Major Projects & Construction 5 Minute Fix 116: proportionate liability and arbitration, expert witnesses, bank guarantees

Arbitration update: High Court to consider role of proportionate liability provisions in arbitration context

The High Court of Australia has granted special leave to appeal a decision concerning the application of South Australian proportionate liability provisions in an arbitration context.

Proportionate liability legislation can operate to limit a defendant's liability to the proportion of the loss or damage that the court considers just, having regard to the defendant's responsibility for that loss or damage. In the South Australia Court of Appeal decision of Tesseract International Pty Ltd v Pascale Construction Pty Ltd [2022] SASCA 107, the Court of Appeal held that the South Australian proportionate liability provisions did not apply in the arbitration context.

The applicant (Tesseract) has been granted leave for the High Court to consider whether they apply and, if so, whether they apply "by force of their own terms" or through the arbitrator's implied power to determine a dispute as if in court.

In considering this issue the High Court is likely to grapple with:

• the potential for inconsistent outcomes in different arbitrations if an applicant is required to commence separate proceedings against another party that is held to be partly responsible for some of the loss in the first arbitration; and
• the ability to join third parties to arbitrations being more restricted than in judicial proceedings.

Federal Court considers role of lawyers drafting parts of an independent expert's report

In New Aim Pty Ltd v Leung [2023] FCAFC 67 the Full Court of the Federal Court overturned a trial judge's decision to reject an expert report on the basis that the involvement of the party's solicitors had not been adequately disclosed in that report.

The appellant (New Aim) imported goods from China. It claimed breach of confidence (and other breaches) by a former employee for a WeChat supplier contact list, taken to a new employer.

New Aim filed a report by its expert, Ms Chen, on the importance of supplier relationships in the business. However, it emerged in cross-examination that New Aim's solicitors had in fact drafted large parts of the report, and this was not disclosed in the report. Emails between the lawyers and Ms Chen were then disclosed which provided evidence of the solicitor's involvement. The trial judge held that the report did not comply with the Federal Court of Australia Expert Evidence Practice Note and the Harmonised Expert Witness Code of Conduct. The judge rejected Ms Chen's evidence in its entirety on the basis he was not able to determine who had written which parts of the report.

The Full Court of the Federal Court allowed the appeal unanimously. The Court held that:

• the majority of the report was factual in nature and drafted on the basis of documents provided by Ms Chen;
• physical, language and resource difficulties may be taken into consideration to determine the appropriate level of legal practitioner involvement in recording an expert's evidence; and
• while it is desirable to disclose that legal practitioners are involved in drafting a report, there is no legal obligation to do so.

Injunction restraining recourse to bank guarantees removed due to lack of evidence of unconscionable conduct

In Total Construction Pty Ltd v Catholic Healthcare Limited [2023] NSWSC 585, the NSW Supreme Court ordered Total Construction Pty Ltd (Contractor) to pay, on an indemnity basis, the costs of Catholic Healthcare Limited (Principal) after the Court declined to extend an interlocutory injunction preventing recourse to bank guarantees.

The Court had initially granted an injunction to the Contractor on an ex parte basis restraining the Principal from calling on two bank guarantees under a design and construct contract. In obtaining the ex parte injunction, the Contractor had claimed that the Principal had engaged in unconscionable conduct. Unconscionable conduct is one of the recognised grounds for preventing recourse to bank guarantees, along with fraud and the existence of an express or implied restrictive covenant.

When the Court subsequently reconsidered the matter with all parties present, the Contractor was unable to identify any unconscionable conduct. Nor was the Contractor able to establish that the Principal did not have a contractual entitlement to call on the bank guarantees. The initial ex parte injunction was removed and the Court ordered the Contractor to pay the Principal's legal costs on an indemnity basis.

No "construction contract" means no jurisdiction under security of payment legislation

The Supreme Court of Queensland quashed an adjudication determination under the Building Industry Fairness (Security of Payment) Act 2017 (Qld) (BIF Act) because of the absence of a "construction contract".

In GCB Constructions Pty Ltd v SEQ Formwork Pty Ltd [2023] QSC 71, the respondent (SEQ) performed works for the applicant (GCB) on two residential towers on the Gold Coast. GCB awarded the contract to SEQ subject to agreement on terms, though agreement on contract terms was never reached. However, before SEQ was awarded the contract, the parties had a conversation regarding certain works and works commenced. A year later, SEQ submitted a payment claim under the BIF Act and the adjudicator awarded the majority of the claimed amount.

Justice Burns quashed the adjudication decision on the grounds that there was no "construction contract" within the meaning of the BIF Act, which meant that the adjudicator did not have jurisdiction to make an enforceable adjudication determination. It was held that there was not a "construction contract" for the following reasons:

• the parties had not agreed how materials would be supplied or paid for;
• the works undertaken (the subject of the payment claim) were beyond the scope of those discussed in the conversation prior to contract award;
• the parties had not agreed the rates to be charged for labour; and
• the parties had not agreed the time for performance of any of the work, the making of claims, the time for payment, retention money or the transfer of ownership of the formwork.

Reform recommended to Modern Slavery Act

The Commonwealth Government's recently released report on the three-year statutory review of the Modern Slavery Act 2018 (Cth) recommends significant reform to improve compliance with and the operation of the Act.

The report, by Professor John McMillan, AO, acknowledges the weaknesses of "transparency reporting" and notes the view that "there is no hard evidence that the Act has caused meaningful change for people living in conditions of modern slavery." Some 30 recommendations are made to target identified deficiencies in the Act, which include that the standard of modern slavery reporting is variable, and that the reporting obligation is not properly enforceable.

Key among the recommendations are:

• to provide that a reporting entity must implement a due diligence system that imposes a duty on the entity to take effective action to identify and assess risks, and that the entity must then explain in its annual modern slavery statement what activity it has undertaken in accordance with that system (Recommendation 11);
• extending the reporting obligation under the Act to businesses that have annual consolidated revenue of $50m or more (down from the current reporting threshold of $100m) (Recommendation 4);
• amending existing and adding new mandatory reporting criteria (Recommendation 8); and
• making it an offence if a reporting entity (Recommendation 20):
  • without reasonable excuse, fails to submit a modern slavery statement within a reporting period;
  • submits a modern slavery statement that knowingly includes materially false information;
  • fails to comply with a request by the Minister to take specified remedial action to comply with the reporting requirements of the Act; or
  • fails to implement a due diligence system that complies with the requirements of the Act.

The Commonwealth Government has said that it will consider the report and undertake consultation in order to formulate its response.

Insurers liable to cover combustible cladding claims

In MS Amlin Corporate Member Limited v LU Simon Builders Pty Ltd [2023] FCA 581, the Federal Court found insurers liable in connection with claims made against the builder of the Atlantis Towers for the use of combustible cladding products.

The builder (Insured) sought to rely on insurance coverage under its professional indemnity policies for the relevant period. The applicants (Insurers) sought a declaration that insurance cover was not available.

The relevant insuring clause was triggered by civil liability claims made against the Insured during the insurance coverage period. While the associated legal claims were not made during the coverage period, the Insured relied upon section 40 of the Insurance Contracts Act 1984 (Cth) which provides that an insurer cannot avoid liability if it has written notice of a claim while the policy has effect.

The Federal Court held that the Insured was covered under section 40 on the grounds that two emails sent to the Insurers during the coverage period had provided sufficient notice. The emails, with the subject line "Potential Claim", attached newspaper articles and reports about a fire at the Lacrosse tower (a project also constructed by the Insured).

In finding that there was sufficient notice, the Federal Court held that:

• it did not matter that the emails did not identify the potential claimants to the associated legal claims because the owners and the owners' corporation of the Atlantis Towers were "obvious candidates" to make such claims; and
• there was a clear connection between the Lacrosse tower fire and the potential claim in respect of the Atlantis Towers.