Major Projects & Construction 5 Minute Fix 100: NSW State Infrastructure Strategy, good faith and other implied terms, builder’s margin in variation claims and expert determinations

By the Major Projects & Construction team
09 Jun 2022
Time to read: 5 minutes

Get your 5 Minute Fix of major projects and construction news. In this special 100th edition of the Major Projects & Construction 5 Minute Fix: NSW State Infrastructure Strategy, implied terms regarding time for performance and good faith, challenging the inclusion of builder’s margin in variation claim quantum, lost opportunity damages explained in multiple judgments, and the “one contract rule” under the SOP Act in NSWCA and “commercially sensible” application of an expert determination clause.

Infrastructure for the Future: NSW and Federal strategy signals a move away from megaprojects and towards climate change prevention

Renewable energy alternatives and other initiatives to address the impacts of climate change have become clear priorities in infrastructure planning and strategy at both a State and Federal level, seemingly at the expense of large-scale motorway projects.

NSW State Infrastructure Strategy

Infrastructure NSW (INSW) has released its 5-yearly update, Staying Ahead: State Infrastructure Strategy 2022-2042. The update sets out independent advice to the NSW Government on the State’s infrastructure needs and strategic priorities. The strategy makes 57 recommendations aimed at improving infrastructure outcomes. The recommendations seek to serve growing communities through integrating metropolitan centres, and address housing affordability, and an orderly and efficient transition to the NSW Government’s goal of achieving Net Zero emissions by 2050.

Infrastructure Megaprojects

Most importantly, INSW suggests that the focus on megaprojects of the last decade should give way to a combination of smaller and medium sized projects delivered in stages as multi-year programs. Smaller, targeted projects would involve more manageable project costs with higher payoffs which is especially desirable given INSW has identified limited capacity of the government to deliver more megaprojects in the short term. INSW recommends that transport megaprojects which have been announced but not commenced should be paused, including the Beaches Link, Paramatta Light Rail Stage 2 and the M6 Motorway Stage 2.

Private Sector Co-development

INSW recommends greater participation from the private sector in the delivery of government-led projects. This includes the co-development of private and social housing, train stations and precincts, investment in electricity to achieve the Government’s Net Zero goal and to ensure NSW infrastructure is fully utilised and will endure in the long term.

Implied duty of good faith and reasonable time to perform

Recent decisions in the Queensland Supreme Court and the Western Australia Court of Appeal are useful reminders of the contractual obligations that arise by implication.

Implied reasonable amount of time

City of Wanneroo v Tah Land Pty Ltd [2022] WASCA 53 involved a Deed that obliged Tah Land to subdivide land prior to City of Wanneroo commencing business on that land. In April 1996, the Deed was varied so that City of Wanneroo could require Tah Land to subdivide the land at any time in the future. In February 2019, 23 years after the variation, City of Wanneroo called upon Tah to subdivide the land.

The Western Australia Court of Appeal upheld the trial judge's finding that the variation to the Deed had the effect of removing the obligation on Tah Land to subdivide "prior to [City of Wanneroo] commencing its business" and that there was an implied term that City of Wanneroo could only require Tah Land to perform the subdivision within a reasonable amount of time (as opposed to any time in the future).

It was held that 23 years was beyond a reasonable amount of time and City of Wanneroo could not now require performance.

Implied obligation of good faith

We have previously written about the duty of good faith in Insights articles and in 5MF 3 and 5MF 82. The Queensland Supreme Court in Findex Corporate Finance (Aust) Pty Ltd v Don Kyatt Spare Parts (Qld) Pty Ltd & Ors [2022] QSC 100 raised again whether the is an implied duty of good faith at law. Ultimately, the court concluded that it did not need to determine whether a good faith obligation was part of the contract because, on the facts of this case, there would have been no breach in any event.

Don Kyatt Spare Parts (DKSP) engaged Findex to help sell its truck parts business. After terminating the engagement with Findex, DKSP re-commenced negotiations with one of the interested buyers identified by Findex and eventually sold the business to that buyer. Findex argued that DKSP breached the duty of good faith by terminating the engagement to avoid paying a success fee.

The Court rejected Findex's claim based upon an alleged breach of good faith on the basis that Findex had not facilitated the recommencement of negotiations between DKSP and the interested buyer, and that the final sale had been completed 12 months after the expiration of the non-exclusivity period specified in the engagement. Therefore, the facts did not indicate a breach of any good faith obligation, and so the Court did not consider whether the obligation was impliedly part of the engagement.

Accounting for builder’s margin in compensation for variations to scope

In Canterbury-Bankstown Council v Payce Communities Pty Ltd [2022] NSWCA 74 the Court of Appeal considered a dispute between Canterbury-Bankstown Council (Council) and Payce Communities Pty Ltd (Payce) in respect of apparent variations arising from the construction of a community centre.

We previously reported on the adjudication here and trial proceedings here. One issue on appeal was whether the trial judge erred in including a 10% builder's margin in the quantum of compensation for variations under a development agreement.

The works contract between Payce and the relevant builder allowed the builder to apply a 10% margin to variation works and the Fit Out Agreement allowed for Payce to charge Council "reasonable rates or prices including a reasonable amount for profit and overheads for each variation". The Court found that there was insufficient evidence to conclude that the builder did in fact charge Payce the 10% margin in respect of the variations in issue and it could not therefore be reasonable for Payce to charge this to the Council.

Assessing loss of opportunity damages

Two recent judgments provide guidance on the courts’ assessment of loss of opportunity damages, including:

  • the importance of differentiating between loss of opportunity damages and direct damages for breach of contract; and
  • claims based on speculative opportunities won't succeed.

Nature of loss of opportunity damages

In Tulloch Brae Pty Ltd v Environmental Protection Equipment Pty Ltd [2022] QCA 97 the Queensland Court of Appeal highlighted the differences between loss of opportunity damages and direct damages for breach of a services agreement.

Tulloch Brae argued that the respondent, Environmental Protection Equipment (EPE) had failed to prove the existence of opportunity loss and the trial approach, where the court did its best to assess a loss, even where there are difficulties with the evidence providing it, involved an error.

The relevant breach of contract concerned Tulloch Brae’s failure to remove containers from a railway station within a specified time. EPE claimed as damages the extra money that EPE would have made had Tulloch Brae performed in a manner that equalled the performance standards of EPE. Tulloch Brae’s central contention on appeal was that EPE had failed to prove the existence of a loss of opportunity.

The Court of Appeal held that EPE had incorrectly described its loss as a loss of opportunity, when it was in fact damages stemming from a breach of contract by failing to render services. The assessment of damages in that context consists of the market price to obtain the services, less the unpaid portion of the contract price. The Court of Appeal observed that while an assessment of damages can be difficult, and can involve a degree of “guess work”, that does not excuse the Court from the task.

Speculative opportunities

In PA Putney Finance Australia Pty Limited v Aalders [2022] NSWSC 607, the New South Wales Supreme Court considered whether there was an entitlement to compensation for opportunity loss in circumstances where the defendants had breached their obligations under an executed Confidential Terms of Settlement.

Under clause 9(ii) of the Confidential Terms of Settlement, the defendant had agreed to refer any customers with rental agreements for equipment to the plaintiffs. The plaintiffs claimed that the defendants had breached clause 9(ii) by reason of failures to refer customers at the end of the minimum term of the rental agreements.

Ultimately, the claim failed because it was time-barred. In obiter, Justice Lindsay stated that compensatory damages for a loss of opportunity are determined according to the degree of probability of the opportunity materialising. Damages will not be awarded if the likelihood of the lost opportunity is so low as to be considered speculative.

The plaintiff contended that a discount of 20% ought to be applied to the loss of opportunity damages to allow for the possibility that they might not have secured business from the customers had the defendants referred them. However, the plaintiffs were unable to demonstrate that customers referred to the plaintiffs by the defendants would have acted upon the defendants’ referral. Therefore, had the claim not been barred, a 20% discount would not have properly reflected the speculative character of the plaintiffs’ claim.

SOP Act: NSW Court of Appeal finds there is no strict one contract rule

In our recent Insights article SOP clarified: meaning of "arrangement" and the risk of claiming payment for work under multiple construction contracts, we considered the case of Ventia Australia Pty Ltd v BSA Advanced Property Solutions (Fire) Pty Ltd [2021] NSWSC 1534 and its interpretation of the “one contract rule” under the Building and Construction Industry Security of Payment Act 1999 (NSW) (SOP Act).

This month Ventia v BSA was overturned by the Court of Appeal in BSA Advanced Property Solutions (Fire) Pty Ltd v Ventia Australia Pty Ltd [2022] NSWCA 82. The Court of Appeal considered the following issues on appeal (amongst others):

  1. whether the SOP Act required a payment claim to relate to work done under only one construction contract (the “one contract rule”); and
  2. if the one contract rule exists, whether it was a precondition to the validity of a payment claim.

Issue 1: Implausible that there is a strict “one contract rule”

The Court of Appeal held that it was "inherently implausible" that there is any strict and precise “one contract rule”. In particular:

  • the expansive definition of “construction contract” in the SOP Act, which includes both a contract and some other “arrangement”, directs attention to the carrying out of the work for reward rather than the legal characteristics of the source of the obligation;
  • as a matter of commercial practicality, the apparent precision of the “one contract rule” does not reflect the expansive scope of arrangements under which goods and services may be supplied for construction work; and
  • it is arguable that there is no “one contract rule” because, when read together, sections 8(1) and 13 of the SOP Act permit a person to serve a payment claim in relation to an entitlement under more than one contract so long as the claim is referable to one reference date.

Issue 2: Any “one contract rule” would not be a condition of validity

The Court of Appeal held that, even if a payment claim must relate to one construction contract with one reference date, the validity of a payment claim is not conditioned on the existence of only one construction contract. In particular, compliance with any “one contract rule” would be a matter to be addressed by the adjudicator.

It was held that the contrary view would impose undue jurisdictional limitations on the functions of the adjudicator and potentially undermine the purpose of the SOP Act by allowing more intervention from the courts.

Is an expert determination “final and binding” notwithstanding procedural irregularities with Resolution Institute rules for expert determinations?

In Aligned Services Group Pty Ltd v Citi-Con (Vic) Pty Ltd [2022] VSC 286 the Court considered whether Resolution Institute Expert Determination Rules (ED Rules) rendered a determination final and binding despite the dispute resolution clause contemplating progressing to litigation, and whether a determination would be invalid if the expert delivered a determination outside of the required timeframe.

The dispute resolution clauses required compliance with notice, negotiation and expert determination requirements as condition precedent to a party issuing legal proceedings. The contract specified that the expert determination was to be conducted in accordance with the ED Rules if the parties could not agree on the identity of the expert. The parties did not agree on an expert and the ED Rules applied. Rule 3(2) of the ED Rules provided that “unless otherwise agreed in writing by the parties, the determination of the Dispute by the Expert shall be final and binding between the parties”.

Aligned Services Group argued that Rule 3(2) rendered the determination “final and binding”. It was argued that this, when considered in conjunction with the contract making expert determination a condition precedent to legal proceedings, limited the court’s oversight of the dispute to reviewing whether the expert determination was properly undertaken in accordance with the terms of the contract.

Justice Stynes held that such a construction would mean that a party could unilaterally force a “final and binding” expert determination by withholding agreement in relation to the appointment of an expert.

Aligned Services Group also argued that the expert determination was not invalidated by the determination being issued more than 28 days after the dispute was referred to an expert (the determination was issued on 7 June 2021, more than 3 months after the process commenced on 16 February 2021).

While the determination was issued more than 28 days after the commencement of the process, it was held that it would be unlikely that the parties would have objectively intended that, having expended time and money on the expert determination, they would be deprived of the benefit of its contents.

As a consequence of these arguments and findings, the expert determination was valid, albeit non-binding in accordance with the dispute resolution clause notwithstanding the ED Rules.

Legislation progress on road user charges for low and zero emission vehicles

The progress of legislated road user charges for owners of zero and low emission vehicles (ZLEVs) in Australia continues. Click here for an update on the latest developments by Peter Holcombe Henley and Amorkor Amartey, which includes:

  • analysis of recent legislative activity in South Australia and Western Australia;
  • the ongoing High Court challenge to the constitutionality of the Victorian Zero and Low Emission Vehicle Distance-based Charge Act 2021; and
  • consideration of the recently-elected federal Government's policy on ZLEV road user charging and the political dynamics that may shape the implementation of its legislative and policy program.
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.