Major projects & construction 5 Minute Fix 30

No implied duty to help a contracting party achieve its commercial goals

The Victorian Supreme Court's decision earlier this month in Primary Flooring Pty Ltd v Australian Comfort Group Pty Ltd [2019] VSC 104 is a salutary reminder that parties cannot assume that an implied duty of good faith will prevent a counterparty from relying on an express term – even if doing so may appear unreasonable to some.

The case concerned a supply agreement for foam offcuts provided by Australian Comfort Group Pty Ltd to Primary Flooring Pty Ltd for use in carpet underlay. Amongst other things, the supply agreement included express termination grounds limited to mutual agreement, default and insolvency. After the supply agreement became a commercial burden on Primary, it sought to terminate the agreement by unilateral notice. Australian Comfort refused to recognise the notice which meant that there had not been the "mutual agreement" necessary to contractually terminate the arrangement. This prompted Primary to seek declarations from the Supreme Court, including that Australian Comfort was bound by implied duties not to unreasonably withhold its consent to termination, which was an attempt to compel Australian Comfort to consent to termination by mutual agreement.

Justice Croft refused to grant the declarations, determining that the supply agreement's express termination clause did not import an implied duty of reasonableness either "as a legal incident of the contract" or "as a matter of fact" (because none of the five criteria in BP Refinery (Westernport) Pty Ltd v Shire of Hastings (1977) 180 CLR 266 were satisfied). Crucially, Justice Croft found that the implication of a duty of reasonableness would contradict the express termination provision which, in the context of termination for convenience, required mutual agreement of the parties. The asserted implied duties were also not necessary to give business efficacy to the contract, as Justice Croft recognised that the relevant legal requirement is that the term be "necessary to give business efficacy to the agreement, not the business or commercial goals of one of the parties, in this case, Primary". Therefore, Australian Comfort was not compelled to consent to termination by mutual agreement.

Assessing recoverable indirect costs on transport infrastructure services

Recoverable costs in the context of transport infrastructure services can be determined by reference to the intention of the parties as construed in relevant contract documents.

In Busways Blacktown Pty Ltd v Westbus Region 1 Pty Ltd (No 3) [2019] NSWSC 155, the court considered whether profit distributions were payable by a bus operator to two other bus operators based on a shareholders agreement. In doing so, the court considered which indirect costs of a parent entity were referrable to its subsidiaries and what categories of costs were "indirect costs".

The court found that the entities had not kept sufficient accounting records, so the relevant indirect costs incurred by the parent company had to be determined by an analysis of the proportion of bus numbers run by the subsidiary.

The court identified "indirect costs" by giving primacy to the shareholders' agreement, a bid template and other project documents. Ultimately, bank charges, bad debts and travel and accommodation all formed part of recoverable indirect costs as the documentary evidence showed that the parties intended such costs to form indirect costs. However, for the same reason, directors' fees were not considered to be indirect costs and were not recoverable.

Global claims: refusal to plead causation of loss or global claim results in strike-out application

The weaknesses inherent in a global claim, whereby a claimant does not plead a causal connection between the alleged breaches and the losses sustained, were highlighted in Built Environs WA Pty Ltd v Perth Airport Pty Ltd (No 2) [2019] WASC 76.

Global claims are permitted where it is impractical to disentangle part of the claimed loss which is attributable to each head of claim and the defendant's breaches are the only cause of any significance for the claimed loss. However, a global claim can be defeated if the claimant cannot prove that there are no operative causes of financial loss other than the defendant's breaches. Perhaps for this reason, Built Environs sought to avoid pleading a global claim, leading Justice Kenneth Martin to conclude that the legal basis of Built Environs' claims remained "impermissibly unclear".

On this basis, in relation to paragraphs in the statement of claim purporting to plead causation between the alleged breaches and the claimed financial losses, Perth Airport sought to:

• avoid further discovery obligations in respect of the matters alleged in those paragraphs; and
• strike out the paragraphs.

Justice Kenneth Martin acceded to both proposals. More than providing relief against discovery, he struck out the paragraphs on the grounds that they are embarrassing. This did not automatically result in a dismissal of the proceeding, because Built Environs was given the chance to amend its pleadings to replace the deficient paragraphs.

Informal contracting results in a "deadlocked" joint venture

A recent decision of the NSW Supreme Court illustrates the difficulty faced by a court when asked to resolve a "deadlocked" joint venture in circumstances where the parties had not appropriately formalised their rights and obligations, and may have in any case departed from the relevant written agreements.

In NWEC Pty Ltd v NW & RS Enterprises Pty Ltd [2019] NSWSC 149, Justice Lindsay facilitated the winding up of a failed joint venture entered into by the plaintiff and several defendants for the purchase of land and subsequent construction of 16 townhouses.

The plaintiff (NWEC), which injected the original funds into the joint venture, sought to recover its loss from the defendants, after it became clear that the townhouses would not be built. At that time, it was common ground between the parties that management of the joint venture entity was deadlocked.

The parties conducted the affairs of the joint venture in a very informal manner, which Justice Lindsay considered "a root cause of the complexity of the proceedings and the unattainability of a consensual resolution". Justice Lindsay went on to find that NWEC had not suffered any loss or damage sufficient to sustain an extra-contractual cause of action outside of the operation of the joint venture agreement and construction contract, and undertook an accounting exercise consistent with the proper construction of the joint venture agreement.

NWEC was entitled, as a priority, to recover its capital plus interest, however the ultimate financial outcome of the proceedings required the parties to make further submissions to the court unless they could reach agreement.

The case is a convenient reminder that parties need to carefully consider their rights and obligations – in relation to the joint venture project as well as to each other – when entering into a joint venture. You can get further analysis of joint venture duties here and here.

SOP Act wrap-up: identification of "construction work" and refreshed "reference dates" following termination

Identification of "construction work"

Justice Lyons recently had cause to revisit the identification requirements for "construction work" when determining the validity of payment claims purportedly issued in accordance with security of payment legislation. The case, John Beever (Aust) Pty Ltd v Paper Australia Pty Ltd [2019] VSC 126, concerned three payment claims served in relation to three months of work performed under two contracts.

Section 14(2)(c) of the Building and Construction Industry Security of Payment Act 2002 requires a payment claim to "identify the construction work… to which the progress payment relates".

Having reviewed the relevant authorities, Justice Lyons set out the following principles concerning identification:

• the test of whether a claim is a payment claim for the purpose of the Act is objective;
• however, the manner in which compliance is tested is not overly demanding and should not be approached in an unduly technical manner or from an unduly critical point of view;
• for the purposes of the identification requirement, it is necessary that the payment claim reasonably identifies the construction work to which it relates such that the basis of the claim is reasonably comprehensible to the recipient party when considered objectively ie. from the perspective of a reasonable party who is in the position of the recipient;
• in evaluating the sufficiency of the identification of the work, it is appropriate to take into account the background knowledge of the parties from their past dealings and prior exchanges of information including correspondence passing between them before and at the time of the payment claim. To that extent, the Court may go beyond the face of the document itself.

Justice Lyons found that two of the payment claims sufficiently identified the relevant work. However, in relation to the third payment claim "there was real doubt that a reasonable recipient in the shoes of the defendant would have reasonably concluded that the… claim was a payment claim under the Act”.

Termination for convenience and "refreshed reference dates"

In Impero Pacific Group Pty Ltd v Bonheur Holdings Pty Ltd [2019] NSWSC 286, Justice Parker recognised that "under the Act there is no entitlement to a progress payment, and there can be no valid progress claim, unless there is an available reference date".

The contractor (Impero) sought summary judgment of a payment claim under the NSW security of payment legislation for approximately $1.4 million. The principal (Bonheur) failed to respond to the payment claim within the time required by the Act, and tried to avoid liability by arguing that there was not a "reference date" and therefore the underlying payment claim was invalid. The monthly reference date set by the underlying construction contract was the 25th day. The contract was terminated on 29 or 30 October 2018, and the relevant payment claim was dated 27 November 2018.

Justice Parker recognised that had the contract remained on foot, the works undertaken after 25 October 2018 but prior to termination would have been recoverable via a payment claim dated 25 November 2018. However, a future right to claim following a reference date does not survive termination, and therefore Impero argued that the act of termination created a new reference date and a new entitlement to receive progress payments. This argument was based upon clause 39A of the construction contract, which stated that where Bonheur terminated for convenience, Impero was entitled to payment up to termination.

Justice Parker concluded that clause 39A gave rise to a statutory entitlement to a progress payment, and that termination for convenience under clause 39A created a fresh reference date under the SOP Act. Justice Parker also recognised that this involved a slight departure from earlier authority, so it will be interesting to observe whether this issue is re-litigated.

Tighter financial licensing requirements to boost QBCC's oversight capability

A series of high-profile construction insolvencies has prompted the Queensland Building and Construction Commission (QBCC) to strengthen the minimum financial requirements for licensing.

Released in two phases, the changes to the minimum financial requirements for licensing have the objective of providing greater transparency and equipping the QBCC with greater industry oversight.

The first phase (commenced 1 January 2019) provided structural changes:

• reintroducing mandatory annual reporting for all contractor licensees
• requiring more stringent reporting of decreases in Net Tangible Assets
• clarifying how assets are treated.

The second phase (commenced 2 April 2019), introduced by the Queensland Building and Construction Commission (Minimum Financial Requirements) and Other Legislation Amendment Regulation 2019, bolsters the QBCC's oversight powers. It focuses on obtaining a more robust assessment of the financial position of" "higher-risk licensees" (> $30 million revenue). This phase:

• requires "higher-risk" licensees to provide more detailed financial information (including detailed debtor information);
• requires "lower-risk" self- certifying licensees (with a maximum revenue threshold of $800,000) to self-report their current ratio of assets to liabilities;
• enables the QBCC to seek independent audit of financial information;
• requires additional information about a covenantor's financial position; and
• introduces new offence and penalties for failing to meet the requirements, including failing to notify the QBCC of changes in a covenantor's financial position.