Security of payment: Lahey Constructions Pty Ltd v Trident Civil Contracting Pty Ltd - [2013] NSWSC 176

The matter of Lahey Constructions Pty Ltd v Trident Civil Contracting Pty Ltd [2013] NSWSC 176 was an application for a declaration, before Stevenson J, in respect of an Adjudicator's adjudication.

Trident was a subcontractor engaged by Lahey to carry out earth works at the North Beach Pavilion in Woolongong. Clause 40 of the subcontract concerned variation claims, placing an onus on the subcontractor to make a variation claim within 2 days of a direction by Lahey to vary works. Lahey gave Trident an instruction (which Lahey denied was a variation) concerning the earthworks, and Trident alleged that this was a variation in a payment claim made 14 months after the work was completed. There was no variation claim made by Trident under the contract.

Particularity of payment schedules

Lahey issued a payment schedule (under the Building and Construction Industry Security of Payment Act 1999 (NSW) (the Act) broadly denying liability for the variation, stating: 'and as such we refer you to the Variation & Notice clauses within the contract'. Stevenson J noted that the Act states that a payment schedule 'must indicate why' the amount in the payment schedule is less than the amount claimed as well as 'reasons' for withholding payment (note: the equivalent Victorian act sets out this requirement in s15(3)). Stevenson J held that although particularity is required to 'a degree reasonably sufficient to apprise the parties of the real issues in dispute', sometimes the issue 'has been so expansively agitated in prior correspondence that the briefest reference in the payment schedule will suffice to identify it clearly' (at [30]:

[28] A payment schedule need not articulate the response to the payment claim as precisely as would be required in a pleading. However, "cryptic or vague" statements in a payment schedule as to the reasons for withholding payment are not sufficient. Particularity is required "to a degree reasonably sufficient to apprise the parties of the real issues in dispute" and "to enable the claimant to make a decision whether or not to pursue the claim and to understand the nature of the case it will have to meet in an adjudication". Sometimes, however, the issue "has been so expansively agitated in prior correspondence that the briefest reference in the payment schedule will suffice to identify it clearly": Multiplex Constructions Pty Ltd v Luikens [2003] NSWSC 1140 at [77] per Palmer J; cited with approval in Clarence Street Pty Ltd v Isis Projects Pty Ltd [2005] NSWCA 391; (2005) 64 NSWLR 448 at [27] per Mason P, with whom Giles and Santow JJA agreed; see also Nepean Engineering Pty Ltd v Total Process Services Pty Ltd [2005] NSWCA 409; (2005) 64 NSWLR 462 at [24] per Hodgson JA.

Here, there was a previous application under the Act in relation to an earlier dispute, and the previous determination dealt with these contentions. Stevenson J held that the issue the subject of the adjudication had been 'expansively agitated' between the parties and the brief reference to that issue in the payment schedule was sufficient for the purposes of the Act.

Jurisdictional error

Lahey submitted to the Adjudicator that Trident was barred from claiming a variation as it had not complied with the contract. In ordering that Lahey pay Trident the amount claimed in Trident's payment claim, the Adjudicator held as follows:

"[Lahey] submits that the conditions of contract provide a bar on any variation made other than in accordance with the contract conditions. The Act provides at section 3 that a person who undertakes to carry out construction work under a construction contract is entitled to receive and is able to recover progress payments in relation to the carrying out of that work. I determine that where [Trident] has undertaken construction work it is entitled to payment for that work and the conditions of contract do not provide a bar to the payment for that work".

Lahey submitted that the Adjudicator 'misapprehended the effect of the Act; that he thereby failed to discharge his statutory function under the Act and failed to consider something that the statute required him to consider, namely the terms of the contract between the parties.' Stevenson J agreed, and held that the Adjudicator committed jurisdictional error and failed to provide the parties natural justice by deciding a contractual issue on a basis not advocated by the parties.

Lahey submitted that the jurisdictional error was 'Proceeding in the absence of a jurisdictional fact; disregarding something that the relevant statute requires to be considered as a condition of jurisdiction, or considering something required to be ignored; and misconstruction of the statute leading to misconception of functions' [Chase Oyster Bar Pty Ltd v Hamo Industries Pty Ltd [2010] NSWSCA 190; (2010) 78 NSWLR 393, and Kirk v Industrial Court of New South Wales (2010) 239 CLR 531] That is, the Adjudicator misapprehended the nature of his powers by disregarding something that the Act required to be considered as a condition of jurisdiction, leading to a misconception by him of his functions. Stevenson J held that the Adjudicator's reasons showed that the Adjudicator felt entitled to reject the bar to variation point by reference to the Act, and in doing so the Adjudicator fell into error.

Stevenson J, referring to the objects of the Act in s3 (also s3 in the equivalent Victorian Act), held that a fundamental matter for consideration by the Adjudicator is the terms of the contract between the parties, and that the Adjudicator had no basis to simply ignore the terms of the subcontract. As such, Stevenson J held that the misapprehension of the role played by s3 of the Act and the Adjudicator's failure to have regard to the terms of the subcontract was jurisdictional error.

Denial of natural justice by deciding a point not agitated

Stevenson J also noted that neither party submitted to the adjudicator that the Adjudicator should decide the bar to variation issue with reference to s3 of the Act. Stevenson J referred to McDougall J in Musico v Davenport [2003] NSWSC 977 at [107]-[108]: "'It follows, in my opinion, that where an adjudicator determines an adjudication application upon a basis that neither party has notified to the other or contended for, and that the adjudicator has not notified to the parties, there is a breach of the fundamental requirement of natural justice that a party to a dispute have 'a reasonable opportunity of learning what is alleged against him and of putting forward his own case in answer to it'". Stevenson J held that the Adjudicator acted in breach of the requirements of natural justice. Stevenson J also noted that had the Adjudicator alerted the parties to the intention to decide the bar to variation point by reference to s3 of the Act, it is obvious that submissions could have been put to change the Adjudicator's mind on the point (referring to Watpac Constructions v Austin Corporation [2010] NSWSC 168 at [144]-[147]).

Lahey Constructions Pty Ltd v Trident Civil Contracting Pty Ltd [2013] NSWSC 176 is an important case. It decides 3 critical issues which commonly occur in the context of security of payment claims, that is, adequacy of particulars in a payment schedule, the necessity for the adjudicator to consider the terms of the contract and the necessity for the adjudicator to decide the matter on the arguments raised by the parties.

Prevention in 2012: Spiers Earthwords PL v Landtec Projects Corporation PL (No. 2) [2012] WASCA 53

In construction law the 'prevention' or 'Peak' principle was considered to have taken a turn for the worse after the two decisions of Turner Corporation Ltd v Co-ordinated Industries Pty Ltd (1995) 11 BCL 202 and Turner Corporation Ltd (receiver & manager appointed) v Austotel Pty Ltd (1997) 13 BCL 378. In the Turner cases, the New South Wales Supreme Court held (by way of summary) that a contractor is not able to claim that the principal prevented the contractor from reaching completion if the contractor failed to exercise its rights under the contract to claim an extension of time for such conduct.

Spiers Earthwords PL v Landtec Projects Corporation PL (No. 2) [2012] WASCA 53 (Spiers v Landtec) revisited the prevention principle in the context of the AS 2124-1986 standard contract (which is similar to the often used AS2124-1992 contract). The contractor claimed that it was prevented from reaching practical completion in respect of a contract for road works which had a 10 week completion period, and that the principal could not impose liquidated damages for the delay beyond the date for practical completion. The contractor claimed that the principal failed to supply sufficient or suitable material, that rectification was performed with unsuitable material, that additional works were undertaken at the principal's requests, that the principal made design changes and that there was inclement weather and also latent conditions.

The principal responded by saying that the contractor had not given notice requesting an extension of time (relying on the principle from the Turner cases). The contractor responded to this by saying that the principal requested additional work and the principal and superintendent had not responded to the contractor's requests for extensions of time, and was therefore estopped from relying on the contractor's failure to issue a notice under the contractual extension of time provisions.

The trial judge found that the principal was estopped from relying on the notice requirements of clause 35.5 in relation to 42 days, being a combination of additional work and rain delay, and that the date of the contract should be extended by 42 days. The contractor appealed this (although the finding was in the contractor's favour) as the contractor's position was that it didn't seek an extension of time, but instead sought that time be 'at large' (i.e. that completion occur within a reasonable time) by reason of the preventative conduct of the principal. The New South Wales Court of appeal upheld the trial judge's decision.

The contract in question (AS2124-1986) had a clause which expressed that principal or superintendent caused delays do not cause time to be set 'at large', in clause 35.5:

A delay by the Principal or the failure of the Superintendent to grant a reasonable extension of time or to grant an extension of time within 28 days shall not cause the Date for Practical Completion to be set at large but nothing in this paragraph shall prejudice any right of the Contractor to damages.

McLure P said that the Court was bound to follow Peninsula Balmain Pty Ltd v Abigroup Contractors Pty Ltd [2002] NSWCA 211, which upheld the Turner cases. Peninsula Balmain approved the Turner cases, and also is authority for the proposition that the power of the superintendent to extend time in the absence of the required contractual notice from the contractor was to be exercised in the interests of both the principal and the contractor, and the superintendent is obliged to act honestly and impartially in considering whether to do so. The result in Peninsula Balmain was that the referee appointed by a court extended the date for practical completion as it considered that the superintendent (which didn't extend the time) ought to have done so.

In obiter, McLure P cast doubt on the proposition that anyone other than the superintendent can grant an extension of time (at [57]). That is, in Peninsula Balmain the referee exercised the power of the superintendent to extend time, but McLure P didn't consider that this was a power that could have been exercised by anyone other than the superintendent.

In Spiers v Landtec the contractor argued, along the lines set out in Peninsula Balmain, that (at [58]):

1. the respondent had breached its duty to ensure the superintendent acted honestly and fairly as a result of the superintendent's breach of his duty to consider and, if appropriate, grant the appellant's requests for an extension of time regardless of the absence of any relevant notice; and
2. in the alternative, by reason of waiver and/or estoppel of the requirement for notice, the superintendent was in breach of his obligation to consider and, if appropriate, grant an extension of time.

McLure P noted that the contractor's propositions ignored the paragraph in clause 35.5 set out above and that its purpose was 'to prevent the prevention principle having the effect of setting time at large' (at [61] and [62]):

61 Whether and to what extent cl 35.5 is intended to exclude the application of the prevention principle is a matter of contractual construction. The objectively determined purpose of cl 35.5 is at least twofold. The first is to provide contractual machinery to prevent the time for practical completion being set at large as a result of the application of the prevention principle. The second is to place on the principal the risk of delay caused loss not attributable to any contractual party. However, it would appear its purpose is not to exclude the prevention principle itself insofar as it applies to delay caused by the principal's breach of the building contract. In the absence of an extension of time under cl 35.5, the contractor would be entitled to damages against the principal for its breach of contract, including any damages (liquidated or otherwise) it suffered as a result of principal-caused delays in practical completion. Whether or not that could be relied on as a defence (such as equitable set-off) does not have to be decided. In the result, cl 35.5 brings the prevention principle back into line with the general contractual principles relating to the implied duty to cooperate. Accordingly, it is unnecessary to determine whether contractual parties are free to exclude the implied duty to cooperate, which is a term implied by law. 

62 The same analysis would apply to a (derivative) breach by the principal arising from a superintendent's breach of the duty to consider the exercise of the power in cl 35.5. Moreover, it is arguable that the prevention principle is a relevant consideration in the exercise of the superintendent's discretion to extend time in relation to the 'non-breach' causes of delay specified in cl 35.5. If a court or another decision-maker concludes that the superintendent should have exercised the power and granted an extension of time, the principal will be prevented from claiming liquidated damages for the relevant (proven) delay. In summary, the relevant purpose of cl 35.5 is to prevent the prevention principle having the effect of setting time at large.

McLure P held that on her analysis the principal would not be entitled to liquidated damages for the period for which the appellant should have been given an extension of time under clause 35.5, and upheld the decision of the trial judge. Newnes JA agreed with McLure P on these grounds.

Spiers v Landtec is particularly important for two reasons (in the context of the 'prevention principle'):

1. The Court has questioned whether anyone other than the superintendent can extend time. This requires an analysis of the relevant contract the subject of a dispute to ascertain the scope of the power to extend time, and to determine whether anyone else can exercise this power.
2. The Court has noted that the prevention principle is alive and well, at least to the extent that a principal may be precluded from relying on a claim for liquidated damages for a particular period of time during which that principal has contributed to the delay.

One of the difficulties, however, with the analysis of McLure P is that it is unclear how the conclusion is reached that the principal is not entitled to liquidated damages for the 42 days. For instance, it is not characterised by McLure P as an entitlement of the contractor in estoppel, despite the trial judge finding that this is how it was to be characterised.