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14 Nov 2019

Major projects & construction 5 Minute Fix 44

By the Major projects & construction team

Get your 5 Minute Fix of major projects and construction news. This issue: risks for contactors in wrongfully suspending work; expert determination and raising of cross-claims; whether pursuit of statutory adjudication process under NSW SOP Act and concurrent Supreme Court proceedings constitutes an abuse of process; Court upholds estoppel by convention; and legislative roundup.

Exercise caution before suspending work

A recent decision by the New South Wales Supreme Court highlights the potential risks for contractors in wrongfully suspending work under a construction contract. In Stepanoski v Aslan (No 3) [2019] NSWSC 1445, the New South Wales Supreme Court was required to consider whether the owners had wrongfully terminated a lump sum construction contract or whether the builder's wrongful suspension amounted to repudiation of the contract.

At termination, the owners had paid almost the entirety of the contract price, but only just over half of the work under the contract had been completed. Justice Emmett held that the contractor had been paid well above the amount it was contractually entitled to be paid under the lump sum contract.

The builder's conduct in suspending work and failing to resume work on the basis that the owners had failed to pay amounts where there was no entitlement to payment, amounted to repudiation of the contract entitling the owners to terminate the contract.  It is important to note that a party does not necessar­ily repudiate a contract by asserting an incorrect view of its construction. However, in this instance, there was no evidence that the builder was willing and able to perform the contract.

Also of note was Justice Emmett's determination about the competing quantum evidence of the parties' experts. The parties elected not to cross examine the experts, requesting instead that the judge make a determination based on the written evidence. In his judgment, relying on the decision of Austin J in ASIC v Rich [2005] NSWSC 149, he concluded that he would only consider the experts' evidence to the extent that they met the prerequisites of section 79 of the Evidence Act 1995 (NSW): expert evidence is only admissible if the opinion is wholly or substantially based on a specialised knowledge arising from the person's training, study or experience. While both parties' experts were experienced quantity surveyors, Justice Emmett appeared to take issue with the basis for the experts opinions, noting "while it is not necessary for all of the factual data on which an opinion is based to be given in evidence, the opinion evidence must include the whole of the reasoning and conclusions on which the opinion is based."

It is difficult to tell from the face of the judgment what opinions he considered to be made without sufficient reasons or conclusions, and therefore, in his view, contrary to the opinion evidence rule in section 79. Nevertheless, it is a sharp reminder for experts and lawyers alike to ensure that the basis for each opinion expressed by an expert is clearly and logically explained – lest it be found to be inadmissible.

Cross-claiming across the jurisdictional Rubicon

Where:

  • a contract contains procedural provisions that govern the matters over which an Expert will have jurisdiction; and
  • that contract also provides that a respondent to a dispute can raise any cross-claim in response to a claim; then

there is no need for there to be a factual or substantive relationship between the primary claim and the cross-claim for the latter to be validly raised. This provides a mechanism for parties to have all their disputes decided in one go and allows a respondent to short-cut their way past the procedural provisions that they would otherwise need to follow.

This issue arose in Poonindie Pty Ltd t/a Ted Wilson and Sons (TWS) v Eurobodalla Shire Council [2019] NSWSC 1485, where Justice Rein was presented with an expert determination which had reached conclusions on four issues. TWS contended that only one of those issues – which was called the "Roads Issue" – had been validly referred to the Expert. Accordingly, in TWS’ view, the Expert’s determination should be quashed as going beyond jurisdiction.

Importantly, clause 71.6 of the contract provided the familiar wording that "[i]n response to any Issue referred to the Expert by a party, the other party may raise any defence, set-off or cross-claim". The Council relied on this provision to sustain the reference of the other three issues which had not complied with the agreed procedure for referral.

TWS’ complaint arose because the other three issues had no factual or legal overlap with the Roads Issue. In the Council’s view, this was irrelevant, as the contract expressly provided that "any" cross-claim could be raised in response to an Issue. In contrast, TWS argued that this construction would create commercial inconvenience, as the respondent to a dispute would have a free-ranging ability to incorporate any dispute, whilst the applicant would not by reason of having to pass the initial reference through the Expert Determination Procedure set out in the contract.

Justice Rein agreed with the Council and noted that it has been accepted "for a very long time" that cross-claims do not need to bear a relationship with primary claims. He then considered that there was no reason to not give that phrase its technical legal meaning; instead, that technical meaning was supported by a consideration of other provisions of the contract as well as what is permitted in court litigation.

Concurrent SOP and court proceedings not an abuse of process

In Canterbury-Bankstown Council v Payce Communities Pty Ltd [2019] NSWSC 1419 Justice Henry considered whether it was an abuse of process for Payce to commence proceedings under the NSW Building and Construction Industry Security of Payment Act 1999 (SOP Act) while the dispute was being heard in the Supreme Court of NSW.

On 30 April 2019, Payce commenced Supreme Court proceedings against Council for an amount of $1.748 million seeking variation works and a builder's margin in respect of an agreement to redevelop the Senior Citizens Centre in NSW for $2.171 million.

On 19 September 2019, upon conclusion of the defects liability period, Payce served on Council its Final Payment Claim for $1.666 million. The Final Payment Claim included an expert report (Daubney Report) that made reference to Council's defence, submitted in the court proceedings.

On 8 October 2019, Council filed a summons against Payce to restrain it from invoking adjudication procedures under the SOP Act. Council's summons alleged that the Final Payment Claim was an abuse of process as:

  • it repeated the claims raised in an earlier adjudication application;
  • Council suffered an insurmountable prejudice in having only had 5 business days to prepare an adjudication response at the same time as preparing its evidence for the court proceedings; and
  • by relying on Council's defence in preparing the Daubney Report, Payce obtained a forensic advantage in breach of the implied undertaking enshrined in Hearne v Street [2008] HCA 36.

Justice Henry rejected Council's claim regarding the earlier adjudication application as there was found to be no reference date and as such the adjudicator did not have the jurisdiction to make a determination. He also rejected Council's claim in relation to the Daubney Report finding that a pleading such as a defence was not a document to which the implied undertaking in Hearne v Street applied.

In relation to the claim for prejudice, Justice Henry considered the well-established case law in Falgat Constructions Pty Ltd v Equity Australia Corp Pty Ltd [2005] NSWCA 49; Rubana Holdings v 3D Commercial Interiors [2008] NSWSC 1405; and Civil Mining & Construction Pty Ltd v Isaac Regional Council [2014] QSC 231, which confirmed that no abuse of process arises from a contractor exercising its right to commence both adjudication proceedings and court proceedings.

Council's position was that prejudice arose from being "jammed" to put on evidence in an adjudication response that was essentially the evidence it would be required to put on in the court proceedings. In doing so, Council submitted that there was a risk of inconsistent statements being made by witnesses. Council also argued that there was a risk the court proceedings would be inutile as a result of any adjudication determination. ;Council sought to distinguish the present case from previous case law on the basis that, in this case, pleadings had closed and the matter was "close to trial".

Justice Henry was not moved by Council's arguments as to prejudice, concluding that such issues are inevitable in cases of concurrent proceedings and were not insurmountable. In particular, he noted that Council could have avoided the risk of inconsistent statements by not adducing sworn evidence in the adjudication proceedings and that any risk of inutility was overcome by security for costs.

Council's summons was ultimately dismissed, with costs awarded to Payce, eliminating all doubt as to a party's ability to exercise its rights under security of payment legislation, in NSW and elsewhere in Australia, regardless of the status of any court proceedings.

Estoppel by convention: you can't deny it later

In Futurepower Developments Pty Ltd v TJ & RF Fordham Pty Ltd t/as TRN Group [2019] NSWSC 1554, the Court held that the owner was estopped from denying that the person acting as superintendent was the superintendent for the contract.

The facts involved a building contract between a developer, Futurepower, and contractor, TRN, for subdivision works on a semi-rural site. TRN removed contaminated fill containing suspected asbestos from the site and Futurepower sought to recover amounts for variations paid to TRN associated with the removal of contaminated fill. Futurepower contended that the person acting as superintendent on the job was not authorised to act as superintendent under the contract.

Justice Rein held that there was an estoppel by convention.  Estoppel by convention can be founded upon assumed law as well as assumed fact. In this instance, both parties proceeded on the basis that the person acting as superintendent was in fact the superintendent for the purposes of the contract. In the circumstances, Futurepower was estopped from denying that the person acting on the job was the superintendent (as evidenced by statements such as "I'll be looking after this one", attendance at site meetings and signature of progress certificates and other communications between the parties).

This case is a good example of how estoppel by convention will prevent a party from resiling from a shared common assumption where it would be unconscionable for the party to go back on the assumption.

Legislation roundup

Building and Environment Protection Legislation Amendment Bill 2019 (Vic)

In Victoria, the Building and Environment Protection Legislation Amendment Bill 2019 was introduced into parliament at the end of October. Among other things, it will effect significant amendments to the Architects Act 1991 aimed at bolstering professional standards and oversight.

Relevantly, the Bill:

  • requires applicants for registration to satisfy a “fit and proper” person test, replacing the current “good character” test;
  • §obliges registered architects to comply with continuing professional development requirements; and
  • provides for the immediate suspension of an architect's registration in certain circumstances.

A new section 10A sets out various probity matters that must be considered by the Architects Registration Board in determining whether a person is fit and proper, including whether in the past 10 years the person:

  • has been convicted or found guilty of an offence under any law regulating architectural services or architects; or
  • has had any registration, licence, approval or other authorisation as an architect, held either in or outside Victoria, suspended or cancelled for any reason other than a failure to renew that registration, licence, approval or other authorisation; or
  • has been subject to an order of a court or the Victorian Civil and Administrative Tribunal made under the Architects Act 1991 or regulations made under that Act, the Building Act 1993 or regulations made under that Act or the Domestic Building Contracts Act 1995 or regulations made under that Act and has not complied with that order within the time required; or
  • has been the subject of any disciplinary action under the Building Act 1993; or
  • is or has been an insolvent under administration.

The Bill also amends the Building Act 1993, in particular by inserting a new financial probity matter that will facilitate monitoring of potential illegal phoenix activity of registered body corporates and directors, secretaries or "influential persons" of a body corporate. The Victorian Building Authority will be able to refuse applications for new or renewed registration where the applicant is suspected of having engaged in illegal phoenix activity during the preceding two years.

Building Fire Safety (Combustible Cladding Rectification Work) Amendment Regulation 2019 (Qld)

In Queensland, the Building Fire Safety (Combustible Cladding Rectification Work) Amendment Regulation 2019 (made under the Building Act 1975 Fire and Emergency Services Act 1990) prescribes fees payable for advisory services provided by the Queensland Fire and Emergency Service (QFES) in relation to combustible cladding rectification work.

QFES performs an advisory role supporting building certifiers on fire safety standards. While fees were contained in the Building Fire Safety Regulation 2008, the imperative of the new Regulation is to ensure that fees do not act as "disincentive" to the undertaking of cladding rectification work. This was in light of concerns that the existing QFES fee structure disincentivized building owners from rectifying combustible cladding. The new hourly rate based fees will be applied retrospectively from 1 July 2018 to ensure that building owners who have already commenced rectification work are not disadvantaged and are able to obtain the benefit of the re-structured fee for this type of work.

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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.