Major projects & construction 5 Minute Fix 15

Do insolvent contractors have the benefit of Security of Payment legislation? Watch this space…

The NSW Court of Appeal has granted leave to appeal from a recent decision of the NSW Supreme Court in which the NSW Supreme Court found that insolvent contractors have the benefit of Security of Payment legislation.

In Seymour Whyte Constructions Pty Ltd v Ostwald Bros Pty Ltd (in liq) [2018] NSWSC 412, the NSW Supreme Court found that Ostwald Bros Pty Ltd, which had entered into a subcontract to perform works on the Pacific Highway with Seymour Whyte Constructions Pty Ltd (SWC), was a "claimant" for the purposes of the Building and Construction Industry Security of Payment Act 1999 (NSW) (NSW SOP Act) and was accordingly entitled to the benefit of the NSW SOP Act even though Ostwald had become insolvent.

SWC had relied upon the decision of the Victorian Court of Appeal in Façade Treatment Engineering Pty Ltd (in liq) v Brookfield Multiplex Constructions Pty Ltd [2016] VSCA 247 in arguing that Ostwald, as an insolvent contractor, was not entitled to the benefit of the NSW SOP Act. In that case, the Victorian Court of Appeal held that insolvent contractors are not "claimants" and are not entitled to the benefit of the Building and Construction Industry Security of Payment Act 2002 (Vic) (Vic SOP Act) because the text, context and purpose of the Vic SOP Act indicates that the Vic SOP Act is only intended to protect persons who are capable of carrying out construction work.

However, the NSW Supreme Court found that the decision of the Victorian Court of Appeal was "plainly wrong" and that there was nothing in the provisions of the NSW or Vic SOP Acts that would compel the conclusion that a company ceases to be a "claimant" if it becomes insolvent and ceases to be capable of carrying out construction work.

SWC sought leave to appeal the decision of the NSW Supreme Court and the NSW Court of Appeal granted that leave, noting that the proposed appeal raises significant issues including the correctness of Victorian Court of Appeal's decision in Façade Treatments. It remains to be seen whether the NSW Court of Appeal will uphold the NSW Supreme Court's decision.

Gambaro v Rohrig: This time it's a strike out!

Another in the series of applications in this long, drawn-out case which turns upon Gambaro's claim for restitution for amounts paid to Rohrig under adjudication on the basis that they exceed Rohrig's entitlement to payment under the contract.

In the original application in this series, Rohrig sought to strike out Gambaro's pleading in its entirety on the basis that sections 99 and 100 of Building and Construction Industry Payments Act 2004 (Qld) (Qld SOP Act) prevented the principal from claiming the moneys back, at least for the life of the contract. In that case, Justice Atkinson held that Qld SOP Act did not prevent or suspend a party from enforcing their contractual rights by civil litigation, for the life of the construction contract or at all: Gambaro Pty Ltd v Rohrig (Qld) Pty Ltd [2015] QSC 170. The application to strike out Gambaro's pleadings was denied.

Nearly three years on and the courts have considered yet another strike out application in relation to Gambaro's pleadings: Gambaro Holdings Trust v Rohrig (Qld) Pty Ltd [2018] QSC 149.

The basis of Rohrig's application this time:

1. There was no basis on which to calculate Rohrig's entitlement under the contract as the contract had been terminated and no final payment certificate had been issued.
2. Gambaro's claim for restitution relied upon the terms of the contract that, on Gambaro's own case, had been terminated.Gambaro claimed restitution for the difference between the amounts paid to Rohrig (both under the contract and by way of adjudication applications) and the guaranteed maximum price under the contract (as adjusted) as the cost of the works performed prior to termination.In support of this, Gambaro relied upon clause 2.1 of the contract which defined the "cost of the works" as the guaranteed maximum price under the contract.
3. Section 100(3)(b) of Qld SOP Act did not provide Gambaro with a right to restitution.
4. Gambaro did not have an arguable action for money had and received as there was not an absence of consideration by Rohrig (the building work under the contract being substantially complete).

Chief Justice Holmes held that Rohrig's first argument was incorrect – termination of the contract or the absence of a final payment certificate did not make it impossible to assess Rohrig's entitlement under the contract.

As to the second ground, Chief Justice Holmes (referring to the judgment in Iezzi Constructions Pty Ltd v Watkins Pacific (Qld) Pty Ltd [1995] 2 Qd R 350) found that there was no "real prospect" of Gambaro demonstrating that clause 2.1 survived termination of the contract. As such, the valuation of the works completed was not limited to the guaranteed maximum price or the cost of the works under the contract.

She also accepted Rohrig's third ground for strike out, finding that it was doubtful that Gambaro could rely on s 100 "as giving it some independent restitutionary right", citing John Holland Pty Ltd v Roads and Traffic Authority of New South Wales [2007] NSWCA 140.

The court rejected Rohrig's fourth ground, finding that Gambaro's position was arguable as the portion of the adjudicated amounts paid to Rohrig that Gambaro claimed as an overpayment could be treated separately to the consideration payable under the contract. On Gambaro's case, the payments were not made in exchange for Rohrig's performance of the obligations under the contract, so there was no consideration. Chief Justice Holmes noted that a failure of consideration could extend to a "payment for a purpose which has failed as, for example, where … a contemplated state of affairs has disappeared." Applying this reasoning to the facts, she considered that the state of affairs under which the overpayment was made (being the statutory obligation under Qld SOP Act to make the payment), had arguably disappeared to allow the actual contractual entitlement to be determined, resulting in an absence of consideration for the overpayment.

Chief Justice Holmes ordered parts of Gambaro's pleadings to be struck out, with leave to re-plead.

The Adjudicator may be wrong, but that doesn't mean you are right to appeal

Justice McDougall restates the dos and don’ts of appealing an adjudication in "yet another dispute over a determination of an adjudicator".

In Southern Cross Engineering v Steve Magill Earthmoving [2018] NSWSC 1027, Southern Cross relied upon SSC Plenty Road Pty Ltd v Construction Engineering (Aust) Pty Ltd [2015] VSC 631 (in which Justice Vickery sets out in detail how an adjudicator should assess a payment claim) as the basis for submitting that the adjudicator had erred in his reasons.

Justice McDougall accepted that the comments made by Justice Vickery in SSC applied to the work that an adjudicator must do to assess a payment claim under the Building and Construction Industry Security of Payment Act 1999 (NSW) (NSW SOP Act), but he rejected that "the requirements identified by Vickery J must be applied serially and mechanically in every case." Justice McDougall found instead that the assessment of an adjudicator's determination required "a consideration of the adjudicator's reasons in their context" which included not just the content of the dispute but the inherent nature of adjudication proceedings themselves, such as the intense time pressures imposed upon an adjudicator to make a decision and the often vast quantity of material that an adjudicator is required to consider. He went on to add, in relation to the reasonableness of an adjudicator's determination, that the court must also take into consideration that adjudicators are not generally lawyers and, in accordance with the objects of the legislation, their determinations are only intended to be an interim decision.

Justice McDougall also warned against the courts embarking upon an inquiry into the merits of an adjudicator's decision as part of any consideration of reasonableness, noting, importantly, "that mere error of law, not resulting in or associated with jurisdictional error, does not entitle the court to intervene."

Ultimately Justice McDougall concluded that the adjudicator's decision in relation to the particular issue under challenge was probably incorrect, but, looking at the adjudicator's approach in context, he was "far from persuaded that it was unreasonable to the extent that it must be taken to invalidate his determination." Southern Cross's appeal was dismissed.

The customer is not always right, at least not when it comes to certifying compliance of a design

The Queensland Court of Appeal has overturned a first instance decision which held that a statutory compliance certificate, issued in relation to a warehouse slab design that was known to carry a risk of significant subsidence, was not in breach of the relevant standard (and therefore did not amount to misleading conduct) because the design was suitable for the requirements of the person who commissioned the construction of the warehouse, albeit not suitable for later owners for the intended purpose as a warehouse.

Actron Investments Queensland Pty Ltd brought proceedings against DEQ Consulting Pty Ltd (DEQ) and its director, Mr Henry (a registered engineer and a "competent person" for the purposes of issuing a compliance certificate) in relation to a "Form 15 – Compliance Certificate – Design" that Mr Henry prepared and DEQ submitted as part of a development application for the construction of a warehouse slab. In a report which formed part of the compliance certificate, Mr Henry indicated that, given the soil conditions, the floating slab design was likely to result in significant subsidence and movement. Notwithstanding this, Mr Henry (by DEQ) issued a Form 15 certifying the design as compliant, which resulted in the approval of the Development Application.

Following Actron's purchase of the warehouse in 2007, significant subsidence of the slab occurred making it difficult (and in some areas of the warehouse, impossible) to drive a forklift or store materials in the packing racks. Actron claimed that the issuance of the compliance certificate by DEQ was misleading conduct in contravention of section 52 of the Trade Practices Act 1974 (Cth) (TPA) as it implied that the slab design complied with AS3600 when the design was, in fact, not compliant.

Mr Henry accepted in cross-examination at trial that his report "calculated typical surface settlement of over 100mm" of the slab design and "that would be a 'red flag' to 'someone doing a due diligence review of these drawings.'" Mr Henry also accepted that the likely settlement of the slab was "undue" but did not consider it to be in breach of AS3600 "because what was "undue" depended upon what the client wanted." The trial judge accepted Mr Henry's evidence that, as the anticipated subsidence of the slab identified in Mr Henry's reports was not undue for the original owner's purposes, the design did not breach AS3600 even if "the settlement of the slab was unsatisfactory for the appellant's use of the building."

However, the decision was overturned on appeal (Actron Investments Queensland Pty Limited v DEQ Consulting Pty Ltd [2018] QCA 147), on the basis that:

"A competent person who puts into circulation a Form 15 … potentially affects, not only the interests of a client of that competent person, but all persons who might be exposed to risks of personal or financial injury as a result of an approval of a non-conforming design of the specified structural elements of a building. It is the appropriately qualified person … designated as a "competent person" who is obliged to make any judgments necessary for a decision whether or not a Form 15 should be issued … the regulatory scheme is irreconcilable with Mr Henry's thesis that a client … is entitled to decide whether anticipated settlement is "undue" in terms of cl 16.2.1 of AS3600." (at [39])

The Court of Appeal held that "the issue of the Form 15 was seriously misleading as to the implicit compliance with AS3600."