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16 Apr 2020

Major projects & construction 5 Minute Fix 50

By THE MAJOR PROJECTS & CONSTRUCTION TEAM

Get your 5 Minute Fix of major projects and construction news. This issue: our hub for the practical and legal impacts of the COVID-19 pandemic on infrastructure and construction projects; recent case law applying High Court guidance on quantum meruit claims and rejecting recourse to unconditional performance securities; regulatory changes affecting WA resources projects; and an update on modern slavery.

COVID-19: Guidance notes for principals and contractors on infrastructure and construction projects

As governments, businesses, communities and individuals react to the extraordinary and pervasive effects of COVID-19, we examine the ways in which this declared pandemic might impact current and future infrastructure projects, and what contractors and principals should be considering in order to navigate this new environment.

The potential of COVID-19 to impede the discharge of contractual obligations is significant. Disruption to supply chains, the unavailability of labour – whether due to occupational health and safety requirements, government restrictions or illness – and increased risk of insolvencies will challenge contractors and principals in delivering projects on time and on budget.

The following are potential heads of claim and other issues that may arise under construction contracts for delays and loss suffered by contractors as a consequence of the current pandemic:

  • force majeure events and/or frustration at common law;
  • changes in law or policy;
  • acts of prevention;
  • suspension;
  • work health and safety and industrial action; and
  • insurance implications.

These issues are discussed in more detail here.

Victorian Supreme Court provides guidance on “True Rule” of contractual interpretation and blocks recourse to unconditional performance security

The recent judgment of Justice Riordan in Siemens Gamesa Renewable Energy Pty Ltd v Bulgana Wind Farm Pty Ltd [2020] VSC 126 provides guidance on two matters of significance in construction disputes:

  • the question of whether ambiguity is a requirement for admitting evidence of surrounding circumstances when construing a contract; and
  • the circumstances in which a court might restrain a call on an unconditional bank guarantee issued under a construction contract.

Although it was recognised that unconditional performance securities often operate as a risk allocation device to determine who is "in the money" during the resolution of a dispute, it was held that such a risk allocation regime can be altered by a later agreement. This is what occurred in this case, with the result that the project principal was unable to have recourse to a performance security the subject of a side agreement. A detailed note by Jack Fan and Kaitlin Jamieson is here

Approach to quantum meruit claims tested: contract rates set upper limit of builder's recovery

A recent NSW home building case brings home the practical implications of the High Court's decision in Mann v Paterson Constructions Pty Ltd [2019] HCA 32 limiting the amount recoverable by a quantum meruit claim. In Paraiso v CBS Build Pty Ltd [2020] NSWSC 190, a builder claimed for variation work via a quantum meruit (essentially, a claim for a reasonable sum in respect of services or goods supplied). The builder pursued a quantum meruit claim because it was not contractually entitled to payment for variation work since variations were not in writing and signed.

The most interesting aspect of the decision involves assessment and proof of a quantum meruit. Justice Fagan was willing to extend the finding in Mann v Paterson (across the judgments of Justices Gageler, Nettle, Gordon and Edelman) that contract rates set a ceiling upon the reasonable remuneration recoverable by the builder where the builder's non-contractual quantum meruit arises from termination due to the owner's fault. He found that "contract rates will similarly be an upper limit on a quantum meruit claim that has arisen because the two parties did not sign written details of each variation" as required by the contract, because that circumstance may be seen as "equally the fault of both parties, or the fault of neither, or the fault of the [builder] himself".

In Mann v Paterson, the High Court's construed section 38 of the Domestic Building Contracts Act 1995 (Vic) as a code, covering the field for variations relating to domestic building work. This approach effectively closed the door upon a residential builder in Victoria claiming variations on a quantum meruit basis where the builder has failed to comply with the relevant statutory notices. However, in Paraiso v CBS Build Pty Ltd, Justice Fagan found that the equivalent NSW residential building legislation, the Home Building Act 1989 (NSW), did not preclude quantum recovery for the additional variation work.

Upfront levy may reduce pressure for WA resources projects

In Western Australia, proposed legislation introduced into the State Parliament will give project owners the option to pay the Building and Construction Industry Training Fund levy in yearly instalments over the life of the construction work instead of as an upfront payment. 

In 2018, the levy was extended to engineering construction work in the resources sector. Resources sector stakeholders subsequently raised concerns that an upfront levy could jeopardise the viability of large resources sector construction projects. The capital intensive nature of resources projects coupled with substantial lead times to profitability meant that the levy (currently set at 0.2% of the value of construction) represents a sizeable upfront regulatory burden.

The amending legislation would allow project owners of large construction projects to pay the assessed levy by instalments, where the assessed levy is over $1 million, either by annual pro rata instalments over the life of the construction work or another period as agreed by the relevant Minister.

The legislative amendments also expand the Building and Construction Industry Training (BCIT) Board's membership to include members with expertise in minerals and petrol construction work.

Modern slavery

Speculation that the NSW Modern Slavery Act 2018 would be abandoned in deference to its Commonwealth counterpart may have been dispelled by the release on 25 March 2020 of the final report of the NSW Legislative Council's Standing Committee on Social Issues. The report expresses strong support for the NSW Act, stating "it is clear that the NSW Act has essential work to do in addressing modern slavery", and recommends that it commence no later than 1 January 2021.

Queries have remained over the constitutionality of the NSW Act and its ability to operate in tandem with the Commonwealth Modern Slavery Act 2018, which was passed some six months after the NSW Act. There are key differences between the two legislative regimes, most notably, the Commonwealth Act relies on a "name and shame" approach to deterrence and applies to entities with an annual consolidated revenue of at least $100 million, whereas the NSW Act provides for penalties of up to $1.1 million and applies to entities with $50 million turnover in a financial year.

The Committee's report makes 17 recommendations on the NSW Act (as well as the Draft Modern Slavery Amendment Bill 2019 and the Draft Modern Slavery Regulation 2019) addressing, among others, the following issues:

  • national harmonisation: to promote harmonisation between the NSW and Commonwealth regimes, the Committee recommends that a statutory review mechanism be incorporated in the NSW Act aligning with the three-year review period under the Commonwealth Act, thereby facilitating evaluation of the parallel operation of the two regimes;
  • reporting threshold: while acknowledging stakeholder concerns about the capacity of some businesses to comply with the reporting requirements, the Committee expresses the view that the existing threshold "strikes a reasonable balance and is appropriate". The report also recommends that the NSW and Commonwealth Governments work together to seek harmonisation of the threshold "ideally at $50 million consolidated revenue, as a key reform for a standard national approach to modern slavery"; and
  • penalties: the report refers to UK experience, stating it "clearly demonstrates the danger in relying on a reporting regime that does not include penalties for non-compliance". The Committee urges the NSW Government to advocate for the inclusion of penalties under the Commonwealth Act.

The business community now awaits the NSW Government's response to the report. The NSW Act may well commence at some point in the near future. Click here to read more.

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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.