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23 Jul 2020

Major projects & construction 5 Minute Fix 57

By the major projects & construction team

Get your 5 Minute Fix of major projects and construction news. This issue: the Queensland Parliament passes security of payment amendments and an update on timing for project trust accounts; QBCC Licence regime tightens as exemption through use of licensed contractors is abolished; the NSW Court of Appeal provides clarity on when a stay of judgment debt may be available; and a round-up of recent UK case law.

Queensland Parliament passes BIF Act amendments – update on timing for project trust accounts

Queensland Parliament has passed the Building Industry Fairness (Security of Payment) and Other Legislation Amendment Bill 2020. The amending legislation sets out the Government's blueprint for tackling late and non-payment of subcontractors.

We previously anticipated delays to the roll-out of project trusts. The Government has flagged delay is necessary due to the effects of COVID-19, but the overall timetable is mostly unchanged. Other reasons for the revised implementation schedule include:

  • allowing industry time to adjust to the changes; and
  • giving financial institutions time to implement software and trust account instruments.

At present, full implementation of the project trust regime has been pushed back six months to 1 July 2023. Last-minute changes to the commencement provisions allowed the Government to retain flexibility over the phasing of the project trust account reforms. The project trust account reforms will come into effect on a date by proclamation. If Queensland's COVID-19 recovery plans stay on-track, we can expect the following indicative timetable for the roll-out of project trusts:

  • Government contracts between $1M and $10M (ie. new scheme for category of projects that currently have project bank accounts)
  • New: 1 March 2021
    Past: 1 July 2020

  • Government and hospital and health services’ contracts over $1M
  • New: 1 July 2021
    Past: 1 July 2020

  • Private sector and Local Government contracts $10M or more
  • New: 1 January 2022
    Past: 1 July 2021

  • Projects with a value above $3M
  • New: 1 July 2022
    Past: 1 January 2022

  • Projects with a value above $1M
  • New: 1 January 2023
    Past: 1 July 2022

Stay tuned for further updates on how the project trust reforms will affect the Queensland building and construction industry.

QBCC Licence regime tightens as exemption through use of licensed contractors abolished

The Queensland Parliament has passed legislation that will remove the current licence exemption that allows unlicensed persons to contract for commercial building work so long as they use an appropriately licensed contractor to carry out that work.

The exemption in section 8 of Schedule 1A of the Queensland Building and Construction Commission Act 1991 (Qld) (QBCC Act) was introduced in 2013 to remove what was viewed as an impediment to commercial development because, without the exemption, there were scenarios where developers, who had no intention to carry out building work themselves, were required to be licensed. The most public instance at the time that called for reform was the development of the Commonwealth Games Village.

However, the drafting of the exemption has in recent years been increasingly relied upon by unlicensed contractors. This has been criticised by various quarters of the industry as an outcome which undermines the licensing regime and restricts the ability of the QBCC to take action against those persons in the event of defective work and for behaviour which licensed contractors are prohibited from engaging in. They considered that the other exemptions to holding a licence which relate to PPPs and prescribed government projects were sufficient. The Government agreed.

The timing for the removal of the exemption (by proclamation) has not been released, and transitional arrangements have yet to be made clear.

Implications

Developers and head contractors who tender for, or contract to carry out, building work will be required to hold the appropriate licences for the building work falling within the scope of the contract regardless of whether the work is to be performed by licenced subcontractors), or else contravene the QBCC Act. This may be particularly challenging for developers as the position returns to what existed prior to 2013 and the remaining exemptions are narrow in their operation. None apply in the case of private commercial development. In that earlier time, the prohibition was often not appreciated or ignored. With today's increased focus on licensing and enforcement, developers are unlikely to escape attention from the QBCC.

NSW Court of Appeal upholds Supreme Court's decision to refuse stay of judgment debt

We previously covered the NSW Supreme Court's decision to refuse the grant of a stay of execution of a judgment debt obtained under the Building and Construction Industry Security of Payment Act 1999 (NSW) (SOP Act). In TFM Epping Land Pty Ltd v Decon Australia Pty Ltd [2020] NSWCA 118, the NSW Court of Appeal has upheld this judgment.

Remind me of the facts

Decon Australia (Builder) commenced SOP Act proceedings for the amount of $6,355,352.46 against Epping Land and Katoomba Residence Investment (Developers). The Developers failed to pay the payment claim amount or serve a payment schedule within the required timeframe under the SOP Act. Consequently, the Builder moved for summary judgment. The Developers resisted summary judgment and unsuccessfully appealed from that judgment.

Although the Builder commenced proceedings against the Developers in May 2019, it was more than a year later, and only after the Developers' unsuccessful attempt to appeal the summary judgment, that the Developers filed their cross-claim in the current proceedings. The Developers sought a stay of the SOP Proceedings judgment until the cross-claim was determined, on the basis they could not pay the $6,355,352.46 due without falling into insolvency and liquidation. In refusing the application, the Supreme Court found that the requirement of justice did not support the granting of a stay.

Court of Appeal decision

The Developers relied on arguments raised before the primary judge that their claim for a stay should be characterised as a "Grosvenor stay". In Grosvenor Constructions (NSW) Pty Ltd (in administration) v Musico & Ors [2004] NSWSC 344 (Grosvenor), the interim nature of decisions under the SOP Act was acknowledged and the risk that the future rights of a party would become worthless due to the insolvency of the claimant supported granting a stay.

However, in its judgment the Court of Appeal refused to accept that Grosvenor should also apply in instances where a judgment debtor (with a potential future claim) was unable to pay pursuant to rights created under the SOP Act.

Additionally, the Developers made submissions that the granting of a stay was consistent with the scheme of the SOP Act. The Developers ultimately submitted that if they were forced into liquidation, this would inevitably prejudice their ability to pursue their final rights against the Builders as their cross-claim would be stultified. The Developers argued this contravened the intent of section 32 of the SOP Act, which ensures that a decision under the SOP Act does not affect another legal right that a party may have under the relevant construction contract.

The Court of Appeal considered section 32 of the SOP Act and concluded that it only speaks to the legal rights of the parties, rather than the practical effect upon them. That is to say, the operation of this provision is not dependent upon whether a developer is experiencing liquidity issues, because the operation of the legislation should not vary depending upon a party's financial circumstances.

Nevertheless, the Court of Appeal did acknowledge that a stay may be available in some circumstances (as it is in respect of any other judgment), stating that:

"a court may nonetheless [grant a stay] where there is the likelihood of irreparable prejudice. In such a case a Court will be cautious, in light of the policy of the statute, but it may do so where the practical effect is to make permanent that which the legislature intended to be merely interim…

But the onus must rest on the party who seeks relief which will prevent the ordinary operation of the processes authorised by the Act, and it is to be borne in mind that a Court will be cautious when intervening, not least because to do so detracts from the primary purpose of the Act in enabling a builder to be paid."

However, in the present case the Court of Appeal was satisfied that the Developers had not shown that such prejudice would result, and upheld the Supreme Court's decision to refuse the stay of execution of the judgment debt.

Insights from UK case law

In Attorney General of the Virgin Islands v Global Water Associates Ltd [2020] UKPC 18, the UK Privy Council found (on appeal from the British Virgin Islands) against the government on a lost profit claim by Global Water Associates (GWA) for the government's failure to provide the site for a water reclamation treatment plant as agreed under a Design and Build Agreement (DBA). GWA claimed that such failure denied GWA the opportunity, once it had built the plant, to run the plant for 12 years under a Management, Operation and Maintenance Agreement (MOMA) it had negotiated with the government. The Board (i.e. the Judicial Committee of the Privy Council) found that GWA’s claimed contract damages, for lost profit under the MOMA, were not too remote to be recovered.

The case is of particular interest to infrastructure projects (including PPPs) where the entry into these types of related development/construction and operation/maintenance agreements are very common.

In coming to its decision (given by Lord Hodge), the Board gave a tour of the remoteness of damage authorities stemming from Hadley v Baxendale, noting that the relevant question has evolved to the following five-element formulation:

“First, in principle the purpose of damages for breach of contract is to put the party whose rights have been breached in the same position, so far as money can do so, as if his or her rights had been observed.

But secondly, the party in a breach of contract is entitled to recover only such part of the loss actually resulting as was, at the time the contract was made, reasonably contemplated as liable to result from the breach. To be recoverable, the type of loss must have been reasonably contemplated as a serious possibility, in the sense discussed in paras 27 and 28 above.

Thirdly, what was reasonably contemplated depends upon the knowledge which the parties possessed at that time or, in any event, which the party, who later commits the breach, then possessed.

Fourthly, the test to be applied is an objective one. One asks what the defendant must be taken to have had in his or her contemplation rather than only what he or she actually contemplated. In other words, one assumes that the defendant at the time the contract was made had thought about the consequences of its breach.

Fifthly, the criterion for deciding what the defendant must be taken to have had in his or her contemplation as the result of a breach of their contract is a factual one.”

This formulation is not binding in Australia, but it makes for an interesting (and, potentially, influential) perspective, especially given the divergence in Australia since the Victorian Court of Appeal reformulated the “two limb” test from Hadley v Baxendale somewhat in Environmental Systems Pty Ltd v Peerless Holdings Pty Ltd [2008] VSCA 26 and the Western Australian Supreme Court rejected both of those formulations in Regional Power Corporation v Pacific Hydro Group Two Pty Ltd (No 2) [2013] WASC 356. Our analysis of both of those decisions can be found here.

The Board gave a number of reasons why the lost profit claim was not too remote under this formulation which essentially revolved around the interconnectedness of the DBA and MOMA (including their having been signed on the same day, dealing with the same plant on the same site and the DBA contemplating operations and maintenance). Ultimately, the Board found that the arbitrators’ original award (that the damages were too remote) was to be set aside for an error of law, and overturned the Court of Appeal’s finding (also that the damages were too remote, but on the basis that the government could have employed another contractor to build the plant).

UK Supreme Court opens the door for insolvent claimants to access adjudication

In Bresco Electrical Services Ltd (In Liquidation) v Michael J Lonsdale (Electrical) Ltd [2020] UKSC 25, the UK Supreme Court found that insolvency and adjudication regimes are compatible, allowing an insolvent claimant to access the adjudication regime under the Housing Grants, Construction and Regeneration Act 1986 (UK). Lord Briggs who delivered the judgment of the Court provided his judgment summary via YouTube in a COVID-19 lockdown innovation.

The decision in Bresco sits in contrast to the current position in NSW and Victoria and is likely to have a fundamental impact on the UK construction industry in a post-pandemic landscape, opening the door for more adjudications by companies in liquidation.

In NSW and Victoria, a corporation in liquidation cannot make a payment claim, apply for adjudication or enforce an adjudication award (in NSW, pursuant to the Building and Construction Industry Security of Payment Act 1999 (NSW) and in Victoria, pursuant to Building and Construction Industry Security of Payment Act 2002 (Vic)).

This position was informed by the review by John Murray AM of Security of Payments legislation throughout Australia in December 2017 (Murray Review) which recommended that such legislation should not be available to a claimant corporation in liquidation. The Murray Review considered the policy of security of payment legislation is to maintain cash flow while a construction company remains solvent and that in circumstances where a company is in liquidation, the Corporations Act should apply. We will be keeping a watching brief on how the UK deals with this issue in a post-pandemic environment.

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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.