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03 Oct 2019

Major projects & construction 5 Minute Fix 42

By the Major projects & construction team

Get your 5 Minute Fix of major projects and construction news: a new direction for public procurement processes in NSW; will silence constitute waiver of contractual rights over non-compliant bank guarantees; factors to injunct enforcement of disputed adjudication determination; use of post-contract conduct when construing construction contracts; and security of payment cases around Australia, including regarding "rough justice" vs natural justice and multiple "reference dates".

NSW Government procurement rules to change on 29 November 2019

The New South Wales Procurement Board has recently issued the Procurement (Enforceable Procurement Provisions) Direction 2019, giving effect to international procurement agreements applying in NSW.

From 29 November 2019, 41 NSW Government agencies (including all principal government departments) will be required to comply with the Direction when procuring goods or services, where:

  • the procurement is effected by any form of contract (including a build-operate-transfer contract or a public works concession contract); and
  • the estimated value of the procurement is or exceeds $9.247 million (for the procurement of construction services) and $657,000 (for the procurement of goods or any other services). When considering if the relevant monetary threshold is triggered for a procurement, it is important to take into account any options or extensions that may be executed over the life of the contract.

Various procurements are exempt from application of the Direction, including the procurement of land, existing buildings or immovable property, health and welfare services, education services and certain procurements by Transport for NSW, for example, the management and maintenance of that part of the NSW rail network vested in Transport for NSW. 

Agencies subject to the Direction must:

  • use an "open approach to market" for all procurements (unless the procurement is from a supplier on a procurement panel or under the "limited tendering" provisions);
  • award contracts to tenderers who provide the best value for money. The Direction lists various factors that can be considered by an agency in assessing value for money, including financial and non-financial costs and benefits, environmental sustainability, tenderers' relevant experience and performance history and whole-of-life costs; and
  • provide debriefings to unsuccessful tenderers if requested.

The Direction also precludes agencies from:

  • discriminating against suppliers on the basis of foreign affiliation or ownership;
  • making prior experience in Australia a condition for participation by a supplier; and
  • imposing conditions on suppliers to use domestic content or suppliers, or similar conditions to encourage local development in Australia.

NSW Government agencies covered by the Direction (as stated in Schedule 1) should carefully consider whether their existing procurement policies comply with the Direction.

What’s in a name? Using post-contractual conduct to correct errors

In BH Australia Constructions Pty Ltd v Kapeller [2019] NSWSC 1086, the Court was called upon to determine whether “Blissful Constructions Pty Ltd” (later renamed “BH Australia Constructions Pty Ltd”) (BC) or “Blissful Developments Pty Ltd” (BD) was the contracting party for a residential building contract. BD was identified as a contracting party, but was neither licensed nor insured and was in external administration. The NSW Civil and Administrative Tribunal's Appeal Panel, however, found that the contracting party was BC, based on what a reasonable observer would have concluded looking at the dealings between the parties.

The dispute allowed Justice Leeming to illuminate case law relating to the admissibility of post-contract conduct when construing a contract and identifying the contracting parties.

When using post-contract conduct as an aid for contractual construction, the traditional distinction lies between construing a contract (where evidence of post-contract conduct is inadmissible) and identifying the existence of a contract (where it is admissible).  It was noted that this distinction is “not necessarily as crisp as it might seem”.

While he noted that post-contract conduct might be used, for instance, to prove mutually known facts to identify the meaning of a descriptive term, he doubted that post-contract conduct could give legal meaning to the “label used in the contract to identify the contracting parties”.  Instead, this was a matter of chronology: the identity of the parties to a contract which came into existence in January could not be affected by conduct which subsequently occurred in March.

The dispute whether BC or BD was the contracting party was ultimately resolved by Justice Leeming finding that the reference to BD was “an obvious mistake on the face of the contract”.  This satisfied the legal test for judicial correction of a contract (this legal remedy differs from the equitable remedy of contractual rectification, which requires a mutual subjective intention). The key factor in this decision was the assumption that the parties objectively intended to enter into a lawful contract, which would not have been the case if the unregistered and uninsured BD was the contracting party.

Receipt of non-compliant bank guarantees not a waiver of contractual rights

The Supreme Court of Queensland recently held that the receipt of bank guarantees improperly the subject of expiry dates, together with the "mere effluxion of time", did not constitute a waiver by the principal under the subject construction contract of its right to obtain replacement bank guarantees, even after the expiry date had passed but before Final Completion.

In CCIG (Australia) Pty Ltd v Amicus Hospitality Group Pty Ltd [2019] QSC 232, an amended form of AS2124–1992 construction contract:

  • required the provision of performance securities in the form of unconditional bank guarantees (clause 5.3);
  • allowed the principal to treat a payment claim as invalid if the contractor failed to provide compliant performance securities (clause 20.3); and
  • stated that payment of moneys by the principal did not constitute approval of the contractor's performance and payment was on account (clause 20.5(iii)).

Importantly, the bank guarantees were required to remain valid until completion of the contract; as such, the contract did not contemplate or include a clause expressly requiring the replacement of expired bank guarantees.

The key question was whether the principal had, by its conduct in accepting the guarantees, waived its right to bank guarantees without an expiry date.  While the recent case of PHHH Investments No 2 Pty Ltd v United Commercial Projects Pty Ltd [No 2] [2018] VSC 92 held that similar conduct by the principal did amount to waiver of its rights, Justice Mullins distinguished the present case on its facts. Unlike PHHH Investments, in this case:

  • the contract included a clause which provided that payment was on account only and did not constitute approval of the contractor's performance of contractual obligations; and
  • there were no prior examples of the principal rejecting non-compliant performance securities and then accepting replacement – but still non-compliant – versions.Here, no discussion transpired in relation to the bank guarantees when they were received, only when they expired.

In the circumstances, Justice Mullins held that there was no implied approval of the non-compliant bank guarantees. Accordingly, the contractor remained obliged to provide performance securities until the contract was fully performed and the principal was therefore entitled to replacement guarantees.

"Rough justice" vs denial of procedural fairness and natural justice

The NSW security of payment system involves a tension between "rough justice" and the concepts of natural justice and procedural fairness.  Court decisions establish that, once made, an adjudicator’s determination can only be challenged on a number of limited grounds, including where there has been a substantial denial of natural justice.  A recent decision of the NSW Supreme Court provides direction as to when the Court will intervene in an adjudication determination made under the Building and Construction Industry Security of Payment Act 1999 (SOP Act) because of a denial of natural justice.

In CC Builders (Aust) Pty Ltd v Milestone Civil Pty Ltd [2019] NSWSC 1251, Justice Rein accepted the following factual matrix relating to a disputed adjudication determination:

  • the relevant payment schedule relied upon a disputed EOT and associated claimed Delay Costs as justification for the principal contractor paying less than the total claimed amount;
  • the adjudicator incorrectly concluded that the payment schedule was silent on this issue; and
  • based on that incorrect conclusion, the adjudicator relied upon section 20(2B) of the SOP Act to disregard the principal contractor's submissions on this issue in its adjudication response.

The key question was whether this refusal to consider the principal contractor's submissions was simply part of the "rough justice" dispensed under the SOP Act that could not be overturned, or whether it constituted a denial of procedural fairness and natural justice.

The claimant relied upon case law that indicated that an erroneous determination by an adjudicator as to whether a submission had been duly made did not invalidate the adjudicator's final decision.  However, this would only be the case if the adjudicator "made a reasonable if erroneous decision… and the adjudicator took a reasonable if erroneous view" as to whether submissions were included in the payment schedule and therefore duly made in an adjudication response.  In addition to being reasonable (albeit erroneous), such a decision also must not be "arbitrary, capricious or irrational".  Justice Rein summarised the relevant case law as follows:

"… [a decision] on whether a submission is duly made is a matter for the adjudicator not the Court to determine, a decision that a submission was not duly made which is not reasonable or which is without foundation will not be immune from correction by the Court."

Noting the considerable time pressures that adjudicators often face, Justice Rein concluded that the adjudicator's decision that the payment schedule did not refer to the disputed EOT and associated Delay Costs set-off had no rational or reasonable basis.  This constituted a breach of procedural fairness and natural justice.  Justice Rein was required to consider the consequences of the finding of jurisdictional error.  That is, whether the entire adjudication should be set aside, or only that part affected by jurisdictional error.  Ultimately, Justice Rein exercised the discretion inherent in the nature of prerogative relief, and preferred to make conditional orders preserving some aspects of the adjudication determination while requiring re-consideration of other aspects.

Once the Building and Construction Industry Security of Payment Amendment Act 2018 (NSW) commences on 21 October 2019, a court will be able to set aside the whole or part of an adjudication determination where it contains a jurisdictional error.

Don’t stop the money flowing: interlocutory injunction unsuccessful

The decision of the WA Supreme Court in Sandvik Mining and Construction Australia Pty Ltd v Fisher [2019] WASC 352 reinforces the difficulties in obtaining an interlocutory injunction.

Sandvik Mining and Construction failed to obtain an interlocutory injunction restraining Civmec Construction and Engineering from seeking the enforcement of a disputed adjudication determination under the Construction Contracts Act 2004 (WA) while pursuing judicial review of the adjudication determination.

Sandvik asserted that the determination was invalid because it was the second adjudication and determination in respect of the same progress claim. Civmec did not dispute that both adjudications related to the same progress claim but countered that the first adjudication determination was only in respect some disputed items, while the second was in respect of the other disputed items.

Justice Archer was not required to make final findings on the merits of Sandvik's broader arguments, and only had to determine whether to grant an interlocutory injunction by considering the following elements:

  • whether Sandvik had demonstrated a prima facie case.  This does not require that its case be more likely than not to succeed at final judicial review.  Rather, it must show a sufficient likelihood of success to justify the preservation of the status quo pending the final judicial review; and
  • whether the balance of convenience favours granting an injunction.  This entails comparing the injury Sandvik would suffer if an injunction was not granted but it succeeded in the final judicial review, with the injury Civmec would suffer if it was restrained in enforcing the determination but was ultimately successful.

While noting that Sandvik's broader case was not particularly strong, Archer J concluded that it had demonstrated a prima facie case that the second adjudication determination, based upon the same progress claim, was void.

However, Sandvik failed to establish that the balance of convenience weighed in favour of granting an injunction.  Justice Archer based this conclusion upon the following considerations:

  • it would not be unjust, oppressive or an abuse of process to allow Civmec to enforce the adjudication determination, because Justice Archer's preliminary view was that the Act intended to allow the enforcement of determinations unless there was a contrary court order.  That is, an invalid adjudication determination is not automatically void, but must be declared as such;
  • enforcement of the determination would not render the judicial review process nugatory. If Sandvik were ultimately successful, it could seek court orders requiring repayment of funds plus interest;
  • on the evidence, there was little risk that Civmec could not repay the money should the adjudication determination subsequently be found to be invalid;
  • the policy of the Act is to "keep money flowing" in the construction industry via a "pay now, argue later system". The granting on an injunction would undermine this policy; and
  • delayed payment would cause real prejudice to Civmec.

Consequently, Justice Archer declined to grant an injunction.  However, the judgment left open the possibility of a different outcome in different circumstances, particularly where there is a stronger prima facie case that an adjudication determination is invalid and there is evidence of a real risk that the claimant would not be able to repay the disputed funds. 

East Coast Security of Payment round-up

In Empire Global Pty Ltd v SA Expert Designs Pty Ltd [2019] ACTSC 244, Chief Justice Murrell dismissed a challenge to an adjudication determination under the Building and Construction Industry Security of Payment Act 2009 (ACT).

In essence, the progress claim included amounts for disputed variations, which Empire Global maintained were not the subject of written directions and therefore fell outside the scope of the relevant construction contract.  When SA Expert Designs sought an adjudication of the payment dispute, the adjudicator determined that the amounts for disputed variations should be paid. 

In a straightforward decision, Chief Justice Murrell dismissed the attempt to avoid the adjudicator's determination on the basis that the disputed variation works had been performed under some other contract.  Whether or not the claimed works were performed under the relevant construction contract is a matter for the adjudicator and is not a jurisdictional fact.

Queensland: Two invoices, two "reference dates" but no valid payment schedule

In Melaleuca View Pty Ltd v Sutton Constructions Pty Ltd [2019] QSC 226, the contractor issued two separate invoices dated 5 and 15 February, and the principal responded to the latter but only provided an assessment of the quantum it would pay in respect of the former.  The adjudicator held that the principal had not issued a valid payment schedule in response to the second invoice, and therefore found in favour of the contractor.

The contract set two forms of "reference date", being the 21st of each month for progress payments and at practical completion of the works.  Justice Brown held that the existence of a "reference date" was a precondition of a valid claim and therefore a "jurisdictional fact", and applied earlier case law to this effect notwithstanding recent amendments to the Queensland security of payment legislation (now in the Building Industry Fairness (Security of Payment) Act 2017) (BIF Act). 

The principal argued that both invoices related to the same "reference date", which contravened section 75(4) of the BIF Act.  However, the parties agreed that practical completion had been achieved on 15 February 2019.  Therefore, it was held that the second invoice of that date was validly issued in respect of its own "reference date", being the achievement of practical completion of the works, irrespective e of the validity of the invoice dated 5 February 2019.  As the principal did not adequately set out how much it would pay in response to the invoice dated 15 February 2019 in its project correspondence, the adjudicator's decision that no valid payment schedule had been issued by the principal was upheld.

Queensland: Repeat invoices, one "reference date" and disputed service

In National Management Group Pty Ltd v Biriel Industries Pty Ltd trading as Master Steel [2019] QSC 219, two adjudication decisions were the subject of challenge.

Justice Wilson set aside the first adjudication decision on the basis of jurisdictional error because two payment claims had been made for the same "reference date".

The second decision is perhaps more interesting, involving a challenge on the basis that:

  • the adjudication application had not been properly served. The Court agreed that service of the adjudication application was an essential element to confer jurisdiction upon an adjudicator. However, the argument that the adjudication application had not been properly served was not sustained on the facts; and
  • the adjudicator had denied the respondent natural justice as he had refused to consider submissions about jurisdiction because the respondent had not delivered a valid payment schedule. The Court accepted that the BIF Act precluded the respondent from making an adjudication response to the adjudication application, but this did not mean it was precluded from making submissions as to jurisdictional issues. As a result, the respondent had been denied natural justice. However, Justice Wilson was unconvinced that even if the jurisdictional issue had been considered by the adjudicator, it would have resulted in a different outcome. As a result, she was not willing to set aside the decision.

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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.