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12 Apr 2018

Major projects and construction: 5 Minute Fix 08

By THE MAJOR PROJECTS AND CONSTRUCTION TEAM

Get your 5 Minute Fix of major projects and construction news. This issue: the latest in banning unsafe building products, the expiry of unconditional undertakings and interest on delayed release of bank guarantees, and security of payment and insolvent claimants.

Building industry update – NSW closer to ban of unsafe building products

Our recent 5 Minute Fix 06 reported the issue of Ministerial Guidelines in Victoria restricting the use of certain combustible building products. The prospect of NSW building owners being forced to redress the risks posed by such cladding materials has now edged closer to becoming a reality.

The Building Products (Safety) Act 2017 (NSW) came into effect on 18 December 2017. It aims to eliminate unsafe building products in the construction industry. It authorises the NSW Commissioner of Fair Trading to issue bans on "unsafe" products and gives enforcement authorities extensive powers to investigate, assess and order the rectification of buildings in which banned products are present. There are penalties of up to $1.1 million for using, or endorsing the use of, banned products.

The Commissioner has sought submissions by 23 April 2018 on whether a "building product use ban" is warranted on the use of:

  • aluminium composite panels (in particular panels containing a polyethylene core);
  • polystyrene products; and/or
  • other similar substances.

For more information, see our Alert on this development.

Commercial risk allocation – expiry of unconditional undertakings and interest on delayed release of bank guarantees

It’s a common problem on construction projects. The contractor provides bank guarantees (unconditional undertakings) with the wording required by the contract, but the guarantees have an expiry date added. The project is delayed and the bank guarantees expire before the work is complete (or the defects liability period has expired). The question becomes: can the principal (as beneficiary under the guarantees) insist upon the contractor providing replacement guarantees to cover the period beyond their expiry?

This situation was recently considered by the Victorian Supreme Court in PHHH Investments No 2 Pty Ltd v United Commercial Projects Pty Ltd [No 2] [2018] VSC 92. The principal, PHHH, sought an injunction to require the contractor to provide replacement guarantees, on the basis that having expiry dates in the bank guarantees did not comply with the approved wording under the contract.

Justice Riordan dismissed the application. He noted that the contract (apparently, based upon an ABIC form) contemplated that other wording could be “approved”, and accepted the contractor’s argument that PHHH had accepted the alternative wording, including the expiry dates. In doing so, Justice Riordan considered and applied the principles applicable to entry into (and amendment of) contracts by conduct (estoppel-based arguments were not pursued by the contractor). Factors taken into account by the Court in concluding that the expiry dates had been accepted included:

  • PHHH having paid progress claims despite being able to withhold payment until it had approved the guarantees; and
  • both parties having proceeded with the project for more than a year without issues being raised about the adequacy of the guarantees.

The case provides a reminder to contracting parties, when seeking to secure obligations by way of performance security and in general, that enforceable contractual provisions need to be in place and need to be consistently acted upon to avoid the imposition of unforeseen conduct-based remedies and/or defences.

In Civil Mining & Construction Pty Ltd v Wiggins Island Coal Export Terminal Pty Ltd (No 3) [2018] QSC 60, after numerous hearings and judgments, it was finally determined that the principal had wrongfully held onto the bank guarantee despite no monies being owed by the contractor. The contractor sought statutory interest calculated by reference to the value of the bank guarantee and the date of the Final Certificate, when the bank guarantee ought to have been released.

However, it was held that a bank guarantee "does not sit well" with the concept of "money", as used in section 58 of the Civil Proceedings Act 2011 (Qld), and therefore no interest was owed on account of the late release of the bank guarantee by the principal. However, as this case turned on the meaning of Queensland civil procedure legislation, and differed from the outcome in a recent NSW Court of Appeal decision, the decision may not be of universal application.

Security of payment development regarding insolvent claimants – NSW Supreme Court rejects Victorian Court of Appeal as "plainly wrong"

In Seymour Whyte Constructions Pty Ltd v Ostwald Bros Pty Ltd (in liq) [2018] NSWSC 412, the NSW Supreme Court considered the extent to which Security of Payment legislation can be used by an insolvent contractor. Although the matter involved a project in NSW under the Building and Construction Industry Security of Payment Act 1999 (NSW) (NSW SOP Act), the impact of the judgment may be felt further afield, especially in Victoria and perhaps in other jurisdictions applying the “East Coast model” of security of payment legislation.

The central dispute concerned the validity of the adjudicator's jurisdiction. Specifically, it was argued that the NSW SOP Act was not available for use by insolvent contractors, relying upon Victorian Court of Appeal precedent in Façade Treatment Engineering Pty Ltd (in liq) v Brookfield Multiplex Constructions Pty Ltd [2016] VSCA 247. In that case, it was held that under the Building and Construction Industry Security of Payment Act 2002 (Vic) (Vic SOP Act) that the proper construction of the term "claimant" could not apply to a contractor in liquidation and that insolvent contractors were unable to take the benefit of the VIC SOP Act regime.

In Farah Constructions Pty Ltd v Say-Dee Pty Ltd (2007) 230 CLR 89, the High Court laid down the guidance – consistent with there being “a common law of Australia" rather than of each Australian jurisdiction – that trial judges (here, Justice Stevenson in the Supreme Court of NSW) must follow the decisions of intermediate appellate courts in other Australian jurisdictions (here, Façade from the Victorian Court of Appeal) “unless they are convinced that the interpretation is plainly wrong”. Subsequent cases have set a high bar for a decision to be found to be “plainly wrong”: for example, in Informax International Pty Ltd v Clarius Group Ltd (2011) 192 FCR 210, Justice Perram noted that the emphasis is on whether there has been a “miscarriage of the adjudicative process” and that “mere disagreement” with other courts “will not suffice”.

Given this high bar, Justice Stevenson set out his reasoning at some length. He noted that the meaning of "claimant" preferred in Façade Treatment turned upon whether a person has "undertaken" construction work in its present tense (connoting ongoing performance). However, he saw nothing in the provisions of the NSW or VIC SOP Acts that would "compel the conclusion that a person … somehow loses that status [of claimant] by reason of (if a company) being wound up or (if a person) becoming bankrupt". Justice Stevenson took care to identify the similarities between the NSW and VIC SOP Acts. Section 1 of the VIC SOP Act states that its purpose is to provide for entitlements to persons “who carry out construction work” (present tense). An identical section does not appear in the NSW SOP Act (though a similar "object" is set out in section 3 of the NSW SOP Act). However, Justice Stevenson did not distinguish Façade Treatment on these grounds, but instead expressly rejected the Victorian Court of Appeal's decision as "plainly wrong". This allowed him to reject Façade Treatment as binding precedent in NSW.

Consequently, notwithstanding the judgment in Façade Treatment, a company in liquidation remains a "claimant" under, and can take the benefit of, the NSW SOP Act. While an insolvent contractor may remain a "claimant" under similar legislation in force in other eastern jurisdictions, it remains to be seen whether this approach will be adopted in Victoria in respect of the VIC SOP Act.

A more detailed note on this case will be issued soon.

Case law round-up

In Shield Lifestone Holdings Pty Limited v LSKF Holdings Pty Limited [2018] NSWSC 335, the NSW Supreme Court confirmed that it can be difficult to nullify a contract on the grounds of uncertainty or illusory obligations.

An obligation will be illusory if it reserves to a party a true discretion or option as to whether to carry out what appears to be a promise. However, little is required to show that a discretion is not unfettered, and good faith obligations on the relevant decision-maker will usually impose sufficient obligations to ensure that the obligation is not illusory.

Society of Construction Law Conference ‒ call for papers

The Society of Construction Law Australia has released its call for abstracts for the annual national conference in 2018. The 2018 annual national conference will take place in the Hunter Valley on 17 and 18 August 2018. Details and online registration for the conference can be completed here: https://www.scl.org.au/what-we-do/conference/registration.

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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.