Top 5 construction cases 2012 – Lexology
There were many noteworthy cases handed down in 2012, however we focused on those which have the most interest and practical relevance to our clients.
The cases we did cover were:
- Dura (Aust) Constructions Pty Ltd v Hue Boutique Living Pty Ltd1 – show cause notices and whether the principal is required to act reasonably
- Cordon Investments Pty Ltd v Lesdor Properties Pty Ltd2 – the meaning of completion and the availability of damages for the rectification of defective work
- John Holland Pty Ltd v Coastal Dredging & Construction Pty Ltd3 – preconditions to reference dates under the Security of Payment legislation
- Downer EDI Mining Pty Ltd v Wambo Coal Pty Ltd4 – compliance with contract dispute resolution provisions
- Merit Process Engineering Ltd v Balfour Beatty Engineering Services (HY) Ltd5 – contracting with letters of intent
Dura (Aust) Constructions Pty Ltd v Hue Boutique Living Pty Ltd
Dura (Aust) Constructions Pty Ltd v Hue Boutique Living Pty Ltd6
- To be valid, a show cause notice must comply with the requirements of the contract under which it is issued and convey to the reader what is amiss.
- Detailed particulars are not necessarily required for a valid show cause notice.
- The level of detail required in a show cause notice depends on a number of factors including the type of breach and the response to be given by the contractor. More detail would be required for a self executing notice to rectify (which is not a concept found in AS 2124).
- In Victoria, courts are unlikely to imply a term of reasonableness when issuing a show cause notice or evaluating whether cause has been shown. The opposite approach has been taken in New South Wales.
The case concerned the construction of an apartment block in Richmond, Melbourne.
The principal engaged the contractor under an AS 2124 – 1992 (Construct only) form of contract.
Eighteen months into the project, the principal expressed concern regarding what it said was the slow progress, poor quality of the works and the quantum of progress claims submitted by the contractor. Accordingly, the principal served four show cause notices on the contractor under the contract, alleging that the contractor was in default by separate substantial breaches of the contract and requiring the contractor to show cause (in writing) why the principal should not:
- take the whole or part of the remaining work out of the contractor’s hands; or
- terminate the contract.
Under the contract, the show cause notices must (among other things) specify the alleged substantial breach.
The allegations of substantial breach made against the contractor in the show cause notices were that, among other things, it had failed to:
- proceed with the works with due expedition and without delay;
- comply with directions of the superintendent; and
- use the standard of materials or workmanship required by the contract.
The contractor responded to the show cause notices seeking to show cause. The principal determined that the contractor had not shown cause, took the work out of the contractor’s hands and engaged a third party contractor to complete the work.
The contractor’s complaint was that the show cause notices did not specify the alleged substantial breaches with sufficient particulars and were therefore invalid – accordingly (on the contractor’s argument) the principal’s conduct in taking the work out of the contractor’s hands was unlawful.
The Court found in favour of the principal and held that the contractor had been in substantial breach of the contract and that the show cause notices served by the principal were valid. The Court also found that when the principal gave notice to the contractor taking the remaining works out of its hands, it had acted properly and in accordance with its rights and obligations arising under the contract. The show causes notices had conveyed to the contractor what was amiss.
The Court held that there was no obligation for the principal to act reasonably in issuing the show cause notices or in assessing them.
Cordon Investments Pty Ltd v Lesdor Properties Pty Ltd
Cordon Investments Pty Ltd v Lesdor Properties Pty Ltd7
- “Completion” if left undefined in the contract, may mean “full completion”, not “substantial completion” or “practical completion”.
- A principal will not recover rectification costs unless they are necessary and reasonable.
This case arose out of a joint venture agreement between Lesdor Properties Pty Ltd (Lesdor), the owner of a property, and Cordon Investments Pty Ltd (Cordon), a property developer and commercial builder. The parties set out to develop a property owned by Lesdor. To do this they entered into a joint venture agreement that worked roughly as follows:
- Cordon would develop Lesdor’s property by developing two floors of commercial offices and 27 residential units
- Cordon would be paid by receiving the proceeds from the sale of 25 of the 27 residential units
- Lesdor would retain the remaining two residential units and commercial offices.
As a commercial builder, Cordon was to carry out the building works itself.
One important feature of the Joint Venture Agreement was that in order to sell the residential units and realise a return on the project, Cordon required Lesdor to sign a strata plan for the residential units to be lodged with the regulator.
Disputes arose between the parties regarding defects and incomplete work. The dispute came to a head when Cordon required Lesdor to sign the strata plan in order for it to start selling units and realising its return. Lesdor refused to sign the strata plan, arguing that it did not have to do so until Cordon had fully completed construction according to the plans and specifications. There was no definition of “Completion” in the contract.
Lesdor terminated the joint venture agreement with Cordon on the basis of Cordon’s unwillingness to properly complete the work and claimed damages for defective work. Cordon commenced proceedings against Lesdor on the basis that Lesdor’s purported termination amounted to repudiation and claimed damages for resulting loss. Lesdor cross-claimed for damages resulting from Cordon’s defective work.
The Court found that the works had not achieved “completion” which the Court interpreted to mean “full completion”. Accordingly, Lesdor was not required to sign the strata plan and, following Cordon’s unwillingness to properly complete the work, Lesdor had lawfully terminated the contract.
However as for damages, the site had passed to the owners’ corporation which showed no intention of demanding that Lesdor rectify the defective work. Therefore any rectification costs incurred by Lesdor were not necessary or reasonable.
The Court found for Lesdor on all the major issues except the calculation of damages, which meant that despite winning the main legal arguments, Lesdor walked away from the Court with very little.
John Holland Pty Ltd v Coastal Dredging & Construction Pty Ltd
John Holland Pty Ltd v Coastal Dredging & Construction Pty Ltd8
- Preconditions to reference dates, such as the giving of a statutory declaration, are void for contracting out of the security of payment legislation.
Facts and Findings
A clause in a contract, which had the effect of prohibiting the service of a payment claim until certain conditions had been met, in other words creating preconditions, was void because it contracts out of the Queensland Security of Payment Act (BCIPA).
Some of the preconditions in this case were that the payment claim:
- be in the format required by the respondent, including the provision of a statutory declaration
- must contain evidence reasonably required by the respondent.
Whether a provision is void under s 99 of the BCIPA is a question of degree. For example in a 2010 Queensland Supreme Court decision, a contract requiring the submission of a draft claim and a progress certificate by a superintendent before a payment claim could be served was not contracting out of the BCIPA. That conclusion was only reached because the progress certificate was deemed to no longer operate as a precondition after a point in time.
In our view, a precondition for a reference date (being the date from which a payment claim may be served) is more likely to be contracting out of the BCIPA if it is a precondition within the control of the respondent.
If you are a claimant under the BCIPA, it is likely that you can serve a valid payment claim whether or not you have complied with contractual preconditions for a reference date. The prudent course however is to comply with those preconditions, which will probably remain enforceable under the contract notwithstanding the BCIPA. It is best to avoid the arguments which were raised in this case. You do not want to serve a payment claim, potentially succeed in adjudication then be required to argue subtle points of preconditions for reference dates in the courts. Although this is a “claimant friendly decision” the application of the principles from this case will turn on each unique set of facts.
If you are a respondent under the BCIPA, do not assume that preconditions to reference dates in your contract will be enforceable. If your contract provides a particular date for serving payment claims, for example the 25th day of each month, then the prudent course is to assume that the 25th day of each month is the reference date, whether or not contractual preconditions for a reference date have satisfied. So if you receive a payment claim served on, for example the 27th day of the month and certain preconditions have not yet been met, such as the provision of a statutory declaration, then the prudent course is to assume nevertheless that the claim is validly served on the 27th day of that month and you should serve a payment schedule within the required time.
This case has application in other jurisdictions including New South Wales and Victoria given the similarly worded Security of Payment Acts in those states. There is no concept of reference date in Western Australia.
This case doesn’t consider whether preconditions to a progress claim amounts to contracting out of the BCIPA.
Downer EDI Mining Pty Ltd v Wambo Coal Pty Ltd
Downer EDI Mining Pty Ltd v Wambo Coal Pty Ltd9
- A party to a contract may be prevented from commencing proceedings until the dispute resolution procedure under the contract has been complied with.
- Courts are willing to imply terms into the dispute resolution procedure where there is some uncertainty.
- Arguing that compliance with the dispute resolution procedure would be futile is unlikely to be an acceptable excuse.
Downer EDI Mining Pty Ltd (Downer) and Wambo Coal Pty Ltd (Wambo) entered into an Operation Agreement, under which Downer was to provide maintenance of plant and equipment services to Wambo. A dispute arose when Wambo stopped making payments to Downer. Downer alleged that this constituted a breach of contract by Wambo.
Under the contract, for a party to commence proceedings, it was first required to comply with the dispute resolution provisions contained in the contract. Downer, who had commenced proceedings, had not complied with those dispute resolution provisions and Wambo sought a stay of Downer’s proceedings on that basis.
Downer argued that the dispute resolution provisions were too uncertain to require compliance and that seeking to resolve the dispute with Wambo was futile so that compliance with the dispute resolution provisions should not be required.
The Court found for Wambo and required Downer to comply with the dispute resolution provisions before continuing with the court proceedings.
As to the uncertainty point raised by Downer, the Court was willing to imply terms into the dispute resolution provisions where there was no time set after a negotiation meeting to seek to resolve the dispute. The Court also dismissed Downer’s argument the provisions were uncertain because there was no contingency built in to resolve the situation where one party was unable to attend one of the meetings; a contingency was not required to give the provisions certainty.
The Court also dismissed Downer’s argument that compliance with the provisions was futile. The Court in its reasons relied on a New South Wales Supreme Court decision where it was said:
“What is enforced is not co-operation and consent but participation in a process from which co-operation and consent might come.”
Merit Process Engineering Ltd v Balfour Beatty Engineering Services (HY) Ltd
Merit Process Engineering Ltd v Balfour Beatty Engineering Services (HY) Ltd10
- Using letters of intent, carrying out works and then never resolving key terms of the contract can lead to uncertainty and prolonged disputes.
- Letters of intent can create binding legal relationships.
- Construction contracts are unlikely to be finalised and binding until there is agreement on key terms, including price.
Merit Process Engineering Ltd (Merit) was engaged by Balfour Beatty Engineering Services (HY) Ltd (Balfour Beatty) to carry out subcontract works under a letter of intent in early 2004.
That letter of intent provided that works could be carried out by Merit up to a certain value.
Balfour Beatty and Merit commenced, but did not finalise, negotiations for the terms of the subcontract, including a price for the works. A draft form of subcontract, which included an arbitration agreement, was sent by Balfour Beatty to Merit but never signed. As for the price of the works, the parties appeared to be only £37,500 apart for works worth approximately £1.6 million.
Merit commenced proceedings against Balfour Beatty for certain losses.
Balfour Beatty argued that the terms of the subcontract had been sufficiently finalised so that there was an arbitration agreement between the parties. Therefore any dispute between the parties (i.e. Merit’s claim) should be referred to arbitration in accordance with the subcontract.
The Court held that Balfour Beatty and Merit had not reached an agreement on price and therefore the terms of the subcontract were not finalised and were not binding on the parties.
It followed that there was no arbitration agreement and Merit’s claim was properly commenced in court, as opposed to arbitration.Observations
In 2004, from the parties’ perspective there was a letter of intent and a general agreement on price. It was on that basis that the works were carried out and a year later terms of subcontract were circulated to “finalise the paperwork”. The parties would certainly not have foreseen that, about six years after the works were carried out, that there would be a dispute about what comprised the terms of their contract and the appropriate forum to commence proceedings. This is clearly an unsatisfactory outcome for Merit and Balfour Beatty and it is not an uncommon situation where parties leave negotiations unresolved with only a letter of intent between them.
This unfortunate situation would probably have been avoided if the parties had a definite agreement on price and would have certainly been avoided if contract negotiations had not stalled while the works were being carried out.
Letters of intent are a necessary feature of the construction industry. However to avoid the unintended consequences of this case, we recommend that parties following these two basic rules:
- Agree on price (right down to the last dollar or pound) before commencing work. Ball park figures are insufficient.
- Build in a sunset date in the letter of intent and a cap on the contractor’s entitlement to recover costs. This will encourage both parties to resolve negotiations before the works are complete, which is when most dispute start to appear.