11 Jul 2019

Major projects & construction 5 Minute Fix 36

By the Major projects & construction team

Get your 5 Minute Fix of major projects and construction news. This issue: new case law on the doctrine of penalties, effectiveness of notices to terminate contractual rights, and implied obligations to act in good faith and with fair dealing in bespoke commercial contracts; new Federal protocols designed to eradicate the "black economy" in the construction sector; new standard form construction contract for national capital works infrastructure projects; and industry consultation on the Building Ministers Forum report on compliance and enforcement in the construction industry.

New General Conditions of Contract for construct only contracts with government and semi-government principals

Austroads and the Australian Procurement and Construction Council have recently released the General Conditions of Contract for Construction, National Capital Works 4 (NCW4).  Through greater consistency in contractual clauses, the NCW4 aims to enhance efficiency of project delivery and reduce the potential for disputes between the parties.

The NCW4 is intended for use where the principal is an Australian Government or semi-Government agency.  Accordingly, there are no provisions in the NCW4 addressing security from, or insolvency of, the principal.  The NCW4 has been developed for construct only contracts and therefore is unlikely to be suitable for design and construction contracts or where services are procured as part of the contract. 

Accompanying the release of NCW4 are "back-to-back" Conditions for Subcontract, designed to pass through via a subcontract the risk allocation under the NCW4.  Further details can be found on Austroads' website here.

Similar to Australian Standards standard form contracts, principals will have the option to add special conditions to the NCW4 to include specific policies or State or Territory legislation.  It is anticipated that each State and Territory will amend the NCW4 to address local legislation and policies. 

Tenderers for Australian Government contracts take note: "Black Economy Procurement Connected Policy" is in force

As of 1 July 2019, the Commonwealth's Black Economy Procurement Connected Policy has commenced.  The purpose of the policy is to improve procurement practices to protect honest businesses, increase integrity in supply chains and reduce black economy behaviour.

Under the policy, businesses seeking to tender for Australian Government procurement contracts (goods and/or services), including for construction services, valued at over $4 million must comply with the following requirements:

  • provide a valid and satisfactory Statement of Tax Records (STRs) from the Australian Taxation Office (ATO); and
  • ·obtain and hold equivalent STRs from their first tier subcontractors.

Tenders must not be accepted if these requirements are not satisfied.  All non-corporate Commonwealth entities must comply with the policy, while corporate Commonwealth entities are encouraged to comply.

Existing contracts and panel arrangements are protected by "grandfathering" provisions, and there is no requirement to amend existing contracts to include model clauses prepared by the Department of Treasury (the policy and model clauses are here, and information from the ATO is here). 

Commercial purpose of termination notice provisions given precedence, and doctrine of penalties not available to avoid termination of contractual rights

The Victorian Court of Appeal has held that a claim for relief against forfeiture may arise from penal contractual provisions or from circumstances involving unconscientious conduct leading to forfeiture of a right.  Further, a termination notice addressed to the wrong recipient was valid and effective.

JPA Finance Pty Ltd v Gordon Nominees Pty Ltd [2019] VSC 171 involved various commercial arrangements which resulted in the sale by Gordon Nominees Pty Ltd (GNPL) of 50% of the units in the Travel Inn Motel Unit Trust, and a loan to GNPL. 

Later, in exchange for cancelling the loan, GNPL agreed to transfer a further 20% of the units to JPA Finance Pty Ltd (JPA), and the parties entered a call option deed allowing GNPL to purchase back the second tranche of units at a purchase price slightly higher than the value of the cancelled loan.  JPA was entitled to terminate the call option deed if an Insolvency Event occurred, which included a failure to respond to a statutory demand under the Corporations Act 2001. 

GNPL was required to pay JPA's legal fees on demand.  It did not pay and JPA served a statutory demand on GNPL that received no response within 21 days.  Although the claimed amount was paid into a solicitor's trust pending taxation of legal costs, JPA then purported to terminate the call option deed.  The notice of termination was addressed to GNPL's solicitors.  GNPL disputed that the call option deed had been validly terminated.  At first instance, the trial judge held that the termination notice was invalid and that GNPL was entitled to the equitable remedy of relief against forfeiture.

On appeal, JPA argued that the trial judge had incorrectly applied the law.  It argued the question was not whether it was unconscionable for GNPL to have lost its rights, but whether JPA acted unconscientiously in insisting upon its strict legal rights. 

The Victorian Court of Appeal agreed with JPA's submissions with the outcome that:

  • The commercial purpose of the phase "addressed to", in the clause requiring delivery of notice of termination to a party, was to ensure that the relevant notice was directed to the attention of GNPL.  This could be, and was, achieved by addressing the notice of termination to a party's solicitors.
  • Equitable relief against forfeiture may arise in two kinds of situation.  First, where the purpose of the right to terminate is to secure performance of the contract (and equity may assist a party defend a claim for breach).  Secondly, where a party is entitled at law to terminate, but it would be unconscientious to do so because of fraud, mistake, accident, surprise or because of some other unconscientious conduct (such as taking advantage of a vulnerability to gain unjust enrichment).
  • A Court should not intervene into the parties' contractual relationship simply because it would fair and reasonable to do so, or to protect a party from its own inadvertence or wilful default.
  • Relief against forfeiture was not available to GNPL as GNPL's failure to respond to the statutory demand gave rise to the Insolvency Event (not its strict failure to comply with a clause of the contract by the non-payment of legal costs).

JPA's appeal arguments were upheld, the trial decision was overturned and the termination of the call option deed was declared valid and effective. 

Implied duty to act in good faith and deal fairly overcomes strict contractual rights

In Aurizon Network Pty Ltd v Glencore Coal Queensland Pty Ltd & Ors [2019] QSC 163, Justice Jackson held that the exercise of express contractual rights was tempered by the implied duty to act in good faith and with fair dealing to a counterparty.

The defendants in this case were customers of a rail network which was used to transport coal in Queensland from coal mines to the ship loading terminal at the Wiggins Island Coal Export Terminal. 

The defendants argued that unambiguous contractual provisions permitted them to give a notice which had the effect of reducing their Wiggins Island Rail Project (WIRP) Fee payable to the plaintiff (Aurizon) to nil. 

Aurizon argued that the notices were ineffective and that the defendants remained liable for the WIRP Fee, including on the basis that there was an implied term that the defendants "act in good faith and deal fairly" with Aurizon. 

Justice Jackson held that:

  • Aurizon was entitled to rely upon extrinsic evidence of pre-contractual negotiations even in the absence of ambiguity in the ordinary meaning of the contractual text, in circumstances where the ordinary meaning would result in an absurd commercial outcome.  In such a case "something has clearly gone wrong with the text so that words may generally be supplied, omitted or corrected [by the Court], where it is clearly necessary in order to avoid absurdity".  However, it must be clear what correction ought be made to the text before the Court will do so;
  • an "entire agreement" clause did not prevent Aurizon from relying upon extrinsic evidence to aid in the construction of the agreements; and
  • there was an implied term that required the defendants to act in good faith and fair dealing with Aurizon when relying upon contractual rights to issue notices and avoid the WIRP Fee.

It was held that the defendants' exercise of rights solely to avoid liability for payment of the WIRP Fee was not in accordance with the implied term.  The fact that one of the defendants acted first, causing the others to protect their commercial interests by also issuing notices, did not, in Justice Jackson's view, excuse the conduct.  The notices were held to be of no operative contractual effect. 

Building Stronger Foundations: NSW Government seeking industry consultation on reforms proposed by the Building Confidence Report

The Council of Australian Governments Building Ministers Forum commissioned an independent review of compliance and enforcement systems for the building and construction industry. 

In early 2018, the results of the report were published in the Building Confidence Report.  It identified serious and widespread compliance failures in the sector and made 24 recommendations to address those weaknesses.  In February 2019, the NSW Government released a response to the Building Confidence Report in support of most recommendations

The NSW Government has now released a discussion paper “Building Stronger Foundations”, seeking industry feedback on the following four recommended reforms:

 

  • Require “building designers” such as architects, engineers and other building practitioners to:
    • declare that plans, specifications and performance solutions they provide are compliant with building regulations including the Building Code of Australia (BCA);
    • demonstrate through documentation how the performance solutions would satisfy the requirements of the BCA; and  
    • declare that buildings are built in accordance with BCA compliant plans.

  • Introduce a new registration scheme for “building designers”, so that only registered practitioners would be entitled to make declarations about how performance solutions comply with the BCA and that a final building complies with its plans.
  • Ensure all building practitioners owe a duty of care to owners’ corporations, subsequent homeowners and unsophisticated developers, with the intent that this will provide property owners more options to seek redress for defective building work.
  • Appoint a Building Commissioner to act as the regulator for building in NSW, with powers to:
    • investigate and take disciplinary action against building practitioners that engage in improper conduct; and
    • undertake investigations and audits of documents and building practitioners.

Following public consultation on its paper, the NSW Government plans to table enabling legislation in NSW Parliament by the end of the year. 

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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.