2014

Proportionate Liability - What Are You Settling For? 1-5

Current Issues in Contractual Set-Off 6-11

Payment Claims: No ‘Contracting Out’ of Security of Payment Legislation 12-15

Discussed inside:

In-house counsel are often asked to document settlements on projects. Bringing a dispute to a satisfactory and effective close can be a challenge, particularly when multiple parties are involved and there is a debate about who caused the loss. The task of in-house counsel has become even more difficult since the introduction of the proportionate liability regime in Australia – especially from the perspective of a defendant.

It is uncertain how the proportionate liability regime, which in Victoria is contained in Part IVAA of the Wrongs Act 1958 (Vic) (Wrongs Act), will accommodate a settlement agreement between a plaintiff and some, but not all, of the defendants. This uncertainty means that a defendant who settles an apportionable claim may potentially end up worse off for its efforts. An apportionable claim is defined as a claim for economic loss, or damage to property, in an action for damages (whether in tort, contract, under statute or otherwise)

arising from a failure to take reasonable care. This includes a claim for damages for a contravention of the misleading or deceptive conduct provisions of the Australian Consumer Law. Given the way in which the proportionate liability regime has been interpreted, it is likely that many contractual claims will be considered ‘apportionable’, and as such, careful regard should be had to the regime in determining whether and how to settle a claim.

While there have been a number of decisions providing some guidance as to how the proportionate liability regime operates where a defendant settles an apportionable claim, these decisions also highlight the scope for substantial uncertainty.

This article provides a summary of a key issue which should be considered in deciding whether and how to settle an apportionable claim from the defendant’s perspective.

ProPortionate LiabiLity – What are you SettLing For?

May 2014

2ProPortionate LiabiLity – What are you SettLing For?the risk of settling an apportionable claim

In dealing with an apportionable claim, in-house counsel should carefully consider section 24AJ of the Wrongs Act or its equivalent depending on the particular jurisdiction.

Section 24AJ of the Wrongs Act provides that:

…a defendant against whom judgment is given under this Part as a concurrent wrongdoer in relation to an apportionable claim—

a. cannot be required to contribute to the damages recovered or recoverable from another concurrent wrongdoer in the same proceeding for the apportionable claim; and

b. cannot be required to indemnify any such wrongdoer.

Section 24AJ is intended to ensure that defendants are protected from having to pay for more than their proper share of the loss or damage the subject of the apportionable claim. However, this protection applies only to those defendants “against whom judgment is given”. Where instead, a defendant chooses to settle a claim, the protection found in section 24AJ will not assist that defendant if another defendant in that same proceeding later brings a claim for contribution against it.

As a consequence, despite having struck a bargain with the plaintiff on favourable terms, a defendant may lose the benefit of reaching a settlement agreement and end up paying more than it bargained for.

If the plaintiff proceeds with its claim against the remaining defendants, and the court finds them liable for the plaintiff’s loss, a defendant may find itself in a position where it is required to make contribution toward the amount the remaining defendants were ordered to pay, over and above the payment of the settlement sum.

Mitigating the risks

There are a number of options available to a defendant who wishes to limit its exposure to contribution claims in circumstances where it enters into a settlement agreement with the plaintiff. First, a defendant could have judgment entered against it for the settlement sum. In the Victorian Court of Appeal decision in Godfrey Spowers (Victoria) Pty Ltd v Lincolne Scott Australia Pty Ltd & Ors [2008] VSCA 28, the Court referred to the fact that a settling defendant does not have the protection of section 24AJ, and noted that “such a defendant may well be advised to oblige the plaintiff to enter judgment against it for the settlement sum”.

While this is one strategy available to a settling defendant in order to protect itself from a contribution claim, there is a risk that a judgment entered for the purpose of giving effect to a settlement may not enliven the protection of section 24AJ. In December 2012, the High Court in Newcrest Mining Ltd v Thornton (2012) 293 ALR 493 found that a consent judgment in proceedings filed solely to give effect to a settlement agreement is not a “judgment first given” as it does not involve a judicial assessment. Although the High Court was considering section 7(1)(b) of the Law Reform (Contributory Negligence and Tortfeasors Contribution) Act 1947 (WA) – which provides that if more than one action was brought in respect of damage against tortfeasors liable in respect of the damage, the sum recoverable under the judgments given in those actions is limited to the amount of the damages awarded by the ‘judgment first given’ – it is arguable that analogous reasoning could apply when determining whether a consent judgment to effect a settlement agreement is a ‘judgment’ for the purposes of section 24AJ of the Wrongs Act.

Secondly, a defendant could require the settlement to be for the plaintiff’s entire claim and at the same time procure a broad release for all other defendants in the action (who would otherwise be “concurrent wrongdoers”). For example, there is nothing to stop an engineer defendant from asking a plaintiff principal to grant a release to both it and a building contractor co-defendant as a term of the settlement (in fact, this approach was considered with approval by the Court in the Spowers decision). This way, the principal could not pursue its claim against the building contractor, and consequently there is no basis for the building contractor to seek contribution from the engineer.

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Drafting considerations

Which of the options above a defendant chooses to pursue will depend ultimately on the particular circumstances of the case and, no doubt, the commercial drivers for any settlement. In any case, it is important that the terms of settlement deal with the procedural and other issues created in consequence of the proportionate liability regime.

In the event a defendant takes the approach of settling a plaintiff’s entire claim, it is important to ensure that the settlement agreement is drafted in a way that will ensure the settling defendant can later pursue the remaining defendants for contribution. To that end, a settling defendant may wish to consider incorporating the following terms:

1. That the settlement sum is provided in settlement of the plaintiff’s entire claim, and not merely the settling defendant’s proportionate liability for the claim.

2. A release from the plaintiff in favour of the remaining defendants against whom the settling defendant intends to bring a claim for contribution or indemnity. This further supports the contention that the settlement sum is being provided in settlement of the plaintiff’s entire claim, as set out in (1) above, and means the remaining defendants are no longer exposed to any claim from the plaintiff, only a claim from the settling defendant in contribution.

A further advantage to this approach (also noted in the Spowers decision) is that a defendant, who settles with a plaintiff on terms which include a release for all other concurrent wrongdoers, can itself seek contribution toward the settlement amount from the remaining defendants. This approach is also likely to appeal to the plaintiff, as it would be relieved from having to pursue the remaining defendants in order to recover damages. Instead, it is the settling defendant who would need to seek contribution to recover an amount equivalent to the remaining co-defendants’ liability in respect of the plaintiff’s original claim.

The third option is to seek a full indemnity from the plaintiff for any losses and costs the defendant incurs arising out of or in connection with claims for contribution brought against it by reason of the plaintiff’s prosecution of its claim against the remaining defendants or other parties who may be joined subsequently.

Finally, the approach taken by the Victorian Civil and Administrative Tribunal in Vollenbroich v Krongold [2006] VCAT 1710 should be considered. In that case, the claim against the settling architects and engineers was ordered to be struck out with no order as to costs, consequent on the settlement. In this way, the settling parties remained as nominal parties to the proceedings, which meant they could be taken into account in respect of any apportionment exercise between the defendants at the time of judgment being entered. This provided a pragmatic solution to the complexities created by the proportionate liability regime.

A defendant may lose the benefit of a settlement agreement and end up paying more than it bargained for.

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3. A full indemnity from the plaintiff in respect of any liability to third parties in relation to the subject matter of the claims, including any remaining defendants (to ensure the settling defendant is protected in the event the plaintiff subsequently seeks to pursue the remaining defendants or other parties who may then try to implicate the settling defendant).

4. Wording for consent orders specifying that the plaintiff’s claim is to be struck out with or without an order as to costs. In the Spowers decision the plaintiff’s claim was ordered to be struck out, but with a right of reinstatement to the architect, which seems to have been a precaution because of the architect’s ongoing contribution claim.

Conclusion

Given the difficulties presented by the proportionate liability regime, it is important that in-house counsel be involved at an early stage in any settlement negotiations to ensure that proportionate liability issues are considered before the deal is concluded.

Careful consideration should be given to the risks identified above in determining whether and how to settle an apportionable claim. If a defendant decides to settle a claim, the adoption of one or more of the above strategies should go some way to ensuring the settlement agreement is effective.

Different considerations will apply for plaintiffs wishing to settle an apportionable claim.

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In a business sense, first and foremost, the purpose of a contractual right of set-off is to lock in the principal’s entitlement to either reduce or eliminate the principal’s debt to the contractor where money is owed by the contractor to the principal.

The set-off clause helps the principal to mitigate the risk that the contractor may be unable or unwilling to pay an amount owed to the principal, for whatever reason. It is possible to dispense with the circuity associated with making actual cross payments.

Contractual set-off provides a powerful self-help remedy for the principal. If there is a choice between setting off against a payment claim and drawing down on a bank guarantee, obviously most principals would prefer to preserve the bank guarantee.

Depending on the circumstances, the principal may also have a right to set-off at common law, in equity or under statute. Each of the different categories of set-off have their own rules and peculiarities. The inclusion of a set-off clause in a contract is intended to address some of the difficulties that can arise when it is necessary to rely on arguments based on common law and equitable set-off.

Even though there may be legitimate reasons for principals to insist on the inclusion of a set-off clause, many contractors are worried about the trend towards broadly drafted contractual rights of set-off that give the impression that the principal is entitled to be both judge and jury on its own claims for payment.

6Current iSSueS in ContraCtuaL Set-oFF

australian decisions on contractual set-off

Set-off principles only come into play in certain circumstances. In the High Court decision of Commissioner of Stamp Duties (NSW) v Perpetual Trustee Co Ltd (1929) 43 CLR 247, which was a case involving a shareholder’s liability on shares, Knox CJ and Dixon J said:

It is, of course, well settled that when the liability upon shares and the liability upon a cross-demand against the Company in a sum immediately payable are mutually extinguished by an agreed set-off, this amounts to payment…

However, this principle is subject to a caveat, which was explained by Knox CJ and Dixon J in the following terms:

But these principles are called into play…only where there is a sum lawfully payable by the Company which when paid might lawfully be repaid to the Company in discharge of the liability upon the shares. The liability upon shares cannot be discharged unless the Company obtains in funds or assets that which is, or is supposed to be, a real equivalent to the capital represented by the shares.

More recently, the Full Federal Court in Opal Maritime Agencies Pty Ltd v The Proceeds of Sale of the Vessel MV “Skulptor Konenkov” (2000) 98 FCR 519 confirmed that the general effect of a contractual set-off is to deem equal liabilities from each party to the other as having been paid with only the balance remaining to be claimed. In Re Application of Keith Bray Pty Ltd (1991) 23

NSWLR 430 McLelland J held that where contractual set-off is available, the consequence is that set-off is “in law equivalent to actual payment on each side”.

The need for equal liabilities was emphasised in Pro-Image Studios v Commonwealth Bank of Australia (1991) 4 ACSR 586 by Fullagar J who said it is the liability of each party “that must be equal, the two causes of action immediately payable, not some assessed value of the prospects which each or one side respectively has or executing for a judgment upon the cause of action once obtained”.

In brief, the reported cases on contractual set-off demonstrate that:

• the outcome on disputes about contractual rights of set-off will turn on the construction of the contract between the parties but there may also need to be a determination on underlying factual issues, such as allegations of delay or defective workmanship;

• the court will look at the contract as a whole - a number of clauses will be taken into consideration when deciding on the proper interpretation of the set-off clause;

• unliquidated claims create complexity;

• difficulties can arise for the principal where the set-off involves a claim for money where both liability and quantum are in dispute; and

• case law dealing with other categories of set-off is not necessarily helpful when considering contractual set-off.

The different categories of set-off have their own rules and peculiarities.

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“Money due”

Consider this scenario: you are the principal, and the contractor’s work is both defective and late. You believe you are entitled to claim damages for loss flowing from the defective work and delay. The contractor has already notified an extension of time and you know that your entitlement to claim damages is disputed.

Your contract contains a set-off clause which reflects the drafting in clause 42.10 of Australian Standard 2124-1992:

The Principal may deduct from moneys otherwise due to the Contractor any money due from the Contractor to the Principal and if those moneys are insufficient, the Principal can have recourse to retention moneys and, if they are insufficient, to security under the Contract.

Would you be entitled to set-off the damages claim against the contractor’s next payment claim?

Arguably, you may not be entitled to set-off the damages claim – at least not yet anyway. Decisions such as Wulguru Heights Pty Ltd v Merritt Cairns Constructions Pty Ltd [1995] 2 Qd R 521 (Wulguru) indicate that the expression ‘money due’ does not include amounts which are only contingently due.

In that case, McPherson JA considered the word “due” and noted that it is susceptible to more than one meaning. However, he concluded that the expression “money due” does not describe a claim which, as regards liability, has not yet been determined and, as regards quantum, has not yet been ascertained. This interpretation was supported by the wording in the payment clause which referred to amounts which the principal was ‘entitled’ to deduct.

McPherson JA considered a range of provisions in the contract, including the clause which detailed the procedure for referral to arbitration. That clause concluded with the following provision:

Notwithstanding the existence of a dispute, each party shall continue to perform the contract. In particular, the Contractor shall continue with the work, and the Principal shall continue to comply with [the provision which required the Principal to pay the Contractor the amount due to the Contractor within a specified number of days after the Superintendent had issued the payment certificate].

McPherson JA concluded that when the various clauses were taken together, it was clear that the principal was not entitled to avoid or defer its obligations under the payment clause by asserting a set-off in respect of a contingent amount.

Davies JA agreed with McPherson JA and noted that that the words “money due” must be more than merely an amount or claim which the principal asserts the contractor is liable to pay.

Fitzgerald P commented that: “[n]o authority was cited … to support the proposition that, at least in this context, the amount of a disputed unliquidated claim is ‘money due’… In my opinion, such a proposition is manifestly incorrect”.

In Wulguru, the court found that the principal’s remedy was to refer the matter to dispute and to prove its entitlement to damages. If in the end the claim for damages was vindicated, then the principal would be entitled to seek an order from the arbitrator for repayment of the amount which was overpaid, plus interest. McPherson JA commented: “no doubt that is a reason why the contract provides for a retention sum or for security for performance by the contractor”.

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The set-off clause helps to mitigate the risk that the contractor may be unable or unwilling to pay an amount owed to the principal.

unliquidated amounts

There are certain categories of set-off which are only available for liquidated amounts. In some classes of procedural set-off, the distinction between whether a claim is liquidated or unliquidated may be critical to the outcome. There are relatively few reported cases dealing with this issue in the context of contractual rights of set-off.

In the Wulguru decision, McPherson JA commented on the set-off clause at clause 42.10 of the contract and noted that it was necessary for the court to put to one side “any difficulties about setting off an unliquidated claim against a liquidated sum” because when read in conjunction with the other clauses, the set-off clause:

[c]an be seen to incorporate its own solution to problems of that kind. The deduction which the Principal is authorised by clause 42.10 to make is a deduction ‘of any money due from the Contractor to the Principal’. The expression ‘money due’ is not apt to describe a claim which, as regards liability, has not yet been determined, and, as regards quantum, has not yet been ascertained.

That is, in Wulguru the court found that the drafting made it clear that the set-off right was limited to liquidated amounts, so there was no need for the court to consider the question of unliquidated amounts.

The Wulguru decision can be contrasted with the approach taken by the Court of Appeal in England in Geldof Metaalconstructie NV v Simon Carves Limited [2010] EWCA Civ 667. That case involved an installation contract for tanks and vessels in a bioethanol plant. The contract included the following clause:

Purchaser, without waiver or limitation of any rights or remedies of Purchaser or Owner, shall be entitled from time to time to set off against the Purchase Order Price any amounts lawfully due from the Supplier to the Purchaser whether under this Purchase Order or otherwise.

At first instance, the judge found it was quite clear that the words “all amounts lawfully due” did not include the principal’s claim for unliquidated damages. On appeal, the supplier made an important concession, namely that unliquidated amounts fell within the set-off clause. However, the supplier argued that set-off could not be applied unless the unliquidated claim had been ascertained via adjudication.

Ultimately the Court of Appeal rejected the supplier’s argument that the set-off clause imposed a requirement for the amount to be ascertained via adjudication. Given the concession mentioned above, the court held that the claim for an unliquidated amount fell within the set-off clause. As a result, the principal was entitled to set-off its counter claim, even though it was unliquidated. It is interesting to speculate on the impact of the concession on the outcome.

Broadly drafted contractual rights of set-off can give the impression that the principal is entitled to be both judge and jury on its own claims for payment.

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Another case dealing with the question of liquidated claims is National Australia Bank Ltd v Indoport Pty Ltd [2007] NSWSC 1349. In that case the court was asked to interpret a mutual set-off clause which Indoport had relied upon to set-off $63 million against a $414 million debt owed to NAB, in circumstances where Indoport had previously been barred from bringing court proceedings against NAB because it had failed to provide security for costs. In these circumstances, the question was whether the amount of $63 million could be set-off under the contractual set-off clause.

There was a debate about whether the amount of $63 million was a liquidated sum and, if not, whether this affected Indoport’s right to set-off. While NAB conceded that Indoport may have a claim against NAB, it was submitted that: “there is not at present any sum due and payable by NAB to Indoport which could constitute a liquidated sum capable of being the subject of contractual set-off”. Young CJ accepted NAB’s submission that set-off is only available where the amount said to be due can be recovered by action. He found it was unnecessary to rule on whether a claim which is not currently in a certain sum is a liquidated demand, if it can be made certain on facts currently known.

The cases demonstrate that any attempt to set-off an unliquidated amount gives rise to complexity. There is nothing to stop a party from attempting to draft a set-off clause in a way that permits damages claims for unliquidated amounts to be set-off. However, query whether the amount can be classed as a sum which is lawfully payable in circumstances where there is live entitlement to refer liability and/or quantum to dispute resolution? The cases make it clear that to extinguish liability by contractual set-off there must be equal liabilities for amounts which are lawfully payable.

“Money due otherwise than under the contract”

The case of Ewing International LP v Ausbulk Limited [2008] SASC 25 involved two contracts to construct grain silos and supporting structural work. Two bank guarantees were provided by Ewing to secure performance of the two contracts.

The principal claimed liquidated damages for delay under the silo contract. There was also a claim for unliquidated damages for defective performance under the silo contract. The principal claimed to be entitled to set-off both the liquidated and unliquidated amounts.

The contracts involved a modified version of Australian Standard 2124-1992. Clause 42.10 was unamended and expressed in the following terms:

The Principal may deduct from moneys due to the Contractor any money due from the Contractor to the Principal otherwise than under the Contract and if those moneys are insufficient, the Principal may, subject to Clause 5.5 [Recourse to Retention Moneys and Conversion of Security] have recourse to retention moneys and, if they are insufficient, then to security under the Contract. (Emphasis added)

The principal argued that, because there were two contracts, the set-off clause enabled the principal to claim money due under the silo contract as a set-off on the structural work contract, and vice versa. The principal argued that it was entitled to have recourse to the bank guarantees provided by Ewing under either contract for debts owed by Ewing. The contractor applied successfully for an interim injunction to prevent the principal from calling the bank guarantees, pending further orders.

Layton J concluded there was a serious issue to be tried with regard to the interpretation of the terms of the contract and the principal’s rights to have recourse to the bank guarantees. His Honour noted that he considered that Ewing had sufficient likelihood of relief at trial in relation to the declarations sought and injunctions. Further, his Honour found:

[W]hat is also obvious is that these interpretative issues cannot be decided in a vacuum as there are also…significant underlying issues of fact which are in dispute as to alleged breach…which would require determination other than by these interlocutory proceedings.

Although this decision involved an interim injunction, rather than a final determination, it highlights that where links are created to other contracts via the set-off clause, there may be scope for the principal to argue that the bank guarantees given under those other contracts are captured.

Conclusion

Set-off clauses are a common feature of contracts in the Australian market. This article focuses on those clauses which contemplate set-off in the strict sense. The cases demonstrate that difficulties may arise where parties purport to set-off unliquidated amounts in reliance on such clauses. Attempts to draft around these difficulties may give rise to different considerations. A party who relies on a clause that contemplates a contractual right to short pay invoices based on the mere assertion of a claim, which may or may not crystallise at some time in the future, needs to bear in mind that this is nothing more than a stop gap measure. There is no getting around the requirement to establish liability and quantum.

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12PayMent CLaiMS: no ‘ContraCting out’ oF SeCurity oF PayMent LegiSLationConstruction contracts will ordinarily include a payment regime under which the party providing the goods or services can submit claims for payment. This payment regime may set out requirements for matters such as:

• the form which the payment claim must take;

• the time at which claims can be made; and

• amounts that can be included in a payment claim.

It may come as a surprise to both principals and contractors that a party who is not entitled to claim for payment under the terms of the construction contract, may, in some instances, be entitled to submit a claim for a progress payment under security of payment legislation. In most jurisdictions, the terms of a construction contract will not override or exclude the statutory entitlement to claim and be paid for work performed.

For construction contracts in Victoria, New South Wales, Queensland, South Australia, Tasmania and the Australian Capital Territory, this is because of the ‘no contracting out’ provisions of the security of payment legislation which applies in those States.

Under these provisions, the terms of the payment regime set out in the security of payment legislation have effect despite any provision in the contract to the contrary. Further, a provision of a construction contract may be held to be void if it:

• restricts, excludes, modifies or waives the operation of the relevant security of payment legislation; or

• may reasonably be construed as an attempt to deter a person from taking action under the legislation.

The legislation in the Northern Territory and Western Australia also contains ‘no contracting out’ provisions. However, in these jurisdictions the interaction between the legislation and the construction contract in relation to payment regimes is slightly different. Terms dealing with the contractor’s entitlement to be paid, to claim progress payments and the time for payment will be implied into a construction contract only where there are not already written provisions about those matters.

Contractors have sought to rely on ‘no contracting out’ provisions to avoid the strict requirements for, or bars to, submitting payment claims under construction contracts by submitting claims under security of payment legislations. Four examples are outlined in this article.

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PayMent CLaiMS: no ‘ContraCting out’ oF SeCurity oF PayMent LegiSLation

Case examples

John Holland Pty Ltd v Coastal Dredging & Construction Pty Ltd [2012] QCA 150

In this decision, the contractor, John Holland, argued that a payment claim submitted by its sub-contractor, CDC, under the Building and Construction Industry Payments Act 2004 (QLD) (BCIPA) was invalid because it did not meet the requirements for a payment claim set out in the construction contract. CDC successfully argued that, despite non-compliance with the terms of the contract, it was a valid claim under the BCIPA.

The payment regime under the construction contract provided that:

• CDC “may” submit a payment claim only on each “Reference Date”, defined to be the 28th day of each month; and

• each payment claim had to satisfy a number of requirements, for example, the payment claim had to include a number of warranties and be accompanied by a statutory declaration to the effect that all subcontractors had been paid.

If a payment claim submitted by the contractor did not satisfy all the requirements, there were two consequences under the contract:

• the payment claim was void; and

• the Reference Date for the purposes of the BCIPA was the 28th day of the following month.

The BCIPA provides that a person is entitled to progress payments “from each reference date under a construction contract”. John Holland’s position was that because CDC’s payment claim did not meet all of the requirements under the contract it was not a valid payment claim, the reference date had not accrued and therefore there was no entitlement for CDC to claim under the BCIPA.

The court determined that the payment claim was in fact validly made under the BCIPA. This was because “reference date” under the BCIPA is defined to mean “a date stated in, or worked out under, the contract as the date on which a claim for a progress payment may be made…” (emphasis added). Under the contract, the date on which a claim for progress payment “may” be made was the 28th of each month, whether or not all of the conditions in the contract for submitting payment claims were satisfied.

The court found that the effect of the contractual provisions dealing with the failure of a payment claim to satisfy the contractual requirements was therefore to defer CDC’s statutory entitlement to a progress payment and, as a consequence, these provisions were void.

BHW Solutions Pty Ltd v Altitude Constructions Pty Ltd [2012] QSC 214

In this case, the principal, Altitude, relied on a similar argument that the payment claims submitted by the contractor, BHW, were invalid under the BCIPA because of a failure to meet the contractual requirements for the submission of payment claims.

The contracts in issue required that, as a precondition to payment, each payment claim must be accompanied by a declaration with a statement to the effect that BHW had paid all of its employees, workers, subcontractors and suppliers in full as at the date of the payment claim.

BHW’s payment claims did not include the relevant declarations. However, the court determined that such a declaration was not a necessary requirement for a payment claim under the BCIPA, and therefore that BHW’s payment claims were valid payment claims under the legislation.

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Minister for Commerce v Contrax Plumbing [2004] NSWSC 823

In this New South Wales decision, the contractor, Contrax, argued that two provisions of the contract which had the effect of limiting its ability to claim variation work fell foul of the ‘no contracting out’ provisions of the Building and Construction Industry Security of Payment Act 1994 (NSW) (BCISPA).

The construction contract provided that:

• “[i]n aggregate, Payment Claims shall not exceed the Contract Price”;

• “[i]n valuing work, regard shall not be had to the value of variations which value has not been included in the Contract Price”; and

• the Contract Price could only be adjusted after a process for “Ex-contractual claims” had come to its conclusion.

Importantly, the process set out in the contract for the valuation of “Ex-contractual claims” to adjust the Contract Price could take more than six months to complete.

The court held that the effect of this contractual framework was that where the Contract Price had been exceeded, Contrax had no entitlement under the contract to be paid for variations until up to more than six months after the works were undertaken. The framework operated to impose a cap or limitation on the entitlement of Contrax to make claims for progress payments for construction work actually done, and were therefore void under the ‘no contracting out’ provisions of the BCISPA.

This decision was challenged in the New South Wales Court of Appeal, and the appeal was ultimately dismissed, although not on the grounds of whether the relevant contractual clauses fell foul of the ‘no contracting out’ provisions.

A payment claim that does not comply with the contract may nonetheless be valid under security of payment legislation.

Disclaimer

The content of our publications is intended only to provide a summary and general overview on matters of interest, current at the time of publication. The content is not intended to be comprehensive, nor does it constitute legal advice. You should seek legal or other professional advice before acting or relying on any of the content.

John Goss Projects Pty Ltd v Leighton Contractors Pty Ltd (2006) 66 NSWLR 707

In this case, the court upheld a clause which provided that the principal, Leighton, would have no liability to meet any claim by the contractor unless certain procedures were complied with within 10 business days of the occurrence of the events giving rise to the claim.

In this instance, the court found that although the effect of the relevant clause was to bar claims, it did not follow that it was inconsistent with the BCISPA. Rather, the clause limited the contractor’s “entitlement to work that might be comprised in a payment claim, whenever the payment claim might be made”, and did not limit the time for making claims under the BCISPA. Provided that notice was given in accordance with the contract, the work the subject of the notice could be included in a payment claim made at any time, subject to the general provisions of the BCISPA.

Interestingly, the judge in this case went further to note that John Goss did not submit that the time limit for providing notice of claims was one with which it could not possibly or reasonably comply in any given case. It is possible therefore that the result would have been different if the time period for submitting claims was found to be unreasonably short.

Conclusion

Principals and contractors should be aware that although a contractor’s payment claim may not satisfy the requirements of the contract, it may nonetheless be valid under the security of payment legislation. Further, if the terms of the contract are inconsistent with the operation of the security of payment legislation, there is a risk that those terms may be held to be void.

While the focus of this article has been on the effect of ‘no contracting out’ provisions of security of payment legislation on the right to submit payment claims, the ‘no contracting out’ provisions apply to all provisions, arrangements and agreements under a construction contract. There are, for example, other cases in which contractors have sought to rely on these provisions in relation to the application of exclusive jurisdiction clauses and performance guarantees. Another instance where contractual terms may fall foul of ‘no contracting out’ provisions is in the case of terms providing for set-off or deductions to be made by the principal to reduce amounts owed to the contractor. This is discussed further in our article dealing with Current Issues in Contractual Set-Off in this edition.

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Tony Molino

Director

MolinoCahill Lawyers

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tmolino@molinocahill.com.au

Meghan Cahill

Director

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mcahill@molinocahill.com.au

Penny Swain

Director

MolinoCahill Lawyers

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pswain@molinocahill.com.au

Alastair Oxbrough

Director

MolinoCahill Lawyers

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Brigid Lloyd

Director

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blloyd@molinocahill.com.au

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