Major Projects & Construction 5 Minute Fix 103

THE MAJOR PROJECTS & CONSTRUCTION TEAM
21 Jul 2022 Time to read: 5 MIN

Get your 5 Minute Fix of major projects and construction news. In this edition: common law and contractual rights in defects and liquidated damages claims; a "battle of the forms" in steel supply contracts; adjudicator's powers to require further submissions; oral contract variations; the binding nature of personal guarantees; and Infrastructure Australia's revised project priority list.

Excluding common law rights – rectification damages available despite procedural mis-steps, but liquidated damages clause codifies right to delay damages

Hacer Group Pty Ltd v Euro Façade Tech Export SDN BHD [2022] VSC 373 is a recent case considering defective work, rectification and liquidated damages.

Hacer Group Pty Ltd (as Builder) commenced proceedings against its Subcontractor, Euro Façade Tech Export SDN. The Subcontractor had been engaged to design, engineer, manufacture and supply a façade system for a residential apartment complex.

Failure to follow contract not a bar to common law rectification damages

The subcontract included terms along the usual lines allowing the Builder to notify the Subcontractor of defects, providing the Subcontractor with an opportunity to rectify them. If the Subcontractor failed to do so, the Builder was entitled to engage others to execute the rectification works and recover its costs.

The Subcontractor pleaded that it never received from the Builder a notice of the defect or a direction to rectify the defect pursuant to the contract, and was therefore denied the opportunity to remedy it. The Subcontractor therefore argued that the Builder was only entitled to recover the cost that the Subcontractor would have incurred to remedy the alleged defect had they been provided the opportunity to do so.

Justice Stynes considered the decision of Turner Corporation Ltd v Austotel Pty Ltd (1994) 13 BCL 378. In this case, no entitlement to recover costs for third-party rectification work was found to arise because of procedural missteps. However, her Honour distinguished the Turner judgment, holding that, as the subcontract included a broad indemnity and did not exclude liability for damages, the Builder retained “its common law right to damages even where it has not complied with the contractual provisions governing the notification and rectification of defects”.

Liquidated damages as an exhaustive remedy for delay

Justice Stynes then considered whether the Builder was confined to its claim for liquidated damages for delay, or whether it could alternatively claim common law delay damages.

Her Honour considered that two factors "weigh heavily in favour of a finding that a liquidated damage clause provides an exhaustive remedy for delay":

  • the contract sets out a "positive sum" of liquidated damages; and
  • the liquidated damages clause is mandatory.

Both of these factors were established in the subcontract. Therefore, Justice Stynes held that the Builder could not claim common law damages for delay and was restricted to the liquidated damages clause.

Battle of the forms: when the relevant services commence could be crucial

In Laurus v Mitsui [2022] VSC 360, the Supreme Court of Victoria dismissed a claim by APT, who owed around $7.4 million in unpaid invoices to Mitsui. APT considered it owed Mitsui a reduced amount on the basis that Mitsui was liable for liquidated damages or damages at common law.

Mitsui had supplied steel to APT for four months. The parties disputed which contract regulated their relationship. The case illustrates the principle that, in situations of ambiguity as to whether a binding contract existed, the court can review post-contract conduct to determine whether the conduct supports an inference that mutual assent had previously been established. It also illustrates how complicated it can be to unravel the applicable legal situation where there is such a "battle of the forms".

On several occasions, APT requested an order of steel from Mitsui and sent through standard form contracts generally favourable to them. This included a term stating that acceptance of the offer must occur within five days of receipt. Mitsui never signed these APT standard contracts, but on one occasion it delivered steel several weeks after receipt of an APT standard contract. After a substantial amount of steel had already been delivered, Mitsui then provided APT with its own standard form contract, which APT signed.

Despite having signed the Mitsui standard contract, APT argued that the APT standard contract regulated the commercial relationship. The Court agreed and held that the delivery and acceptance of the steel indicated mutual assent to the terms of the APT standard contract. This was despite the fact that:

  • the APT standard contract offer had expired; and
  • APT had signed the Mitsui standard contract afterwards.

Justice Osborne did not accept, however, that there was a term that required delivery of steel by a certain date, so APT's claim for liquidated damages failed.

NSW Court confirms security of payment adjudicator's power to require submissions on adjudication applications

In 12 Bridge Street Epping Pty Ltd v DR Design (NSW) Pty Ltd [2022] NSWSC 866, the NSW Supreme Court dismissed 12 Bridge Street's (Developer) application to set aside an adjudication decision in favour of DR Design (Architect) under the NSW Security of Payment Act.

Before issuing its adjudication response, the Developer alleged that the Architect had not properly served the adjudication application. The adjudicator requested “further written submissions” from each party on this issue under section 21(4)(a) of the Act. The Developer argued that the adjudicator did not have the statutory power to make this request because the adjudication response had not yet been issued.

The Developer's argument was based upon a literal interpretation of section 21(4)(a) of the Act and the reference to “further” submissions. In circumstances where initial submissions (that is, the adjudication response) had not been issued, the Developer contended that there could be no “further” submissions. Justice Stevenson rejected this argument.

The Court held that the Developer's act of raising the issue with the Adjudicator early in the process, before serving its adjudication response, constituted a "submission".

Terms of oral variation to share sale agreement found evidenced by post-contract conduct

Leviston v PQ Management Pty Ltd [2022] FCA 787 concerned a dispute regarding the effect of a post-contract oral variation to a share sale agreement (SSA) entered into in July 2017 in respect of Treated Waste Agencies Pty Ltd (TWA). The SSA provided that Leviston would sell 70% of the shares of TWA for $910,000 to PQ Management. By 2020, the relationship between the parties broke down and PQ Management issued a notice to Leviston under a separate agreement permitting PQ Management to buy out Leviston’s remaining shares.

Leviston claimed an oral variation prior to completion under the SSA meant that the purchase price would not be determined until TWA's July 2017 accounts had been finalised. The parties were not in dispute that an oral variation existed. What was in dispute were the terms of that variation.

Justice Derrington in the Federal Court confirmed that post-contractual conduct can be considered when resolving a dispute where the alleged contractual terms had not been written. Justice Derrington reviewed the relevant caselaw, which recognises that where contracts are entirely oral, post-contract conduct of the parties can provide the best form of evidence as to whether certain terms came into existence, but also that the application of this legal principle depends upon the facts of each particular case.

In this case, the Court held that the post-contract conduct was inconsistent with the content of the oral variation alleged by Leviston and found for the variation alleged by PQ Management.

Beware when giving a personal guarantee: unfair contracts provisions might not save you

In Hardy v Coates Hire Operations Pty Ltd [2022] NSWCA 122, the NSW Court of Appeal upheld the validity of a personal guarantee despite arguments that it was “unjust” under sections 7 and 9 of the Contracts Review Act 1980 (NSW).

The appellant, Robert Hardy, sought to void a personal guarantee that he had provided to Coates Hire Operations. He provided it in connection with a commercial credit from Coates to a company of which Hardy was a director. The company defaulted on its payments and entered liquidation. Coates claimed against Hardy as guarantor. Hardy argued that it would be unjust to enforce the guarantee because he was suffering from cognitive defects when he signed the guarantee. He submitted that these created a material inequality in bargaining power such that he could not properly protect his interests. At the time of trial, Hardy was unable to give evidence because he was in an advanced stage of dementia.

The Court of Appeal rejected Hardy's arguments. The Court held that the guarantee was, amongst other things, both detailed and transparent, and contained acknowledgements by the parties that they had obtained (or had the opportunity to obtain) legal advice. The Court also considered the extent of Hardy’s commercial experience, position as company director and access to both hardcopy and electronic versions of the document to all be relevant factors when weighing up any potential injustice. In addition, the Court held that, although a cognitive deficit was present when Hardy gave the guarantee, it was not of a sufficient degree as to constitute a material mental impairment.

Infrastructure Australia releases update to Infrastructure Priority List

Infrastructure Australia has added 32 new proposals to its Infrastructure Priority List in 2022, with 17 of those projects added in June 2022.

The projects include the following at Stage Three (investment-ready proposals):

  • Australia-Asia Powerlink, Sun Cable’s proposal for solar farms and batteries in the Northern Territory including a 4200km subsea cable from Darwin to Singapore.
  • Additional water storage in the Darwin region and associated infrastructure proposed by the Northern Territory Government.
  • The NSW Government’s proposal for upgrades of the Circular Quay ferry terminal, train station and public space.

The Stage Two (potential investment options) proposals added in 2022 are road upgrades in Karratha and the Kimberley, WA and an upgrade to the M1 Pacific Motorway south of Brisbane.

Among the new Stage One (early-stage) projects is the Victorian Government’s proposed Suburban Rail Loop and intermodal freight investigations in Melbourne and Brisbane as part of the Inland Rail project.

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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.