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12 Dec 2019

Major projects & construction 5 Minute Fix 46

By THE MAJOR PROJECTS & CONSTRUCTION TEAM

Get your 5 Minute Fix of major projects and construction news. This issue: we look at the outcomes of the Building Industry Fairness Reforms Implementation and Evaluation Panel Report and what’s next for Project Bank Accounts in Queensland; and various judgments of the NSW Supreme Court regarding: resolution of inconsistencies in standard form contracts, lack of severance of invalid parts of an adjudicator's determination and the "substance over form" approach when assessing payment claims.

BIF Panel Report – the cultural changes the industry might not be ready for

In 2018, the Building and Construction Industry Payments Act 2014 (Qld) was replaced with the Building Industry Fairness Act (BIF Act).  The first of the major changes introduced by the BIF Act was the introduction of Project bank Accounts (PBAs).  Phase 1 of the BIF Act, which commenced in 1 March 2018, required head contractors to set up and maintain bank accounts for the holding of project funds.  The 2018 amendments initially only applied to State Government funded projects valued between $1 million to $10 million, with the intention to have a staged roll-out of the requirements to all projects in Queensland. 

A joint taskforce and evaluation panel was appointed to investigate the application of the project bank account initiative and make recommendations for the further phases.  The results of the taskforce and the Government's response, initially intended to have been published in February 2019, have now been released.

The report, "Building Fairness: An Evaluation of Queensland's Building Industry Fairness Reforms" sets out 20 recommendations in relation to PBAs that were, for the most part, adopted by the Queensland Government.  The first recommendation sets the timeframes for the rollout of the next 3 phases as follows:

Phased expansion of PBAs

Timing

Expected commencement

Phase 2: public and private projects valued at $10m or more

At least 2 months after the passing of any amendments to the BIF Act

I July 2021

Phase 3: all private projects valued at $3m-$10m

4-6 months after Phase 2

1 January 2022

Phase 4: all private projects valued at $1m-$3m

4-6 months after Phase 3

1 July 2022

Other notable recommendations included in the Report:

  • Recommendation 3: removal of the requirement for head contractors to hold a trust account for disputed funds as part of the PBA framework;
  • Recommendations 6, 7 and 10: requirement to hold separate trust account for retention on each project, rather than the holding of retention as part of the PBA;
  • Recommendations 11 and 18: limiting the responsibility of principals in relation to PBAs;
  • Recommendation 12: requiring all PBAs to be "trust" accounts;

Possibly the most noteworthy recommendation is Recommendation 5 which introduces the concept of "payment withholding requests" which may be served on parties higher in the contractual chain (including head contractors) following the making of an adjudication application.  This would require monies to be retained from monies payable to the person against whom the adjudication application is made sufficient to cover the claims made in the adjudication.  The Report envisages that withholding requests could even be made against the financier, in circumstances where the adjudication application is made by the head contractor against the principal. The Recommendation was only accepted in principle, the Queensland Government identifying that Queensland would be the first jurisdiction to introduce legislation to provide head contractors with the ability to secure payment of an adjudication amount over a principal.  While the intention is to reduce the risk of non-payment of adjudication amounts, there are already penalties in place in the BIF Act for non-payment. It is not presently clear how the proposed withholding notices are intended to work. 

One thing is clear, the project bank account requirements will be rolled out over the next few years to apply to all newly tendered projects of $1 million or more, both public and private, with the goal being to force a cultural change as to how the industry approaches payment of contractors.  The question is whether the industry, whose business models largely depend upon the fluidity of project cash flow, is capable of such cultural change.

Standard form contracts: resolving inconsistencies between general conditions and particulars

In NEXTracker Inc v ACN 003 905 093 Pty Ltd (formerly RCR O'Donnell Griffin Pty Ltd) (in liq) [2019] NSWSC 1604, tension created by the interaction between standard form general conditions and specific language chosen by the parties was resolved by the application of some important rules of contract interpretation.

The key principles considered by the Supreme Court of NSW included that:

  • a construction that gives effect to all provisions in a contract will generally be preferred to one that leaves any provisions redundant. However, this principle is merely a guide to assist in ascertaining the parties' objective intentions.
  • courts will pay particular attention to language that has been specifically chosen by the parties, on the basis that this is more likely to reflect their objective intentions.

The application of these principles in respect of disputed ownership of imported equipment following the RCR O'Donnell Griffin Pty Ltd insolvency is discussed by Jonathan McTigue and Sean Kelly here.

Bad adjudication determination not saved by severance

In Hanson Construction Materials Pty Ltd v Brolton Group Pty Ltd [2019] NSWSC 1641, a denial of natural justice was unable to be remedied by severing the affected part of an adjudication determination. Consequently, the adjudicator's reliance on a reference date that occurred post-termination of the underlying construction contract, which was not raised by either party during the adjudication process, led to the adjudication determination being quashed.

Significance of decision

This case will provide some hope to respondents in adjudication processes, as it provides that particularly egregious adjudication determinations may not be able to be "saved" by severing the offending part of the determination while enforcing the rest.

Background

Brolton Group was required to submit claims for interim payments on the last Tuesday of each month. The construction contract was terminated by Hanson Construction Materials on 3 October 2018.

Almost one year later, on 28 August 2019, Brolton submitted a claim entitled "Progress Claim for September 2018", which included a number of claims it had previously submitted as well as subcontractor invoices relating to work performed after Tuesday, 24 September 2018 up to 10 October 2018.  Therefore, the payment claim sought payment of works completed after termination of the construction contract.

The adjudicator found in favour of the claimant and determined that the applicable reference date was 23 October 2018, despite the fact that neither party had made submissions to that effect and that the contract had been terminated before that date.

Hanson sought judicial review of the adjudication determination in the NSW Supreme Court.  The main issues resolved by the Court were:

  • first, whether the payment claim made on 28 August 2019 was supported by a valid reference date; and
  • secondly, whether any errors made by the adjudicator were reviewable, and if so, whether the affected parts of the adjudication determination could be severed and the remaining parts preserved.

Adjudication determination quashed

While Justice Ball held that it was invalid to rely upon a reference date occurring after the construction contract was terminated, the claimant was not prevented from claiming payment for works performed after an earlier reference date.  Therefore, a reference date of 25 September 2018 could have provided a valid basis for the payment claim.

The adjudicator did not however base the determination on this earlier reference date but on the l date occurring after termination of the construction contract – despite neither party raising that option in their respective submissions.  This meant that the adjudication process involved a denial of natural justice, as the adjudicator did not provide the parties with a further opportunity to be heard on this issue.

Given the gravity of the adjudicator's failure to decide the claim in accordance with the correct reference date, involving a denial of natural justice, Justice Ball held that no part of the adjudication determination was severable, and the entire determination was quashed.  This was because the adjudicator's error "went to the heart of the payment claim and altered the lens through which that payment claim was assessed".

"Substance over form" approach allows adjudication determination to stand

A subcontractor (ZS Queenscliff) has successfully argued that an email attaching a monthly project summary sheet, together with six subsequent emails each attaching multiple third party trades and project management invoices, was sufficient to constitute a single consolidated "payment claim" for the purposes of the security of payment legislation in NSW.

In Modog Pty Ltd v ZS Constructions (Queenscliff) Pty Ltd [2019] NSWSC 1743, the Supreme Court of NSW adopted a "substance over form" approach to assessing the validity of the purported "payment claim", and refused to quash an adjudication determination made in favour of ZS Queenscliff.

Significance of decision

The decision affirms the entrenched practice of courts taking a "substance over form" approach to assessing adjudications under the security of payment legislation in force around Australia.  This "substance over form" approach is generally favourable to claimants, as it lessens the prospect of adjudication terminations being quashed by the courts.

Background

ZS Queenscliff had developed a habit of circulating "payment summary sheets" to the main contractor (Modog) that listed outstanding invoices and amounts due and payable for ZS Queenscliff's project management services.

Two days before the subcontract was terminated by Modog, ZS Queenscliff issued a final project summary sheet.  This was followed later that day by 6 more emails to Modog attaching multiple invoices, including 5 invoices from ZS Queenscliff for project management services and multiple invoices for third party trades.  Modog responded with 5 separate payment schedules and assessed the progress claims at $0.

Following an adjudication, the adjudicator determined that ZS Queenscliff was entitled to payment in respect of all of the third party trades invoices and 4 of the 5 project management invoices.  Modog challenged this determination on the following grounds:

  • (invalid payment claim) there was no valid "payment claim" because the email and attached summary payment sheet did not expressly claim payment from Modog for project management services.Modog argued that it should instead be characterised as merely a direction for Modog to pay the third party trades; and
  • (multiple payment claims) in addition to the email and attached summary payment, three of the project management invoices purported to be separate payment claims. As a result, Modog claimed that the adjudicator had determined payment in respect of four purported "payment claims" for a single "reference date", which constituted a jurisdictional error.

Modog's arguments rejected

In respect of these issues, Justice Henry held that the:

  • terms of the email and attached summary payment sheet, when understood in the context of the past dealings between the parties, meant that those documents should together constitute a valid "payment claim". In particular, it was held that "unclear drafting in a document which a party purports to be a payment claim and which may lead to confusion because it is open to different interpretation, does not, in my view, necessarily raise a jurisdictional error. The parameters of a payment claim are a matter for an adjudicator, as are its scope and nature"; and
  • three project management invoices – which were "in a more traditional form of payment claim" – did not represent separate and distinct payment claims. As a matter of "substance over form", there was only one "payment claim", which incorporated the email and attached project summary sheet and the subsequent emails that attached numerous invoices for trades and project management services.

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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.