Major Projects & Construction 5 Minute Fix 82: the prevention principle, implied term of good faith, NSW construction pause

19 Aug 2021
Get your 5 Minute Fix of major projects and construction news. This issue: NSW Supreme Court considers the prevention principle, SA set for significant security of payment reforms, Qld Supreme Court considers implied term of good faith, Infrastructure NSW releases commercial guidance for the NSW construction pause, and NSW Supreme Court considers whether directing deceitful conduct might amount to repudiation.


Prevention principle diluted? NSW Supreme Court upholds contracting out in water treatment agreement

The NSW Supreme Court in MP Water Pty Ltd v Veolia Water Australia Pty Ltd (No 3) [2021] NSWSC 1023 continues the line of authority that the application of the prevention principle is dependent on there being wrongful conduct under the contract and is capable of being modified or excluded by the terms of contract.

MP Water sought an order that required the defendant, Veolia, to comply with a Step-In Notice for failure by Veolia to provide contracted services under a Services Provider Agreement, for the management and treatment of water produced by underground coal mines. Veolia argued that its inability to provide the services the subject of the notice was because of a failure by MP Water to complete a water storage facility, and as such, the prevention principle precluded MP Water from relying on the default notice.

Justice Williams accepted that the prevention principle has two elements: wrongful conduct (assessed by reference to the terms of the contract) and the consequences of wrongful conduct. Also, that the operation of the principle may be modified or excluded by contract. In this instance, Justice Williams held that this was just such a situation. She concluded that the prevention principle did not apply to preclude MP Water from relying on the default notice because the contract had excluded the application of the prevention principle. This arose from her interpretation that the contract required only the existence of relevant service failure for a default notice to be issued, and the reason why the relevant service was not provided was irrelevant.

Major changes to SA's security of payment regime introduced

Security of payment reform is back on the agenda for South Australia. The South Australian Government is proposing a major overhaul of its scheme for construction industry payments. The Building and Construction Industry Security of Payment (Review Recommendations) Amendment Bill 2021 (SA), introduced into the South Australian Parliament on 26 May 2021, provides for major amendments to the Building and Construction Industry Security of Payment Act 2009 (SA), including:

  • improved oversight of adjudicators, authorised nominating authorities and adjudication applications referral process;
  • additional requirements relating to progress payments, payment claims and payment schedules;
  • protection around unreasonable contractual terms and threatening or intimidating behaviours; and
  • extension of the Act's coverage to certain construction contracts relating to residential premises.

Some of the amendments proposed in the Bill go significantly further than the recently-enacted security of payment reforms in NSW and WA. You can read our more detailed analysis of the Bill in our Insights article here.

Qld Supreme Court considers implied term of good faith

In North Queensland Pipeline No 1 Pty Ltd v QNI Resources Pty Ltd [2021] QSC 190, the defendant joint-venture participants (QNR and QNM) asked the Court to imply an obligation of good faith into a gas transportation agreement (GTA).QNR and QNM framed the implied term as an obligation to:

"Act in good faith by acting reasonably and with fair dealing to take all reasonable steps available to [them] under the GTA to eliminate or correct the QNI imbalance before seeking to charge the Imbalance Charge."

The defendants contended that the obligation of good faith was either implied as a matter of law or was implied as a matter of fact. 

The question of whether under Australian law an obligation of good faith is implied into all contracts, or all commercial contracts, is unsettled. Courts in different jurisdictions have taken different views and the High Court of Australia is yet to deliver an authoritative decision on the matter. Therefore, it remains open to parties to use clear language to expressly exclude such an obligation where they intend to do so.

Justice Freeburn was unwilling to take a "large step" to imply a duty of good faith as a matter of law because:

  • the element of necessity was not present.Here, the GTA remained capable of operation in the absence of the implied term of good faith sought by QNR and QMM.Indeed, other options existed for dealing with what the GTA described as an "imbalance" charge, without recourse to the proposed implied term;
  • the GTA's sophistication and position of the parties did not warrant it; and
  • the contract contained terms contradictory of either a general or specific term of good faith.

Justice Freeburn emphasised that satisfying the test for a term implied "in fact" can be difficult. According to the test in BP Refinery (Westernport) Pty Ltd v Hastings Shire Council(1977) 180 CLR 266, it must:

  • be reasonable and equitable;
  • be necessary to give business efficacy to the contract, so that no term will be implied if the contract is effective without it;
  • be so obvious that "it goes without saying";
  • be capable of clear expression; and
  • not contradict any express term of the contract.

Here, it was concluded that the facts of the case did not support an implied term of good faith. Justice Freeburn identified that the implied term was inconsistent with an express provision of the GTA and also the agreed risk allocation around the disputed imbalance charge mechanism. As well, he noted the accepted authority that the content of the duty to act in good faith does not require a contracting party to subordinate its own interest to those of the counterparty to the contract. Yet, the pleaded implied term would have that effect. 

Infrastructure NSW Guideline for the construction pause

Infrastructure NSW has released a guidance document for commercial principles to assist affected parties resolve the impacts of the restrictions imposed under public health orders which recently forced the closure of construction sites in Sydney.

The guideline was prepared to support NSW Government agencies with resolving the impacts of restrictions on construction on the Government’s infrastructure program, and provides additional commercial principles and guidance to be adapted by delivery agencies on a case by case basis. It is also capable of being applied by State Owned Corporations and other tiers of government. You can learn more here.

NSW Supreme Court considers intentionally deceitful conduct and repudiation

In Harden v Willis Australia Group Services Pty Ltd; Australia Group Services Pty Ltd v Harden [2021] NSWSC 939, Justice Sackar found that an employer's direction to its employee to intentionally deceive a third party, although a breach of an implied term to act in good faith, did not amount to a repudiation of an employment contract.

It comes after financial services provider, Willis Tower Watson, directed a former executive to inform clients that he was on leave when he was in fact serving out his notice period and had been suspended from daily activities pursuant to his employment contract. 

Justice Sackar held that the direction did not amount to a repudiation of the employment contract, because Willis indicated its intention for the contract to remain afoot and explicitly stated that Mr Harden was not being terminated.

Although the case involved an employment contract, a key takeaway is that a party to any contract should think carefully before directing its counterparty to deceive a third party intentionally. Even if such conduct does not amount to repudiation in each case, it might result in liability for breach of contract where there is an obligation of good faith (whether express or implied).

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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.