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25 Jun 2020

Major projects & construction 5 Minute Fix 55

By the major projects & construction team

Get your 5 Minute Fix of major projects and construction news. This issue: courts hold parties to their bargain in cases involving expert determination and indemnities, Queensland Court of Appeal considers the scope of the implied duty to cooperate, developments in combustible cladding class actions, and an update on Queensland trust account reforms.

Expert determination clause enforced as parties "held to their bargain"

The NSW Supreme Court has upheld the operation of an expert determination clause in a decision that favours the broad interpretation of dispute resolution provisions.

The ambit and validity of an expert determination clause were considered by Justice Hammerschlag in Illawarra Community Housing Trust Limited v MP Park Lane Pty Ltd [2020] NSWSC 751 (17 June 2020).The Illawarra Community Housing Trust Limited (Housing Trust) entered into a project agreement with MP Park Lane Pty Ltd (Developer) for the construction of apartment buildings and low density housing (Agreement). Clause 21 of the Agreement relevantly provided that:

  • "Any dispute in connection with this agreement must be dealt with by this clause 21";
  • a notice of dispute be given in the event of such a dispute; and
  • absent resolution, either party may submit the subject dispute to expert determination.

After the parties did fall into dispute (largely relating to the Developer's ability to achieve certain "Critical Dates"), the Housing Trust gave notice terminating the Agreement. The Developer responded by giving a dispute notice under the Agreement in which, among other things, it contended that the Housing Trust's purported termination constituted a repudiation of the Agreement. The Developer accepted that repudiation and took steps to procure the appointment of an expert.

In the proceedings, the Housing Trust contended that clause 21 should be narrowly construed and:

  1. did not survive termination of the Agreement;
  2. did not confer jurisdiction on an expert to determine a dispute concerning the termination or repudiation of the Agreement;
  3. was so uncertain as to be void and/or unenforceable; and
  4. did not require the conduct of an expert determination as a condition precedent to the commencement of proceedings in the courts.

The Court disagreed. Commenting that the Agreement was "a detailed document plainly intended to legislate comprehensively for a substantial project", Justice Hammerschlag held that clause 21 should be construed "liberally and not narrowly" so as to "avoid working commercial inconvenience".

His Honour deferred to the "plain meaning" of clause 21 and relevantly, noted as follows:

  • the fact that the expert determination process provided for a speedy resolution of disputes, regardless of complexity, did not justify a reading down of the ambit and operation of the clause;
  • the Housing Trust's argument that the subject dispute was not "apt to be resolved by an expert" because it involved issues of mixed fact and law concerning a termination was simply not supported by the words of clause 21. Hence, there was no basis on which to construe the clause as operating only in respect of disputes of a discrete subject matter;
  • clause 21 contained no implication to the effect that the clause did not operate if the Agreement was terminated. A dispute following or in respect of termination of the Agreement was a dispute "in connection with it." The Court reasoned that, had that demarcation been intended, the parties "could and would have said so"; and
  • the absence of express procedural rules and mechanisms did not render clause 21 vague or unworkable; it was sufficient that the parties "left it to the expert" to stipulate a process for the conduct of the determination.

As alternative dispute resolution mechanisms continue to garner popularity, the decision should prompt parties to think carefully about the dispute processes included in their contracts; chances are, they will be held to them. 

New Zealand Supreme Court revisits the law on penalties

New Zealand has taken the same path as English and Australian courts in lessening the impact of the penalties doctrine. A recent decision of the Supreme Court (New Zealand's highest court) elevates contractual freedom, reflecting a judicial reluctance to interfere with the parties' contractual bargain, unless necessary.

In 127 Hobson Street Limited v Honey Bees Preschool Limited [2020] NZSC 53, the Supreme Court confirmed that the test for a penalty involves the application of a "disproportionality test". This approach is consistent with approaches taken by the Supreme Court of the United Kingdom and the High Court of Australia. The court formulated the test: "A clause stipulating a consequence for breach of a term of the contract will be an unenforceable penalty if the consequence is out of all proportion to the legitimate interests of the innocent party in performance of the primary obligation. A consequence will be out of all proportion if the consequence can fairly be described as exorbitant when compared with the legitimate interests protected."

The case concerned the characterisation of an indemnity clause as an unenforceable penalty. A landlord and tenant entered into a commercial lease which required the landlord to install a second lift at the leased premises. A collateral deed provided that if the lift was not installed by a certain date, the landlord would indemnify the tenants for their obligations under the lease until its expiry. The lift was not installed by the stipulated date, the tenants sought to enforce the indemnity and the landlord argued that the obligation to indemnify was an unenforceable penalty.

The Supreme Court held that the particular indemnity clause did not offend the prohibition against penalties. In applying the "disproportionality test", the Court set a high threshold: "out of all proportion to the innocent party’s legitimate interests in performance". This test allowed the court to have regard to commercial objectives extending beyond the four corners of the contract. On the facts of the case, the indemnity was not out of proportion to the tenant's legitimate interests – in securing easy access to its childcare premises.

Guidance about scope of implied duty of co-operation

In Wellington & Ors v Huaxin Energy (Aust) Pty Ltd (formerly Cuesta Coal Limited) & Anor [2020] QCA 114, the Queensland Court of Appeal provided guidance as to the scope of the implied duty to co-operate. 

The background is complicated. In brief, the appellants claimed damages based on loss of a valuable commercial opportunity to receive "Third Tranche Shares" and "Third Tranche Options" in connection with the sale of an exploration permit for coal, and the related environmental authority and mining information as property. The appellants contended there was an implied duty on the first respondent to co-operate so that the appellants would have the opportunity to receive the benefit of the relevant shares and options. The appellants framed the scope of the implied duty to co-operate as causing to be obtained "detailed and reliable exploration, sampling and testing information". Conducting a drilling program of the type contended for by the appellants would permit an inference as to the existence of a Measured Mineral Resource in the contemplated quantity, a necessary precondition to the issue of the Third Tranche shares and Third Tranche options.

The Court of Appeal held that the trial judge was correct in rejecting the implied duty to co-operate contended for by the appellants. Justice Philippides (with whom Morrison JA and Ryan J agreed) observed that the content of an implied duty to cooperate was qualified: "The content of the duty to co-operate in the present case is not one to do all things necessary (in effect "to do whatever it takes") to enable the other party to have the benefit of the contract, rather the scope of the implied duty is conditioned by the concept of reasonableness."

The appellants did not adduce any substantial evidence going to the issue of what exploratory work was reasonably required in the circumstances. As the trial judge observed, a major difficulty in this case was that the appellants approached "the question of what was reasonably necessary by way of exploration with the benefit of hindsight and not as at the time when the terms of the Amended and Restated Tenement Sale Agreement or final contract were entered into". If the implied duty to co-operate is limited to acts that are reasonably required in the circumstances, contracting parties should ensure that their contractual arrangements expressly reflect necessary actions and inputs towards performance of the contract and achievement of milestones. The implied duty of co-operation will not assist in filling the gap in contractual arrangements.

Queensland Supreme Court reviews obligations when considering "new reasons"

A recent Queensland Supreme Court decision has considered the scope of an adjudicator's decision-making powers under the Building Industry Fairness (Security of Payment) Act 2017 (Qld) (BIF Act). In Acciona Agua Pty Ltd v Monadelphous Engineering Pty Ltd [2020] QSC 133, Monadelphous entered into a head contract to carry out works involving the upgrade of sewage treatment plant. Monadelphous then entered into a subcontract with Acciona.

Monadelphous, in responding to the large number of progress claims made by Acciona under the contract, began deducting amounts by way of set off. In response, Acciona chose to pursue the statutory adjudication process under the Building and Construction Industry Payments Act 2004 (Qld) (BCIPA). Importantly, in an adjudication response to the payment claim the subject of the proceeding, Monadelphous made new statements suggesting that it was entitled to a set-off for damages pursuant to the subcontract and in equity. In outlining the reasons for the set-off in its payment schedule previously, Monadelphous had not made any statements suggesting it believed it was entitled to damages. The adjudicator accepted Monadelphous' set off and accepted the amount of the progress payment payable to Acciona was $nil. Acciona contended that the adjudicator's decision constituted a jurisdictional error because the adjudicator failed to give proper reasons and, in the alternative, the adjudicator acted ultra vires in finding that Monadelphous had the right to recover the claim which it had set off.

Justice Bond considered what an adjudicator can and cannot consider when making a determination under Queensland's new security of payment legislation. Significantly, section 82 of the BIF Act states that an adjudication response must not include any "new reasons" for withholding payment that were not included in the payment schedule at the time it was given to the claimant. His Honour identified that the adjudicator, in making their determination, had considered the "new reasons" which Monadelphous had provided in its adjudication response, and on this basis the adjudicator's decision was invalid on the grounds of jurisdictional error.

Further, his Honour accepted that it was appropriate to render null and void only the parts of the adjudication upon which the adjudicator had relied on "new reasons" provided by Monadelphous.

Implications

Justice Bond's decision here highlights that, in light of the new scope of decision-making powers for adjudicators under the BIF Act, it is critical that parties in receipt of payment claims identify all relevant arguments within their payment schedules so that an adjudicator may rely upon it in order to make their determinations.

Expect delays to Queensland's new project trust account reforms

Principals, contractors and subcontractors engaged in Queensland's building industry are preparing to change their business practices to be ready for the proposed project trust account regime (previously Project Bank Accounts). However, initial expectations of a 1 July 2020 commencement date for the roll-out of project trusts to Hospital and Health Services' building projects now seems unlikely.

The Queensland Parliament has not passed the Building Industry Fairness (Security of Payment) and Other Legislation Amendment Bill 2020 (BIF Amendment Bill), and review of the BIF Amendment Bill is ongoing. The Queensland Transport and Public Works Committee recommended the Bill be passed and made various recommendations. The Minister has tabled an interim response to the recommendations, with a final response due by 20 September 2020. No further information is available as to the timing of the project trust account reforms. However, the Bill will likely be passed in largely the same form. Principals, contractors and subcontractors need to be across the project trust account reforms and putting internal measures in place to ensure compliance.

Statutory periods could mean raising the time bar for combustible cladding class actions

The Owners – Strata Plan No 87231 v 3A Composites GmbH (No 3) [2020] FCA 748 has provided further clarity on the potential procedural issues which can arise in class actions concerning defective building works. The applicant in this representative proceeding (Owners) is seeking statutory compensation and damages under the applicable Commonwealth fair trading legislation (namely, the former Trade Practices Act 1974 (Cth) and the Competition and Consumer Act 2010 (Cth)) arising from the purported acquisition of Alucobond panels, a form of light-weight architectural cladding. Owners claim that the panels are not suitable for use in the residential, commercial and public buildings for which the panels were bought, by Owners and group members to the application, because they pose significant fire risks and are an inherently dangerous building product. 

In the present proceeding (an interlocutory hearing), the first respondent (3A) contended that it was likely to bring potential contribution claims against various third parties; to name a few, developers, façade subcontractors, architects, consultants and engineers who at some point may have engaged in the process of affixing the Alucobond panels to the Owners' and group members' buildings.

This class action proceeding included claims by group members nationally; therefore, the Court was required to consider various limitation periods across the Australian States and Territories. Despite the fact that this proceeding constituted an interlocutory hearing, Justice Wigney observed that certain long stop limitation provisions relating to defective building work claims may apply to certain contribution claims seeking to include third parties in the present litigation. Therefore, his Honour cautioned 3A to act expeditiously to investigate and prosecute its potential contributory claims in the "relatively near future", to avoid some of those claims becoming statute barred before 3A would be able to bring them. However, at this stage of the litigation his Honour was hesitant to determine the exact scope or extent of the likelihood that 3A could forfeit some viable contribution claims as a result of a statutory time bar.

Also at issue before the Court was whether the Court could accept 3A's proposed class closure order, the implication of this being that a group member who did not register their claim would be unable to receive any of the potential settlement sum arrived at in the representative proceeding (despite still being bound by the terms of that litigation). The Court accepted that it had the power to accept such an order; however, in the circumstances and absent sufficient evidence from 3A that there was a risk of prejudice to their case, such an order was disproportionate and therefore not warranted.

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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.