Major Projects & Construction 5 Minute Fix 83: penalties home and abroad, Infrastructure Victoria 30 year strategy, building materials on credit

Liquidated damages clause not a penalty despite staged completion and partial possession

A liquidated damages (LDs) clause was enforced by the English Technology and Construction Court (TCC) in Eco World – Ballymore Embassy Gardens Company Ltd v Dobler UK Ltd [2021] EWHC 2207.

LDs clauses are common in construction contracts. They operate to impose a pre-set liquidated sum of damages that accrues upon failure to achieve completion by a contractual completion date. Often the quantum of LDs is measured in days, but in this case the sum accumulated on a pro-rata weekly basis, as follows:

“Liquidated damages will apply thereafter at the rate of £25,000 per week (or pro rata for part of a week) up to an aggregate maximum of 7% of the final Trade Contract Sum…"

The TCC found that there was sufficient certainty to enforce the clause: the full amount was payable for each week (or part thereof) of delay regardless of the principal being in partial possession. In addition, applying the principles laid down in Cavendish Square Holding BV v Talal El Makdessi [2015] UKSC 67, especially around whether the LDs were “extravagant, exorbitant or unconscionable” and “out of all proportion” to the principal's legitimate interest in securing timely completion, the TCC held that the LDs clause was not a penalty. The Australian High Court's approach to the doctrine of penalties permits LDs clauses to protect an interest that is different from, and is potentially greater than, the damages that could be recovered for breach of contract.

Finally, the TCC held that, if the LDs provision had been found unenforceable as a penalty, the Court would have been willing to find that the LDs set a cap on the general damages which could have been recovered. This was because the contractual provisions contained two elements: the first element provided the weekly rate of LDs, and the other stipulated an overall cap on aggregate damages.

Acquiescence and assumptions insufficient to change payment terms in long term supply agreement

In Grand Metal Pty Ltd v Nashco Pty Ltd [2021] NSWSC1005, the NSW Supreme Court rejected a claim by a building materials distributor that the fabricator of those materials was obliged, under an implied or amended contractual term, to allow Grand Metal to purchase materials on credit up to $1.4 million (or alternatively, was estopped from withholding that credit).

The 5-year supply agreement between Grand Metal and Nashco included:

• an "entire agreement" clause in the usual terms, namely, that the supply agreement contained the entire agreement between the parties; and
• terms to the effect that Grand Metal could make an application for the supply of materials on credit, but that once credit application was approved, it could only be amended by Nashco in writing.

The parties executed a collateral credit account application with an approved credit limit of $750,000 and payment terms requiring payment to be made within 60 days of the end of the month. Under the supply agreement, these conditions could only be amended with the written consent of Nashco.

Over the subsequent years Grand Metal regularly exceeded the credit limit of $750,000 and often failed to make payment within the required period. There were numerous discussions between the parties about payment arrears. When Nashco ultimately ceased supplying materials in late 2019, Grand Metal argued that Nashco's earlier acquiescence to Grand Metal's credit exceedances and late payments:

• evidenced an implied term extending the credit limit to $1.4 million; or
• gave rise to an estoppel preventing Nashco from denying the extended credit limit.

Both of these arguments were rejected by the Court. It was held that Grand Metal's directors appeared to assume that Nashco's acquiescence "somehow had the effect" of changing the contractual arrangements. However, there was no evidence of Nashco consent, let alone in writing, which was the only way the agreement could be amended according to its terms. On the contrary, there was evidence of numerous discussions during which Nashco's representatives expressed their displeasure with Grand Metal's performance. This also provided the basis for the rejection of the estoppel claim, because Grand Metal could not prove the essential element of representations by Nashco that induced Grand Metal to assume that the supply terms had been changed.

Infrastructure Victoria's 2021–2051 Infrastructure Strategy

Infrastructure Victoria recently tabled its infrastructure strategy 2021–2051 in the Victorian Parliament, identifying, and proposing some 94 recommendations to address Victoria's long-term infrastructure challenges. Canvassing major transport projects, as well as social and environmental infrastructure, the total capital cost of the recommendations is approximately $100 billion over 30 years.

The strategy speaks to structural changes caused by climate change, shifts in energy generation, the COVID-19 pandemic and the accelerating emergence of smart technologies and automation. It is structured around four key areas, namely:

"Confront long-term challenges"

This section comprises recommendations 1 to 31, including:

• recommendation 1: publication, within the next two years, of a statewide electric vehicle charging network strategy and the production of "charging infrastructure design standards and payment principles", such as smart charging and integrated payment systems.
• recommendations 28 and 29: within the next twelve months, aim to "increase and upgrade waste processing infrastructure" on priority materials, consider funding mechanisms and "align recycling infrastructure with land use settings." The strategy also urges that standards and specifications be updated so as to be "performance-based rather than material-based, and explicitly require the Victorian public sector to use recycled products where feasible". The strategy proposes the strengthening of initiatives to support the market for recycled materials, pointing to the Victorian Government's Recycled First policy and suggesting extending its reach beyond major infrastructure projects. It is also suggested that Victoria's Social Procurement Framework be considered as a means of requiring public sector use of recycled materials.

"Manage urban change"

Recommendations 32 to 56 include:

• recommendation 36: within the next two years, change planning regulations so as to introduce mandatory requirements in the re-zoning of residential land in appropriate areas, relevantly to "include a value-capture mechanism to generate ‘very low income', affordable rental housing".
• recommendations 51 to 53: application of congestion based peak and off-peak tolling to new metropolitan freeways, trialling congestion pricing in inner Melbourne and replacing "fixed road user charges with variable distance-based and congestion charges over the next 10 years".
• recommendations 55 and 56: renewal of dilapidated public housing properties and, within the next five years, the publication of "priorities for hospital renewal".

"Harnessing infrastructure for productivity and growth"

Among others, recommendations 57 to 77 address:

• recommendation 60: preparation of a business case within the within the next two years for the reconfiguration of the City Loop.
• recommendation 61: preparation for a "Melbourne Metro Two" business case and steps to protect land required for its construction.
• recommendation 62: protection of a long term option for a new cross-city motorway.

"Develop regional Victoria"

The final section, comprising recommendations 78 to 94, is directed to the expansion and improvement of a range of social infrastructure services and facilities in regional Victoria.

When will accelerated payment obligations constitute an unenforceable penalty?

Justice Adamson has considered whether terms accelerating payment obligations and back-dating interest could amount to a penalty in Australian Karting Association Ltd v Karting (NSW) Incorporated [2021] NSWSC 1075. Although not a construction law case, it provides useful guidance on the operation of the doctrine of penalties beyond the LDs context.

The key principles of the doctrine were described as follows:

1. The essence of a penalty is that it is a collateral stipulation, a predominant purpose of which is to punish the counterparty and compel performance.
2. To test whether the term is intended to punish, one can ask whether the amount to be paid is wholly disproportionate to the maximum amount of damage (including legitimate commercial interests) that might be expected in the circumstances.
3. The relevant time for the assessment is the time at which the contract was made.
4. The onus of proving that a contractual stipulation amounts to a penalty lies on the person asserting it.
5. There is a rebuttable and weak presumption that a clause is a penalty if it stipulates that the sum is to be paid on the occurrence of one or more of several events, some of which may occasion serious harm and others which might cause only minimal damage.

This case involved a centralised national body (Karting Australia) that received levies from associations and then paid them out as interest free loans to state-based members (in this case, Karting NSW) for the purpose of funding track developments. Karting NSW entered a loan arrangement with Karting Australia but this loan arrangement provided for back-dated interest and accelerated repayments triggered by events that were unrelated to repayment under that loan, such as Karting NSW seeking to end its membership of Karting Australia.

Taking into account the circumstances of the parties, Justice Adamson held that Karting Australia’s contractual right to claim back-dated interest and accelerate repayment was extravagant and wholly disproportionate to its loss or legitimate interest. The only purpose for which Karting Australia was entitled to use the money was to make interest-free loans to its members for the purpose of track development. It was common ground that this was the purpose for which the funds were to be (and were in fact) used by Karting NSW. The conditions in the loan were unrelated to Karting NSW's repayment performance, and considered at the time of contracting, it was designed to punish Karting NSW should it seek to end its membership of Karting Australia.