Major projects & construction 5 Minute Fix 58

Court takes "broad and liberal" approach to expert determination clause

Commercial common sense has been endorsed by the NSW Court of Appeal in the interpretation of an expert determination clause.

In Lepcanfin Pty Ltd v Lepfin Pty Ltd [2020] NSWCA 155, parties to a development deed entered into a multiparty expert determination agreement (EDA) for the resolution of a dispute concerning a claimed payment under that development deed. According to the schedule to the EDA, the dispute was whether or not the applicant had "waived the obligation" of the respondent to pay the amount in contention, and the applicant's "entitlement" to the payment. In the course of the expert determination process, the respondent also asserted that the relevant payment provision in the development deed was void and unenforceable as a penalty.

The parties appointed an expert, Dr Elisabeth Peden, to make a final and binding decision in relation to the dispute. Dr Peden determined that there had been no waiver, but that the claimed payment did indeed constitute a penalty.

The applicant commenced proceedings on the basis that the expert had exceeded her mandate by determining a matter that was beyond the “dispute as defined" in the EDA, namely the penalty issue. The primary judge did not agree and disposed of the argument on a summary basis. In issue before the Court of Appeal was whether the primary judge erred in so doing.

The Court of Appeal agreed with the primary judge’s conclusion, preferring an approach that affords dispute resolution clauses a "broad and liberal construction". Responding to the applicant's contentions regarding the ambit of the dispute as described in the EDA, President Bell noted the importance of contextual considerations and observed:

"As a matter of plain English, a party’s “entitlement” to rely on a particular contractual provision comprehends, or at least includes, whether or not there is any reason which may preclude that party from asserting or enjoying a contractual benefit otherwise conferred by it. If a clause is properly characterised as a penalty, that will be a classic instance where a party is not entitled to enjoy the benefit the contractual provision otherwise offers."

Dismissing the appeal, the Court of Appeal held that "Professor Peden clearly acted within her mandate in resolving the penalty issue in her Determination".

Implied terms: a study in feasibility

In Pilbara Iron Ore Pty Ltd v Ammon [2020] WASCA 92, the Court considered whether to imply into the parties' joint venture agreement (JV Agreement) terms about the preparation of a feasibility study.

Facts

The appellant (Pilbara) and the first respondent (Ammon) entered into the JV Agreement, which stipulated that Pilbara's acquisition of an 80% interest in the joint venture property (an exploration licence) was contingent upon Pilbara paying for and providing a feasibility study within five years. According to Ammon, the study Pilbara completed was not of the requisite standard. Ammon sought a declaration stating that Pilbara had withdrawn from the JV Agreement. Ammon argued that the study needed to satisfy various terms purportedly implied in the JV Agreement; specifically, it needed to be:

• accurate in the interests of raising project finance;
• verified by an independent person; and
• reliable.

Court of Appeal refuses to imply terms

The WA Court of Appeal disagreed with the approach of the lower courts, finding that the terms could not be implied as part of the JV Agreement. The terms put forward by Ammon did not satisfy the test for the implication of a term as set down in BP Refinery (Westernport) Pty Ltd v Hastings Shire Council (1977) 180 CLR 266. For a term to be implied "in fact" into a contract in writing, it must:

• be reasonable and equitable;
• be necessary to give business efficacy to the contract, so that no term will be implied if the contract is effective without it;
• be so obvious that "it goes without saying";
• be capable of clear expression; and
• not contradict any express term of the contract.

In this case, the stringent test in BP Refinery was not satisfied because the terms put forward were "too imprecise and vague".

The Court looked to the express terms, context, and purpose of the JV Agreement to establish whether the parties had set some standard applicable to the preparation of the feasibility study. The Court concluded that, objectively, the parties intended to prepare a feasibility study which "in its nature, scope, and analysis would meet the minimum criteria that financiers to the mining industry would ordinarily require before considering a proposal to finance the development and mining of [the exploration licence]". In reaching the determination, the Court considered the objectives of the feasibility study (to gather relevant information to enable Ammon to decide whether to withdraw from the venture or seek subsequent finance). The Court also identified a contractual provision which stated that any feasibility study needed to offer an opinion on the project's net present value.

Because the Court's judgment was based upon new arguments not previously made before the lower courts, the matter was remitted for re-hearing to determine whether the feasibility study met the requirements prescribed in the JV Agreement.

What does this mean for you?

The decision illustrates the potential for disputes in resources projects about the requisite standard of feasibility studies. As evidenced in this case, courts will be slow to imply a term into a contract in writing unless the test for implied terms can be strictly satisfied. To minimise the prospect of disputes, parties should ensure that their contract specifies the standard or content of any underpinning feasibility study.

Construction defects: No evidence of "temporary disconformity" principle in NSW

A controversial issue is whether an owner can recover damages for defective work before completion and handover of the works. Under English law, the concept of "temporary disconformity" provides that for defects occurring during construction, the contractor has the opportunity to rectify the defect first; it is only once this opportunity passes and the "temporary disconformity" is not put right by the contractor that it amounts to a breach of contract. Under this approach, the owner would normally have to wait until completion or handover to recover damages for defects.

A recent NSW Supreme Court decision illustrates that the "temporary disconformity principle" is not part of the law of New South Wales. In Cohen v Zanzoul trading as Uniq Building Group (No 2) [2020] NSWSC 838, Justice Stevenson found that the owners' entitlement to damages for defective work accrued at the time the defective work was done. Although he did not make express mention of "temporary disconformity", the finding that the defective work amounted to a breach of the contract at the time the defective work was performed is at odds with the "temporary disconformity" principle.

This case is in line with other recent decisions, as seen in Owners of Strata Plan 80458 v TQM Design & Construct Pty Ltd [2018] NSWSC 1304, as well as Icon Co (NSW) Pty Ltd v Australian Avenue Developments Pty Ltd [2020] NSWSC 178. In these cases, both Justice Hammerschlag and Justice Stevenson rejected the "temporary disconformity principle".

Victorian Supreme Court considers what is a "reasonable" time for service of an adjudication application

The recent Victorian Supreme Court decision in 1155 Nepean Hwy v Promax Buildings [2020] VSC 398 provides guidance on what is a reasonable time within which an adjudication application must be served on the respondent, under the Victorian SOP Act.

The plaintiff (1155 Nepean Hwy) sought to set aside an adjudication determination on a number of grounds, including that the adjudication application in respect of which it was made was invalid to the extent that the defendant (Promax) failed to serve the application in accordance with section 18(5) of the Victorian SOP Act.

The plaintiff contended that section 18(5), which provides that a respondent must be served with a copy of an adjudication application, on its proper constructions requires that service be effected "as soon as practicable." Here, the adjudication application had been served six business days after it had been filed.

The Court rejected this contention on the basis that the timing of service of an adjudication application is not critical to the sequence of procedural steps leading up to the determination, holding instead that service under section 18(5) is required within a "reasonable time."

Having regard to the circumstances (including the form and order of the documents, subsequent communication between the parties and the fact that both parties were represented by law firms who specialised in such matters), the Court found that six business days was a reasonable time within which to serve the application. Accordingly, the defendant was found not to be in breach of section 18(5), and the adjudication determination was upheld.

Victorian Supreme Court considers inconsistent contract arbitration clauses

A Victorian Supreme Court case has reinforced the pivotal gap-filling role that the Commercial Arbitration Act 2011 (Vic) plays in the event that the parties' dispute resolution agreement is uncertain when contemplating the procedure for arbitration.

In Gemcan Constructions Pty Ltd v Westbourne Grammar School [2020] VSC 429, Westbourne Grammar School (WGS) entered into an amended AS4000-1997 construction contract with Gemcan Constructions (Gemcan). When a dispute arose, the parties pursued the dispute resolution process under the contract.

Clause 42.2 of the contract stipulated that if, within 14 days following a conference between the parties, an agreement to resolve the dispute had not been reached, then the dispute "shall be and is hereby referred to arbitration". Clause 42.3 provided further specifics to the procedure for arbitration, stating that Item 32 of Annexure A of the contract (the General Conditions) would identify:

• the person who would nominate the arbitrator if the parties did not reach an agreement upon this question; and
• the rules which would govern any arbitral proceedings.

Relevantly, the responses in Item 32 merely stated "Not Applicable" and "Nor [sic] Applicable". On the facts, the intention of the parties completing Annexure Part A in this way was unclear.

The issue was whether, upon the failure to resolve the matter following a dispute resolution conference between the parties, Gemcan was permitted under the Contract to refer the dispute to arbitration. WGS contended that the responses in Item 32 meant that the General Conditions dealing with arbitration were not enforceable, that the lack of arbitral rules meant that there could be no valid arbitration agreement, and, despite clause 42.3, WGS had not agreed to amend the contract to provide for arbitration as a recourse for dispute resolution.

The Court, however, held that clause 42.2 was "clear and unambiguous in its terms", and revealed the parties' objective intention that arbitration was a mechanism by which a dispute would be resolved under the Contract. Further, the phrases "Not Applicable" and "Nor Applicable" at Item 32 were found to relate to the procedural mechanism for arbitration, and did not evince an intention to negate the referral to arbitration in clause 42.2 of the contract.

Justice Lyons was satisfied that sections 10 and 11 of the Act, which outline the default position regarding the number of arbitrators and applicable procedural rules if the parties are unable to reach agreement on such matters, applied to the contract. The Court accepted Gemcan's submissions that the contract contained a valid arbitration agreement, and appointed a single arbitrator to hear the proceedings, pursuant to the Act.

Implications

This case reinforces the significant role that the Act plays in filling the gaps concerning the procedure for arbitration, in the event of uncertainty within a parties' agreement. Contracting parties should consider reviewing their agreements to ensure that their dispute resolution process is clearly drafted, and not inconsistent with any annexures or supplementary documents so as to create doubt as to the parties' objective intentions.

WA Court of Appeal determines that parent company guarantee does not mean that money is "on demand"

The recent WA Court of Appeal decision in JKC Australia LNG Pty Ltd v CH2M Hill Companies Ltd (No 2) [2020] WASCA 112 considered three identical parent company guarantees and determined that they did not constitute "on demand" or "pay now, argue later" instruments. The Court considered the terms of the guarantees and determined that the guarantors were not liable to respond to the claims under the guarantees in the circumstances.

The case concerned an arrangement whereby the appellant (JKC) entered into a subcontract agreement with an unincorporated joint venture comprising three entities (collectively referred to as the "Subcontractor"). After the subcontract was terminated, JKC commenced proceedings seeking a declaration that it was entitled to call upon the three guarantees for payment of moneys purportedly owed by the Subcontractor, for additional costs and expenses incurred in completing the works and damages, following the termination of the subcontract.

Significantly, clause 3 of each of the guarantees stipulated that if, "in [the] contractor's reasonable opinion", the Subcontractor failed to perform any of its obligations under the subcontract, then the guarantor was required to perform those obligations "until the termination of the subcontract".

At first instance, the Court held that the terms of the guarantees did not create a "pay now, argue later" obligation. The primary Judge concluded that clause 3 only applied before the subcontract was terminated, and only if JKC formed the "reasonable opinion" that the Subcontractor had failed to perform its obligations, and required the guarantor to step in and take over performance of the subcontract until completion.

The WA Court of Appeal upheld the primary Judge's decision. The Court observed that there are no separate rules of construction about contracts which provide for the issue of performance bonds; the express terms, context and purpose of the subcontract and the guarantees must be considered to identify the parties' objective intentions. The Court concluded that, on that basis, the guarantees were not "on demand" instruments, as they did not create an immediate obligation to "pay money now, argue later" notwithstanding the assertion of a defence, set-off or counter-claim.

Additionally, the Court found that a "reasonable opinion", as it appears in clause 3 of the guarantees, means an opinion that, when assessed objectively, was reasonable based on the information and facts then known, or which ought reasonably to have been known, at the time. It determined that clause 9.2 of the guarantees, which stipulated that JKC could assert any defence, set-off or counterclaim available to the Subcontractor, further qualified the "reasonable opinion" requirement in clause 3.

Implications

When determining the intention of contracting parties, the courts will always look first to the express terms of the agreement. When entering into a contract, parties should ensure that the intentions relating to performance bonds and guarantees, which are often supplementary to the main agreement, are clear and unambiguous.

Inquiry into ACT Building Quality published

Following in NSW's path, the ACT is tackling the quality of work within the building industry. The Standing Committee on Economic Development and Tourism has recently (July 2020) published its report on the Inquiry into Building Quality in the ACT. The inquiry considered the quality of new buildings in the ACT and any potential or actual causes of poor building quality.

The Report draws upon submissions and evidence from public hearings and is informed by reforms around the country. Indeed, the first recommendation was to implement outstanding recommendations from the 2016 Improving the ACT Building Regulatory System Report and the Shergold-Weir "Building Confidence" report.

In total, the Report provided 48 recommendations. Many recommendations encourage further consideration and reporting, including setting up more stringent requirements for planning, constructing and certifying buildings in the ACT.

We'll keep you abreast of further regulatory developments in this space.

Queensland amends BIF Act to address payment withholding requests and statutory charges

The Queensland Government has passed a number of amendments to the Building Industry Fairness (Security of Payment) Act 2017 (Qld) relating to payment withholding requests and charges over property, which will have flow-on effects for upstream operators (namely principals, developers and lenders) when they commence.

These amendments are discussed in more detail in an article by Frazer Moss and Clare Maguire.