18 Feb 2021

Major projects & construction 5 Minute Fix 69

By THE MAJOR PROJECTS & CONSTRUCTION TEAM

Get your 5 Minute Fix of major projects and construction news. This issue: developments in statutory limitation periods under the NSW Home Building Act; offers to settle proceedings; enforcing ICSID's awards; security of payment adjudications; liquidated damages; and new Victorian heritage laws.

Clarity on retroactive effect of amendments to statutory limitation periods under the NSW Home Building Act

In the NSW Supreme Court case of Vagg v Routledge [2020] NSWSC 88, Justice Ball clarified amendments to the statutory limitation periods under section 18E of the Home Building Act 1989 (NSW). Section 18E prescribes limitation periods for proceedings for breach of a statutory warranty. The section was amended in 2011 by the Home Building Amendment Act 2011 (NSW) (2011 Amendments), and again in 2014 by the Home Building Amendment Act 2014 (NSW) (2014 Amendments). As the building works the subject of this dispute were carried out pursuant to a contract entered into in 2009, it fell to Justice Ball to consider, as a threshold issue, the applicable limitation period.

We summarise below the applicable limitation periods for claims of a breach of statutory warranty under section 18E at the relevant points in time considered by the Court:

Pre-2011 (at the date of contract)

Being:

  • 7 years from the date the work was completed; or
  • if not completed, the date the work was meant to be completed under the contract.

2011 Amendments

Being:

  • 6 years for a breach that results in a "structural defect" (as defined in the regulations); or
  • 2 years in any other case.

2014 Amendments (current position)

Being:

  • 6 years for a breach that results in a "major defect" in residential building work; or
  • 2 years in any other case.

 

While transitional provisions in the 2011 Amendments made it clearly those amendments did not apply to contracts for residential building work entered into before the amendments commenced, Justice Ball noted the position with respect to the 2014 Amendments was "not entirely clear".

However, on the basis of the two decisions of the NSW Civil and Administrative Tribunal (Vella v Mir [2019] NSWCATAP 28 and Vella v Mir (No 2) [2019] NSWCATAP 240), and absent any "contrary argument", Justice Ball accepted that the applicable limitation period for a breach of a statutory warranty in building work arising from the contract was 7 years.

When cost orders will cost you: the importance of clarity in offers to settle

The Queensland Supreme Court of Appeal decision in Wiggins Island Coal Export Terminal Pty Limited v Civil Mining & Construction Pty Ltd [2021] QCA 8 provides useful pointers for parties wanting to make offers to settle proceedings involving counterclaims. In particular:

  1. when making an offer to settle a proceeding that involves a claim and a counterclaim, it is necessary to distinguish between the amounts offered to settle the claim and the counterclaim to enable a determination of compliance with rules 360 and 361 of the Uniform Civil Procedure Rules 1999 (QLD) (Rules); and
  2. the use of such words as "without prejudice, except as to costs" are not sufficient to ensure an offer can be relied on as a Calderbank offer.

The decision concerned an "all-up" offer made by Wiggins Island Coal Export Terminal Pty Ltd (Wiggins) to Civil Mining & Construction Pty Ltd (Civil Mining) in relation to proceedings between them which involved a claim and related counter-claim, expressed to be made under Chapter 9, Part 5 of the Rules to settle "all claims in the proceeding" between the parties. The offer was accompanied by a letter which bore the heading "Without prejudice except as to costs".

At trial, Wiggins had unsuccessfully contended that:

  1. it had made an offer that was compliant with the relevant Rules (being rules 360 and 361) and more favourable to Civil Mining than the proceedings' outcome. Consequently, Civil Mining ought to pay Wiggins' costs of the claim from the day the offer was served, and the entirety of Wiggins costs of the counterclaim; and
  2. if this was not accepted, the offer should be treated as a Calderbank offer due to the wording at the top of the letter stating, "Without prejudice except as to costs".

When determining an order as to costs where an offer to settle was previously made, the Court must adopt one of the following two positions as set out by the Rules:

  • the Court must order the defendant to pay the plaintiff's costs on an indemnity basis in the circumstances where:
    • the plaintiff makes an offer that the defendant does not accept;
    • the plaintiff obtains an order no less favourable than the offer;
    • the court is satisfied the plaintiff was willing and able to carry out what was proposed in the offer; and
    • the defendant cannot show another order for costs is appropriate in the circumstances (rule 360);
  • the Court must order the defendant to pay the plaintiff's costs on a standard basis up to and including the day of service of the offer, and order the plaintiff to pay the defendant's costs on a standard basis after the day of service of the offer in the circumstances where:
    • the defendant makes an offer that is not accepted by the plaintiff;
    • the plaintiff does not obtain an order more favourable to the plaintiff than the offer; and
    • the court is satisfied that the defendant was willing and able to carry out what was proposed in the offer (rule 361).

The Court of Appeal upheld the trial judge's finding that rules 360 and 361 require a comparison between the offer made and the order the plaintiff ultimately obtained. Wiggins only offered a single amount as settlement for both the claim and counterclaim, which made it impossible to compare the offered amount against the order made on the relevant claim. Wiggins could not demonstrate that the orders Civil Mining obtained were less favourable than the offer Wiggins had made.

In respect of the second issue, the Court of Appeal found that although the phrase "Without prejudice, except as to costs" was typical of Calderbank offers (informal offers of compromise made on a “without prejudice” basis between the parties, in accordance with the principles set out in Calderbank v Calderbank [1975] WLR 586 and subsequent authorities), the mere use of the words is not sufficient to indicate that an offer is to be relied on as a Calderbank offer. Wiggins' letter used the phrase in conjunction with the advice that the offer was made pursuant to Chapter 9, Part 5 of the Rules with no suggestion that it was made pursuant to anything else. Chief Justice Holmes stated:

"A party who receives an offer expressed to be made under the Rules, and conveying no intent that it be used for any other purpose, should be entitled to rely on what it represents. If it fails to meet the requirements of the rules under which it purports to be made, it cannot be unreasonable for that party then not to act on it."

The reign of Spain fails mainly on the plain… of an ICSID arbitration enforcement hearing

The Full Federal Court has allowed an appeal in relation to the application of the ICSID Convention (Convention on the Settlement of Investment Disputes between States and Nationals of Other States) under the Foreign States Immunities Act 1985 (Cth) (FSIA). In Kingdom of Spain v Infrastructure Services Luxembourg S.à.r.l. [2021] FCAFC 3, the Court decided that the proceedings initiated by Infrastructure Services Luxembourg SARL (IS) sought recognition of an ICSID award, and that Spain had consented to jurisdiction for that purpose. The ultimate question of whether an award, once recognised, can be enforced or executed in Australia, was left open.

It is common for parties – particularly States – to comply with ICSID awards voluntarily. However, a judgment creditor may seek recognition or enforcement of an ICSID award in any ICSID Contracting State. The decision about where to pursue enforcement is usually based on where the judgment debtor holds assets, as well as consideration of the domestic laws relating to recognition and enforcement.

This case arose in relation to a EUR139M investment by IS into solar power projects in Spain, encouraged by the Spanish Government's subsidy program. The program was subsequently withdrawn, leading to IS and others bringing claims against the State. An ICSID Convention arbitration awarded IS EUR101M plus interest (case number ARB/13/31) (the Award).

IS brought the award before the Federal Court for enforcement. Spain claimed immunity from suit as a foreign state under the FSIA. At trial ([2020] FCA 157), the primary judge made orders giving leave to IS to enforce the Award in Australia, specifically ordering Spain to pay EUR101M plus interest and costs of proceedings. Justice Stewart found that Spain had agreed to submit itself to the Court's jurisdiction by its accession to the ICSID Convention, therefore waiving the right to claim "foreign state immunity". Spain appealed on that point.

The Full Court (Justice Perram giving the leading judgment) approached the question as one turning on interpretation of the FSIA, especially the distinction between the terms recognition, enforcement, and execution, and how the present proceedings should be characterised. Answering that question traversed a great deal of interpretive ground, including the terms of the ICSID Convention itself as well as FSIA.

Ultimately, the Court found that the proceedings were in the nature of recognition and that Spain had acceded to the jurisdiction of the Federal Court of Australia in respect recognition of the Award. This rendered irrelevant the secondary question of whether "execution" under article 55 of the ICSID Convention includes "enforcement". This provides an interesting example of possible ambiguity raised by words with slightly different meanings in the English, Spanish and French versions of the Convention (each of which are said to be equally authentic).

The Court decided to hear the parties again as to the form of order for the recognition of the award.

The orders made at first instance had significant implications for Australia as an ICSID Contracting State. Australia appeared to be a forum where investors would be successful in seeking enforcement of ICSID awards; States were considered to have submitted to jurisdiction by signing and ratifying the ICSID convention, therefore waiving the right to claim foreign state immunity.

The decision of the Full Court allowing the appeal sets out a more nuanced position. While recognition and enforcement processes are closely aligned – and one (recognition) necessarily precedes the other (enforcement) – they are distinct. It was accepted that Spain could not rely on foreign state immunity in relation to recognition proceedings, but whether investors will be able to enforce or execute an ICSID award against a State in Australia remains to be seen.

Know your limits in security of payment adjudications

In the recent decision of Civil Contractors (Aust) Pty Ltd v Galaxy Developments Pty Ltd & Ors; Jones v Galaxy Developments Pty Ltd & Ors [2021] QCA 10, the Queensland Court of Appeal considered the validity of an adjudication decision given beyond the time limit for the decision specified in the Building Industry Fairness (Security of Payment) Act 2017.

Civil Contractors (Aust) Pty Ltd (CCA) filed an adjudication application in respect of a payment claim it served on Galaxy Developments Pty Ltd (Galaxy) for a progress payment under its civil works contract. The adjudicator made three requests for an extension of time for the delivery of his decision. The adjudicator ultimately decided that CCA should recover an amount of $1.4 million from Galaxy. However, this decision was provided to the parties outside of the time limit for the decision to be made under the Act.

Galaxy appealed the adjudicator's decision, and the trial judge found that the adjudicator's decision was delivered beyond any relevant time limit under the Act. The Court of Appeal had to consider the effect of an adjudicator's decision which is given beyond the time limit specified under the Act.

The Court formed the view that the text of sections 85, 86 and 94 of the Act strongly indicates that the adjudicator must not decide an application beyond the maximum period for doing so except for in the circumstances outlined in section 86(2) (being agreement between the parties that the adjudicator has additional time to decide an application, or the parties have failed to reach such an agreement and the application relates to a complex payment claim). On this construction of the legislation, the court found that as the decision was delivered after the time prescribed by the legislation and the circumstances outlined in section 86(2) had not been met, the adjudicator's decision was void. The operation of the Act also prevented the adjudicator from being any fees or expenses because he failed to make a decision on the application on time.

The Court considered the Victorian case of Ian Street Developer Pty Ltd v Arrow International Pty Ltd [2018] VSCA 294, which allowed an out of time determination to be effective, but distinguished that case on the basis of the statutory provisions being different under the Victorian and Queensland legislation. The Court also considered that rendering the determination effective was consistent with the intent of both States' legislation to facilitate the recovery of progress payments.

Even though the provisions are different in the various States, there does seem to be a division at intermediate appellate court level, between Victoria and Queensland, as to the how to meet that policy imperative in the case of out of time determinations. The Court also considered, and dismissed, appeals to findings in relation to licensing and whether the adjudicator acted in good faith.

New Victorian regime strengthens local powers to protect heritage from demolition

This month, the Victorian Government proposed a number of amendments to the Planning and Environment Act 1987 (Vic) under the Planning and Environment Amendment Bill 2021 following the controversial demolition of Carlton's historic Corkman Hotel in 2016 and review by the Commissioner for Better Regulation of the Victorian planning and buildings approvals in 2019.

The amendments are intended to:

  • deter the unlawful demolition of buildings of local heritage significance and disrepair;
  • qualify the right to claim compensation under section 98 of the Act for financial loss as a consequence of land being reserved for a public purpose so that it applies only if the planning scheme that has reserved the land has an express purpose of reserving land for a public purpose;
  • introduce new notification, document publication and inspection requirements and panel hearing arrangements, which allow for the online publication of documents and for planning panel hearings to be conducted virtually;
  • provide greater flexibility around the expiry of extractive industry planning permits, allowing permit holders to respond to market conditions by entering periods of inactivity for up to ten years without their permits expiring; and
  • provide greater equity in funding precinct structure planning costs by enabling the Victorian Planning Authority to cost-recover structure planning costs from those who benefit from the value uplift of structure plans where it was previously excluded from doing so.

We will provide you with further updates on this Bill as it progresses through Parliament.

Take care when drafting liquidated damages clauses in your multi-jurisdictional contract

The Supreme Court of Singapore, in the judgment of Denka Advantech Pte Ltd and another v Seraya Energy Pte Ltd and another and other appeals [2020] SGCA 119, has rejected the Australian and UK expansion of the penalty doctrine in considering a liquidated damages (LD) clause.

The appeal related to three electricity retail agreements (ERAs) between Seraya Energy Pte Ltd (Seraya) the electricity retailer, and Denka Advantech Pte Ltd (Denka) who were customers of Seraya. Denka had two core obligations under the ERAs, which they entered into with Seraya in 2012:

  1. to take or pay a certain minimum volume of steam; and
  2. to ensure that its steam consumption adhered to certain defined levels.

Denka requested to reduce the amount of steam it was obliged to buy. The parties agreed to a concession of the original terms, which were implemented however there a formal agreement was not executed.

The ERAs also contained LD clauses. The LD clauses were tied to Seraya's express contractual right to terminate the agreements in certain situations, for example, if Denka repudiated the contracts. Denka wrote to Seraya stating that 'the supply of steam and electricity shall cease'. Seraya treated the letter as evidence of repudiation of the ERAs and subsequently terminated the contracts.

Seraya commenced proceedings against Denka claiming breach of contract and claimed damages under the LD clauses in the ERAs or common law damages in the alternative. Denka denied liability for LDs for wrongful termination arguing that they were not bound by the ERAs as a formal agreement containing the concessional terms agreed by the parties had not been executed. Denka also argued that the LD clauses were unenforceable penalties.

At first instance, the trial judge found that Denka had repudiated the contracts but that the LD clauses in each ERA was not a genuine pre-estimate of damages and were therefore unenforceable penalty clauses.

The Supreme Court of Singapore allowed an appeal from Seraya and held that the LDs clauses were not unenforceable penalties. The Court undertook a detailed review of the case law regarding liquidated damages in the UK and Australia, ultimately coming to a conservative view grounded in the decision of the UK case Dunlop Pneumatic Tyre Company, Limited v New Garage and Motor Company Limited [1915] AC 79. The traditional test espoused in Dunlop is that if the LD provision is disproportionate to a genuine pre-estimate of the likely damages the innocent party can recover, then that provision is unenforceable.

Applying Dunlop, the Supreme Court of Singapore rejected both the Australian High Court's expansion of the penalty doctrine to instances where there is no breach of contract and the UK position that LDs will not be penalties if they uphold a legitimate interest. The Court reasoned that expanding the doctrine would involve reopening agreed provisions between parties resulting in an unjustified incursion into freedom of contract.

This decision has significance for the choice of governing law for businesses operating across Australia, Singapore and the UK as more LD provisions are likely to be interpreted by the court as a penalty under Australian or English law. It is imperative when drafting liquidated damages clauses to also consider including a choice of law provision as well as suitable mechanisms for extending time if necessary to reduce the risk of the court holding LD clauses unenforceable.

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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.