Major projects & construction 5 Minute Fix 122: construction costs escalation, adjudications, access to performance securities, law reforms

Price renegotiation addressing costs escalation not a notice of inability to proceed with contract

In ESR Investment Management 2 (Australia) Pty Limited v AllRoads Pty Ltd [2023] QSC 235, the Supreme Court of Queensland considered the effect of a letter from a contractor informing the principal that it was financially unviable for the contractor to continue to perform the Contract because of construction costs escalation.

The principal, ESR Investment Management 2 (Australia) Pty Limited (ESR), entered into a contract with AllRoads Pty Ltd (AllRoads) for the performance of civil earthworks at Berrinba. AllRoads subsequently wrote a letter to ESR which addressed the "unprecedented challenges" impacting the project financially. The letter cited numerous causes of cost escalation delays and reduced productivity (including COVID-19, the Australian Government's economic stimulus, conflict in Ukraine, extreme wet weather and shortages of construction materials and labour). The letter proposed a "constructive dialogue" between the parties to explore "an equitable resolution".

ESR alleged that the letter was a notice that AllRoads was unable to proceed with the contract under clause 44.11(a) of a modified AS2124-1992 contract. Under the contract, such a notice would have given rise to a right to terminate the contract or take over the work, and consequent obligations to hand over particular documents.

Justice Kelly accepted AllRoads' contention that a distinction exists between a party not having the financial wherewithal to perform the contract and the party making a financial loss while continuing to perform the project. Accordingly, the letter did not enliven the termination/take over rights under the contract.

For a more detailed consideration of issues relating to cost escalation in the construction industry and contractual responses to escalation, see our Insights article from earlier this year.

Issue estoppel extends to adjudications in Queensland

In the recent case of Karam Group Pty Ltd ATF The Karam (No. 1) Family Trust v HCA Queensland & Ors [2023] QSC 245, the Queensland Supreme Court has confirmed that issue estoppel applies to adjudications in Queensland under the Building Industry Fairness (Security of Payment) Act 2017 (Qld) (BIF Act).

In 2020, Karam Group Pty Ltd (Karam) contracted with HCA Queensland Pty Ltd (HCA) to design and construct apartments in Coorparoo, Queensland. HCA lodged four adjudication applications under the BIF Act between April 2022 and March 2023. Relevantly:

• liquidated damages were determined in Karam's favour in the second and third adjudications; and
• in its fourth adjudication application, HCA submitted that Karam was not entitled to those liquidated damages already determined in an earlier adjudication because of the application of the "prevention principle".

Karam sought injunctions from the Supreme Court of Queensland restraining HCA from reagitating (and the adjudicator from determining) the liquidated damages already determined in the second and third adjudications on the basis it would constitute an abuse of process.

Relying on Dualcorp Pty Ltd v Remo Construction Pty Ltd (2009) NSWLR 190 and Wiggins Island Coal Export Terminal Pty Ltd v Monadelphous Engineering Pty Ltd [2016] QSC 96, Karam also argued that issue estoppel applies to adjudications in Queensland and that the proper application of the BIF Act precluded re-agitation of issues that have been determined in earlier adjudications.

The Court held that in Queensland issue estoppel does extend to adjudications under the BIF Act, and resolved the matter using the parties' submissions on the prevention principle in the second adjudication.

Building legislation reform in NSW and Victoria: domestic building insurance and chain of responsibility

NSW: Building Product Safety Act 2017 (NSW): introducing the chain of responsibility

Passed on 21 November 2023, the Building Legislation Amendment Bill 2023 amends several Acts to expand the powers of the NSW Building Commissioner to improve customer protection for homeowners, tackle poor industry behaviour and promote DLI insurance.

Victoria: New offences for failing to obtain Domestic Builders Insurance in Victoria and other reform

The Victorian Government introduced the Building Legislation Amendment (Domestic Building Insurance New Offences) Bill 2023 (Vic) into Parliament on 28 November 2023. If passed, it will provide added protection to consumers by introducing offences for failing to obtain domestic building insurance before accepting payments from building owners under any major domestic building contract.

Court dissolves injunction restraining calls on unconditional performance securities

In Descon Group Australia Pty Ltd v 35 Merivale Pty Ltd [2023] QSC 276, the Supreme Court of Queensland dissolved an interlocutory injunction restraining a call on insurance bonds provided under a construction contract.

35 Merivale Pty Ltd (Developer) contracted with Descon Group Australia Pty Ltd (Builder) to build residential apartments in South Brisbane. Under the contract, the Builder agreed to provide security in the form of unconditional insurance bonds. The contract permitted the Developer recourse to the security for unpaid debts and claims to payment.

The parties entered into two side deeds to document a commercial agreement which addressed various project delays. The first deed required the Builder to provide further security which was capable of being called upon immediately and without notice to the Builder if work was taken out of the Builder's hands. The second deed – which never came into operation – would have novated the building contract to a third party and permitted the Developer to retain the existing security under the contract and prevented the Builder from seeking to inhibit or injunct the Developer from calling on it.

The parties' relationship broke down and the Developer exercised its contractual rights to take work out of the Builder's hands. On the same day, the Builder obtained an injunction preventing the Developer from calling on the bonds. The Builder sought to terminate the contract the next day.

The Builder sought to maintain the injunction preventing the Developer from calling on the bonds. To be granted such relief, the Builder was required to establish a prima facie entitlement to an injunction and that the balance of convenience favoured an injunction pending trial of the issues.

Ultimately, the Court dissolved the injunction because the Court:

• was not satisfied there was a prima facie case to restrain the Developer from calling upon the bonds. The Court was satisfied the Developer had followed the contractual processes setting up its rights to call on the bonds; and
• considered the balance of convenience also favoured refusal of the continuation of the interlocutory injunction. The Court had regard to the fact that the Builder had either terminated the contract or been removed from performing the works (and so was no longer involved in the project), and that both parties had claims against each other. Therefore, the parties were no longer mutually involved in the project and there was no evidence that the Developer's financial position would have meant it was unable to satisfy a future judgment on those claims.

The Court observed that as between the bond issuer and beneficiary, "judicial intervention will generally only be justified when there has been fraud or unconscionable conduct". As the Builder had not persuaded the Court that the Developer had acted unconscionably (and fraud was not alleged), the Court declined to extend the injunction.

Does "without prejudice" mean we haven't got a deal?

In Stekovic v Radovanovic [2023] NSWSC 1471, the Supreme Court of New South Wales applied the test from Masters v Cameron to hold that acceptance of a without prejudice offer constituted an immediately binding agreement. Acceptance of the offer was binding notwithstanding that the parties' contemplated the subsequent preparation of deed of settlement.

Masters v Cameron identified three categories to illustrate where, and when, parties objectively intended to create legal relations. A fourth category subsequently evolved, namely, where parties enter into an immediately binding agreement on certain specified terms and on such other terms as are either subsequently agreed by the parties or able to be determined by the Court.

The plaintiffs contended that the parties had settled a dispute concerning the distribution of proceeds of a property sale through the acceptance of a "Calderbank offer" from the defendant marked "without prejudice save as to costs". After applying the principles set out in Masters v Cameron, Justice McGrath made a declaration that an immediately binding settlement agreement arose between the parties.

His Honour stated that by marking the relevant communications as “without prejudice save as to costs”, the parties objectively sought to settle the whole dispute between them and had aimed to avoid further legal proceedings. The following factors were relevant to this conclusion:

• Despite the defendant's arguments to the contrary, there was no "key term of substance" remaining to be agreed.
• Correspondence indicating that the parties intended to subsequently enter into a deed of settlement, which would include various "standard provisions", was held to be evidence of the parties' objective intention as to the manner in which the already agreed transaction would proceed. This was notwithstanding the "standard provisions" including matters of substance, such as releases, non-disparagement and confidentiality clauses.
• Post-agreement communications considered by the Court did not evidence any further negotiation or agreement and were consistent with a binding settlement having already been reached.

It was held that these factors made the case more like the fourth category, and consequently the settlement agreement was immediately binding upon the parties.