© Carter Newell 2012 www.carternewell.com

By David Rodighiero, Partner and Marnie Carroll, Solicitor

Protect yourself against adverse interpretation: recommended amendments to standard form construction contracts

Introduction

With 2012 in full swing, it is an appropriate time to consider two recent issues which have led us to recommend amendments to standard form contracts. These issues are:

� the identification of reference dates (when payment claims may be made under security of payment legislation) in a contract; and

� a superintendent’s discretion to extend time for the benefit of a contractor.

Time for Issuing Payment Claims

After the unanimous decision of the Qld Court of Appeal in Daysea Pty Ltd v Watpac Aust Pty Ltd, it was commonly accepted that following the issue of a progress claim upon practical completion under contracts in a form comparable to AS 2124-1992, contractors were not entitled to issue further progress claims until final completion.

However, a more recent decision of the Supreme Court of Queensland demonstrates the uncertainty of this principle.

This issue was considered by His Honour Justice Douglas in the matter of Tailored Projects Pty Ltd v Jedfire Pty Ltd

1. The claim in that matter was

based on a Queensland Master Builders Association LSC2 August 2006 form contract (‘QMBA Contract’).

Under the QMBA Contract, monthly progress claims were to be submitted by Tailored Projects on the last day of the month. Clause 14(a) of the QMBA Contract provided:

“14. PAYMENT

(a) The Contractor shall submit payment claims to the Proprietor by the following reference dates:

(i) the times stated in the Schedule (or, if any time stated in the Schedule is not a Business Day, the next Business Day) or the last Business Day of each month, whichever is the earlier; and

(ii) on the Works reaching Practical Completion.”

Practical Completion was achieved on 12 May 2008. Tailored Projects submitted a payment claim under the Building and Construction

1 [2009] QSC 32

Payments Act 2004 (Qld) (‘BCIP Act’) on 26 May 2008 and then a further payment claim on 31 July 2008 (‘July Payment Claim’). While Jedfire disputed the July Payment Claim on the basis that more than one payment claim had been served for the same reference date, it did not serve a Payment Schedule within the time stipulated under the BCIP Act.

In response, Tailored Projects applied to the Supreme Court for summary judgment with respect to the July Payment Claim on the basis that a Payment Schedule had not been served within the timeframe provided under section 18(4) the BCIP Act. In support of its application, Tailored Projects submitted that clause 14 of the QMBA Contract established a contractual regime similar in effect to the statutory regime.

2

Before Justice Douglas, Jedfire argued that more than one payment claim had been made in respect of the same reference date (being the date of practical completion). Jedfire argued that this was contrary to section 17(4) of the BCIP Act, which states:

“A payment claim may be served only within the later of:

(a) The period worked out under the construction contract; or

(b) The period of 12 months after the construction work to which the claim relates was last carried out or the related goods and services to which the claim relates were last supplied.'”

A 'reference date' is (in part) defined in Schedule 2 of the BCIP Act as:

“(a) A date stated in, or worked out under, the contract as the date on which a claim for a progress payment may be made for construction work carried out or undertaken to be carried out, or related goods and services supplied or undertaken to be supplied, under the contract…”

Accordingly, Jedfire submitted that the July Payment Claim was invalid and that, on the basis of clause 14(a), the only relevant reference dates were the date of completion and the expiry date of the defects liability period (in accordance with clause 25 of the QMBA Contract). In reply, Tailored Projects argued that section 17(4)

2 See Daysea Pty Ltd v Watpac Aust Pty Ltd [2001]

QCA 49 at [17]-[19] (which is discussed below).

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of the BCIP Act permitted payment claims to be submitted within a period of 12 months after the completion of the relevant construction work. On that basis, Tailored Projects submitted that the two payment claims were made with respect to different reference dates.

At paragraph [17], Justice Douglas determined that the relevant reference date should be determined in accordance with the contract, stating that the “claim made in reliance on the Act fails as more than one payment claim was made in relation to the reference date for practical completion under the contract.”

Although the wording within clause 14 of the QMBA Contract differs to the equivalent payment provisions in, for instance, Australian Standard form contracts, the function of the clauses is similar. Accordingly, if the decision of Justice Douglas in the Jedfire case is followed, it is arguable that equivalent payment provisions only provide for payment claims to be submitted up to and upon the issue of a Certificate of Practical Completion. A further progress claim issued after Practical Completion will be invalid, except for the Final Payment Claim submitted at the expiry of the defects liability period.

Daysea Pty Ltd v Watpac Australia Pty Ltd

While the decision of Justice Douglas in Jedfire is clear on its face, it requires consideration in light of the decision in Daysea Pty Ltd v Watpac Australia Pty Ltd

3.

In that decision, the Queensland Court of Appeal considered the validity of progress claims submitted after practical completion in relation to AS4300-1995. The case concerned an application for summary judgment for payment of a progress claim where a Payment Certificate was not issued in accordance with clause 42.1 of the contract.

In Daysea, practical completion was achieved on 30 November 1999. Watpac issued progress claims subsequent to practical completion on 3 December 1999 and 22 February 2000. However, those claims for payment included claims in relation to the performance of variations directed by the superintendent after practical completion.

The superintendent failed to issue a Payment Certificate for the claim made on 22 February 2000 within time and Watpac sought full payment on that basis.

Daysea argued that the progress claim was invalid because it was submitted after the date of practical completion.

Justice Williams, who delivered the leading judgment, stated at paragraph [27] that “given the fact that work had to be carried out at least on variations thereafter, it was certainly not unreasonable to expect there would be one further Progress Claim lodged”.

The reasoning in Daysea at paragraphs [26] to [28] appeared to be in light of the specific surrounding factual circumstances in that case (namely, the performance of extra works after practical completion). It is apparent from the leading decision of Williams JA in Daysea, who stated at [29] “In the circumstances there is no

3 [2001] QCA 49

substance in the submissions that Progress Claim no 18 was invalid”, agreed that the court understood the argument that multiple payment claims had been submitted after the date of practical completion and dismissed it.

Isis v Clarence

The issue was further considered by Master Macready in the New South Wales Supreme Court decision of Isis v Clarence

4. The contract in that case was based on

AS2124-1992, but within the scope of the Building and Construction Industry Security of Payments Act 1999 (NSW).

Isis argued that the contractual ability to make progress claims continued after practical completion. Clarence contended that the proper construction of clause 42.1 of the contract provided the right to issue monthly claims only continues until the issue of a certificate of practical completion.

The relevant provisions of the contract provided:

“42.1 Payment Claims, Certificates, Calculations and Time for payment.

At the times for payment claims stated in the Annexure and upon issue of Practical Completion and within the time prescribed by Clause 42.7, the Contractor shall deliver to the superintendent claims for payment supported by evidence of the amount due to the Contractor and such information as the superintendent may reasonably require. Claims for payment shall include the value of the work carried out by the Contractor in the performance of the Contract to that time together with all amounts then due to the Contractor arising out of or in connection with the Contract or for any alleged breach thereof.

42.7 Final payment claim

Within 20 days after the expiration of the defects liability period, or where there is more than one, the last to expire, the contractor shall lodge with the superintendent a final payment claim and endorse it ‘final payment claim’.”

Macready M at [20] found that on the face of the above clauses, there is nothing in them to give any indication that multiple payment claims may not be issued after the issue a certificate of practical completion.

Implication of the above decisions

If the decision of Justice Douglas in the Jedfire is followed, it is arguable that AS2124-1992, AS2545-1993 and AS4300-1995 standard form contracts only provide for payment claims to be submitted up to and upon practical completion. No further payment claims within the defects liability would be valid, except for the final payment claim submitted upon final completion.

However, in light of the observations of Williams JA of the Queensland Court of Appeal in Daysea, which appears to be opposed to such argument and the decision of Master Macready in Isis (which did not consider Daysea but in a reasoned decision came to the

4 [2004] NSWSC 73

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same conclusion), it would appear that the decisions of Daysea and Isis would likely be followed.

Suggested amendments

As the above decisions all turned on the interpretation of the contractual entitlements of a contractor to deliver a payment claim, it is recommended that contracts be amended to expressly provide whether progress claims can be submitted during the defects liability period.

Extension of Time Provisions

Over the past 10 years, it has generally been accepted that Australian Standard form contracts provide the superintendent with a unilateral discretionary power to grant extensions of time. This discretionary power exists notwithstanding whether a contractor has a contractual entitlement or has not made a claim.

Following on from the decision of the New South Wales Court of Appeal in Peninsula Balmain v Abigroup Contractors Pty Ltd

5, a line of authorities have

confirmed that the superintendent under an Australian Standard form contract must exercise its discretion under clause 35.5 of AS2124-1992 by extending the time for completion where they are required to act honestly or fairly.

Peninsula Balmain involved an unmodified clause 35.5 of AS 2124-1992. In that case, the contractor had not made any claim for an extension of time. A court-appointed Referee nevertheless found that a superintendent, acting honestly and fairly, should have exercised his discretion and extended time for completion. The Court of Appeal agreed with the primary judge’s acceptance of the Referee’s conclusion, opining that the superintendent’s power to grant an extension of time is capable of being exercised for the benefit of both the contractor and principal.

The Court further determined that the power to extend time survived the termination of the contact. The Court reasoned that as the liquidated damages mechanism expressly operates after the termination of a contract, there must be a date of practical completion after termination for that clause to operate. Accordingly, the Court found that the superintendent’s power is not lost on termination, “even if the claim for exercise of the power to extend notwithstanding non-compliance had not been made until after termination” [at 80].

The decision in Peninsula Balmain gave rise to the principle that a superintendent, who is given an unqualified power to extend time, should (if required to act reasonably or in good faith) do so for the contractor’s benefit even where the contractor has not made a claim or has not otherwise strictly complied with the requirements of a contract. This principle has been subsequently followed in Kane Construction Pty Ltd v Sopov

6 and 620 Collins Street v Abigroup Pty

Limited (No 2)7.

Accordingly, a superintendent may be required to grant an extension of time where it is fair and reasonable to do so, even though a contractor has not complied with the notice and time requirements for extension of time

5 [2002] NSWCA 211

6 [2005] VSC 237

7 [2006] VSC 491

under the contract. However, the burden still remains on the contractor to prove its entitlement.

The judgment of Justice McMurdo in the matter of Hervey Bay (JV) Pty Ltd v Civil Mining and Construction Pty Ltd

8 provides that it is possible to draft extension of

time provisions to remove the obligation placed on superintendents to exercises their discretionary power.

The case concerned an adjudicator’s determination of delay damages under an amended AS 2124-1992 contract. While the superintendent did not grant extensions of time, the adjudicator, ‘standing in the shoes’ of the superintendent determined that the contractor was entitled to those extensions and awarded delay damages. The Hervey Bay contract had specifically removed the clause 23 obligations from acting on the discretion to extend time unilaterally.

In that case, the superintendent was relieved from an obligation to exercise the discretionary power.

The Contractor’s argument, which the adjudicator accepted, was that the adjudicator was entitled to allow delay costs absent the grant of an extension of time from the superintendent if the adjudicator concluded, as he did, that the Contractor was entitled to an extension of time.

However, Justice McMurdo of the Supreme Court of Queensland however said:

“In my view there is no tenable construction of cl 35.5A by which the Superintendent could be said to be under any obligation and in particular an obligation to extend time if it would be fair to do so. Absent such an obligation there was no entitlement in any sense to an extension of time, if there had not been compliance with cl 35.5. So in the adjudicator’s calculation, he was wrong to have included delay costs for which extensions of time have not been granted and for which there was no entitlement to an extension under cl 35.5 or cl 35.5 A.”

His Honour (in obiter) commented that “whether the Superintendent had refused or postponed consideration of the extensions of time, the adjudicator was entitled to include delay costs if the Contractor was entitled to those extensions.”

Accordingly, the obligation to exercise its discretion for the benefit of the Contractor is absolute. Should a contract not be expressly amended to remove the discretion of the Superintendant (in the Contractor’s favour) the position in Peninsula Balmain may prevail.

Principals may also consider amending any contractual provisions which may entitle a contractor to delay damages (i.e. GC 36 of AS 2124-1992) to ensure the entitlement only arises when the contractual requirements have been complied with.

8 [2008] QSC 58

A Contractor’s ability to issue payment claims upon termination

For the past eight years, the general consensus across all Australian jurisdictions was that contractors were not prevented from issuing payment claims under security of payments legislation following termination of the contract regulating the works.

This position was based on the New South Wales case of Brodyn Pty Ltd t/as Time Cost and Quality v Davenport,9

where the Court of Appeal held that the NSW security of payments legislation (‘BCISPA’) does not provide that reference dates cease on termination of a contract or cessation of work, unless the contract provides otherwise. BCISPA defines reference dates ’in relation to a construction contract 10Until recently, this interpretation of reference dates was generally accepted in Queensland.

The Supreme Court of Queensland in Walton Construction (Qld) Pty Ltd v Corrosion Control Technology Pty Ltd & Ors

11held that the termination of a construction contract deprives the claimant its entitlement to make a payment claim under the Queensland security of payments legislation (‘BCIP Act’) as the termination prevents the reference dates from occurring.

Justice Lyons noted that the subcontract contained a default clause common in Australian Standard form contracts which provides that the parties rights will be the same as they would be at common law had the defaulting party repudiated the subcontract. Accrued rights survive termination of a contract for repudiatory conduct, such as those arising under an arbitration or liquidated damages clause. However, Justice Lyons said that the existence of contractual terms which specifically survive termination demonstrates that contractual terms typically do not operate after termination. Accordingly, Justice Lyons found that the effect of clause 44.10 of the contract was that reference dates ceased to accrue with the exercise of a right to terminate under clause 44 of the contract.

Walton was further distinguished from its NSW counterpart, Brodyn on the basis that the wording in the relevant Acts differed. Justice Lyons found that while the NSW Act defines a reference date ‘in relation to a construction contract’:

“the use of the expression “under a construction contract” found in the Queensland definition makes it

9 [2004] NSWCA394 10 Building and Construction Industry Security of Payment Act 1999 (NSW) section 8(2) 11 [2011] QSC 67

somewhat more difficult to conclude that a reference date occurs after termination. There is no longer a contract “under” which there might be a reference date”.

Ultimately, Justice Lyons found that it was [at 58]

“inconsistent with the statutory language to conclude that a statutory right to a final payment accrues independently of a reference date; or that a reference date occurs after termination, at least where that would be contrary to the effect of the contract”.

Queensland is the only jurisdiction which uses the expression ’under a construction contract’. The definition of reference date in Victoria, South Australia and Tasmania is similar to the New South Wales legislation,12while the Australian Capital Territory legislation uses the expression ’for a construction contract’. 13 A reference date is not defined in Northern Territory and Western Australian legislation.

Therefore, in Queensland alone a payment claim issued after termination of an Australian Standard form contract may be invalid for want of a reference date. If you want to preserve your right to issue payment claims following any termination of a construction contract, you should amend any Australian Standard form contract to ensure the contract expressly provides for the issuing of payment claims following termination.

Authors

David Rodighiero Partner

T (07) 3000 8376

E djr@carternewell.com

Marnie Carroll Solicitor

T (07) 3000 8484 E mcarroll@carternewell.com

12 Building and Construction Industry Security of Payment Act 2002 (Victoria) section 9(2); Building and Construction Security of Payment Act 2009 (SA) section 4; Building and Construction Industry Security of Payment Act2009 (TAS) section 4. 13 Building and Construction Industry Security Act 2009 (ACT) section 10(30.