Major projects & construction 5 Minute Fix 33

NSW Government releases draft Regulation to implement Security of Payment reforms

In November 2018, the Building and Construction Industry Security of Payment Amendment Act 2018 (Amendment Act) was passed, introducing significant reforms to the Security of Payment Act 1999 (NSW) (SOP Act) – our outline of the key reforms and implications for the construction industry in an earlier article is here. Now some six months after assent, the Amendment Act is yet to commence.

This week, to facilitate commencement of the reforms, the NSW Government released an exposure draft amending the Building and Construction Industry Security of Payment Regulation 2008 for public consultation.

The reforms to the Regulation:

1. Exempt owner-occupier construction contracts from the operation of the SOP Act: It will be recalled that the Amendment Act removed the pre-existing owner-occupier exception from the SOP Act.
   
   
2. Additional prescribed offences under the Regulation to which executive liability will apply: Contraventions of sections 13(7) and (8) (relating to the giving of Supporting Statements and false Supporting Statements) are executive liability offences under the Amendment Act. The reforms add to this list offences relating to retention money trust accounts, including matters such as a head contractor illegitimately withdrawing from a trust account or failing to, hold retention money on trust; notify of overdrawn or closed accounts; retain account records or provide information.
   
   
3. Prescribe the offences under the SOP Act and Regulation for which penalty notices may be issued and the amount of the penalty payable: Schedule 3 contain a list of offences under the SOP Act for which a penalty notice may be issued.These include failures to attach a supporting statement to a payment claim; notify of changed circumstances; serve a copy of an adjudicator's determination; give notice of withdrawal of an adjudication application; provide the principal contractor's identity and contact details; and retention money trust assets.

The consultation period closes mid-June. It is anticipated that the amending Regulation will be published mid-year, with the Amendment Act and amending Regulation proposed to commence three months thereafter (which will be around October 2019).

A construction law smorgasbord in the WA Supreme Court

In AGC Industries Pty Ltd v Karara Mining Ltd [2019] WASC 140, Justice Allanson considered a number of construction law issues raised by AGC Industries to recover losses on the Karara Iron Ore Project. The following are of particular interest:

• AGC Industries attempted to rely upon the prevention principle as the basis for claiming "lost opportunity" damages. AGC Industries alleged that it was unsuccessful in achieving completion milestones under an incentive regime in respect of dirty concentrate works because delays by Karara Mining prevented it from achieving completion by the milestone dates. However, Justice Allanson concluded that there was no earlier authority that suggested that the principle could be a basis for liability, and that instead the principle operated to excuse non-performance where the other party's act of prevention caused the non-performance.
• AGC Industries was, however, able to establish an entitlement to claim lost opportunity damages flowing from a negative variation (one which omits work).After the failure to achieve the milestone completion dates, Karara Mining varied the scope of works by taking some of the dirty concentrate works away from AGC Industries and awarding it to another contractor. This was not expressly permitted by the variation regime in the contract, and therefore the act was contrary to the principle established by the High Court in Carr v JA Berriman Pty Ltd (1953) 89 CLR 327.

However, this was of no practical effect, because AGC Industries was barred from claiming compensation by other provisions of the contract, such as:

• a widely drafted consequential loss clause that excluded Karara Mining's liability for consequential loss."Consequential loss" was defined in the contract to include loss of opportunity, loss of revenue, loss of profit or anticipated profit, loss of contracts, loss of goodwill, loss arising from business interruption or any indirect loss.The exclusion clause provided that "in no event" would Karara Mining liable for the defined consequential loss.After construing this clause to give it its "natural and ordinary meaning", Justice Allanson held that Karara Mining was not liable to AGC Industries; and
• final payment claim provisions, which included a bar on claims not included in the final payment claim within the prescribed time limit.Barring provisions in connection with final payment claims are relatively standard in the construction industry, and Justice Allanson applied the provision despite noting that it might produce a harsh result. 

Expert determination enforced, not subject to judicial review for "error of law"

Justice Hammerschlag of the NSW Supreme Court has preserved the integrity of agreed alternative dispute resolution (ADR) processes, in particular the enforceability of a "final and binding" expert determination.

In Lainson Holdings Pty Ltd v Duffy Kennedy Pty Ltd [2019] NSWSC 576, the parties to a building contract for a commercial development in Sydney also entered into a deed with provisions relating to ADR processes.  Clause 9(b) of the deed provided that:

"Any dispute or difference whatsoever arising out of or in connection with this contract shall be submitted to an expert in accordance with, and subject to, The Institute of Arbitrators & Mediators Australia Expert Determination Rules (Rules)."

The deed also provided that a determination of an Expert would be final and binding.  The Rules included that "the Expert shall determine the Dispute as an expert in accordance with these Rules and according to law" (rule 5.1). 

Lainson Holdings sought to circumvent the expert determination process by arguing that:

• the reference to "according to law" in rule 5.1 required the Expert to not make any mistakes of law which affect the result;
• the Court is entitled to interfere with an Expert's determination which involves a mistake of law; and
• it was not bound by the Expert's determination because it involved a mistake of law which affected the result.

Justice Hammerschlag did not consider the merits of the Expert's determination, and instead dismissed the arguments on the basis that the deed providing for expert determination did not have the meaning argued for by Lainson Holdings.  The overarching principle is that "the parties will be bound if the Expert did what the Contract, on its proper construction, required him to do, irrespective of the result". 

The meaning of the words "according to law" in the Rules, when incorporated into an enforceable ADR agreement, were to be determined objectively by what a reasonable person would have understood them to mean.  In the commercial context of an ADR agreement, the phrase "according to law" did not have the same meaning that an appellate court would give it when reviewing a judgment from an inferior court.  Instead, in this context

"the words "according to law" mean in the manner which the law requires a person in the position of the Expert to go about the mandated task, so as to give it contractual efficacy; for example, honestly, without bias or collusion, and while not intoxicated.  There is no suggestion that the Expert acted in any way not "according to law" in this sense…  The construction contended for by Lainson works commercial inconvenience."

Accordingly, Lainson Holding's arguments were rejected and the ADR process was enforced.  

NSW Supreme Court allows evidence of prior negotiations and subsequent conduct

In Lawrence v Ciantar [2019] NSWSC 464, Justice Henry was required to resolve a dispute regarding a property development joint venture.  Lawrence, a registered builder, claimed that he had entered into a joint venture with the property owners by which he would carry out preparatory works and provide funding for the balance of the development in exchange for receiving a one third equity interest in the property.  The property owners claimed that the agreement required Lawrence to complete a broader scope of sub-division works.

In construing the disputed agreement, Justice Henry took into account evidence of prior negotiations on two separate grounds:

• first, because evidence of prior negotiations is admissible to the extent that it establishes objective facts known to both parties and the subject matter of the contract, which can be taken into account when construing a contract; and
• separately, because of the "true rule" identified by the High Court in Codelfa Construction Pty Ltd v State Rail Authority of New South Wales (1982) 149 CLR 337: evidence of surrounding circumstances is admissible to assist in the interpretation of the contract if the language is ambiguous or susceptible of more than one meaning.

By reference to evidence of negotiations leading up to the execution of the disputed joint venture agreement, Justice Henry concluded that the genesis of the contract was Lawrence's approach to the owners of the property following the property being advertised for sale, where Lawrence's role as a registered builder was an objective fact known to all parties.  This supported an interpretation of the disputed agreement whereby Lawrence was obliged to deliver the full scope of sub-division works, and not merely preparatory works. 

This conclusion was supported by Lawrence's subsequent conduct.  Justice Henry confirmed that subsequent conduct cannot be used to construe a contractual clause insofar as the conduct evidences the parties' subjective beliefs.  However, evidence of subsequent conduct can be used to establish the existence of a contract or specific terms, such as a term requiring the completion of sub-division works, particularly where the contract is not wholly in writing.  The relevant conduct included Lawrence applying for a construction certificate from the local council that was would only be necessary if Lawrence was obliged to complete more than merely preparatory works, and actually carrying out some of the sub-division works.  

Can a subcontractor claim in unjust enrichment against the principal?

In A&A Martins Pty Limited v Liu [2019] ACTCA 8, the ACT Court of Appeal rejected a subcontractor's claim against a principal for unjust enrichment.  The subcontractor claimed that the enrichment arose when it performed building work for the principal following the purported termination of the principal's contract with the head contractor.  The question was complicated by the fact that the head contractor and subcontractor were related parties and had referred to themselves interchangeably as the contracting party across the contract, invoices, emails and other documents.  This was a key factor leading the Court to reject the subcontractor's claim.

Relying on the High Court decision in Lumbers v Cook [2008] HCA 27, the Court reiterated the need to look to any contracting arrangements which the parties have made in considering claims for a quantum meruit.  The Court held that it was not possible to “ignore the contractual relationship and posit a situation where [the subcontractor] was no longer acting as [the head contractor's] subcontractor”.  This was because the subcontractor could not demonstrate that the principal had actual or implied knowledge that it was no longer acting as the subcontractor and instead was looking to the principal for payment. In this context, the Court noted that it is not unusual for owners to have discussions on site with subcontractors.

The Court also noted that any unjust enrichment of the principal was not at the expense of the subcontractor but at the expense of the head contractor.  However, the head contractor had not raised a restitutionary claim against the principal in previous proceedings and that such a claim would likely now be “stymied by a limitation defence or by the raising of an Anshun estoppel”.

Doing work for the Commonwealth with a value over $4 million? The building accreditation requirements have changed

The Commonwealth Government has recently updated the workplace health and safety laws for building and construction industry participants.

Made under section 43 of the Building and Construction Industry (Improving Productivity) Act 2016 (Cth), the Building and Construction Industry (Improving Productivity) (Accreditation Scheme) Rules 2019 (Cth) repeal and replace the previously-prescribed accreditation scheme for persons who wish to carry out Commonwealth-funded building work. 

Among other things, the Rules:

• set out how persons who wish to carry out building work funded by the Commonwealth or a Commonwealth authority are accredited;
• provide for pre-accreditation audits;
• prescribe the building work to which section 43 of the Act does not apply;
• set thresholds for both directly funded building work and indirectly funded building work; and
• empower the Federal Safety Commissioner to revoke a person's accreditation for a breach of conditions.

Under section 43 of the Act, the Commonwealth cannot fund building work unless contracts for the building work (with a value of $4 million or more) will be entered into with accredited builders.  

QLeave Levy changes in the pipeline

The Queensland Government is currently seeking input from building and construction industry stakeholders about proposed changes to the levy structure that applies to the undertaking of building and construction work in Queensland.

According to the Consultation Regulatory Impact Statement, the impetus for review of the portable long service levy (PLSL) structure comes from the need to address future provision for increased eligibility of long service leave benefits as the scheme matures. 

At present, the PLSL scheme is funded by a levy of 0.25% payable to QLeave on the total project costs (including all direct and indirect costs) of all building and construction work over $150,000 (excluding GST).  A tiered levy structure results in a discounted levy rate for the portion of a project’s costs that exceed $1.161 billion.

The Consultation Regulatory Impact Statement identifies a number of options.  The Government's preferred options include:

• increasing the PLSL levy rate from 0.25% to 0.3%, whilst removing the tiered levy structure in favour of a single base levy structure; and
• including GST in the definition of the total cost of works.

The Government is also proposing a small increase to the work health and safety levy (of 0.005%).  This will provide a dedicated source of funding for mental health and suicide prevention initiatives in the building and construction industry – reflecting the high incidence of suicide in the construction industry.