10 Jun 2021

Major Projects & Construction 5 Minute Fix 77: FIDIC's standard form contracts, penalties, insolvency and adjudication

BY THE MAJOR PROJECTS & CONSTRUCTION TEAM

Get your 5 Minute Fix of major projects and construction news. This issue: FIDIC to develop standard form contract for collaborative procurement models; penalties, again, this time for acceleration of contractual obligations triggered by external events; payment schedule issued by Superintendent remains valid under security of payment legislation; risk of insolvency not grounds for stay of adjudication determination; and damages for consequential loss, notwithstanding claimant's conduct.

FIDIC to develop standard form collaborative contract procurement model

In May 2021, FIDIC announced its plan to develop a standard form contract for collaborative procurement models. FIDIC's current portfolio of standard form contracts includes: Construct Only, Design and Construct and Design, Build and Operate models. The new standard form will cover various subsets of collaborative contracting, such as partnering, alliancing and other forms of collaboration, and will include optional payment provisions such as Target Price.

FIDIC has established a task group to research existing collaborative contracting models and draft a standard form contract that will suit development banks and private sector clients used to FIDIC contracts. Of the ten task group members, four are from a legal background and six are from commercial, risk and contract-management backgrounds. The collaborative standard form contract is expected to be released by the end of 2023.

Doctrine of penalties: Clause accelerating payment by reference to external events not an unenforceable penalty

The facts in Anjoul v Anjoul [2021] NSWSC 592 bring to mind the old adage "don't mix business with family". The judgment is largely dedicated to untangling the legal consequences of a family matter, however it also provides guidance on the application of the doctrine of penalties to clauses that are "subject to" the occurrence of identified external events.

Mr Anjoul helped his brother and sister-in-law with home renovations via an informal arrangement that meant that there was very little evidence substantiating what works were done, and the costs incurred. There followed the arrest and incarceration of Mr Anjoul's brother, and a subsequent deed between Mr Anjoul and his sister-in-law pursuant to which he was entitled to be paid $700,000 as a debt payable either upon sale of the property or a marriage breakdown.

Ultimately, Justice Robb found that the deed was an unjust contract for the purposes of section 7 of the Contracts Review Act 1980 (NSW) and that, in equity, Mr Anjoul took an unconscientious advantage of his sister-in-law after the arrest and incarceration of her husband.

Of wider application is Justice Robb's rejection of an argument that a clause in the deed was an unenforceable penalty because it would have the effect of accelerating the date for repayment by reference to external events. The relevant clauses were:

  • Clause 6 which provided that, subject to clause 7, repayments under the deed were not required until the property was sold or transferred. 
  • Clause 7 provided that, in the event of a separation or divorce, the amount would become immediately due and payable.

It was held that this arrangement did not constitute an unenforceable penalty because from the inception of the deed, the time for payment was always subject to the possibility that it might occur earlier. This was akin to some loan agreements, that can validly accelerate repayment of loaned amounts if certain events occur. The events that trigger the acceleration of the repayment obligation may not involve any breach of a term of the loan agreement by the borrower. This was consistent with the present case, where the breakdown of the marriage also would not itself constitute a breach of the deed.

While it is possible for the deprivation of an accrued contractual right to constitute a penalty, this was not the case in respect of this deed. 

"Calderbank offer" results in an order for indemnity costs, despite the offeror only succeeding on one out of three grounds

In Ausipile Pty Ltd v Bothar Boring and Tunnelling (Australia) Pty Ltd [2021] QSC 122, the consequences of a party to litigation unreasonably rejecting a "Calderbank offer" were determined by Wilson J. The result was an order to pay the other party's costs on an indemnity basis from the date of the offer.

The applicant had sought $761,296.75 in unpaid progress payments under section 78(2)(a) of the Building Industry Fairness (Security of Payment) Act 2017 (Qld). The respondent raised three grounds of defence to the primary claim, and offered to settle the dispute before trial via a "Calderbank offer". The applicant rejected the offer but, ultimately, the respondent was successful in its third ground of defence and the primary claim was dismissed.

The judgment highlights the risks of rejecting a reasonable settlement offer, particularly where the dispute involves numerous heads of contention but can be fully determined by reference to only one of them.

The respondent submitted it should receive its costs on an indemnity basis because the applicant rejected its "Calderbank offer", which was properly put and not unreasonable. The applicant countered by arguing that:

  • it was successful on two of the three grounds of defence, and the third ground was raised relatively late in the proceeding, and therefore the respondent should bear some of the costs in connection with the first two grounds;
  • it was only given 5 business days to consider the respondent's offer, which was not enough time to be a "reasonable opportunity"; and
  • the offer was couched so as to relate only to ground three of the defence, so it was reasonable to reject the offer in order to oppose the other two grounds.

It was held that there was no reason to reduce the respondent's costs entitlement because the two unsuccessful defences were not advanced in bad faith and were not irrelevant to the real issues. Moreover, it was held that the applicant unreasonably rejected the "Calderbank offer" because:

  • a period of five business days was sufficient in the circumstances for the applicant to consider the offer, especially in circumstances where the applicant rejected the offer two days before it expired; and
  • the timing of the offer (five business days before the final hearing) meant that the applicant was fully prepared for trial, well-advised by its legal representatives and had been aware of the respondent's grounds of defence for over ten months.

Adjudicator's jurisdiction remains despite payment schedule being issued by the Superintendent and not the principal

In RHG Construction Fitout and Maintenance Pty Ltd v Kangaroo Point Developments MP Property Pty Ltd [2021] QCA 117, the Queensland Court of Appeal upheld the efficacy of clause 37.2 of a construction contract which specified that, for the purposes of security of payment legislation, the Superintendent was acting as the agent of the principal when issuing a payment schedule in response to a payment claim.

In this case two payment schedules had been issued:

  • the first by the Superintendent; and
  • the second by the principal.

The principal challenged the jurisdiction of an adjudicator under the Building Industry Fairness (Security of Payment) Act (the BIF Act) on the basis that only the first payment schedule was identified in the adjudication application. The principal asserted that the application did not meet the requirements of section 79 of the BIF Act which requires that an adjudication application refer to the relevant "payment schedule".

This argument was rejected. It was held that the payment schedule issued by the Superintendent fell within the meaning of a "payment schedule" under the BIF Act, even though it was not issued by the principal, as a result of clause 37.2 of the construction contract which provided that:

In so far as necessary to ensure compliance with the Security of Payment Act, the Superintendent is deemed to issue any payment schedule … as the agent of the Principal and each such schedule shall constitute a payment schedule for the purposes of the Security of Payment Act.

Although clause 37.2 referred to the repealed antecedent of the BIF Act, the BIF Act addressed this possibility in section 206 which provides that a reference in a document to the repealed antecedent of the BIF Act could still be effective.

When viewed alongside the NSW Court of Appeal's earlier decision in Baulderstone v Queensland Investment Corporation [2007] NSWCA 9, the decision demonstrates the courts' reluctance to find a payment schedule invalid on technical grounds.

No stay granted on enforcement of adjudication determination despite risk of contractor insolvency

In Pheonix Builders Pty Ltd v Deca Australia Pty Ltd [2021] NSWSC 581, an application for a stay of enforcement of an adjudication determination was dismissed. It was held that the application, if granted, would have been contrary to the policy of the Building and Construction Industry Security of Payment Act 1999 (NSW) (the SOP Act), which is to promote the efficient resolution of payment claims by contractors.

The plaintiff argued that the underlying adjudication determination was invalid as there was no relevant construction contract, and therefore the adjudicator had no jurisdiction to determine the dispute. In addition, the plaintiff argued that the respondent was facing financial difficulties and was likely on the verge of insolvency.

The application was dismissed notwithstanding these arguments. In dismissing the claim, the following factors were considered:

  • the strength of the applicant's argument that the adjudication determination is invalid and the bases of that argument;
  • the likelihood that the contractor will ultimately be unable to repay the amount. if the adjudication decision is overturned; and
  • the risk the contractor will become insolvent if the stay is granted.

In respect of the final factor, the Court referred to the policy underlying the Act – that contractors should have their bills paid promptly. Dismissing the application would result in payment of the amount determined by the adjudicator which would likely ameliorate the cash flow issues experienced by the contractor. However, if the application was dismissed and the adjudicated amount was paid to the contractor, the financial difficulties (and likely insolvency) of the contractor would mean the money to be paid would likely be unrecoverable.

The Court acknowledged that where the applicant is unlikely to be able to recover any of the amount paid (if the adjudicator is later found by the Court to have lacked jurisdiction), this would favour the granting of a stay. However ultimately, consistent with previous decisions such as in Seymour Whyte Constructions Pty Ltd v Ostwald Bros Pty Ltd (in liq) [2019] NSWCA 11, these considerations were outweighed by the policy considerations underpinning that Act, namely to promote quick recovery of money owed to contractors.

Damages for consequential loss available notwithstanding the claimant's subsequent conduct influencing the loss

In Housman v Camuglia [2021] NSWCA 106, the New South Wales Court of Appeal considered whether there was an entitlement to compensation for consequential loss in circumstances where the conduct of the claimant had the effect of increasing the loss that was incurred.

The case arose from damage to a stairway in a residential property which was caused by building works on neighbouring land. The home owner (Ms Camuglia) delayed leasing the property until the damage was permanently rectified, instead of first adopting a temporary solution in order to bring forward the time at which the property could be leased.

At first instance it was held that the home owner was entitled to consequential loss (comprising lost rental revenue) because she was prevented from renting her property due to the damaged stairway. The neighbour (Mr Housman) appealed on the grounds that the property was lettable at an earlier time, based on engineering evidence that there was a temporary solution for safe access to the stairway. The Court of Appeal unanimously rejected the appeal stating that while temporary access may have been available from an engineering perspective, it was reasonable for the home owner to wait for permanent rectification before letting the premises.

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