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17 Sep 2020

Major projects & construction 5 Minute Fix 61

By the major projects & construction team

Get your 5 Minute Fix of major projects and construction news. This issue: cladding safety legislation proposed in Victoria; expert determinations under the New South Wales Government GC21 (Edition 2) explored; estoppel defeats variation claim in New South Wales decision; and New South Wales decision examines principles of reasonable for claiming rectification costs.

Victoria introduces cladding safety bill

The much anticipated Cladding Safety Victoria Bill 2020 (Vic) is in the final stages of review and, if passed, will come into effect by 1 July 2021 at the latest.

The Bill establishes Cladding Safety Victoria (CSV) as a separate entity with responsibility for administering the State's cladding rectification program, assuming those functions from the Victorian Building Authority.

If passed, the Bill will enable CSV to make decisions on and prioritise buildings for potential financial assistance, to enter into funding agreements with owners or owners corporations to procure cladding rectification work, and then to monitor those cladding rectification works. In addition, CSV will provide support by providing guidance to owners and owners corporations, procuring building practitioners and engaging technical design and project management services for cladding rectification work.

A key change for building owners and owners corporations to note is an extension of the limitation period under section 134 of the Building Act 1993 (Vic) from 10 years to 12 years for bringing "cladding building actions" relating to non-compliant or non-confirming external wall cladding products. The relief extends to cladding building actions that would otherwise have expired on or after 16 July 2019, but before 12 months after the commencement of the Bill.

Binding expert determinations – the clause language is critical

It is not uncommon these days for dispute resolution clauses to provide for expert determination which is final and binding unless a nominated threshold (typically dollar value) is exceeded. The recent decision in Lahey Constructions Pty Ltd v Department of Education [2020] NSWSC 1158 highlights just how critical it is to understand the threshold that is being agreed.

Remind me of the facts

The Department of Education (DoE) contracted with Lahey Constructions Pty Ltd (Lahey) for upgrade works to two public schools in New South Wales. The general conditions under each contract were identical and in the form of the New South Wales Government GC21 (Edition 2) (GC21). At issue was the proper construction and application of the expert determination provision within the standard form GC21 which provided:

71.7     Subject to clauses 71.8 and 71.9, the parties must treat each determination of an Expert as final and binding and a party that owes money to the other pursuant to the determination must pay that amount to the other party within 28 days after receiving the determination.

71.8      Neither party may commence litigation in respect of the matters determined by the Expert unless the determination:

.1 does not involve paying a sum of money; or

.2  requires one party to pay the other an amount in excess of the amount stated in Contract Information item 54, calculated without having regard to:

.1 any interest that may be payable; and

.2 any amount that has been paid pursuant to the Building and Construction Industry Security of Payment Act 1999 (NSW) [emphasis added].

Lahey pursued claims for variations under the dispute resolution clause and also by adjudication under the BCISP Act. A decision in the adjudication was made before the expert determination process was completed. The adjudicated amounts totalling $12.6m, which DoE paid, were substantially higher than Lahey's entitlements as determined by the expert. As a result, the net outcome of the expert process was that Lahey would have to repay to DoE the difference of $3.8m by way of restitution under the Act.

Lahey maintained that it was entitled to the higher adjudicated amount and commenced litigation on the basis that the expert determination was not final and binding because the difference of $3.8m exceeded the $500,000 threshold stated in Contract Item 54. DoE applied to dismiss the proceedings. It said Lahey had calculated the threshold amount incorrectly because the only amounts ordered to be paid in the determination which could be taken into account were $119,042 and $65,224, which were under the threshold.

Decision

The dispute turned on the proper construction of the clause. Justice Henry reaffirmed the entrenched interpretation principles which apply to the construction of a commercial contract:

  • construe a clause objectively by reference to its text, context and commercial purpose, asking what a reasonable person would have understood it to mean;
  • unless a contrary intention is indicated, approach the task on the assumption that the parties intended to produce a commercial result that avoided commercial nonsense or working commercial inconvenience.

Adopting this approach, Justice Henry concluded that the clause operated so that "neither party may commence litigation in respect of the matters determined "unless" the determination requires one party to pay the other more than $500,000, calculated without regard to SoP Act payments":

Lahey had already been paid the amounts that the expert determined was payable to it for the claimed variations. As a result, the determination did not require the payment of those amounts. Rather, the only amounts required to be paid by the determination were $119,042 and $65,224. These amounts were well under the $500,000 threshold, which meant that the determination was final and binding.

An interesting suit: estoppel defeats variation claim bar

In Valmont Interiors Pty Limited v Giorgio Armani Australia Pty Limited [2020] NSWDC 395, the New South Wales District Court, the contractor succeeded in circumventing a contractual provision that barred variation claims not notified within a certain period.

The contractor succeeded in an estoppel argument, allowing it to recover additional money for some variation claims, despite not having complied with the provisions of the relevant clause requiring the contractor to give notice if it believes a direction is a variation, and barring claims not so notified.

As may be expected, the facts and findings around the estoppel are complex, but Justice Smith's essential finding was that:

"the conduct of Armani encouraged Valmont to proceed with the work, in spite of the provisions of cl 15 of the contract. Having carried out the work on that basis, it would occasion detriment to Valmont if the assumption was no longer maintained. In those circumstances, it would be unjust for Armani to rely on the terms of cl 15.2 in relation to these items and it is estopped from doing so".

Justice Smith also mentions the prevention principle, accepting the observation in Probuild Constructions (Aust) Pty Ltd v DDI Group Pty Ltd (2017) 95 NSWLR 8 that the principle can be modified or negated by the terms of the contract. Here, Armani's ability to claim an EOT under cl 16 meant that "it does not matter whether or not Armani’s conduct actually caused a delay in practical completion… Clause 16 ousts the operation of the prevention principle and denies operation to applications for extension unless they comply with the provisions of the clause."

On its face, this seems to give very broad scope to the ability to "contract out" of the operation of the prevention principle – the mere presence of the ability to gain an EOT via the clause seems to leave no room for the operation of the principle. However, the position in Australia about the ability to "contract out" of the effect of the prevention principle is not yet settled, with conflicting decisions at intermediate appellate level.

The "bedrock" principle of reasonableness in claiming rectification costs

Rectification costs are the primary measure of damages for defective construction work. But, where rectification is not a "reasonable course" to adopt, then the alternative diminution in value measure of damages is applicable. This principle is uncontroversial. However, the application of the test is less straightforward.

Crea v Bedrock Construction and Development Pty Ltd; Bedrock Construction and Development Pty Ltd v Crea & Anor [2020] SADC 124 provides a practical illustration of how the courts will apply the unreasonableness exception laid down by the High Court in Bellgrove v Eldridge (1954) 90 CLR 613. The case involved alleged defects in the fit-out of an Adelaide pizza restaurant. An arbitral award determined the cost of rectifying the alleged defects. The builder (Bedrock) opposed the Court adopting the arbitral award on several grounds (including the reasonableness of incurring rectification costs).

The judgment is facts-heavy, but DCJ O'Sullivan traverses the current state of the law concerning rectification damages. When examining the "reasonable course" qualification, his Honour refers extensively to the SA Full Court's decision in Stone v Chappel (2017) 128 SASR 165 in which the Court set out various factors which could be taken into account in relation to the "reasonableness" limb of Bellgrove, including proportionality. DCJ O'Sullivan explicitly uses the factors identified in Stone v Chappel to resolve each of the alleged instances of defects. However, unlike the outcome in Stone v Chappel, the primary measure of damages (rectification costs) prevailed in this instance.

The Court also considered whether Bedrock had a right (as well as an obligation) to carry out rectification work. The Court confirmed that an owner is required to allow the builder to minimise the damages it must pay by rectifying defects, except where its refusal to give the builder that opportunity is reasonable. Here, the owner was found to have given Bedrock opportunities to conduct the repairs, but Bedrock had not rectified all the defects. Furthermore, the parties' relationship had deteriorated, and the owner had lost confidence in Bedrock's ability to complete the repairs. As a result, it was reasonable for the owner to refuse to allow Bedrock to fix the defects.

Irrespective of what the contract states, owners should be alert to their obligation to mitigate loss. Suppose a contractor is successful in establishing that the owner denied it the opportunity to fix defective work. In that case, the owner's claim for damages may be limited to what it would have cost the contractor to carry out the rectification work (which will typically be much less than the cost of bringing in an outside contractor).

A useful refresher on reference dates, final payment claims and adjudication jurisdiction

In Citi-Con (Vic) Pty Ltd v Trojan Built Pty Ltd [2020] VSC 557, Justice Stynes, recently appointed to the Victorian Supreme Court, has provided a comprehensive and useful analysis of jurisdictional issues that sometimes arise under the Building and Construction Industry Security of Payment Act 2002 (SoP Act).

The proceedings arose from a subcontract entered into by the parties for the supply and installation of a flooring system. Citi-Con engaged Trojan, who carried out the works until around August 2018.

Approximately five months later, in February 2020, Trojan made a payment claim and pursued that claim to adjudication. The Adjudicator found that the reference date for the payment claim under the subcontract was 25 January 2020.

Citi-Con brought judicial review proceedings which disputed the Adjudicator's decision, primarily on the basis that:

  • there was no valid reference date for the payment claim – Citi-Con submitted that the subcontract limited reference dates to those months in which work was done, which meant that the applicable reference date for the payment claim should have been August 2018;
  • alternatively, the payment claim was a final payment claim and there was no valid reference date.

Justice Stynes dismissed the appeal, pointing out that the Adjudicator had correctly determined the reference date with regard to the subcontract, and that the reference date was valid. This was the case even though it was 5 months after the works, to which the payment claim related, were completed.

Of interest was Justice Stynes' consideration of whether the payment claim was a "final payment claim". With no definition of a "final payment claim" under the SOP Act, she approached the issue as a matter of contractual interpretation and objective analysis. In summary, the relevant findings were:

  • the covering email and the claim itself did not suggest it was a final payment claim;
  • the subcontract provided for periodic progress claims as well as a final payment claim;
  • a pre-condition under the sub-contract to making a final payment claim is the expiry of a defects liability period which, in this case, had not even begun;
  • practical completion had not been certified;
  • the contract was still on foot.

Each of these considerations tended to show that the payment claim would fall within the definition of a periodic progress claim rather than a final payment claim.

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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.