Major Projects & Construction 5 Minute Fix No 129: bifurcated arbitration, security of payment across border, statutory trusts

High Court considers bifurcated arbitral proceedings: the risk outweighed the reward

In CBI Constructors Pty Ltd & Anor v Chevron Australia Pty Ltd [2024] HCA 28, the arbitral tribunal bifurcated (split) proceedings such that "all issues of liability" would be determined first, before a second hearing on quantum and quantification. However, issues of liability and damages are often entwined. This decision shows how hearing and determining liability issues separately from quantum issues can cause unexpected difficulties for the parties in pleading their case.

The arbitration arose from a contractual dispute concerning the Gorgon oil and gas project. Chevron’s contractors, CKJV (a joint venture of CBI and Kent Projects Pty Ltd), contended that Chevron had underpaid staff costs. Chevron contended that it had overpaid because the staff costs were to be reimbursed on an "actual cost" basis, whereas CKJV claimed a rates-based entitlement. The contract's arbitration agreement provided that any dispute would be "exclusively and finally settled" by arbitration and that any award would be "final and binding". The parties' chosen UNCITRAL Rules for the conduct of an arbitration also provided that all awards shall be final and binding.

A few months out from the scheduled hearing, Chevron provided amended particulars of its counterclaim, which included a methodology for calculating the alleged overpayment. In order to allow CKJV an opportunity to respond to the particulars, and to preserve the scheduled hearing, the arbitral tribunal issued a series of procedural orders bifurcating the proceedings between "all issues of liability" under the contract and issues of quantum.

CKJV was unsuccessful in the tribunal's first interim award on issues of liability (First Interim Award). The tribunal held that "CKJV's entitlement was to be paid actual costs". Following the First Interim Award, the tribunal ordered CKJV to replead its case on quantum. For the quantum hearing, CKJV pleaded a new case in which it framed its staff cost entitlement by reference to contractual criteria (Contract Criteria Case). Chevron objected to the Contract Criteria Case on the grounds of estoppel and functus officio. According to Chevron, the Contract Criteria Case was a case on liability and the First Interim Award was determinative of all liability issues. Consequently, the tribunal was functus officio (that is, it had exhausted its authority) in respect of the Contract Criteria Case and lacked jurisdiction. However, the tribunal rejected Chevron’s objections and issued the second interim award (Second Interim Award) in which the tribunal decided that it was not functus officio. Chevron applied to the Supreme Court of Western Australia to have the Second Interim Award set aside under section 34(2)(a)(iii) of the Commercial Arbitration Act 2012 (WA), arguing that the Second Interim Award dealt with matters beyond the scope of the submission to arbitration.

On appeal to the High Court, CKJV did not challenge the Court of Appeal's findings that the arbitral tribunal had determined all issues of liability in the First Interim Award and the Contract Criteria Case was a case on liability, but submitted that the determination of whether the First Interim Award precluded the advancement of the Contract Criteria Case was within the exclusive authority of the arbitral tribunal and the Court of Appeal had applied an incorrect standard of intervention.

A majority of the High Court confirmed that the Supreme Court of Western Australia had the power to set aside an arbitral award under section 34(2)(a)(iii) of the Commercial Arbitration Act 2012 (WA) when a tribunal exceeds its authority or jurisdiction in making the award. While the principle of competence-competence grants the arbitral tribunal the competence to determine its own jurisdiction, that is not unfettered. The High Court upheld the decision of the Court of Appeal of the Supreme Court of Western Australia setting aside the Second Interim Award on the basis that the tribunal was functus officio and lacked jurisdiction.

In complex construction disputes, bifurcating arbitral proceedings can potentially reduce the potential time and cost involved. However, splitting liability and quantum issues can raise strategic challenges in ensuring issues are raised at the appropriate stage or risk them being shut out.

Location is not necessarily everything: Security of Payment legislation in cross-jurisdictional projects

In Lendlease Building Pty Ltd v BCS Airport Systems Pty Ltd & Ors [2024] QSC 164, the Queensland Supreme Court considered whether a Queensland adjudicator had jurisdiction over payment claims where airport expansion works straddled the Queensland and New South Wales border. Although unique circumstances, the case is significant because it clarifies the operation of section 61(4) of the Building Industry Fairness (Security of Payment) Act 2017 (Qld) (BIF Act) where work for a project is performed in different states.

Section 61(4) of the BIF Act provides that the Chapter 3 provisions relating to payment claims, payment schedules and adjudications do not apply to a construction contract to the extent it “deals with construction work carried outside Queensland”. At the crux of this case was the interpretation attributed to the words “outside Queensland”. Lendlease’s construction of section 61(4) focused on the discrete activities involved in carrying out construction work, as opposed to the geographical location of the physical buildings or structures. It contended that section 61(4) meant that BCS’ payment claim was invalid because work was carried out in both Queensland and New South Wales, and the payment claim did not distinguish which work was performed in which state. Lendlease also submitted that the BIF Act required a payment claim in a cross-border project (as was the case here) to identify the location of the construction work.

Justice Sullivan identified that the construction of section 61(4) and the words “outside Queensland” were ambiguous in the context of cross-border works. His Honour found that section 61(4) ought be construed as meaning that Chapter 3 of the BIF Act did not apply to a construction contract to the extent it dealt with construction work carried out “wholly” outside Queensland. He observed that this interpretation avoided the need to undertake a “bolt-by-bolt” analysis of activities performed in each state: “the geographic focus of section 61(4) is the location of the thing to which an activity is applied to”. Justice Sullivan noted such an interpretation best promoted the purposes of the BIF Act and reduced the possibility of jurisdictional uncertainty for parties.

Ultimately, Lendlease was unable to discharge its onus of proof that the claimed costs were not for construction work carried out on a structure sited “wholly” outside Queensland. Justice Sullivan also held that there was no requirement, in a cross-border project, such as this, for the payment claim to identify the location of the construction works.

Queensland Statutory Trusts: Rollout of final stages

The final stages implementing the statutory trust scheme under the Building Industry Fairness (Security of Payment) Act 2017 (Qld) will roll out in 2025, approximately three years after the introduction of the previous stage of rollouts and four years since the initial introduction of the scheme.

Currently, project trusts, and the accompanying requirement to establish project trust accounts with approved financial institutions, applies to contracts for project trust work entered into by Queensland government departments or hospital and health services with a contract price of $1 million or more (ex GST) and contracts for project trust work entered into by other principals (including private entities) which have a contract price of $10 million or more (ex GST).

From 1 March 2025, the contract price threshold for other principals is lowered to $3 million or more. The price threshold for state government departments and hospital and health services will remain unchanged.

From 1 October 2025, the final stage of the project trust rollout will take effect, requiring project trust accounts to be established for all contracts for project trust work which have a contract price of $1 million or more (ex GST), both public and private. As well, retention trusts, and the requirement to establish retention trust accounts where cash retention is held, will be extended to capture second tier subcontracts. Until then, a retention trust applies to a head contract and first tier subcontract only.