08 Jul 2021

Major Projects & Construction 5 Minute Fix 79: procurement practices, security of payment, damages for defects

BY THE MAJOR PROJECTS & CONSTRUCTION TEAM

Get your 5 Minute Fix of major projects and construction news. This issue: default procurement practices for NSW large, complex infrastructure projects; update on WA's overhaul of its security of payment laws; when a builder is "in the business of building residences" (or not) for Victoria's SOP legislation; SA Court of Appeal reduces damages for defects; latest development in enforcing ICSID's awards, and arbitral tribunal issues.

Collaboration between NSW and Contractors sets new procurement standards

The NSW Premier's Memorandum issued on 24 June 2021 sets out the default procurement practices that NSW government agencies and State Owned Corporations are expected to apply to all large, complex infrastructure projects in the "Framework for Establishing Effective Project Procurement" from 1 July 2021.

To find out more about the procurement principles, and if they apply to any current or future infrastructure projects in the pipeline, please see Collaboration between NSW and contractors sets new procurement standards.

WA Parliament passes its security of payment legislation

The Building and Construction Industry (Security of Payment) Act 2021 (WA) has been passed by the Western Australian Government. When it commences it will overhaul Western Australia's security of payment and broadly bring WA's security of payment model into line with the "East Coast" model.

The Act is in substantially the same form as the Building and Construction Industry (Security of Payment) Bill 2020 (WA), which lapsed following the dissolution of State Parliament in December 2020. As we reported in our earlier note, the Act:

  • introduces new security of payment laws, requiring timely engagement in the payment process;
  • imposes serious consequences where a party fails to comply with the payment processes;
  • provides for the review of adjudication determinations by an experienced adjudicator in limited circumstances; and
  • applies only to contracts executed after the proclamation date.

Further to this, the Act introduces a deemed retention trust scheme into WA's security of payment regime. Under these provisions, all construction contracts must have a retention money trust account established (with some limited exceptions). A party to a construction contract who is withholding retention money must hold those funds in a dedicated trust account for the benefit of the party who provided the money, with limited access rights. The intention behind this scheme is to provide additional security where the holding party becomes insolvent, essentially "ring-fencing" retention money away from distribution to general creditors.

The operative provisions of the Act will come into force on dates proclaimed by the Western Australian Government in the Government Gazette, with the Government indicating that there will be an intensive education program about the Act rolled out for industry participants before that happens.

Company not "in the business of building residences" for construction of family unit complex

In Saath Pty Ltd v Seascape Constructions Pty Ltd [2021] VSC 358, the Supreme Court of Victoria found that Saath Pty Ltd was not in the business of building residences for the purposes of the Building and Construction Industry Security of Payment Act 2002 (Vic). This meant that the Act did not apply to Saath Pty Ltd's contract with Seascape Constructions Pty Ltd.

Construction contracts that are "domestic building contracts" are generally not covered by the Act. However, the Act carves out construction contracts where the building owner is in the business of building residences and the construction contract is entered into in the course of, or in connection with, that business.

The case highlights five key principles from other cases that have considered the phrase "in the business of". The principle focused on in this case was whether the enterprise engaged in by Saath Pty Ltd was for the purpose of profit on a continuous and repetitive basis. If the enterprise was for the purpose of profit, the Court would be more likely to view Saath Pty Ltd as being in the business of building residences. The actual purpose of the development was to build four units so that two families could live closer to one another.

Justice Stynes considered other factors including engagement of a corporate trustee, establishment of a company for building the residences, the contract sum of $1,125,000 and registration for GST by the company. Her Honour was not persuaded that those factors were sufficient to show Saath Pty Ltd was in the business of building residences at the time it entered into the Contract and quashed the adjudication determination.

A failure to allow a contractor the chance to fix defects sounds in reduced damages

Bedrock Construction and Development Pty Ltd v Crea [2021] SASCA 66 illustrates the risk to owners of not allowing a contractor the opportunity to fix defects before seeking to recover the cost of doing so from a third party.

The Court of Appeal considered whether an owner (Crea) unreasonably refused the contractor (Bedrock) access to the site to fix defects. At first instance, the judge found it was reasonable for the owner to refuse to allow Bedrock to fix the defects. You can find our previous discussion of the first instance decision here. However, the Court of Appeal's judgment focuses on ensuring that the parties are kept to the terms of their bargain, allowing the contractor to fix defects as required under the contract. In this instance, the contract provided Bedrock with a contractual opportunity of at least 10 working days to rectify any defects. But, Crea failed to afford Bedrock with access to the site to fix the defects.

Justice Doyle (with whom Justices Livesey and Bleby agreed) observed that, on a strict view, Crea might not recover any amount from Bedrock since Crea did not afford Bedrock the 10 working days opportunity to fix defects. However, on the evidence, the Court of Appeal found it appropriate to reduce the damages award. Nonetheless, the decision is a stark warning for the need for principals to ensure that they follow the contract provisions dealing with the rectification of defects unless there is a good reason to depart from them, lest they find themselves unable to recover the full, or any, amount from the contractor.

SID award against Spain recognised as if it were a judgment of the Court

The efforts by a successful claimant to enforce an arbitral award in Australia against the Kingdom of Spain continue. In our previous 5MF, we examined Spain's claim for foreign state immunity.

In the latest development, the Full Federal Court in Kingdom of Spain v Infrastructure Services Luxembourg S.à.r.l. (No 3) [2021] FCAFC 112 has recognised the ICSID Convention arbitral award against the Spain as if it were a judgment of the Court.

The claimant sought orders that give appropriate effect to the Court's previous decision. Chief Justice Allsop viewed the purpose of Article 54(I) of the ICSID Convention and section 35(4) of the International Arbitration Act 1974 (Cth) as requiring awards under the ICSID Convention to be given the same status and enforceability as a Court judgment. Any orders by a Court aimed at giving effect to awards under the ICSID Convention should reflect that purpose. The Court's orders were to recognise the award as being binding on Spain with a judgement being entered against Spain for the pecuniary obligations under the award.

The Court separately, and briefly, examined an order for costs against the intervener in the proceedings, the European Commission. It was decided that an international body that unsuccessfully intervenes in a proceeding should pay the costs of the private parties to the extent such costs are increased as a result of the intervention.

The composition of an arbitral tribunal: who did we choose again?

In Hub Street Equipment Pty Ltd v Energy City Qatar Holding Company [2021] FCAFC 110, the Court provides an important reminder for parties to ensure the composition of an arbitral tribunal is in accordance with the relevant agreement or risk having the arbitral award deemed unenforceable.

Overturning the Federal Court's decision in Energy City Qatar Holding Company v Hub Street Equipment Pty Ltd (No 2) [2020] FCA 1116, the Full Court concluded the arbitral award was not enforceable in Australia, as the arbitral tribunal was not composed in accordance with the agreement of the parties, which provided a "proper basis to resist enforcement". The Full Court further held that as the failure to compose the arbitral tribunal in accordance with the agreement was fundamental to the arbitrators' jurisdiction, the judicial discretion to enforce the award should not be exercised.

The delivery of this judgment was in somewhat unusual circumstances as the proceedings had "settled in principle" two days prior to the proposed delivery of the judgment. Deciding to hand down the judgment anyway, his Honour cited "important considerations of public policy and public interest", including:

  • the significance of publishing judgment where the relevant points of law are of public interest;
  • the correction of errors of both law and fact;
  • the stage at which the preparation of judgment had reached (being complete); and
  • the parties' failure to effect settlement despite having sufficient opportunity to do so.

Streamlining standards for design and building practitioners

In our April 2021 Insights, we outlined the NSW Government's new legislative framework for the regulation of the residential apartment building sector, which commenced on 1 July 2021.

The Design and Building Practitioners Amendment (Miscellaneous) Regulation 2021 commenced on 1 July 2021 and makes a range of amendments to the Design and Building Practitioners Regulation 2021, which include:

  • building practitioners who have already provided regulated designs and other relevant documents will be exempted from providing the same designs and documents after an occupation certificate is issued;
  • a condition on a relevant authorisation of a person may now be a ground on which the Secretary may form the opinion that the person is not a suitable person to carry out relevant work under Design and Building Practitioners Act 2020;
  • the duration of the exemption for registered practitioners from the requirement to hold a certain level of insurance in relation to work carried out as a registered practitioner is reduced to 30 June 2022;
  • clarification on the operation of alternative pathways to satisfy the minimum qualifications, experience, knowledge and skills required to be granted registration as a professional engineer; and
  • various changes in relation to fees payable under the Act.

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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.