Projects Disputes in Australia: Recent Cases

COMMENTARY

DECEMBER 2016

under the Building and Construction Industry Security

of Payment Act 1999 (NSW), but Probuild rejected the

claim in its payment schedule on the basis that it was

entitled to liquidated damages of $1,089,900 from

Shade. An adjudicator awarded $277,755 to Shade and

rejected Probuild’s liquidated damages claim.

Probuild challenged the decision in the NSW Supreme

Court, and was successful on its alternative argument

that although there was no jurisdictional error, the

decision should be quashed by the Court because

the rejection of the liquidated damages claim involved

an error of law on the face of the record. The Court

held that the adjudicator had wrongly assumed that

the onus was on Probuild to demonstrate that Shade

was at fault for the failure to achieve practical comple-

tion on time.

The decision is significant because it potentially

opens the door to greater judicial scrutiny of adjudica-

tion decisions, which may result in less certainty and

more disputes for the industry.

However, it is important to note that the position is not

yet settled—the decision is controversial given previ-

ous case law, and Shade has brought an appeal which

is due to be heard in December 2016. In a decision

staying the original costs order in favour of Probuild

During the second half of 2016, a number of high-

profile cases across Australia have offered significant

insights to stakeholders in the construction and min-

ing industries. Below we review several of the key ones.

New South Wales

Case: Probuild Constructions (Aust) Pty Ltd v Shade

Systems Pty Ltd [2016] NSWSC 77

The scope for challenging an adjudicator’s decision in

New South Wales may have expanded.

Earlier this year, a single judge of the New South Wales

(“NSW”) Supreme Court held that the Court has juris-

diction to review an adjudication for any error of law on

the face of the record. This represented a significant

expansion of the grounds on which a court can review

an adjudication, which was previously limited to the

confined notion of jurisdictional error (including non-

compliance with the essential elements of the legisla-

tion, such as invalidity of the payment claim).

The decision concerned a contract between Shade

Systems (“Shade”) and Probuild Constructions

(“Probuild)” under which Shade agreed to supply and

install external louvers to the facade of an apartment

complex. Shade issued a payment claim for $324,334

Projects Disputes in Australia: Recent Cases

Jones Day Commentary

pending the outcome of the appeal, the Court recognised

the “public importance” of the issue and held that Shade has

reasonable prospects of reversing the decision in its appeal,

so a decision by the NSW Court of Appeal will bring welcome

clarity to the industry.

High Court of Australia

Case: Paciocco v ANZ [2016] HCA 28

High Court clarification on the penalties doctrine, which has

important implications for the enforcement of liquidated

damages clauses.

By way of reminder, this dispute concerned the question of

whether late payment fees charged by a bank (ANZ), consti-

tuted a penalty, but has been cause for wider interest given

the impact on the penalties doctrine across a range of indus-

tries, including in the context of liquidated damages clauses

in construction contracts and disputes.

The Federal Court had originally held that the late payment

fees were impermissible as penalties, on the basis that they

were extravagant and unconscionable when compared to the

actual loss suffered by the bank. On appeal, the Full Federal

Court overturned that decision, and the High Court has now

agreed with the Full Federal Court.

The High Court decision confirms that a payment on default

or breach of contract will only be a penalty if it is “out of all

proportion to the interest of the party which the provision

seeks to protect”. This is a high bar. More importantly, the

High Court has clarified that this must take into account the

totality of the party’s interests and is not confined to losses or

expenses directly caused by the breach.

Within the construction industry, the decision will also make

it harder to argue that a liquidated damages clause for delay

on a project is a penalty. This is because, particularly on large

projects, delay can have a large number of indirect impacts

which principals can point to as part of the legitimate inter-

ests to be protected by a liquidated damages clause under

the test confirmed by the High Court. This can be the case

whether the assessment of that legitimate interest is one of

the damages actually suffered upon a particular delay, or a

prospective estimate of the damages made prior to com-

mencement of the project. However, it is perhaps even easier

to do so on a prospective basis when there may be additional

factors that represent realistic commercial risks even if many

of them may not actually come to pass in the event of a par-

ticular delay.

Victoria

Case: SSC Plenty Road Pty Ltd v Construction Engineering

(Aust) Pty Ltd [2016] VSCA 119

Mediation is not a “method of resolving disputes” for the pur-

pose of Security of Payment legislation.

The Victorian Court of Appeal was recently asked to consider

the validity of a determination by an adjudicator appointed

under the Building and Construction Industry Security of

Payment Act 2002 (Vic) (“Victorian Act”).

In calculating a progress payment due under the construc-

tion contract (“the contract”), the adjudicator took into account

“variations” to the contract pursuant to s10A of the Victorian

Act. That section permits variations to be taken into account

in certain circumstances, including: (i) where the contract sum

does not exceed $5.0 million; or (ii) where the contract sum

exceeds $5.0 million, but the contract “does not provide a

method of resolving disputes under the contract”. The dispute

resolution process under the contract required the parties’

representatives to meet to try to resolve the dispute, and, if

unsuccessful, to attend mediation. If the mediation was unsuc

cessful, the parties were entitled to pursue their rights at law.

The adjudicator considered that the contract did not provide

for a dispute resolution method and thus took into account the

variations in determining the amount of the progress payment.

The principal challenged the adjudicator’s determination in

the Victorian Supreme Court, arguing that the contractual

requirement of mediation constituted a “method of resolving

disputes”. such that the adjudicator was not entitled to con-

sider variations pursuant to s10A of the Victorian Act.

At first instance and on appeal, the adjudicator’s decision

was upheld. The Court of Appeal held that the purpose of

s10A is to ensure that parties have available a means of finally

Jones Day Commentary

determining an entitlement to a progress payment, rather

than a mere forum to address the controversies between

them. Accordingly, mediation is not a “method of resolving

disputes” for the purposes of s 10A(3)(d)(ii) of the Victorian Act

because it does not ensure a final resolution.

A second issue before the Court was whether the adjudica-

tor was bound to adopt the value of work determined by the

superintendent (under powers conferred by the contract).

The Court held that the role of the adjudicator is entirely stat-

utory, not contractual, so the adjudicator’s valuation was not

constrained by the terms of the contract. Requiring the adju-

dicator to simply adopt the price of the superintendent would

be inconsistent with the adjudicator’s statutory obligation to

independently assess the value of the progress payment.

The case helpfully demonstrates that if contractors wish to

avoid adjudicating disputed variations under the Victorian Act,

they must ensure the contract includes a dispute resolution

process capable of ensuring a final determination. While the

process may include mediation (as many such provisions com

monly do), there must be further steps that ensure a resolution

(other than legal proceedings) in the event mediation is unsuc

cessful (for example, a binding third party determination).

Western Australia

Case: Ralmana Pty Ltd v BGC Contracting Pty Ltd [2016]

WASC 131

When claiming an EOT or delay costs in legal proceedings, a

party must plead and prove the satisfaction of any conditions

precedent, including notice provisions.

The Western Australian Supreme Court considered an appli-

cation to strike out claims in respect of an Extension of Time

(“EOT”) and associated delay costs, on the ground that the

claimant had not pleaded satisfaction of a notice require-

ment that applied to EOTs under the relevant contract.

BGC Contracting (“BGC”) subcontracted Ralmana Pty Ltd

(“Ralmana”) to carry out excavation and filling of earthworks

for rail embankments, roads and associated works for the

purpose of building the roads and rail for the Roy Hill Project.

The subcontract required that in order to claim an EOT,

Ralmana was required to request an EOT from BGC’s desig-

nated representative under the subcontract.

Ralmana commenced proceedings against BGC claiming

$33 million for delay costs (including due to access and site

problems). Ralmana’s claim did not positively plead satisfac-

tion of the requirement to first request an EOT from BGC’s

designated representative. BGC sought to strike out the

claim on that basis. In response, Ralmana argued that any

non-satisfaction with the requirement was a matter to be

raised and proved by BGC, and that in the absence of it doing

so, the Court should assume satisfaction of the requirement.

The Court rejected Ralmana’s argument and struck out the

EOT claims accordingly. It held that satisfaction of a condi-

tion precedent for the claim for a liquidated sum (including

an EOT), such as a notice provision, is a matter which must be

positively pleaded and proved by a claimant. To do otherwise

would in effect ignore the express provisions of the contract.

When claiming an EOT or delay costs in legal proceedings,

a party will need to establish the satisfaction of any contrac-

tual conditions precedent to making the claim. This makes

it important that contractors comply with any notice require-

ments or other preconditions for any time or money claims,

and maintain records of doing so in order to support any sub-

sequent proceedings should a dispute arise.

Queensland

Case: Armour Energy Limited v AEGP Australia Pty Ltd [2016]

QSC 153

Interpretation of a condition precedent in an exploration farm-

out agreement highlights the importance of clear drafting.

The Queensland Supreme Court considered the proper

interpretation of a farm-out agreement (“Agreement”) in

which Armour Energy Limited (“Armour”) agreed to sell a 75

per cent interest in petroleum exploration permits to AEGP

Australia Pty Ltd (“AEGP”). Armour sought specific perfor-

mance of the Agreement. In determining the application, the

key question was whether a condition precedent had been

satisfied. It required execution of a Deed of Assignment and

Assumption (“DOAA”) by Armour, AEGP, the Northern Land

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Council (“Council”) and the Native Title Parties, for the pur-

pose of assigning the rights and obligations owed to the rel-

evant Native Title Parties under the exploration permits.

Instead of the DOAA, the Council executed a Deed of Covenant

(“Deed”) in respect of each existing Native Title Agreement.

Armour argued that execution of the Deed satisfied the condi

tion precedent because it had the effect of obtaining the con-

sent of the Native Title Parties to a novation and assignment

of the exploration permits to AEGP, by the Council acting on

behalf of the Native Title Parties (as their legal representative).

Conversely, AEGP argued that, for the condition precedent to

be satisfied, each Native Title Party had to execute the DOAA

in the form annexed to the Agreement.

There was clearly a degree of ambiguity in the drafting of

the relevant clause. Further, the draft DOAA annexed to the

Agreement failed to identify the names of the Native Title

Parties. Nonetheless, the Court was able to resolve this by

finding that the terms of each Native Title Agreement were

incorporated by reference into the Agreement. The Court held

that, viewed objectively, in the context of the Agreement as a

whole, the clause did not require strict execution of the DOAA

by each Native Title Party. Instead, the Deed simply had to be

substantially in the form of the draft DOAA (which it was). As

each Native Title Agreement had been novated, the execu

tion of each Deed by the Council was sufficient to bind the

assignee (AEGP) to the rights and obligations under the explo

ration permits. As the condition precedent was satisfied, the

Court ordered that the Agreement be specifically performed.

As well as providing a timely reminder of the importance of clear

and unambiguous drafting when setting conditions precedent

in mining contracts, this case demonstrates that the native title

consequences when assigning rights to rural land (in particu

lar mining permits) are not mere formalities. The specific rights

and obligations to the native title stakeholders should always

be clarified when buying and selling such interests. This will

help ensure that the relevant conditions precedent can be eas

ily satisfied so that there are no unintended consequences and

no difficulties in enforcing the agreement in the future.

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James Ebert

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