Major Projects & Construction 5 Minute Fix 108: withholding payment, implied terms and High Speed Rail Authority

NSW Court of Appeal reminds us not to assume that payment can be withheld pending certification

The NSW Court of Appeal has upheld a trial judge's finding that certification by an architect of work completed was not a precondition to the right to payment under a standard form Master Builders of Australia cost-plus contract.

In Keegan v Ballast Point Pty Ltd [2022] NSWCA 179, the contract required Keegan (the Owner) to pay Ballast Point Pty Ltd (the Builder) within 10 days of the Builder submitting a payment claim.

The contract also included special conditions that appointed an architect to administer the contract on the Owner’s behalf and provided:

"In order to determine the amount of money, if any, payable to the Builder by the Owner, the Architect is to assess and certify claims by the Builder pursuant to the provisions of the contract". [emphasis added]

At trial, the primary judge rejected the Owner's argument limiting the Builder's payment entitlement to amounts certified by the architect because the contract obliged the Owner to pay claims independently of whether they had been assessed and certified by the architect. On appeal, the Court considered whether the above-mentioned special condition limited the Owner's obligation in this manner.

The Court of Appeal confirmed the trial judge's conclusion. In finding that there was no such precondition to payment, the Court had regard to several factors:

• "the language which the parties have used";
• "the nature of their cost-plus contract" under which the builder could make monthly payment claims; and
• "the remaining provisions of that contract considered as a whole".

In doing so, the Court confirmed the case law that for certification by a third party to be construed as a condition precedent to a principal's obligation to pay a contractor, the contract had to contain clear and express language to that effect. In this instance, there was no such precondition to the right to payment.

The Court of Appeal also offered some observations about the wording used in contracts to describe the superintendent/ contract administrator role. These potentially have resonance beyond this case, including in respect of widely-used commercial contracts like the Australian Standard forms AS2124-1992 and AS4000-1997. Here, the Architect was to perform his functions "in good faith and reasonably". The Court said that this wording was consistent with the Architect being the agent of the Owner. The Court noted, on the other hand, that wording for the role like "honestly and fairly", "independently and honestly" or “impartially and fairly” has been found in other cases to mean that the superintendent (however described) “is not acting as the owner’s agent in the strict legal sense”.

The Court did not explicitly engage with the Australian Standards provisions. However, the observation that there may be a distinction between "reasonably and in good faith" and "honestly and fairly" is potentially significant, as the former is used in AS4000 (and AS4902) and the latter in AS2124 (and AS4300) yet it has generally been assumed that the two couplets have equivalent effect in reflecting that the superintendent has both agent and certifier roles. Thus, it will be of interest to see whether the case opens up further suggestions from the courts that the AS4000/ 4902 wording (which has not been the subject of as much judicial consideration as that in AS2124/ 4300) may in fact not import obligations of independence – or, at least, not to the extent they had previously been assumed.

NSW Court of Appeal considers the battle of the forms

When faced with a contract formation dispute involving a "battle of the forms", the battle is often won by the party who fired the "last shot". For example, Forte was the last party to put forward its contractual conditions in Forte Sydney Construction Pty Ltd v N Moit & Sons (NSW) Pty Ltd [2022] NSWCA 186. Since the other party (Moit) did not expressly accept Forte's conditions, the Court of Appeal found there was an implied acceptance of them by Moit from its conduct in starting work at the site. This case serves as a reminder of the risks of not executing a formal contract before commencing work under the contract.

The case involved a complex chronology of negotiations between Forte and Moit concerning excavation and construction subcontract works. The factual background illustrates how the "battle of the forms" can occur in construction projects as each party puts forward draft offer documents on the same day. In short, Moit contended it was its "Final Revision Tender" (Moit’s Final Tender), but Forte's position was that its subcontract, as provided to Moit (Forte Subcontract), bound the parties. Despite neither party expressly accepting nor signing the Moit’s Final Tender or the Forte Subcontract, Moit subsequently commenced works at the site.

Before the Court of Appeal, Forte successfully challenged the primary judge's decision that the Moit’s Final Tender bound the parties. The case illustrates how the courts can look at conduct as constituting implied acceptance of the terms of offer. Here, the Court held that Moit’s offer (that is, Moit’s Final Tender) was rejected by Forte’s subsequent provision of the Forte Subcontract that contained terms inconsistent with those in Moit’s Final Tender. Although the Forte Subcontract was accompanied by a letter of engagement that set out a manner of acceptance (which was not complied with by Moit), the Court found that Forte’s offer had not lapsed. The Court applied the test for acceptance of a contract by conduct. Specifically, whether "a reasonable person in the position of Forte" would have thought that Moits (as offeree) was by its conduct (in commencing works at the site) intending to accept "the offer embodied in the Forte Subcontract".

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Family feud provides a reminder of conditions for implying terms

Implied terms are often argued in construction disputes but not always successfully. Although not a building dispute, Hobhouse v Macarthur-Onslow [2022] NSWCA 158 provides a reminder of the five well-established conditions necessary for the implication of a term established in BP Refinery (Westernport) Pty Ltd v Shire of Hastings (1977) 180 CLR 266. For a term to be implied "in fact", it must be:

1. reasonable and equitable;
2. necessary to give business efficacy to the contract so that no term will be implied if the contract is effective without it;
3. so obvious that "it goes without saying";
4. capable of clear expression; and
5. not contradict any express term of the contract.

Hobhouse v Macarthur-Onslow involved a dispute concerning the exercise of a call option under a deed to purchase an apartment. The deed provided the respondent with the first call option to purchase the apartment, and the appellant with the second. The first call option was exercisable by the service of written notice together with executed copies of a contract for the purchase of the apartment and a cheque for a deposit. The deposit was required to be calculated by reference to the midpoint of two market valuations obtained by an authorised accountant within 60 days.

When the respondent purported to exercise its call option, only one of two valuations sought had been provided within the 60 days stipulated. The respondent calculated its deposit based on the sole valuation received (rather than two valuations as required by the deed). The appellant challenged the validity of the call option's exercise. Applying the conditions established in BP Refinery, the primary judge implied a term in the deed to the effect that a deposit was not required if the market value could not be determined and held that the option was validly exercised.

The Court of Appeal was critical of the implication of this term and found that conditions two, three and five of BP Refinery had not been satisfied. It reasoned that the option was capable of exercise if the accountant obtained two valuations and calculated the midpoint of those valuations, as required by the deed. Delay in receiving the second valuation was foreseeable, and it was open to the accountant to seek another valuation within the 60 days required. Consequently, the respondent did not validly exercise the option to purchase, and the appeal was allowed.

High speed rail on track at last in Australia?

The Australian Government has introduced a Bill in the Commonwealth Parliament to establish the new High Speed Rail Authority, which will lead, plan, develop, coordinate, oversee and monitor the construction and operation of a high-speed rail network in Australia.

The key functions of the Authority are to:

• provide independent advice to State and Territory Governments and other interested stakeholders; and
• build on previous viability studies undertaken and undertake further research,

concerning the high-speed rail network (supporting trains capable of travelling at speeds exceeding 250 km/hr), the high-speed rail corridor, a faster rail network (railways that are not capable of supporting high-speed trains) and additional rail corridors for a faster rail network.

The Authority will be overseen by a Board comprised of experts from the rail or transport infrastructure industries.

The Bill's definition of "high speed train" expressly contemplates vehicles that do not have wheels. This definition leaves it open to the Authority to explore the use of rail technology such as magnetic levitation (maglev), which is being explored overseas but faces several hurdles, including high development costs and incompatibility with existing track infrastructure.

The Authority’s mandate is likely to be challenging, given the development challenges that have historically arisen in interstate rail regulation and projects and the social, environmental and technical difficulties new infrastructure for high-speed rail can present.