed course of action. Mirvac satisfied its good faith obligations in this regard. At PCG meetings, each party was to assess whether it wished to incur those costs in the prevailing commercial circumstances of the project. Mirvac was entitled to form the view that it did not want to incur the costs it had calculated. To do so did not breach its obligation of good faith. The obligation was applied narrowly according to its terms and was not permitted to override legitimate commercial decision-making. This highlights the importance of careful drafting when including "good faith" obligations in a contract.

  • No hindering obligations: Binningup also argued that there was an implied term in the Services Agreement to the effect that Mirvac would refrain from conduct that would hinder or prevent fulfilment of the purpose of the development agreements. However, Justice Archer recognised that there is a difference between Mirvac co-operating to provide the benefits actually contracted for by Binningup, and the alleged obligation on Mirvac to ensure that Binningup obtained what Binningroup hoped to obtain from the development agreements. The terms of the agreements did not give Binningup the right to insist upon Mirvac's continued involvement until the overall project was completed. Therefore, Mirvac was under no implied obligation to provide Binningup with this outcome and, accordingly, was not prevented from pursuing contractual processes that led to early termination of the project.

  • Prevention principle: Binningup invoked the "prevention principle" in an attempt to stymie Mirvac's reliance on an express clause in a Loan Agreement requiring repayment of loaned funds upon the occurrence of a "Trigger Event". "Trigger Event" was defined to include termination of the Services Agreement "for any reason". Binningup argued that Mirvac had repudiated the Services Agreement and could not rely upon its own breach (repudiation) as a ground for claiming the repayment of loaned funds under the Loan Agreement.

    Justice Archer quoted from the recent NSW Court of Appeal case of Probuild Constructions (Aust) Pty Ltd v DDI Group Pty Ltd [2017] NSWCA 151, and stated that "consistently with Probuild, it was common ground that the operation of the principle may be modified or excluded by contract". This does not necessarily require a specific linguistic approach, for example an express term stating that "the operation prevention principle is excluded". Rather, it could be achieved if the contract as a whole manifests an intention contrary to the application of the "prevention principle". This was the outcome in this case. It was held that by express terms Binningup was required to repay the funds under the Loan Agreement irrespective of alleged repudiation of the Services Agreement by Mirvac. These express terms were contrary to the application of the "prevention principle" because they conveyed that Mirvac was entitled to repayment even if it was to blame for the occurrence of the Trigger Event.

Novation of construction contracts: when formality matters

The recent judgment of Justice White in Kitchen Complex Pty Ltd v Revelop Building and Development Pty Ltd [2020] NSWSC 96 demonstrates the pitfalls of adopting informal processes in the administration of contracts, particularly if the intention is to effect a novation. The consent of all parties to the original contract and of the incoming party is essential for a novation to be effective. Formal written consent is not required but the parties must be able to point to words and conduct establishing consent of all parties, otherwise the novation will fail.

In this case, the parties failed to properly implement a novation. A construction contract was initially entered into between Kitchen Complex (KC) and Revelop Projects (RP). By subsequent email correspondence, RP requested that invoices be rendered to a related company, Revelop Building and Development Pty Ltd (RBD). At first instance, the Local Court found that the contract had been novated "when the plaintiff agreed that the first defendant (RBD) became the contracting party". On appeal, although ultimately KC's claim was dismissed, this element of the trial decision was overturned on the basis that there was no evidence that the contract had been novated. This was because:

  • the emails relied on were insufficient to demonstrate that the parties objectively intended to substitute RBD for RP as the contracting party;
  • the "uncommunicated subjective intentions of either party" were not relevant; and
  • matters "of internal accounting between the defendants were not the plaintiff’s concern".

SOP legislation update: suspension of work for unpaid interest and interplay with licencing requirements

Right to suspend works under SOP legislation confined

In Duffy Kennedy Pty Ltd v Galileo Miranda Nominee Pty Ltd [2020] NSWCA 25, the NSW Court of Appeal confirmed that there is no entitlement under the Building and Construction Industry Security of Payment Act 1999 (NSW) (SOP Act) to suspend works for a party's failure to pay interest on an overdue progress payment.

In this case, Duffy Kennedy (DK) contended that it was entitled to suspend works under its construction contract with Galileo Miranda Nominee (GMN) because GMN had failed to pay interest on a progress payment that was paid three days late.

Under section 27(2) of the SOP Act, a claimant is entitled to suspend work for non-payment of an "amount that is payable". DK argued that this includes interest payable on overdue portions of a progress payment. The Court disagreed, and held that for the purposes of section 27(2), "the amount that is payable" includes the "scheduled amount" or an "adjudicated amount" defined under the SOP Act, but not interest for late payment of those amounts.

No licence, no problem… as long as a regulatory exception applies

In Waterford PPG Pty Ltd v Civil Constructors (Aust) Pty Ltd [2020] QSC 8, a principal sought to overturn an adjudication under the Building Industry Fairness (Security of Payment) Act 2017 (Qld) by arguing that the claimant builder did not have the requisite licence to carry out the relevant construction works.

The principal argued that the construction contract was unenforceable because the contractor did not hold the necessary licence. In the absence of an enforceable construction contract it was asserted that the adjudicator did not have jurisdiction to adjudicate the payment claim dispute. The builder countered that the works it performed fell within a regulatory exception to the licence requirement and asserted that the construction contract and adjudication were valid. After consideration of the works in issue, Justice Boddice agreed with the builder's submissions and held that because the licensing exception applied, the adjudication determination was valid and enforceable.

Recycling Victoria – Government launches 10 year plan to overhaul the sector

The recycling sector in Victoria is set for a major overhaul with the launch last week of the State Government's new policy, "Recycling Victoria – A New Economy".

"Recycling Victoria" is a 10 year, $300 million action plan designed to comprehensively respond to industry challenges and transform behaviours and attitudes towards waste. The policy is also intended to ensure that industry and communities are equipped to meet targets agreed by States and Territories under the Federal National Waste Policy (2018).

The "Recycling Victoria" reforms include:

  • the introduction of new legislation, which will regulate waste as an essential service and provide for transparency and accountability in the industry;
  • a new waste authority to manage the sector;
  • the establishment of a new Waste Crime Prevention Inspectorate within the Environment Protection Authority, to work across WorkSafe Victoria, emergency service agencies, Councils and other regulators and to address illegal conduct such as dumping and stockpiling, especially of high-risk substances;
  • the introduction of a container deposit scheme by 2022/23, drawing on the experiences of other jurisdictions;
  • measures to attract private investment in infrastructure to sort and process certain recyclable materials into high-value material streams;
  • support for the waste to energy market, including grant or loan funding and investment facilitation;
  • staggered increases to the landfill levy to encourage better resource recovery and deter illegal waste stockpiling and disposal;
  • the creation of "Circular Economy Business Innovation Centres" to foster innovation, in particular in terms of how businesses use materials; and
  • kerbside reform and complementary education campaigns, including providing all households with access to an organic waste service by 2030.

Related Insights

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.