Major Projects & Construction 5 Minute Fix 119: conditional completion certificates, termination rights, refusing payment

"Conditional" certificate of practical completion not valid resulting in large liability for liquidated damages

The New South Wales Supreme Court has provided a salient reminder that superintendents (and parties) must understand the requirements of the terms of the contract, particularly when granting practical completion. If the parties desire a course of action not permitted under the contract, they will need to agree on that separate process or amend the contract.

In H & M Constructions (NSW) Pty Ltd v Golden Rain Development Pty Ltd (No 4) [2023] NSWSC 925, the developer (Golden Rain) enforced an entitlement to $22 million in liquidated damages for delays in achieving practical completion of high-rise apartments in Erskineville.

By mid-2018, the date for practical completion had passed, entitling Golden Rain to liquidated damages. On 24 September 2018, the Superintendent issued a "conditional" certificate of practical completion requiring H&M to complete seven outstanding issues.

The Court found the "conditional" certificate was invalid for two reasons:

1. the Superintendent was not empowered to issue conditional certificates under the contract: it could only either grant practical completion unconditionally or give written reasons why it had not been achieved; and
2. was inconclusive as to whether and when practical completion was achieved, leaving the parties "in a state of uncertainty".

Justice Stevenson evaluated the circumstances which led to the issue of the "conditional" certificate and concluded that H&M had not established any of its alternative arguments in estoppel, unconscionable conduct or pursuant to the prevention principle.

No termination for works outside of scope

In RW & ME Smith Pty Ltd v Boral Resources (Vic) Pty Ltd [2023] VSCA 182, the Victorian Court of Appeal held that a termination right had not been validly exercised because the unsafe works relied upon were not required by the contract.

The proceedings related to a cartage agreement with the applicant, RW & ME Smith (operated by Robert Smith). Boral had requested Mr Smith assist replacement of a broken drive chain at Boral's concrete plant. Boral alleged that Mr Smith had engaged in serious misconduct (due to the unsafe way he assisted in the repair), and notified Mr Smith of its termination for breach.

The primary judge held that the repair works performed by Mr Smith fell within the ambit of the contract. On appeal, Mr Smith argued that the repair works were not within the ambit of "Cartage Works" and so were performed outside the contract, with the result that no right to terminate the contract was engaged.

The Court of Appeal overturned the trial decision, agreeing with Mr Smith.

While the definition of Cartage Works included "associated tasks performed by [Mr Smith] for Boral in accordance with the [Contract]", the Court of Appeal held that repairing Boral's plant was not a task associated with the delivery of concrete, performed in accordance with the Contract.

Relying on new reasons to justify non-payment after the fact

In Digga Excavations Tas Pty Ltd v Linear Capital Pty Ltd [2023] TASSC 22, the Tasmanian Supreme Court confirmed that parties can rely on a contractual right to refuse payment of a progress claim, even though the right was not raised at the time payment was refused.

In August 2016, the parties agreed to suspend works so Linear Capital could source alternative funding for the project. At the time, Linear Capital had paid three of six progress claims submitted by Digga Excavations. Two months later, the three remaining progress claims remained unpaid, and Digga Excavations purported to terminate the contract.

Before the Court, Linear Capital relied on a clause (in the AS 4000-1997) permitting it to withhold payment if a progress claim was not accompanied by evidence demonstrating that subcontractors and employees had been paid. It had not relied upon this right in refusing payment in August 2016.

On this point, Justice Brett:

• held Linear Capital was entitled to refuse payment under the clause, even though it had not previously raised this argument. Linear Capital did not make a positive election not to rely on the clause, and no estoppel arose because it did not make any representation about its reliance (or non-reliance) on the clause. Rather, the parties had simply not turned their minds to the requirements of the clause before; and
• applied the rule from Shepherd v Felt and Textiles of Australia Ltd (1931) 45 CLR 359 that if a party gives a wrong reason for refusal, this does not deprive that party of a justification which existed, but it was not aware of. Here, the primary consideration was whether the non-payment can be justified under the contract (not what was considered at the time of refusal).

Arbitration agreement no impediment to joinder in court proceedings

A recent decision of the Court of Appeal of Western Australia, North West Pilots Pty Ltd v Daniel [2023] WASCA 122, has upheld a primary judge's order for joinder of a party in circumstances where the plaintiff and the joined second respondent were parties to an arbitration agreement.

The appellant, Port Headland Pilots (PHP), sought an order restraining the first respondent, Heath Daniel, from undertaking marine piloting and other roles while employed by the second respondent, Pilbara Ports Authority (PPA). PHP had a contract with PPA which required any dispute or difference between PHP and PPA be referred to arbitration.

PHP argued that the trial judge should have refused to join PPA to the proceedings between Daniel and PHP by reason of the Commercial Arbitration Act 2012 (WA) and the arbitration clause in the contract between PHP and PPA. Section 8 of the Act provides that a court must, if requested by a party, refer a matter to arbitration where an action is brought in a matter which is the subject of an arbitration agreement.

The Court of Appeal held that joinder would not transform the subject matter of the primary proceedings and that there was no current controversy between PHP and PPA, given there were no pleadings or claims between PHP and PPA. Accordingly, there would be no waiver of PHP's rights under section 8 of the Act. Importantly, neither the Court of Appeal nor the trial judge considered how this outcome might be different if either PHP or PPA were to make claims against the other, but noted that the issue would need to be revisited at the time of any such claim.

Judicial review of non-jurisdictional errors: a reminder of the Victorian approach

The recent decision of Hunters Green Retirement Living Pty Ltd v JG King Project Management Pty Ltd [2023] VSC 536 is a reminder that non-jurisdictional errors in Victoria are treated slightly differently than by its neighbours in NSW and South Australia.

As we noted in February 2018, the High Court's decisions in Probuild Constructions and Maxcon Constructions confirmed that, to be reviewable in NSW and South Australia, an error on the face of the record of an adjudication determination must be jurisdictional.

By contrast, the basis for judicial review in Victoria has been different – due to the application of the Victorian Constitution in relation to "privative clauses" (statutory provisions purporting to limit the jurisdiction of the Supreme Court to order certiorari).

In Hunters Green, Justice Attiwill agreed with the parties' joint submission that where "judgment has not been entered… the Supreme Court of Victoria has jurisdiction to review a security of payment adjudication determination for error of law on the face of the record". This means that Victoria stands apart from other States (or at least, from NSW and South Australia) in allowing a challenge to a non-jurisdictional error, provided that judgment has not yet been entered.

Notwithstanding this, the Court confirmed that a grant of certiorari is discretionary. Therefore, a party must establish that the non-jurisdictional error is "material" – that is, "of a sufficient type and severity that, in the Court’s discretion, the adjudication determinations ought be quashed".

In Hunters Green, Justice Attiwill found that the adjudicator's errors of law in calculating payment entitlement were "material" because:

• they were central to the determination;
• they were not in accordance with the contract; and
• but for the errors, the adjudicator should have found a "nil" payment entitlement.

Security of payment wrap-up

ACT: Payment claim with recycled claims still valid

In Civil & Civic Corporation Pty Ltd v Nova Builders Pty Ltd [2023] ACTCA 30, the ACT Supreme Court confirmed that a payment claim which:

• includes construction work the subject of prior payment claims; but
• relies on a different reference date,

is valid and not in contravention of section 15(5) of the Building and Construction Industry (Security of Payment) Act 2009 (ACT).

Queensland: Replacement adjudicators

In Sun Engineering (Qld) Pty Ltd v Registrar Appointed under section 150 of the Building Industry Fairness (Security of Payment) Act 2017 [2023] QSC 168, the Queensland Supreme Court provided clarity on where it would be inappropriate to compel the Registrar to refer an adjudication to another adjudicator. Section 94(2)(a) of the Building Industry Fairness (Security of Payment) Act 2017 (Qld)allows a party to request that the Registrar refer an adjudication application to a new adjudicator if the first adjudicator's decision has not been made in time.

The Court held that section 94 concerns situations where the adjudicator's power to make a decision is "spent" because they failed to make a decision within the time specified under the legislation. This is distinct from where a decision was made, but which may ultimately held to be void.

NSW: Prohibition against "new reasons" does not extend to new expert report

In Miller v LMG Building Pty Ltd [2023] NSWSC 995, the New South Wales Supreme Court held that the provision of a further report by a principal in an adjudication response may not amount to "new reasons" under section 20(2B) of the Building and Construction Industry Security of Payment Act 1999 (NSW) and, therefore, must be considered by an adjudicator. Justice Ball held that there was nothing in the Act which prevents a respondent from including, as part of responsive submissions, documentation prepared after the date of a payment schedule, provided that documentation does not raise a new reason for non-payment which was not included in the earlier payment schedule.

NSW: Grosvenor stay not granted despite potential for claimant to become insolvent

In Heather v Taylor Building Industries Pty Ltd [2023] NSWSC 968, the NSW Supreme Court denied a Grosvenor stay of enforcement of a judgment of an adjudicated amount under the Building and Construction Industry Security of Payment Act 1999 (NSW), on the basis that the applicant had not established with sufficient certainty that there was a risk of insolvency.

NSW: recovery of corporate overheads via adjudication

In Hawkesbury City Council v The Civil Experts Pty Ltd (t/as TCE Contracting) [2023] NSWSC 962, the NSW Supreme Court refused an application to overturn an adjudicator's determination.

The contract price in the contract between the Council and TCE was described as "Cost + 25%". TCE submitted a progress claim expressed to be a payment claim under the Building and Construction Industry Security of Payment Act 1999 (NSW) which included, offsite overhead costs with the 25% margin applied to those costs. The adjudicator held that TEC's interpretation of "Cost" was "broad", but "not so broad as to strain credulity", and awarded the overhead costs as "Costs" (with 25% margin). The Council argued that the work the subject of offsite overheads (such as accounting services) was not "construction work" within the meaning of the Act.

The Court held that the contract did not define "Cost" and therefore it was reasonable for the adjudicator to rely on TCE's unchallenged evidence and interpret the term as meaning all costs incurred by TCE (other than legal fees), including corporate overhead costs.