Major Projects & Construction 5 Minute Fix 128: proportionate liability in arbitrations; security of payment, liquidated damages, subcontracting

High Court rules on proportionate liability in arbitrations

In Tesseract International Pty Ltd v Pascale Construction Pty Ltd [2024] HCA 24, a majority of the High Court has confirmed that proportionate liability regimes can apply in arbitration in South Australia.

Pascale engaged Tesseract to perform engineering work for Pascale’s construction of a Bunnings Warehouse. Pascale commenced an arbitration about Tesseract’s allegedly defective work. As part of its defence, Tesseract sought to attribute liability to a third party designer engaged by Pascale.

The South Australian Court of Appeal had held that the arbitrator could not apply South Australian proportionate liability legislation. The High Court was asked to reconsider this including because the parties agreed that South Australian laws applied to the main contract.

Across three judgments (by Chief Justice Gageler, Justices Gordon and Gleeson, finally Justices Jagot and Beech-Jones), the majority overturned this decision, finding that substantive provisions in the proportionate liability regimes form part of the substantive law of South Australia, and so are applicable to arbitrations which apply that law. Further, the majority held that, when applying the substantive law of South Australia, an arbitrator is empowered to modify the relevant provisions as necessary to give effect to the law in an arbitration (for example, by reading the South Australian legislation’s references to a “court” as references to an “arbitration”).

Key differences across the majority judgements arise in relation to:

• The source of the arbitrator’s authority to modify the laws of South Australia. Chief Justice Gageler considered the source of authority arises from a purposive reading of the legislation, whereas Justices Gordon and Gleeson found the power is “impliedly” conferred by submission to arbitration, provided that the meaning of the law is not “distorted”.
• The significance of public policy in determining whether proportionate liability legislation applies in arbitration. This was a key point for Justices Jagot and Beech-Jones. Instead, Chief Justice Gageler considered the “primary question” in the dispute was the substantive law applicable to the arbitration.

In separate minority judgments, Justices Edelman and Steward disagreed that proportionate liability can apply in arbitration without express agreement by the parties. Justice Edelman held that the distribution of potential liability between wrongdoers (and therefore the distribution of a dispute) by proportionate liability legislation is incongruous with the purpose of arbitration to deliver finality between the parties.

Separately, Justice Steward considered that the modifications required to render the proportionate liability legislation applicable in arbitration were so substantial that they change the “essential nature” of the laws such that they become a “misshapen parody of what was intended” by Parliament.

As foreshadowed by Justice Edelman in his postscript, this case is sure to be the focus of much further analysis considering its broader impact on the application of proportionate liability in arbitration (including its application in different States and Territories, where proportionate liability legislation is drafted differently).

High Court considers duty to avoid causing pure economic loss

The High Court has found that a seed producer did not owe a duty of care to farmers to avoid causing pure economic loss, where one party does not have a contractual relationship with another. The extent of such a duty (which may be owed depending on the salient features of that relationship) is an important issue in construction disputes, as recently illustrated in Raymond v Lewis [2024] QCA 43.

In Mallonland Pty Ltd v Advanta Seeds Pty Ltd [2024] HCA 25, farmers (Mallonland and others) alleged that contaminated sorghum seeds, produced by Advanta and supplied under contract by authorised suppliers, had caused them pure economic loss. Bags of seed contained a proportion of "shattercane", a plant which outcompetes sorghum and causes the loss of sorghum crops. The bags of seed contained specifications regarding the proportion of sorghum seeds present, within recognised tolerances. The trial judge had found that the seeds conformed to those specifications. A statement on the bags provided that if the end user disagreed with the disclaimer, the user should return the bags for a refund.

The farmers argued that their losses were reasonably foreseeable to Advanta, that Advanta knew of the risk of those losses and could control those risks, and that the farmers were vulnerable as they were unable to protect themselves from the consequences of Advanta's lack of reasonable care.

Across two judgments, the Full Bench of the High Court confirmed the findings at trial and in the Queensland Court of Appeal that no duty arose. While the losses were reasonably foreseeable, this was not sufficient (but was necessary) to imply a duty of care to avoid pure economic loss. Advanta did not know of the contamination, nor could it completely control the risk of contamination. The Court relied on the fact that the disclaimer on the seed bags made clear to purchasers that Advanta was not assuming liability of the type described by the farmers. As a consequence, the farmers were able to protect themselves by not planting the seeds.

Security of payment wrap

Claim in New South Wales not for “construction work”

In EnerMech Pty Ltd v Acciona Infrastructure Projects Australia Pty Ltd [2024] NSWCA 162, the NSW Court of Appeal held that a payment claim under the Building and Construction Industry Security of Payments Act 1999 (NSW) (NSW Act) is not limited to claims "for construction work" and may extend to different entitlement under a construction contract.

EnerMech contracted with a joint venture (Acciona) to undertake electrical works on a tunnel as part of the WestConnex project in Sydney. EnerMech served a progress payment claim to recover amounts Acciona obtained by recourse to bank guarantees. The trial judge had quashed an adjudication in EnerMech’s favour on the basis that EnerMech’s claim was not a claim "for construction work".

The Court of Appeal allowed EnerMech’s appeal, holding that the NSW Act requires a party's entitlement be calculated in accordance with the construction contract, and is not limited to amounts "for construction work" or related goods and services.

Consideration of Victorian Excluded Amounts Regime

In Hanson Construction Materials Pty Ltd v Decmil Australia Pty Ltd [2024] VSC 361, the Supreme Court of Victoria has applied the excluded amounts regime under section 10B of the Building and Construction Industry Security of Payment Act 2002 (Vic).

Hanson was to supply Decmil with concrete containing a particular cement to slag ratio, to achieve the necessary foundation strength for wind turbines. However, the cement supplied had an incorrect ratio and was defective.

The contract provided that, should Hanson fail to remedy a defect as instructed by Decmil, the cost of remedying the defect would be a "debt due and payable… upon demand”. In response to a payment claim by Hanson, Decmil set off its defect rectification costs, but did not refer to the specific clause of the contract or use the language of that clause.

Justice Stynes determined that the payment schedule was not a demand for payment of the debt, and was instead a claim for damages, and therefore an excluded amount.

Adjudicated amount higher than relevant payment claim

In Binah Constructions Pty Ltd v PTMG Pty Ltd [2024] NSWSC 872, the NSW Supreme Court upheld an adjudication under the NSW Act, even though the adjudicated amount was higher than the adjudicated payment claim.

The total contract sum in PTMG's payment claim included an amount for a previously accepted, but unpaid, claim. The adjudicator's award included this unpaid sum, meaning the total sum awarded was higher than the amount claimed in the payment claim.

Justice Ball upheld the adjudication, on the basis that the adjudicator had not committed a jurisdictional error. His Honour considered that, whilst the determination may have been erroneous, it was not without foundation and so was within the adjudicator's jurisdiction.

Federal Court considers contractual regime for interim payment of liquidated damages

In Rimfire Energy Pty Ltd v BSF Co Pty Ltd [2024] FCA 602, the Federal Court applied a contractual interim payment regime to a claim for liquidated damages. The case considered two power purchase agreements between a buyer (Rimfire) and supplier (BSF), which provided that a party must pay 50% of a disputed invoice amount pending resolution of the disputed invoice, at which point any overpayment must be refunded (interim payment clauses).

Separate clauses of the agreements permitted Rimfire to invoice BSF for liquidated damages on an "interim basis". These separate clauses did not expressly refer to the interim payment clauses or otherwise define the term "interim basis".

Rimfire issued invoices to BSF for liquidated damages for delay, however BSF had made claims for extensions of time which had not yet been determined. BSF argued that Rimfire's right to issue invoices for liquidated damages only arose upon Rimfire establishing actual delay, which required a final determination of BSF's EOT claims. BSF submitted that Rimfire's entitlement to invoice on an interim basis meant only that Rimfire could progressively issue revised invoices for liquidated damages while delay was ongoing, but this did not give rise to an obligation on BSF to pay under the interim payments clauses.

Justice O'Callaghan rejected BSF's arguments, holding instead that, if Rimfire issued invoices for liquidated damages on an interim basis, the interim payments clauses applied. BSF was required to pay 50% of the amount invoiced immediately, pending final determination of the actual delay.

No intention to be legally bound to subcontract work

In Cirrus Real Time Processing Systems Pty Limited v Hawker Pacific Pty Ltd [2024] FCA 763, the Federal Court rejected Cirrus’s claim that it had a binding agreement to supply Hawker with training software and associated services.

Prior to Hawker submitting its bid for a New Zealand Defence Force (NZDF) contract, Cirrus provided a series of quotes during confidential negotiations with Hawker. Hawker sought Cirrus's permission to disclose its quote to NZDF. In response, Cirrus requested a letter from Hawker that it would engage Cirrus if it won the bid. Hawker provided such a letter which indicated the engagement would be "on the basis" set out in Cirrus’s quote. Hawker won the NZDF contract, but engaged a different company to perform the work the subject of Cirrus's quote.

Cirrus claimed that Hawker was bound to subcontract that work to Cirrus. Justice Kennett held that while an exchange of letters could form a contract – as they set out the relevant services and a price to be paid – other factors indicated the parties did not intend to be legally bound, such that no binding agreement arose out of the exchange of letters. Matters considered in arriving at this view included:

• the nature and extent of incomplete terms in the quote;
• the language used before and on the date of letter exchange;
• that Cirrus did not expressly ask for a binding contractual commitment;
• the parties continued to negotiate subcontract terms after the date of exchange; and
• it was improbable that Hawker intended to bind itself to supply a specific training software as referenced in Cirrus's quote, given that the NZDF could have required different software under the head contract.