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16 Feb 2012

The Construction Contracts Act 2004 (WA) may not apply to your contract after all

by Carine Cruse, Stephen Boyle

A recent decision provides some clarity in relation to the "mining exclusion" under the Construction Contracts Act 2004 (WA).

Increasing popularity of adjudications in WA

The Construction Contracts Act 2004 (WA) allows for the determination of payment disputes by adjudication. In Western Australia, there has been a steady increase in the number of adjudication applications brought under the Act since its inception.

In the last financial year, around 200 such applications were made (up from 172 in the previous financial year) – claiming a total of $309 million in payment disputes.

Determinations are enforceable as judgments, even if they are not binding on judges or arbitrators subsequently determining the same claims. Making and responding to applications can consume significant resources of contracting parties.

A party can only make an adjudication application if the contract in question is a construction contract as that term is defined in the Act. Accordingly, the first issue which a party receiving an adjudication application should address is whether the contract is a construction contract for the purposes of the Act. An adjudicator must likewise satisfy himself that he has jurisdiction to determine the application.

Significantly, the Act contains a number of exceptions to the definition of construction contract, including section 4(3), which is colloquially referred to as the "mining exclusion". Given the number of contracts in Western Australia which relate directly or indirectly to mining projects, it is helpful to consider the extent of the "mining exclusion".

The mining exclusion

Until recently there has been no judicial guidance on the interpretation of that provision. It was commonly considered that section 4(3) of the Act applied to work performed in the resources industry, rather than to identified activities which are commonly associated with the resources industry. The decision of Conneq Infrastructure Services (Australia) Pty Ltd and Sino Iron Pty Ltd [2012] WASAT 13 is the first to consider the interpretation of section 4(3) of Act.

In that case, the parties had entered into a contract for the construction of a seawater desalination plant to supply water for an iron ore project located in the Pilbara. The State Administrative Tribunal (SAT) found that the desalination plant extracted or processed a "mineral bearing… substance", as salt was a mineral. The SAT also found that the application of section 4(3)(c) turned on the purpose of the construction of the plant, rather than the purpose of extracting and processing the mineral bearing substance. What was important was the primary purpose of the plant, rather the use that might be made of any product created by that plant or its association with the resources industry. The purpose of the plant was the processing seawater to produce desalinated water. It did not matter that desalinating water was not a mining activity in and of itself, or even part of a larger mining process. The plant came within the exception of section 4(3)(c) and the contract was not a construction contract for the purposes of the Act.

Another interesting point arose in this case. The plant was fabricated overseas as completed interconnecting modules. The contractor argued that it was not constructing a plant; it was merely installing pre-fabricated modules on site and commissioning the plant. The SAT found that the contractor was completing the building of the plant so that it became operational. It concluded that work constructing any plant encompassed work, which formed part of the construction process. Therefore, the modular work was "constructing" for the purposes of the Act.

What does this mean for contracting parties?

First, all work which would ordinarily be considered construction work, or forming part of the construction process, will be construction work for the purposes of the Act.

Secondly, it is now clear that the "mining exclusion" in section 4(3) of the Act applies more broadly than just to mining – it can also apply to the construction of a plant, which is not used for mining.

As a result, some contracts which might ordinarily be considered to be construction contracts will be excluded from the application of the Act, because they fall within the exception of section 4(3). Contractors in those circumstances will not be able to avail themselves of adjudications to determine payment disputes.

Contracting parties need to be aware whether their contracts are covered by the Act. This case now gives some guidance for that consideration. Whether the Act applies is not only important in determining whether an adjudication application can be made and how to respond to such an application, but is also important in determining whether the implied terms under the Act apply. These implied terms can have a significant impact on the parties' rights and liabilities.

 

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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.