14 Oct 2021

Major Projects & Construction 5 Minute Fix 86: arbitration clauses, prevention principle, excluded amounts and liquidated damages

By THE MAJOR PROJECTS & CONSTRUCTION TEAM

Get your 5 Minute Fix of major projects and construction news. This issue: appellate court consideration of the ambit of an arbitration clause; High Court to consider special leave applications regarding the prevention principle and the court's jurisdiction to excise "excluded amounts" from debt judgments under Victorian security of payment legislation; and Victorian Supreme Court highlights avenue to avoid "excluded amounts" in connection with liquidated damages deducted from earlier claims.

Watch this space: High Court to hear special leave applications regarding important construction law issues

The High Court will shortly hear special leave applications regarding whether the following judgments of the Victorian Court of Appeal can be appealed to the High Court:

  • Bensons Property Group Pty Ltd v Key Infrastructure Australia Pty Ltd [2021] VSCA 69, which concerned the application of the prevention principle; and
  • Yuanda Vic Pty Ltd v Facade Designs International Pty Ltd [2021] VSCA 44, which concerned the "excluded amounts" regime in the Building and Construction Industry Security of Payment Act 2002 (Vic) (Vic SOP Act).

Prevention principle

The judgment of Bensons Property Group Pty Ltd v Key Infrastructure Australia Pty Ltd [2021] VSCA 69 is discussed in detail in our Insights article here. The principles discussed in the judgment are of national importance because they have the potential to apply to disputes on construction projects in all Australian jurisdictions. The Victorian Court of Appeal held that the prevention principle did not operate at large, but could only be triggered by a failure to comply with contractual obligations, such as a contractual obligation to cooperate. The special leave application for the Yuanda case is due to be heard on 15 October 2021 [STOP PRESS: the application was refused] and the application for Bensons on 5 November 2021.

Expansive approach to arbitration agreements upheld by Queensland Court of Appeal

The Court of Appeal has upheld the application of an arbitration agreement in Cheshire Contractors Pty Ltd v Civil Mining and Construction Pty Ltd [2021] QCA 212, confirming the decision at trial by Justice Henry.

At trial, it was held that the arbitration clause (which was relevantly expressed to apply to "disputes or differences arising between the Parties") should be liberally applied such that it encompassed Cheshire's claims for relief based on estoppel by convention or statutory unconscionable conduct under the Australian Consumer Law. As a result, the court proceedings were stayed and the dispute was referred to arbitration.

This decision was challenged on appeal, and the appeal was dismissed. Cheshire contended that the words "in respect of a defined legal agreement" in the definition of "arbitration agreement" in section 7(1) of the Commercial Arbitration Act 2013 (Qld) require that the arbitration agreement itself defines the legal relationship to which it is intended to apply. This "strained" interpretation was rejected by the Court. Instead, it was held that section 7(1) of the Commercial Arbitration Act requires that there be a defined legal relationship (in this case, the relationship between a contractor and subcontractor was sufficient), and did not require the arbitration agreement itself to define that relationship.

Similar legislative definitions exist in other domestic arbitration legislation across Australia.

Vic Security of Payment Act: recovering amounts previously deducted from earlier payment claims

The "excluded amounts" regime, which is unique to the Vic SOP Act, has again been the subject of detailed judicial consideration. In Goldwind Australia Pty Ltd v ALE Heavylift (Australia) Pty Ltd [2021] VSC 625, Justice Stynes highlighted an avenue for claimants to recover an amount that was previously deducted from an earlier payment claim on the basis of a claimed entitlement to liquidated damages.

As we have discussed in more detail here, similar issues have been addressed by earlier judgments of the Victorian Supreme Court.

  • In Shape Australia Pty Ltd v Nuance Group (Aust) Pty Ltd [2018] VSC 808, it was held that an attempt to recoup an excluded amount that had previously been deducted was itself an excluded amount, and therefore could not be claimed as part of a subsequent payment claim.
  • Following that decision, in VCON Pty Ltd v Oliver Hume & Anor [2020] VSC 767, Justice Stynes rejected the claimant's attempt to recover via a payment claim an amount reflecting the value of bank guarantees called by the principal to obtain redress for accrued liquidated damages. The attempt was an excluded amount and could not be characterised as compensation for work performed under the contract.

A different outcome was reached by Justice Stynes in Goldwind Australia Pty Ltd v ALE Heavylift (Australia) Pty Ltd [2021] VSC 625. In its responsive payment schedule, Goldwind Australia had deducted from ALE Heavylift's claim an amount reflecting liquidated damages for delay. ALE Heavylift issued a subsequent payment claim which ignored this deduction and claimed the unpaid amounts for work performed.

It was held that the adjudicator was correct to characterise the claimed amount as compensation for work performed under a construction contract, and the deduction for liquidated damages an "excluded amount". A point of distinction from the earlier judgments was that ALE Heavylift's claim was for unpaid amounts for works performed, rather than for the recovery of offset liquidated damages.

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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.