Major projects & construction 5 Minute Fix 52

NSW case highlights the potential limitations of narrow multi-tiered dispute resolution clauses

In Inghams Enterprises Pty Limited v Hannigan [2020] NSWCA 82, the NSW Court of Appeal held that while all disputes relating to a contract were the subject of the parties' multi-tiered dispute resolution clause (DR Clause), only a subset of those possible disputes were required to be referred to arbitration because of the narrower scope of the arbitration clause.

Inghams entered into a chicken growing contract (Agreement) with Mr Hannigan (a chicken grower). Inghams was to supply chicks to Mr Hannigan, who would grow them in exchange for a fee. In 2017, Inghams purported to terminate the Agreement and stopped supplying chicks. Mr Hannigan obtained a declaration from the NSW Supreme Court that the termination was wrongful, and that the contract remained on foot. Following this determination, Mr Hannigan made a claim for unliquidated damages for loss of profits during the period of non-supply of chicks, which Inghams rejected.

Mr Hannigan gave a notice of dispute under the Agreement's DR Clause. The clause provided for the mediation of all disputes. However, if mediation did not achieve a resolution, disputes that concern "any monetary amount payable and/or owed by either party to the other under this Agreement" were to be referred to arbitration. When mediation of the claim failed, Mr Hannigan sought to refer the dispute to arbitration. Inghams commenced proceedings in the NSW Supreme Court to restrain the referral on the basis that the arbitration clause did not apply to the disputed claim, because Mr Hannigan's claim for damages was not a claim for an amount "payable and/or owed under this Agreement".

At first instance, the primary judge held that Mr Hannigan could pursue the dispute under the DR Clause. Inghams appealed this decision.

The Court of Appeal overturned the primary judge's decision and concluded that the claim for unliquidated damages did not fall within the scope of the arbitration clause. The majority construed the arbitration clause narrowly, excluding the claim for unliquidated damages from its scope because it did not relate to an amount "payable" or "owed" under the agreement. Damages for loss of profits did not constitute "a monetary amount payable under the contract", as the claim was based upon Inghams' breach of contract. Accordingly, it was held that the dispute was not required to be referred to arbitration.

The decision illustrates that dispute resolution clauses, especially multi-tiered ones, should not be considered boilerplate, as the devil is in the detail. Such clauses provide fertile ground for litigation, as reflected by the survey of interpretation approaches in various cases contained in an appendix to the judgment.

The terms of multi-tiered dispute resolution clauses must be considered carefully before entering into a contract, to ensure that there is a clear understanding of how disputes are dealt with. Sometimes that might not be uniform. In particular, if an objective is to arbitrate all disputes arising in relation to, or connected with, a contract, and avoid fragmentation of processes, the scope of an arbitration clause must be broad enough in its terms to encompass that.

Failure to expressly refer to relevant contractual provisions may not necessarily amount to a void adjudication decision

A head contractor has been unsuccessful with its argument that an unfavourable adjudication decision made against it should be set aside because, on the face of the decision, the adjudicator had not given consideration to time bar provisions that had been relied on by the head contractor, as there was no mention made of those provisions in the decision.

In Diona Pty Ltd v Downer EDI Works Pty Ltd [2020] NSWSC 480, the head contractor (Diona) sought a declaration from the NSW Supreme Court that an adjudication, made under the Building and Construction Industry Security of Payment Act 1999 (NSW) (SOP Act) in favour of the subcontractor (Downer), was void.

Diona contended that the adjudicator had erred in failing to consider provisions of the parties' contract (Agreement) that purportedly entitled Diona to set-off amounts for liquidated damages against amounts claimed by Downer.

A key issue during the adjudication proceedings was Downer's entitlement to extensions of time for practical completion. Diona contended that Downer was not entitled to these extensions of time, because they were not claimed by Downer within the time requirements specified in the Agreement.

In his determination, the adjudicator acknowledged that he understood that it was a requirement under the SOP Act to consider the provisions of the Agreement when making their decision. The adjudicator then dealt with Downer’s entitlements by reference only to those provisions of the contract relied upon by Downer, which set out the circumstances in which Downer could make a claim for an extension of time.

Diona's argument in the present case was that the adjudicator failed to make reference to the provisions dealing with the time within which the claim ought to have been be made.

The Court was not prepared to accept that the adjudicator had failed to give effect to the requirements of the SOP Act. It accepted that the adjudicator was aware that he was required to consider the provisions of the contract, but, after examining the Adjudication Application and Adjudication Response, identified a number of reasons why the relevant provision may not have been referred to in his decision. A failure to refer expressly to the relevant contractual provision, without more, was not considered to be a basis to set aside the set aside the determination.

Accordingly, the Court held that Diona had failed to establish a basis to quash the adjudicator's determination for jurisdictional error and dismissed Diona's application.

A riverside dream home produces a nightmare dispute

The recent South Australian Full Court decision of Tincknell v Duthy Homes Pty Ltd [2020] SASCFC 24 provides court guidance in relation to the measure of damages available in contract for defects, the impacts of the "prevention principle" and the availability of damages for distress and disappointment under section 52 of the TPA (now section 18 ACL). The judgment reinforces the Australian position on the importance of proportionality of benefit, the availability of misleading and deceptive conduct claims in the residential building context, and the ability to contract out of the prevention principle.

A detailed summary of the case and its implications, prepared by Frazer Moss, Courtney Prior and Matthew Bell, can be found here.

NSW now considers combustible cladding to be a "major defect"

On 1 May 2020, the Home Building Regulation 2014 (NSW) was amended by the Home Building Amendment (Miscellaneous) Regulation 2020 (NSW). Clause 69A of the amended Regulation now provides that the failure of external cladding of a building fails to comply with the National Construction Code for fire resistance and safety of that building will be regarded as a "major defect" in residential building work.

The effect of non-compliant cladding now being declared a "major defect" is that the statutory warranty period for such works are extended to six years (rather than two years, prior to the amendment).

Final Report of NSW parliamentary inquiry advocates further reforms for construction industry and rectification of flammable cladding

The NSW Government Public Accountability Committee (PAC) released its Final Report, "Regulation of building standards, building quality and building disputes", on 30 April 2020. The Final Report makes 22 recommendations, many advocating the adoption of measures put in place in Victoria, including establishment of a cladding rectification fund and a specialist agency to oversee such rectification. If implemented, the recommendations would overhaul the NSW construction industry.

A detailed summary of the Final Report and its implications, prepared by Lina Fischer, Stuart Cosgriff and Jessica Lighton, can be found here.