Major Projects & Construction 5 Minute Fix 91: Queensland's project trust regime, arbitral awards, liquidated damages, Building Equality Policy

Queensland's Project and Retention Trusts: certain private sector contracts captured from 1 January 2022

The next stage of Queensland's project trust regime is fast approaching - and will, for the first time, include the private sector. From 1 January 2022:

• all Queensland Government contracts (including hospital and health services) of $1 million or more where project trust works account for 50% or more of that price; and
• private sector, local government, Queensland statutory authorities and government-owned corporations contracts of $10 million or more where project trust works account for 50% or more of that price, 

  
  will require project trust accounts.

In addition, from 1 January 2022, certain contracting parties who withhold "eligible" cash retention amounts will need a retention trust. If you are:

• a principal, owner or developer under a head contract that is the subject of a project trust, and you withhold cash retention from payments made to the head contractor; or
• a head contractor withholding eligible cash retentions for a first-tier subcontract,

you will need to create and operate a retention trust account.

Importantly, if a retention trust is required; then, the trustee of the retention trust (or a nominee of the trustee) must undertake the "Mandatory retention trust training" offered by the Queensland Building and Construction Commission (QBCC). The QBCC is running retention trust training sessions in January and February to support trustees in meeting their required training obligations.

NSW Supreme Court says an arbitral award that was not specifically sought by the parties can be valid

Parties to arbitration should be given proper and reasonable opportunities to make submissions on the issues of dispute between the parties. Otherwise, the parties may suffer unfairness and practical injustice. For this reason, arbitral awards that have been made without having provided parties with such opportunities are at the risk of being found void.

However, what if an arbitrator makes a finding that was not specifically sought by the parties - particularly if that means one of the parties has to pay almost $1 million? The NSW Supreme Court says such arbitral award can be still valid in its recent judgment of The Nuance Group (Australia) Pty Ltd v Shape Australia Pty Ltd [2021] NSWSC 1498.

The Nuance Group (Australia) Pty Ltd operates a duty-free store at Melbourne International Airport. In 2016, Nuance contracted Shape Australia Pty Ltd to expand and refurbish the duty-free store for $13.8 million. The parties subsequently fell into multiple disputes regarding Shape's claims for latent conditions and variations, and proceeded to arbitration.

During the arbitration, Nuance made cross-claims against Shape, including a claim for liquidated damages in the sum of $990,000 that it had already withheld from payment, to deny any payment to Shape in the event Shape was successful with its claims.

After considering the parties' extensive pleadings and expert evidence, including evidence on liquidated damages, the arbitrator found that Shape was not entitled to its claims and that Nuance was only entitled to withhold $32,699.04 for liquidated damages. As such, the arbitrator ordered that Nuance pay the balance of $957,300.96 that it had withheld, to Shape, even though Shape was not successful with its claims and Nuance's cross claims were contingent on Shape being successful with its claims.

Nuance appealed to the NSW Supreme Court on the basis that Nuance was taken by surprise because the arbitrator gave an award that was not specifically contended for by either party. Further, the arbitrator did not give any notice to the parties that he was considering making such award, with the result that both parties were deprived of the opportunity to make submissions on this issue of liquidated damages.

The NSW Supreme Court disagreed with Nuance's submissions and found that the arbitral award ordering Nuance to pay the sum of $957,300.96 to Shape was a 'product' of the competing contentions of the parties that the arbitrator had worked through. The arbitrator's findings about those matters were not his own creation, but were sought by the parties, even if the award made was not a result that Nuance or Shape had specifically sought in the arbitration. The Court also found that Nuance's cross-claims were not contingent on Shape's claims because a claim and a cross-claim are independent of each other and are separate proceedings. In light of this, the NSW Supreme Court dismissed Nuance's appeal.

This case serves as a useful reminder that an opportunity to make submissions on the "issues in dispute" is not the same as the opportunity make submissions on what an arbitrator may have in their mind to award.

SOP and multiple contracts: NSW Supreme Court finds Queensland Court of Appeal "plainly wrong"

The NSW Supreme Court has described the view recently expressed by the Queensland Court of Appeal in Ausipile v Bothar Boring [2021] QCA 223, that a payment claim under the Building Industry Fairness (Security of Payment) Act 2017 (Qld) (BIF Act) will not be rendered void because it relates to multiple contracts, as "plainly wrong".

In Ausipile, the Court considered that a payment claim for amounts under different contracts should not be treated as a nullity for failure to comply with the BIF Act unless the failure was "patent on its face", and that the question of whether one or multiple construction contracts are the subject of a payment claim can be finally resolved by an adjudicator, so long as the payment claim is "on its face, for amounts due under one contract".

However, in Ventia Australia Pty Ltd v BSA Advanced Property Solutions (Fire) Pty Ltd [2021] NSWSC 1534, the NSW Supreme Court has characterised "this aspect of the reasoning" in Ausipile as being "plainly wrong" and declined to follow it.

In this case, the plaintiff sought to quash an adjudication determination made under the Building and Construction Industry Security of Payment Act 1999 (NSW) (note, the version of the Act preceding the 2019 amendments) on the basis that the payment claim included claims for work under multiple construction contracts.

Justice Rees concluded "the Act does require a payment claim to be made in respect of one construction contract, not multiple contracts. Further, I consider that this is a jurisdictional issue and not one which is finally resolved by an adjudicator after the issue has been raised in a payment schedule."

In the judgment, Justice Rees examines the text of the (pre-2019) NSW Act, including its referral throughout to "construction contract" in the singular, and also deploys a purposive interpretation, revolving around the "need for speed" in keeping cashflow moving. Her Honour concludes that properly construed, the Act "requires a payment claim to be made in respect of "a" construction contract" (that is, in the singular).

This decision is consistent with the obiter views of Justice Henry in Crown Green Square Pty Ltd v Transport for NSW [2021] NSWSC 1557. You can read our more detailed analysis of that judgment in our Insights article here.

No SOP Act "arrangement" without payment

A recent decision of the NSW Supreme Court has provided clarification as to the meaning of "other arrangement" in section 4(1) of the Building and Construction Industry Security of Payment Act 1999 (NSW) (SOP Act).

Section 4(1) defines a "construction contract" as:

"a contract or other arrangement under which one party undertakes to carry out construction work, or to supply related goods and services, for another party."

The use of the term "arrangement" in this definition has led to uncertainty because it is unclear what the characteristics of an "arrangement" actually are (as opposed to the well understood requirements for a "contract"). In Crown Green Square Pty Ltd v Transport for NSW [2021] NSWSC 1557 (Green Square), Justice Henry has provided some welcome elucidation.

Subject to one qualification, her Honour concluded that "an arrangement under the SoP Act does not need to be legally enforceable in the sense that it must give rise to legally binding obligations on the parties to it to carry out the construction work and receive payment for that work."

The qualification in issue was expressed as follows:

"an arrangement under the SoP Act requires something more than a party undertaking to carry out construction work for another. There must be a concluded state of affairs between two or more parties involving some element of reciprocity or acceptance of mutual rights and obligations relating to payment or price for the works (which may or may not be legally binding obligations) under which one party undertakes to carry out construction work for another party to the arrangement."

The decision will be of considerable assistance in determining when an "arrangement" can be said to exist, potentially relieving adjudicators and courts of the need to carry out often complicated analysis to ascertain whether or not a legally binding obligation has been created.

You can read our more detailed analysis of this judgment in our Insights article here.

Validity of liquidated damages clause in a construction subcontract

Midson Construction (Qld) Pty Ltd v The Haggarty Group Pty Ltd [2021] QDC 280 concerns the validity of a liquidated damages clause in a construction subcontract. The subcontractor (Haggarty) failed to achieve completion under the subcontract by the due date, triggering the liquidated damages (LD) clause. Haggarty challenged its liability to pay liquidated damages to the head contractor (Midson) on three grounds:

• the LD clause was uncertain - and therefore void;
• the LD clause was void because it constituted a penalty; and
• Finally, Midson lost its right to LDs because its delays in granting site access prevented Haggarty from reaching completion, and the subcontract did not exclude the so-called "prevention principle".

Ultimately, Haggarty was unsuccessful in its multi-faceted attempts to resist liability for LDs. As a result, the judgment is lengthy and traverses previous decisions where the operation of the prevention principle has been modified or excluded by agreement - as was the case here. However, the decision provides a helpful illustration of the issues that can arise with LDs in a subcontracting situation where the commercial drivers for LDs may differ from the head contract scenario. For example, LDs typically compensate the principal for the delay in using the completed building or asset. However, Porter QC DCJ observed that the commercial drivers differed in the subcontracting scenario. The head contractor's interest is to avoid LDs upstream under the head contract and demobilise from the site.

Haggarty argued that the liquidated sum ($1,000 per day) was a penalty because no LDs were applied under the Head Contract. The demobilisation from the site meant that Midson had no exposure to substantive loss in site establishment costs. Haggarty had completed the substantive work, but Haggarty's delay in providing warranties held up completion. However, Porter QC DCJ observed that even if Midson's exposure to site establishment costs had ended, the failure to give warranties would require ongoing contract administration costs on Midson's part. Porter QC DCJ observed those "costs will likely be difficult to keep track of and assess. However, difficulty of assessment is one of the reasons why a liquidated sum is justified and creates an evidential difficulty in demonstrating that a liquidated sum is exorbitant." On the facts, Haggarty could not demonstrate that the daily liquidated sum of $1,000 was exorbitant compared to the damage which might flow from its failure to provide the requisite warranties.

Australia's first Building Equality Policy introduced by the Victorian Government

Earlier this month the Victorian Government introduced Australia's first policy aimed at redressing gender inequality in the building, infrastructure and engineering sectors. The Building Equality Policy (BEP) is designed to create training and employment opportunities for women in these sectors and to promote a more gender inclusive industry.

Government figures indicate that presently, women make up only 2% of field-based workers in Australia's construction industry. The stated aim of the BEP is to "remove some of the ingrained cultural and structural barriers that have historically prevented women" from participating in the construction industry.

The BEP will apply to:

• all entities defined as either a public body or a department under section 3 of the Financial Management Act 1994 (Vic); and
• all publicly funded construction projects valued at $20 million or more over the life of the project, excluding GST.

From 1 January 2022, principal contractors for construction procurement activities meeting the above financial threshold will be subject to a contractual obligation to ensure that participants in their supply chains contribute to certain targets. The BEP will be implemented via the existing Social Procurement Framework but will not apply retrospectively.

Among other things, from 1 January suppliers who are subject to the BEP will be required to meet the following targets:

• 4% of labour hours for apprentices and trainees will be required to be performed by women;
• at least 3% of the contract works’ labour hours for each trade position will be required to be performed by women;
• at least 7% of the contract works’ labour hours for each non-trade Construction Award covered labour position will be required to be performed by women; and
• at least 35% of the contract works’ labour hours for each management/supervisory and specialist labour staff position will be required to be performed by women.

Suppliers will also need to provide a project-specific and organisation-wide Gender Equality Action Plan when submitting an expression of interest or tender for Government funded construction work. The BEP will, however, be subject to a transitional compliance period on all applicable Victorian Government procured projects in 2022 and 2023.

Contractors, suppliers and other entities to which the BEP applies will need to take steps now to understand, and comply with, its requirements, in particular entities tendering for Victorian Government projects.