04 Sep 2014

Defence claims not constrained by dispute resolution clauses in Australian Standard AS2124-1992

by Stephen Boyle, Emily Mickle

The dispute resolution clause of the Australian Standard AS2124-1992 General Conditions doesn't bar defendants from raising a counterclaim.

For anyone involved in construction contracts, the dispute resolution clause of the Australian Standard AS2124-1992 General Conditions has raised some questions. Does it survive termination? Does a claim have to have gone through the process under the dispute resolution clause before it can be raised by way of defence in proceedings?

A recent decision by Justice Kenneth Martin in Jamac Construction Group Pty Ltd v De Mol Investments Pty Ltd [2014] WASC 273 examined the scope of clause 47 of AS2124-1992, which sets out the parties' obligations for dispute resolution. Significantly, the Court held that a defendant who has not instigated the dispute resolution provision under the contract in respect of a claim is not prevented from raising that claim in its defence or by way of counterclaim.

Dispute resolution under clause 47 of AS2124-1992

Clause 47 of the General Conditions requires, as is relevant to this case, that where a dispute between the contractor and the principal arises, a party shall serve a notice of dispute on the other party and must confer in an attempt to resolve the dispute prior to the dispute being referred to arbitration or litigation.

The issue that the Court considered was whether a defendant is able to raise claims in its defence or counterclaim which were not subjected to the dispute resolution process under the contract.

The construction contract and the course of the dispute

The principal, De Mol, and head contractor, Jamac, entered into a construction contract which incorporated AS2124-1992 General Conditions.

De Mol terminated the contract. The parties agreed that the performance of the contract came to an end by reason of events of frustration – in this case, an inability to resolve dewatering issues at the excavation site.

Jamac then made a payment claim for works performed and costs incurred prior to the date of frustration of the contract. This payment claim was disputed and became the subject of the current litigation. In its defence, De Mol raised various claims which had not been subjected to the dispute resolution process under the contract. In particular, notices of dispute pursuant to clause 47.1 had not been issued by De Mol in respect of the claims that it sought to raise in its defence.

Jamac applied to the Supreme Court of Western Australia to strike out various paragraphs of De Mol's defence on the basis that De Mol had failed to comply with the dispute resolution prerequisites under clause 47 and was therefore barred from raising the claims by way of set-off and counterclaim.

Defendants can raise their claims in court without prior dispute resolution processes

The Court rejected Jamac's argument, holding that De Mol could raise a claim by way of set-off and counterclaim, even though it had not complied with its contractual requirements to provide a notice of dispute and confer with Jamac in respect of that claim.

Justice Martin, in finding that the principal was not obliged to go through the dispute resolution process at this stage, said that:

"For this court to mandate that process to unfold at this late stage presents to me as pointless in the extreme. I would assess that as a significant triumph of form over substance."

He observed that the wording in clause 47 did not suggest that the obligations were a legal prerequisite to a party acquiring a cause of action, or the dispute resolution procedure had to be followed before a party's cause of action is complete.

Jamac's application to strike out De Mol's defence was dismissed.

What does this mean for anyone using the AS2124-1992 General Conditions?

It is clear, following Jamac, that:

  • the parties are bound by the dispute resolution provisions of a contract even after termination of the contract; and
  • a defendant can raise, by way of set-off, counterclaim or defence, a claim notwithstanding that that claim has not gone through the dispute resolution process under a contract which incorporates clause 47 of the AS2124-1992 General Conditions.

This might not be the last word on this subject. Justice Martin's view that a party's cause of action could arise even if it did not comply with the clause 47 obligations raises the prospect that the decision may have been different if the contract had contained a provision to the effect that:

  • the cause of action in respect of any claim did not arise until the contractual dispute resolution procedure was completed; or
  • that a claim could not be raised by way of set-off or counterclaim until the contractual dispute resolution process was completed.

For the time being, anyone using the AS2124-1992 General Conditions in their contracts will need to consider the Jamac decision if a dispute arises.

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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.