Get your 5 Minute Fix of major projects and construction news. In this issue, the Court of Appeal of New South Wales revisits the doctrine against "fettering" of government contracts, the Supreme Court of Victoria considers the proper construction of dispute resolution clauses and we round up recent cases involving security of payment issues.

Boosting public confidence in government contracts: The court revisits the "fettering" doctrine

The Court of Appeal's most recent re-examination of the "fettering" doctrine is a useful exploration of the issue which will be of interest to anyone who contracts with government. 

The decision in Searle v Commonwealth of Australia [2019] NSWCA 127 highlights two competing concerns with reliance upon the doctrine against "fettering" of executive powers.  First, ensuring contracts do not constrain the business of governing.  Second, the importance of upholding commercial contractual bargains. 

In this instance, the Court of Appeal was disinclined to allow the Commonwealth to resile from the contract.  The decision will be welcomed by parties seeking to enforce contractual compensation provisions in government contracts.  However, this is a nuanced area of law and the breadth of the "fettering" doctrine in Australia remains unsettled.

Read more here

Expert determination or arbitration? Consideration of dispute resolution clauses and agreements to arbitrate

A complex dispute resolution clause in a D&C contract which prescribed that disputes "in relation to Compensation" would be referred to expert determination and all other disputes would be resolved by arbitration has been recently considered by the Supreme Court of Victoria.

In RW Health Partnerships Pty Ltd v Lendlease Building Contractors Pty Ltd [2019] VSC 353 the plaintiff (Project Co) gave notice under the dispute resolution clause, alleging the defective design and construction of a domestic water system at The Royal Women's Hospital.  

Project Co submitted that the dispute should be determined by arbitration because it was not a dispute "in relation to Compensation".  It argued that phrase should be interpreted narrowly to mean disputes about the amount of loss or damage, not liability. A broader construction would leave little room for the operation of the arbitration limb of the dispute resolution clause.  Project Co also submitted that the informal and fast track summary procedure of expert determination would be inappropriate for the resolution of disputes regarding defaults and breaches.

Justice Riordan disagreed. His Honour noted that dispute resolution clauses are to be construed using the same principles that apply to other commercial contracts, asking: "[w]hat would a reasonable business person have understood those terms to mean?". He found that disputes "in relation to Compensation" should be read as including disputes with respect to liability andquantum.  He commented that this interpretation would avoid inefficient bifurcation of disputes, where questions of liability went to arbitration but the assessment of compensation was determined by expert determination. 

Before the dispute ended up in court, the parties had exchanged a series of letters about who to appoint  as arbitrator. Project Co contended that this correspondence constituted an ad hoc agreement to arbitrate.  Justice Riordan found that no such agreement could be inferred, as the correspondence did not demonstrate any intention to vary the contract. It was simply evidence that the parties were preparing to put steps in place for arbitration under a misapprehension that arbitration was the appropriate mechanism provided for under the contract.

The decision also contains a useful summary of the principles of contractual waiver in response to Project's Co's unsuccessful submission that the Contractor had abandoned its right to refer the dispute to expert determination.  

Court of Appeal confirms liberal view of adjudicator's duties under section 22 of the NSW SOP Act.

The NSW Court of Appeal has confirmed its view of an adjudicator's task to determine the value of the construction work that has been carried out, as required by section 22 of the Building and Construction Industry Security of Payment Act 1999 (NSW) (SOP Act).

In Iskra v MMIR Pty Limited [2019] NSWCA 126, the Court considered an appeal against the decision of the Supreme Court of NSW quashing an adjudicator's determination pursuant to section 22(1) of the SOP Act that the builder (Iskra) had demonstrated an entitlement to payment in accordance with the contract with the owner of a property (MMIR), for works carried out.

The primary judge had held that the adjudicator had failed to exercise jurisdiction under the SOP Act by failing to form a view as to what was properly payable having regard to the true construction of the contract and the true merits of the claim and that there had been a jurisdictional error.

On appeal, the Court was required to consider whether the primary judge had properly considered the functions conferred on the adjudicator under section 22 of the SOP Act to determine progress claims. The Court of Appeal held that it had and that there had been no jurisdictional error by the adjudicator to warrant a review of its decision.

Although the language used by the adjudicator in the determination could not be characterised as "legal" and the primary judge had identified some limitations of the adjudicator's construction of the contract, the Court found that these matters occurred within the jurisdiction of the adjudicator and could not form the basis upon which an adjudication can be quashed.

In overturning the trial judge's decision, the Court of Appeal noted that “there is no requirement in s 22(3)… for legally correct language, and a ‘fine-tooth comb’ approach to the reasons of the adjudicator is to be avoided." 

The important distinction between work done under the contract and work claimed to be done under the contract

A recent decision by the ACT Court of Appeal in Canberra Drilling Rigs Pty Ltd v Haides Pty Ltd [2019] ACTCA 15 emphasises the importance of proper statutory interpretation in the context of the Building and Construction Industry (Security of Payment) Act 2009 (ACT) (SOP Act). 

This case was an appeal by Canberra Drilling, the contractor of works in relation to a multi-story residential development, of the decision of the Supreme Court of the ACT to dismiss Canberra Drilling's challenge of the validity of an adjudicator decision that Canberra Drilling pay its subcontractor, Haides for works the subject of a payment claim under the SOP Act.

On appeal brought by Canberra Drilling, the Court was required to determine whether section 15(4) of the SOP Act means that the jurisdiction of the adjudicator is contingent upon the construction work to which the claim relates being in fact work done under the contract (and that the primary judge had erred in failing to determine that jurisdictional fact) or whether it sufficient that the construction work is claimed to be work done under the contract.

The Court considered that both the text and structure of the legislation indicated that the question of whether the work was done under the contract is to be determined by the adjudicator and is not a question of jurisdictional  fact. This was informed by an analysis of the history of section 13 of the Building and Construction Industry Security of Payment Act 1999 (NSW) (NSW SOP Act) (the equivalent to section 15 of the SOP Act) which had, prior to amendments made in 2002, given rise to the argument that a payment claim could only be made when the claiming party was actually entitled to a progress payment under a construction contract. 

The current language brought in by the amendments to the NSW legislation and adopted in the ACT now refers to the claimant as a person “who is or claims to be entitled” and the respondent to the claim as a person who “is or may be liable to make the payment", destroying the possibility that actual entitlement was an essential precondition to the making of a payment claim.  The Court noted that the SOP Act aims to permit the adjudication process to determine the entitlement to progress payments on an interim basis and that it would be inconsistent to find that an essential precondition to the making of a claim was that the work was done "under" the relevant construction contract, ultimately dismissing the appeal by Canberra Drilling. 

Multiple invoices and supporting statements may not necessarily be fatal to a payment claim

The New South Wales Supreme Court recently considered whether multiple invoices submitted under one cover letter constituted multiple payment claims under the Building and Construction Industry Security of Payment Act 1999 (NSW) (SOP Act) in respect of the same reference date, and were therefore invalid, in Sought After Investments Pty Ltd v Unicus Homes Pty Ltd [2019] NSWSC 600.

Section 13(5) of the SOP Act prohibits a claimant from serving more than one payment claim in respect of each reference date under a construction contract. In determining the issue, Justice Ball considered the purpose of the prohibition in section 13(5) as being to:

"prevent a principal from being vexed by having to deal with more than one progress claim … during the period between reference dates."

The Court decided that the letter enclosing four invoices constituted a single payment claim. Although the invoices were referred to in the letter as "claims" (plural), Justice Ball was persuaded that objectively, a recipient must have understood that a single claim was being made for payment of the full amount of the four invoices, all of which were presented at the same time and that characterisation is consistent with the purpose of section 13(5) of the SOP Act. 

Factors which the Court considered relevant included the single due date for payment and reference to “payment in full” in the letter. Justice Ball also noted that service of the four payment schedules in response to the claim did not change the character of the claim nor did it undermine the policy of the SOP Act. In contrast to the prohibition on the service of more than one payment claim in respect of a reference date in section 13(5), the Court noted that there is no prohibition on the number of supporting statements that can be served in respect of each payment claim.