Major projects & construction 5 Minute Fix 62

Unconditional undertakings as risk allocation mechanisms: call on undertakings not restrained

The Supreme Court of Victoria has reinforced that unconditional performance securities act as a contractual risk allocation mechanism in Uber Builders and Developers Pty Ltd v MIFA Pty Ltd [2020] VSC 596. In the process, and on the facts of this case, Justice Nichols rejected an argument that recourse to the security would be unconscionable and found that refusal of the injunction application carried the lowest risk of injustice.

MIFA was the developer of an apartment complex in Melbourne and Uber was the contractor engaged to deliver the project. MIFA sought to call on security provided under the contract when Uber failed to pay amounts certified in payment certificates as due and payable to MIFA under the contract. Uber contested MIFA's underlying entitlement to receive payment, and asserted that the provision of security was not intended to allocate risk between the parties pending final determination of the parties' rights.

Clause 42.9 stated that where a party fails to pay the other party an amount due and payable under the contract the other party may have recourse to retention moneys and to security under the contract. The amounts claimed by MIFA were held to be "due and payable" under the contract because they were certified as such by the Superintendent in a payment certificate. Under the contract, a payment certificate was not intended to be the final rendering of the parties' rights under the contract, because it could be disputed under the dispute resolution clause. Justice Nichols rejected Uber's argument that amounts in a payment certificate could not be considered "due and payable" under the contract, for the purposes of recourse to security, unless the underlying contractual entitlement was also finally resolved. Instead, the contract imposed an obligation to pay notwithstanding the provisional nature of the certification and payment regimes.

Uber submitted that there were various side agreements between the parties that liability for certain variations would be finally determined as between the parties and that liquidated damages were not payable. Justice Nichols held that even if the agreements were enforceable, it overrode neither MIFA's entitlement to have recourse to performance security under the contract nor the payment certification process. Moreover, while recourse to security can be barred if the claiming party is acting fraudulently or unconscionably, Uber had not established the existence of the alleged agreements to a sufficient degree and therefore it was held that MIFA was not acting unconscionably or in bad faith.

MIFA was permitted to have recourse to security because there would be a substantial injustice if the commercial purpose of performance security was defeated, and because Uber could not establish that MIFA would be unable to re-pay the funds should it be found, following a final determination of the parties' underlying rights, that the amounts certified as due and payable were in fact not owed to MIFA.

Settlement agreement not voided by NSW SOP Act "no contracting out" provisions

The "no contracting out" provision in section 34 of the Building and Construction Industry Security of Payment Act 1999 (NSW) (NSW SOP Act) is framed widely and renders void provisions in agreements which:

• purport to exclude, modify or restrict the operation of the NSW SOP Act, and provisions with that effect; or
• may reasonably be construed as an attempt to deter a person from taking action under NSW SOP Act.

No contracting out provisions of this kind have been given wide application when considered by the courts. For example, the Victorian Supreme Court recently found that an equivalent provision rendered void words which made a right to payment arising from repudiation of the contract contingent upon a “finding” by a court or tribunal that there had been repudiation. Delaying the payment right in this way was held to be inconsistent with the purpose of the Victorian security of payment legislation.

In this context, the recent decision of Justice Stevenson in Reward Interiors Pty Ltd v Master Fabrication (NSW AU) Pty Ltd [2020] NSWSC 1251 is noteworthy. In determining an application for summary judgment, the Court held it was "at least arguable" that an agreement under which a subcontractor (Master) agreed to settle a payment claim with the head contractor (Reward) was effective in the face of section 34 of the NSW SOP Act.

Master issued payment claims under the NSW SOP Act for February 2020 ($566,285.81) and for March 2020 ($266,570.81). Reward did not respond to either with a payment schedule, and as a result became liable for the full amount on a provisional basis. However, Reward alleged that the parties subsequently reached an agreement that the lesser amount ($202,066.81) was payable.

Justice Stevenson was asked to decide whether that agreement was effective in the face of section 34. Emphasising that his findings were in the context of an application for summary judgment application rather than a trial, his Honour was prepared to accept that there was an agreement of the kind alleged by Reward. He noted it was hard to see why the legislative "pay now, argue later" scheme should "prevent parties reaching binding settlements compromising their rights" under their contract and the NSW SOP Act. Justice Stevenson noted of the settlement agreement:

• in terms of section 34(2)(a), that it was “hard to see how such an agreement could be characterised as one purporting to exclude, modify or restrict the operation of the Act. … Such an agreement in effect acknowledges the operation of the Act but records the parties’ agreement that, in the particular circumstances, their rights will instead be governed by their agreement”; and
• in terms of section 34(2)(b), that there was “no question here of an attempt to deter a person from taking action under the Act. … Master did take action under the Act by serving payment claims. And an agreement entered into by Master itself could hardly be reasonably construed to be such an attempt.”

As it was at least arguable that the alleged settlement agreement would not be voided by section 34 of the NSW SOP Act, the application for summary judgment was rejected.

Onus of proof on party seeking to rely upon a force majeure clause

"Force majeure" relief clauses are under heavy pressure during 2020 as the COVID-19 pandemic impacts all aspects of commercial arrangements. In that context, the NSW Court of Appeal's decision in Meetfresh Franchising Pty Ltd v Ivanman Pty Ltd [2020] NSWCA 234 is of interest across all areas of commercial contracting (though, of course, the case turns on its own facts and the terms of the specific contract). The Court upheld a trial decision in respect of a force majeure clause in a franchise agreement. The clause was:

39. EVENTS BEYOND MEETFRESH’S CONTROL

Meetfresh shall not be liable to the Franchisee for any loss sustained by the Franchisee caused by Meetfresh’s failure to honour the terms of this Franchise Agreement where such failure has occurred because of an event which is beyond Meetfresh’s reasonable control including but not limited to strikes, war, fire, flooding, earthquakes and other natural disasters

This matter involved the loss of the right to use certain intellectual property that was essential for the Franchisee's business and required under the franchise agreement. Justice Macfarlan (with whom President Bell and Justice Meagher agreed) held that the onus of establishing the applicability of the force majeure clause was borne by Meetfresh, the party seeking to rely upon the clause, because it constituted an exception from Meetfresh's otherwise broad contractual liability under the agreement. In interpreting the agreement to find that clause 39 was such an exception, Justice Macfarlan took into account factors including that the clause was positioned amongst "incidental clauses" appearing at the end of the agreement.

This finding was critical to determination of this issue, because there was "a distinct lack of evidence about the cause of the event and [Meetfresh's] inability to prevent its occurrence". Therefore, Meetfresh failed to establish that the force majeure clause applied, and this ground of appeal was rejected.

Lost opportunity damages awarded to developer for misleading or deceptive certification of design

In Mistrina Pty Ltd v Australian Consulting Engineers Pty Ltd [2020] NSWCA 223, a developer entered into a contract with Jabbcorp Construction Management to build a mixed use development. The development was funded by a loan facility. The loan was repayable 18 months from initial drawdown and could only be repaid out of the eventual proceeds of sale of the development. The loan was also secured by a mortgage over another property.

The design of the building included a raft slab which required a structural engineering compliance certificate. Australian Consulting Engineers (ACE) erroneously certified the structural design of the slab. Jabbcorp relied on the certification in deciding to commence construction incorporating the raft slab. However, when construction was well advanced, it was discovered that the raft slab was non-compliant and work was suspended. The developers suffered substantial loss when the lender exercised its rights to sell both the partially completed development and the other mortgaged property.

It was not disputed that in erroneously providing the certificate, ACE engaged in misleading or deceptive conduct in trade or commerce in breach of the Trade Practices Act 1974 (Cth) (as the relevant events occurred before the Australian Consumer Law came fully into force, section 52 of the TPA applied rather than section 18 of the Australian Consumer Law (ACL)). The case was put on a "loss of opportunity" basis: that ACE's conduct caused the loss of opportunity to make a profit from the development and the loss of the other mortgaged property. However, because the direct cause of the loss was the lender's decision to exercise security rights, it was held at trial that the developer had failed to establish a causal link between the loss and ACE's erroneous certification.

On appeal, this aspect of the trial decision was overturned. It was held that there was an overwhelming inference that the cessation of works because of the defective raft slab was a material cause of the lender's decision, which was sufficient to establish the causal link between ACE's erroneous certification and the loss. The "overwhelming inference" was necessary because no evidence from an officer of the lender was adduced regarding its decision-making processes. However, on appeal this was not fatal to the claim, because it was "the most obvious (and probable) inference to be drawn from all of the facts". In respect of the kind of loss claimed, it was held that loss of opportunity was a foreseeable result and therefore it was recoverable.

Termination of construction contract creates final "reference date" under Queensland security of payment legislation

In EHome Construction Pty Ltd v GCB Constructions Pty Ltd [2020] QSC 291, the Queensland Supreme Court quickly dispensed with an application for a declaration that a payment claim was void on the basis that it did not comply with the requirements of the Building Industry Fairness (Security of Payment) Act 2017 (the BIFA).

It was common ground that the contract had been terminated, and the respondent issued a payment claim about one month later seeking payment for all work carried out up to and including the date of termination.

Justice Bond determined that, where a contract is silent on any "reference date" surviving beyond termination, the BIFA contemplates that a final "reference date" must exist when a contract is terminated. The applicant had asserted that there was a jurisdictional error on the ground that the applicable periods under the BIFA could not be determined where the contract was silent as to the reference date.

This argument was rejected. Justice Bond held that the definition of "final payment" in section 75(6) of the BIFA is clear, being a progress payment for final payment for construction work carried out, or for related goods and services supplied, under a construction contract. The only construction work to be carried out under this construction contract had to have been completed prior to termination. Section 75 of the BIFA permits a final payment claim to be made "6 months after the completion of all construction work to be carried out under the construction contract", and therefore the final payment claim was submitted within time.

Does Bitannia still rule the waves? NSW Court of Appeal foreshadows consideration of interplay between Federal ACL and State security of payment legislation

Since the passage in 1999 of the NSW SOP Act, the interplay of the state-based legislation with federal legislation has been a matter of significant interest. The issue was last given significant consideration by the NSW Court of Appeal in the Bitannia v Parkline case in 2006. That Court has now signalled, in MTR Corporation (Sydney) NRT Pty Ltd v Thales Australia Ltd [2020] NSWCA 226, that the issue will be considered in an appeal to be heard in October arising from a dispute on the North West Rail Link in Sydney.

Justice Basten's judgment concerned the application by MTR (as the construction joint venture on the project) for a further stay of an adjudication determination made under the SOP Act. By the adjudicator's determination, Thales (as subcontractor) was entitled to payment for works undertaken pursuant to its construction contract. MTR argued that jurisdictional errors meant the adjudication determination was invalid and also made claims for misleading and deceptive conduct under the ACL. The primary judge rejected MTR's arguments but granted an injunction restraining the subcontractor from enforcing the adjudication determination. In this application, MTR sought to extend that injunction.

The issue before the NSW Court of Appeal was whether to grant the stay on enforcing the adjudication determination pending the appeal in respect of the adjudication determination, which was now separated from the ACL claims. The effect of the separate proceedings was contested, with MTR asserting that it would seek a stay on the basis of the pending nature of its claims in either proceeding.

Justice Basten considered various factors in deciding whether to grant the stay, including any prejudice to the parties, MTR's prospects of success and the relevance of reputational damage. He observed that, in the circumstances of the case, neither party would be greatly prejudiced by such an order. However, he emphasised that a stay of proceedings enforcing an adjudication determination under the NSW SOP Act should be reluctantly granted, unless there are sufficient reasons which warrant depriving the claimant of its statutory entitlements. Ultimately, it was held that two factors tipped the balance in favour of granting the stay:

• the expectation of an early hearing and determination of the appeal; and
• the complications and potentially significant expense, arising from the further interlocutory steps, which may result if a stay was not ordered.

The case foreshadowed serious issues as to the inter-relationship between the provisions of the NSW SOP Act and Federal legislation (such as the ACL), which could not be assessed on the material available. Justice Basten's observations alluded to the question of whether the NSW SOP Act may prevent an applicant from agitating claims under the ACL in defence of a judgment debt enforceable pursuant to the NSW SOP Act (and other state-based security of payment legislation).

Existence of unsatisfied adjudication determination and judgment debt under NSW SOP Act does not bar party from commencing related civil proceedings

In Lindvest DM Pty Ltd v CPDM Pty Ltd [2020] NSWSC 1290, the Court held it was not an abuse of process for a developer to initiate proceedings under section 32 of the NSW SOP Act against its judgment creditor, despite that developer having an unsatisfied adjudication determination and judgment against it under sections 22 and 25(1) of the NSW SOP Act. The developer was not required to pay the judgment amount into Court, however, it was required to provide security for costs.

CPDM Pty Ltd entered construction contract with the property developer Lindvest DM Pty Ltd for the provision of project management services. Lindvest terminated that agreement pursuant to the contract. CPDM issued Lindvest an invoice and subsequently received an adjudication determination and a judgment debt in its favour under sections 22 and 25(1) of the NSW SOP Act. Lindvest did not initially take any steps to have that determination quashed, or have the judgment debt set aside or stayed.

Lindvest then initiated civil proceedings under section 32 of the NSW SOP Act against CPDM seeking a declaration that CPDM was not entitled to payment. CPDM sought a stay or strike out of those proceedings for abuse of process. The adjudication determination and associated judgment debt against Lindvest remained unsatisfied at the time of these proceedings.

The Court held that the NSW SOP Act contemplated consecutive proceedings and the possibility of inconsistent judgments. The rationale was that any judgment debt under section 25 was rendered provisional by section 32, which permitted the parties to an adjudication to commence related civil proceedings to claim restitution. The Court held that Lindvest's initiating of civil proceedings was consistent with the operation of the NSW SOP Act, and that CPDM could still separately seek to enforce the judgment debt.

There was no abuse of process as the proceedings were not "unjustifiably oppressive", had not been initiated for an "improper purpose" and did not bring the "administration of justice into disrepute". Lindvest acknowledged that it had to provide security for costs and the Court accepted CPDM's proposed quantum of security, which was two-thirds of the estimated costs of the proceedings.