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15 Oct 2020

Major projects & construction 5 Minute Fix 63

By the major projects & construction team

Get your 5 Minute Fix of major projects and construction news. In this issue, we take a look at three cases dealing with security of payment adjudications. The NSW Court of Appeal explores the remedies available for in the construction context for misleading deceptive conduct under the Australian Consumer Law, and the NSW Supreme Court summarises the relevant principles relating to the interpretation of contracts. Finally, we outline the key features of the draft revision to the arbitration rules issued by the Australian Centre for International Commercial Arbitration.

Adverse inferences and adjudication

The recent Victorian Court of Appeal decision in 1155 Nepean Highway Pty Ltd v Promax Buildings Pty Ltd [2020] VSCA 253 examines the inferences that an adjudicator can draw from the absence of supporting material provided by the respondent to a payment claim.

In 5MF58, we covered the Trial Division proceedings. On appeal, the applicant (1155 Nepean Hwy) argued that the trial judge had erroneously approved the approach of the adjudicator. At issue – the ability to draw adverse inferences from the applicant's failure to adduce contradictory material in the adjudication, even though the statutory prohibition in the Building and Construction Industry Security of Payment Act 2002 (Vic) (SOP Act) prevented the applicant from lodging an adjudication response.

The Court agreed. "The applicant's silence in the adjudication could not be taken as indicating anything at all about the strength of its case" in the circumstances. Here, the fact that the applicant had not provided a payment schedule meant that section 21(2A) of the SOP Act prevented the applicant from lodging an adjudication response. Also, the adjudicator had not sought further submissions or material under section 22(5).

Relevantly, however, the Court went on to distinguish between an adverse inference based on the absence of an adjudication response and the applicant's earlier failure to serve a payment schedule.

To the latter, the Court reasoned that:

"…an inference drawn, not from the absence of an adjudication response but from the applicant’s failure to provide a payment schedule, is in a different position… A recipient of a payment claim may be taken to know of the critical significance of a payment schedule to the operation of the Act in general and to the making of an adjudication determination in particular. … As a matter of common sense, a recipient of a payment claim who does not respond to it might rationally be thought to have no basis upon which to contest it."

On that basis, the Court held that it was "permissible for an adjudicator to infer, based on the failure of a recipient of a payment claim to provide a payment schedule, that the recipient was not in a position to contest the claim".

In the end, the Court declined to find that the adjudicator drew the inference identified by the applicant.

The applicant also argued that the contract drawings constituted part of the "construction contract" which was required to be considered by the adjudicator pursuant to section 23(2)(b) of the SOP Act, so that a failure to have regard to them rendered the determination void under section 23(2B). Although not forming a separate ground of appeal, the Court considered this argument and made observations regarding what constitutes "the provisions of the construction contract from which the application arose" for the purposes of section 23(2)(b). The Court observed: 

"…two interpretations are open. On the broader view, all the contents of documents having force as part of the contract or arrangement constituting the construction contract make up the provisions of that contract. On a narrower reading, the provisions of a construction contract are to be found only in the contract executed by the parties, and not in other documents incorporated by reference in that document."

Ultimately the Court concluded that the text of section 23(2)(b) supports the narrower approach, noting (among other things) that the use of the expression "the provisions of the construction contract", rather than "the construction contract" in section 23(2)(b) suggests that the section "contemplates something other than the whole of the construction contract as broadly defined". In reaching this conclusion, the Court also adopted a practical approach consistent with the expeditious conduct of adjudications. The Court determined that section 23(2)(b) sets a basal level of contractual material that an adjudicator must always consider, while empowering the adjudicator to demand further submissions, including the provision of documents, where the adjudicator considers that the parties have not provided all "relevant documentation".

SOP Reminder: Purchase orders and the risk of multiple construction contracts

The recent NSW Supreme Court decision in Acciona Infrastructure Australia Pty Ltd v Holcim (Australia) Pty Ltd [2020] NSWSC 1330, highlights the issue of purchase orders resulting in multiple construction contracts – rather than one construction contract.

The plaintiff (Acciona) entered into an Agreement with the defendant (Holcim) for the supply of concrete. On 28 May 2020, Holcim served a payment claim on Acciona for concrete allegedly supplied. On 12 June 2020, Acciona responded with a nil payment schedule. Holcim submitted an adjudication application for the claim, and an adjudication determination was made in favour of Holcim for $2.9 million. Acciona challenged the adjudication determination.

Acciona argued that the adjudicator lacked jurisdiction because there was neither a valid payment claim nor a valid adjudication application because the payment claim contained claims for work done under two or more contracts. Section 13(5) of the Building and Construction Industry Security of Payment Act 1999 (NSW) (SOP Act) specifies that a claimant can only serve one payment claim in any particular month for any work done or goods and services supplied in that month. Justice Hammerschlag referred to the judgment of Trinco (NSW) Pty Ltd v Alpha A Group Pty Ltd [2018] NSWSC where the Court held that a single progress claim cannot validly claim for work done under more than one contract. Relevantly, under clause 2(c) of the Agreement, the issue of a purchase order resulted in a separate contract coming into existence between the parties. Applying Trinco, Justice Hammerschlag concluded that the payment claim straddled numerous purchase orders and therefore did not constitute a valid payment claim because each purchase order was a separate contract. As a result, the adjudicator had no jurisdiction because the payment claim was invalid as per section 13(5) and was therefore ineffective to engage the operation of the SOP Act.

Justice Hammerschlag also rejected a procedural fairness argument advanced by Acciona that turned on its facts.

This case highlights the importance of reading the provisions of the SOP Act within the context of the agreement between the parties. In this case, the fact that each purchase order resulted in the creation of a new contract meant that Holcim needed to prepare a separate payment claim and adjudication application for each purchase order in order for the payment claim to be valid and for the adjudicator to have jurisdiction in relation to the dispute.

NSW Court of Appeal considers ACL remedies in construction context

Although consumer-focused, the decision in Jonval Builders Pty Ltd v Commissioner for Fair Trading [2020] NSWCA 233, is helpful for companies to understand their potential liability under the ACL and the flexibility available to the court in tailoring compensation for consumers arising out of the rescission of agreements.

The case arose from contracts for the sale of villas at a holiday park. The Commissioner for Fair Trading commenced proceedings seeking compensation for consumers who purchased the villas. Before entering into the contracts for purchase, Jonval, Hacienda (who operated the holiday park) and a director of both entities told the consumers and purchasers that contractual terms and planning requirements that limited occupation to 180 days per year would not be enforced. Most of the consumers intended to live in the villas permanently. The primary judge found that the misleading and deceptive and unconscionable conduct caused the consumers to enter into the contracts. Jonval appealed and sought to challenge the orders for compensation under the NSW Fair Trading Act (FTA) and the Australian Consumer Law (ACL). Jonval did not challenge the findings of misleading or deceptive conduct or unconscionable conduct, but did challenge the primary judge's finding that the director of the company had engaged in unconscionable conduct.

The Court of Appeal dismissed the appeal and upheld the orders for compensation.

The Court of Appeal held that the FTA and ACL confer a broad discretionary power to make orders which will compensate for loss, or prevent or reduce loss. Although it is necessary to identify the actual or likely loss or damage caused by the misleading and deceptive conduct before making the orders, it is not necessary to quantify that loss or damage as a precondition to making orders for compensation.

The Court of Appeal agreed with the primary judge that it was appropriate to award compensation at 85% of the costs of improvements in circumstances where the occupiers made the improvements primarily as a result of the representations regarding permanent occupation. The primary judge based the orders on compensating for loss of damage or preventing or reducing the damage or loss suffered. Additional orders provided for a refund of the purchase price plus interest on the grounds that consumers would reconvey title to villas.

Finally, the Court of Appeal rejected Jonval's argument that the director had personally engaged in unconscionable conduct and found that the director was the controlling mind of the company and had either personally executed certain contracts, or knew of and endorsed the conduct of the company's employees.

Stuck in a sand trap? NSW Supreme Court considers principles relevant to interpretation of contract for works to Strathfield Golf Clubhouse

Jabbcorp (NSW) Pty Limited v Strathfield Golf Club [2020] NSWSC 1317 is an interesting case study on contract interpretation to resolve issues around variations and guaranteed maximum price contract on golf clubhouse construction contract, including the relevance of extrinsic evidence about parties' intentions and the provisions of Australian Standard AS4902.

The decision largely turned on its facts, which resulted in the dismissal of Jabbcorp's claim for variations and an extension of time.

Justice Ball summarised the principles relevant to the interpretation of a commercial contract, including:

  • negotiations between the parties leading to the contract are not relevant to the correct construction of that contract, except to the extent that they shed light on the objective facts known to both parties;
  • ambiguity is not a pre-condition to a consideration of any extrinsic circumstances (in reaching this conclusion, he considered himself bound by the NSW Court of Appeal decision in Cherry v Steel-Park [2017] NSWCA 295);
  • the extent to which an "entire agreement" clause modifies the principles of construction; the answer to which the Court said must turn on the correct construction of the entire agreement clause itself; and
  • post-contractual conduct is not admissible to interpret the words of a written contract. However, subsequent conduct may be relevant in other ways, such as where it amounts to an admission in a question of fact.

The decision provides a useful recap about the principles relevant to contractual interpretation, with a particular focus upon NSW authorities.

ACICA launches draft changes to ACICA Arbitration Rules

On 5 August 2020, the Australian Centre for International Commercial Arbitration (ACICA) launched its Consultation Draft (CD) for public comment, outlining proposed changes to the ACICA Rules 2016. The proposed changes align ACICA with best-established practices internationally but also contain several novel procedural innovations that address contemporary issues emerging from practice.

Most significantly (and the subject of continued internal debate and consultation) is a proposed extension of rules permitting consolidation of arbitrations arising from the same "series of transactions" but under separate agreements, to cases involving different parties (see CD 16). This change could permit consolidation, for example, of arbitrations involving large-scale infrastructure projects, where project delays and defects give rise to common intertwined questions concerning the performance and liability of multiple contractors who were working simultaneously on site. The proposed power would serve to reduce costs for parties, and avoid inconsistent findings being made by different tribunals. However, it would represent a departure from commercial parties' customary expectation that their contract and arbitration agreement is strictly bilateral, and is a change that should be properly understood when drafting arbitration clauses.

CD 53 creates a new obligation on parties to disclose to the tribunal, ACICA and other parties the existence of third-party funding arrangements and the identity of the funder (but not the terms of the arrangement). Such provisions are becoming increasingly common in arbitral institutional rules. Disclosure obligations promote transparency to avoid conflicts of interest that may jeopardise the integrity of the arbitral procedure, but may also have implications for a party seeking security for costs.

Recognising the important role that mediation can play in the efficient and amicable resolution of disputes, ACICA has also proposed a rule under which arbitral tribunals "shall raise for discussion the possibility of using mediation or other forms of alternative dispute resolution". This change permits the tribunal to grant a stay of proceedings for such procedures to be pursued (CD 54). The proposed rule contains safeguards to prevent misuse of the provisions, and require the arbitration to resume on the request of any party. The rules also address the novel situation where parties elect to appoint their arbitrator to act as mediator (CD 55).

Clayton Utz joined ACICA's rules consultation workshops in September, during which ACICA indicated that it is was also in the early stages of exploring whether to devise rules relating to "online" hearings, to directly address the increasingly virtual format of arbitrations now occurring due to the COVID-19 pandemic (in addition to ACICA's guidance note for online arbitrations released earlier in the year).

It remains to be seen whether ACICA will ultimately adopt these changes. ACICA's review and consultation remains ongoing.

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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.