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AUSTRALIAN
CONSTRUCTION
LAW NEWSLETTER
ISSUE #152 SEPTEMBER/OCTOBER 2013
ACLN
AUSTRALIAN
CONSTRUCTION
LAW
NEWSLETTER
ABN 55 138 594 706
ISSN 1032 0288
Published by: Swap Exchange Pty. Ltd.
PO Box R1140 Royal Exchange
SYDNEY NSW 1225 AUSTRALIA
Email: publisher@acln.com.au
Website: www.acln.com.au
IMPORTANT NOTICE
The material contained in ACLN is in
the nature of general comment only
and is not information or advice on any
particular matter. No one should act on
the basis of anything contained in this
Newsletter without taking appropriate
professional advice upon the particular
circumstances. The publishers, editors
and authors do not accept responsibility
for the consequences of any action
taken or omitted to be taken by any
person, whether a subscriber to this
Newsletter or not, as a consequence of
anything contained in or omitted from
this Newsletter.
CONTENTS #152
ARTICLES
EDITORIAL4
JOHN TWYFORD
NEGLIGENCE6
THE DUTY OF CARE IN DESIGN—CAN ENGINEERS RELY ON CODES OF
PRACTICE?
DONALD CHARRETT AND ANDREW POTTS
CONTRACTS16
GOOD FAITH IN CONTRACT PERFORMANCE—HAS THE LAW CHANGED?
TOM GRACE AND JOCK HAMILTON
ELECTRONIC TRANSACTIONS
24
HIT ‘SEND’ AND HOPE—PROBLEMS WITH CONTRACTUAL NOTICES BY EMAIL
OWEN HAYFORD AND BETINA FRIEDEBERG
SECURITY OF PAYMENT
THREE EARLY SECURITY OF PAYMENT CASES IN SOUTH AUSTRALIA
ROBERT FENWICK ELLIOTT
28
CONTRACTS30
PROPORTIONATE LIABILITY IN THE BUILDING AND CONSTRUCTION INDUSTRY FOLLOWING HUNT & HUNT V MITCHELL MORGAN
JACLYN SMITH
ARBITRATION45
ARBITRATION IN AUSTRALIA—SUPREME COURT SUPPORTS DOMESTIC
ARBITRATION IRRESPECTIVE OF THE PROSPECT OF SPLIT PROCEEDINGS
GEOFF HANSEN AND JENNIFER GALATAS
COPYRIGHT
Material published in the ACLN is
copyright. Apart from fair dealing for
the purposes of private study, research,
criticism or review as permitted under
the Copyright Act 1968 (Cth), no part
may be produced by any process
without written permission.
SUBSCRIPTIONS
Please see our website or contact us.
PRINTING
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PO Box 123 BROADWAY NSW 2007
2 AUSTRALIAN CONSTRUCTION LAW NEWSLETTER #152 SEPTEMBER/OCTOBER 2013
EDITOR
John Twyford
CONTENTS #152
ARTICLES
SECURITY OF PAYMENT 48
DO YOU HAVE A STANDING TRADE CREDIT AGREEMENT TO SUPPLY CONSTRUCTION SERVICES OR MATERIALS?
ALISA TAYLOR AND KIMBERLY MOORE
PUBLISHER / ASSISTANT EDITOR
Myra Nikolich
EDITORIAL PANEL
Matthew Bell
Lecturer and Co–Director of Studies for
SECURITY OF PAYMENT
50 Construction Law, Faculty of Law
THE CURATE’S EGG REVISITED
University of Melbourne, Melbourne
PHILIP DAVENPORT
Philip Davenport
Solicitor, Sydney
BUILDING REGULATION
52
Philip Dawson
UNCERTAIN TIMES AHEAD—THE QUEENSLAND BUILDING SERVICES Partner
AUTHORITY NO LONGER!
Clayton Utz, Sydney
REN NIEMANN AND GORAN GELIC
Leigh Duthie
SECURITY OF PAYMENT
54 Partner
Baker & McKenzie, Melbourne
SECURITY OF PAYMENT LEGISLATION MAY NOT APPLY TO CONTRACTS Graham Easton
FOR WORKS INVOLVING MINING PLANT
Arbitrator & Mediator
SCOTT LAYCOCK AND ROHAN DIAS
G R Easton Pty Ltd, Sydney
COMPETITION LAW
56 Arch Fletcher
Partner
IMPACT OF COMPETITION LAW ON THE CONSTRUCTION INDUSTRY Clayton Utz, Brisbane
MALCOLM CHIN AND MIRANDA NOBLE
Robert Floreani
Senior Partner
CASE NOTES
Floreani Coates, Adelaide
CASE NOTE
59 Janet Grey
Architect, Arbitrator & Mediator, Sydney
NEW SOUTH WALES COURT OF APPEAL FINDS DEFECTS DUTY PETER PETHER, ADAM WALLWORK AND JENNIFER TURNER
Phillip Greenham
Partner
Minter Ellison, Melbourne
Laurie James
Chairman of Partners
Kott Gunning, Perth
Doug Jones AO
Partner
Clayton Utz, Sydney
Christopher Kerin
Partner
Teys Lawyers, Sydney
Scott Laycock
Partner
Gadens Lawyers, Sydney
Wendy Roydhouse
Solicitor, Sydney
CONTRIBUTIONS
Contributions to the ACLN from readers
are encouraged. Please submit articles
for consideration to the publishers.
PEER REVIEW
We now offer the facility of peer review.
If you would like to register your name
with us as a potential referee—willing to
peer review other professionals’ work—
please send your details and area/s of
expertise, marked for the attention of the
Editor.
AUSTRALIAN CONSTRUCTION LAW NEWSLETTER #152 SEPTEMBER/OCTOBER 2013 3
EDITORIAL
EDITORIAL
John Twyford
In the leading article of this issue
of the ACLN, Donald Charrett and
Andrew Potts consider the extent
to which an engineer’s duty of
care to a client is satisfied by the
design complying with the relevant
standards. It is a very interesting
paper and well worth careful study.
The work includes a detailed
description of the Standard making
process and the authors assert
that for the design of ‘conventional
infrastructure’ compliance with the
relevant standards ought to satisfy
the duty of care. The Courts, as is
instanced in the Goonyella case,
may not share this view. This case
is discussed in detail and the
authors fear that the end result
requires an engineer to question
the efficacy of any standard he
or she is using. It is a decision of
a single justice of the Supreme
Court of Queensland and, given
the sums of money that were
probably at stake, is surprising
that there was no appeal. In their
text the authors have quoted one
of your Editor’s favourite judicial
statements: ‘The law does not
require of a professional man that
he be a paragon, combining the
qualities of polymath and prophet,’
Eckersley v Binnie & Partners
(1988) 18 Con LR 1.
Our next paper concerns the
arcane subject of the implication
of a term into commercial
contracts requiring the parties to
act toward each other exercising
‘good faith’. The authors, Tom
Grace and Jock Hamilton, have
given us an excellent history of
the development of the doctrine
through its various manifestations.
It would seem that the doctrine
might have reached its high water
mark in the South Australian
decision of Alstom v YDMRL.
There, a single justice of the
Supreme Court decided that
the doctrine was applicable to
all commercial contracts. The
authors conclude by discussing
how a contract might be drafted to
accommodate the principle.
Remaining on the question of
arcane subjects, Owen Hayford
and Betina Friedeberg discuss
the difficulties that arise from
the giving of contractual notices
by email. The authors suggest
some strategies to overcome the
difficulties caused by the inability
to prove the receipt and time of
receipt of an email notice. Those
strategies include both technical
and legal steps, however, it is
impossible to eliminate all of the
risks associated with electronic
communication.
Although not discussed in the
article, an even more fundamental
question arises in respect of
contract formation through the
rules of offer and acceptance. We
have all been bemused by Lord
Herschell’s magisterial declaration
of the postal acceptance rule
in Henthorn v Fraser (1892) 2
Ch 27 but does that rule extend
to acceptances sent by email?
What is the impact of the various
Electronic Transactions Acts? This
legislation is repeated in most
jurisdictions as it is based on the
United Nations Commission on
International Trade Law’s Model
Law on Electronic Commerce.
ACLN would love to publish and
article on this topic.
The South Australian Building and
Construction Industry Security of
Payment Act 2009 (SA), enacted in
2009, is something of a newcomer
to this form of regulation of the
industry. Because of its recent
enactment, courts have had only
three opportunities to consider its
provisions. Robert Fenwick Elliott
has provided a short summary of
what has been decided in these
cases. He concludes that thus far
the courts have taken a slightly
jaundiced view of the legislation.
Robert is an old friend of ACLN
and it is pleasing to see that he
is now a member of the South
Australian bar.
Jaclyn Smith, who is becoming a
regular contributor to the ACLN,
in a detailed paper, analyses
the impact on the construction
industry of the proportionate
liability statutes in the various
States. The author asserts that
the legal regimes have failed in
their primary purpose of making
damages awarded against multiple
defendants more equitable. The
recent High Court decision in
Hunt & Hunt v Mitchell Morgan
Nominees Pty Ltd [2013] HCA 10
has not resolved the uncertainty
as to how the laws should operate.
The matter is before the Standing
Committee of Attorney’s–General
who are considering the need for
legislative reform. It would seem to
be a matter of ‘watch this space’!
Geoff Hansen and Jennifer
Galatas give a brief outline of the
recent legislative changes to both
the domestic and international
arbitration law in Australia. The
work concludes with a discussion
of a decision of the Victorian
Supreme Court, Lysaght Building
Solutions Pty Ltd v Blanalko
Pty Ltd [No 3] [2013] VSC 435,
where the power of the court
to stay proceedings under the
Commercial Arbitration Act 2011
(Vic) was considered. Under the
Act, the Court must grant a stay
where there is an arbitration clause
in the contract. However, where
the parties have referred particular
disputes to another form of dispute
resolution, this provision will be
respected. This has the potential
to culminate in split proceedings
with additional costs to the parties.
This is something that needs to
be taken into consideration when
drafting arbitration clauses.
Alisa Taylor and Kimberly Moore
note in a short article that in NSW
and ACT it is not possible to
enforce multiple invoices under
a standing order contract in the
same payment claim under the
security of payment legislation.
Each must be made the subject of
a separate claim.
Our old friend, Philip Davenport,
brings us up to date on some of
the latest decisions on the security
of payment legislation.
Ren Niemann and Goran
Gelic tell us of the Queensland
Government’s plans to restructure
the regulation of the Queensland
Building Industry by replacing the
Queensland Building Services
Authority with the Queensland
Building Construction Commission.
For the time being it will be
business as usual but from the
table of changes proposed the
changes will be more than a
‘rearrangement of the deckchairs’.
Scott Laycock and Rohan Dias
discuss a Queensland decision
in Agripower Australia Ltd v J &
D Rigging Pty Ltd [2013] QSC
164 where it was held that the
Building and Construction Industry
Payments Act 2004 (Qld) did not
apply to a contract for the removal
of mining equipment from a mine
site. It is an interesting case that
raises questions about property
law. The authors speculate
whether this will be the case in
other States.
The decision comes as something
of a surprise as the builder was
held to owe a duty of care to the
developer and the owners of the
strata plan. In some respects it
reinstates the much maligned
decision in Bryan v Maloney (1995)
182 CLR 609. It will be interesting
to see if there is an appeal to the
High Court?
APOLOGY
We do make mistakes and when
we do we like to put things right.
The ACLN did not acknowledge
the co–authorship of Mr Michael
Lake, Solicitor, Herbert Smith
Freehills, to Ms Elisabeth
Maryanov’s two articles in the
July/August 2013 issue of the
ACLN. The articles in question,
‘The importance of getting your
adjudication application and
response right’ and ‘When is a
rental agreement a ‘construction
contract’?’ appeared on pages 26
and 42 respectively. The ACLN
apologizes to Mr Lake for its error.
An international flavour is added
to this issue of ACLN by Malcolm
Chin and Miranda Noble who use
introduction of the Hong Kong
Competition Ordinance as a basis
for a review of anti–competitive
regimes in other nearby
jurisdictions. The discussion is
wide ranging and covers Japan,
Australia, Singapore and the
United Kingdom. The article is a
cautionary tale for the Construction
Industry in Hong Kong and calls to
mind the Giles Royal Commission
in New South Wales.
Peter Pether, Adam Wallwork and
Jennifer Turner, in a case note,
detail how the New South Wales
Court of Appeal has overturned
the first instance decision in The
Owners—Strata Plan No 61288 v
Brookfield Australia Investments
Ltd (2013) NSWCA 317.
NEGLIGENCE
THE DUTY OF CARE
IN DESIGN—CAN
ENGINEERS RELY ON
CODES OF PRACTICE?
Dr Donald Charrett, Barrister,
Arbitrator and Mediator
Melbourne TEC Chambers and
Chairman AMOG Holdings,
Melbourne
Dr Andrew Potts, Chief
Executive Officer
AMOG Holdings, Melbourne
INTRODUCTION
Contracts for engineering design
normally include the obligation
that the services will be performed
with the reasonable skill, care
and diligence that would be
applied by a normally skilled
member of the profession in similar
circumstances. The profession
makes considerable use of codes
of practice, or ‘standards’, which
codify current design practice.
The prevailing view of the design
profession is that such standards
represent the ‘state of the art’ that
they are expected to apply. But
does compliance with the current
applicable standard mean that
the designer has discharged
his/her contractual duty of
care? Might something more
be required? Does the designer
need to anticipate how the design
standards may evolve?
This paper addresses these
questions in the light of a recent
case, in which the judge’s findings
on the applicable standard of
care in relation to the use of
current design standards may be
surprising to many designers.
CODES OF PRACTICE
AND STANDARDS
WHAT IS A STANDARD?
Standards can be guidance
documents including the following
types of documents:
• Australian Standards
• International Standards and Joint
Standards
• Codes of Practice
• Specifications
• Handbooks
• Guidelines
The following definitions from a
UK publication define the different
meanings ascribed by engineers
to ‘Standards’ and ‘Codes of
Practice’:
Standards ‘set out certain tests,
dimensions, tolerances and
qualities for a product or process.
Historically in certain areas, e.g.
structures, they have set out
prescribed methods for specific
calculations and even prescribe
permissible stresses. More
recently these kinds of standards
have become normative’.1
Codes of Practice ‘are not
standards but do set out the
standard to be followed. The
specific requirements in a code of
practice must be followed either
for best practice or because the
document has a legal status.
For example specific partial
factors of safety are stated in
structural codes. Requirements
for tying together tall buildings, to
ensure robustness and prevent
progressive collapse are set out
in the UK Building Regulations.
The ways of complying are set
out in codes that are deemed to
satisfy that part of the Building
Regulations’.2
In the context of the engineer’s
duty of care and for the purposes
of this paper, there is no significant
difference between ‘Standards’
and ‘Codes of Practice, and the
terms are used interchangeably.
PROCESS FOR ISSUE
OF AN AUSTRALIAN
STANDARD
Australian Standards are
issued by ‘Standards Australia’,
an independent company
whose principal activity is the
development of Australian
Standards. Whilst Standards
Australia is an independent
company, it is acknowledged
by the Australian Government
(via a Memorandum of
Understanding) as Australia’s
peak non–government Standards–
writing body and the Australian
representative on the International
Organisation for Standardisation
(ISO).
In developing a Standard,
Standards Australia uses a
process based on:
• Consensus;
• Transparency; and
• Balance of representation.
Consensus means: ‘General
agreement, characterised by the
absence of sustained opposition to
substantial issues by any important
part of the concerned interests and
by a process that involves seeking
to take into account the views of all
parties concerned and to reconcile
any conflicting arguments’.3
Notwithstanding the requirement
for general agreement, consensus
need not imply unanimity within the
broad spectrum of stakeholders
brought together as the Standard
Committee to draft the final
Standard.
Transparency means: ‘that
information on current work
programs and proposals is
available to all interested parties.
Transparency also includes the
concept of openness, participation
on a non–discriminatory basis,
impartiality and a balanced
participation in the development
process by interests that will be
significantly affected by the final
Standard’.4
Transparency is intended to
avoid the potential for skewing
the provisions of a Standard
towards particular commercial
interests. However, where there
are few, or only a single Australian
manufacturer, it is often difficult
to separate implicit commercial
interests from provisions that
appropriately cover the spectrum
of Australian manufactured
products. Thus, if these Australian
manufactured products do not
represent world’s best practice,
then the Standard may reinforce
inferior standards. However the
movement towards bringing
national standards in line with other
major trading nations, and the
associated drive towards greater
commonality with International
Standards Organisation (ISO)
Standards, works against such
parochial practices.
Balance of Representation: ‘The
membership of a Standards
Australia Committee is formally
balanced as part of the constitution
of the Committee to represent the
broadest possible spectrum of
stakeholder interests’.5
In reality, participation on all
Standards Australia Committees is
voluntary in nature, as participants
are not remunerated for their
efforts by Standards Australia.
Participation typically requires
time given by employers, so
membership on a Technical
Committee may often be additional
to normal work duties, and/or
done in personal time as an extra
curricula activity. Consequently, the
best qualified persons or leading
practitioners, are not always
available for such sustained
participation.
Thus, the balance achieved in
the ‘spectrum of stakeholder
interests’ can be subjective and
once established, can by its own
make–up be self–perpetuating in
the interests and expertise being
represented.
The entire process of writing
Standards is itself formalized
and documented in a series of
Australian Standards:
• SG–001 Preparing Standards
• SG–002 Structure and Operation
of Standardisation Committees
• SG–003 Standards and Other
Publications
• SG–004 Roles and
Responsibilities in Standardisation
• SG–005 Technical Governance
and Advisory Structures for the
Standards Development Process
• SG–006 Rules for the Structure of
Australian Standards
• SG–007 Adoption of International
Standards
• SG–009 Preparation of Standards
for Legislative Adoption
• SG–015 Australian Involvement
in International Standardisation
• SG–017 Drafting of Standards
Referenced Under OH&S
Legislation
• SG–018 Standards Referenced
by Water Utilities
• SG–020 Participation by
Consumers in Standardisation.6
INTERESTED PARTIES
The content of a Standard is
the responsibility of a Technical
Committee. The basis for the
composition of a Technical
Committee is to ensure balanced
participation by those interests
that are significantly affected
by the resulting Standard.
Individual members of a Technical
Committee are selected by
Nominating Organisations that
may include, but are not restricted
to, government bodies, industry
associations, community–based
and consumer organisations,
employee organisations and
professional, technical or trade
associations.
For example, the following 17
interested parties represented
on Committee BD–025 that
was responsible for AS2870–
2011 Residential slabs and
footings shows a wide range of
representation:
(1) Australian Building Code Board
(2) Australian Chamber of
Commerce and Industry
(3) Australian Geomechanics
Society
(4) Australian Institute of Building
Surveyors
(5) Cement Concrete and
Aggregates Australia
(6) Concrete Masonry Association
of Australia
(7) Construction Industry Advisory
Council
(8) Engineers Australia
(9) Foundations and Footings
Society of Australia
(10) Housing Industry Association
(11) Master Builders Australia
(12) National Timber Development
Council
(13) Plastics and Chemicals
Industries Association
(14) Steel Reinforcement Institute
of Australia
(15) Think Brick Australia
(16) University of Newcastle
(17) University of South Australia
The diversity of the interested
parties being represented meets
the charter ‘to represent the
broadest possible spectrum of
stakeholder interests’, but does not
necessarily have influence over
the personnel being nominated in
terms of qualifications, expertise,
currency of research or industry
practice, etc. Indeed, without in
any way casting aspersions on the
example Committee cited above, it
is readily apparent that whilst there
are numerous ‘industry sector
interest groups’ represented,
it is not apparent whether their
nominees are representing
current ‘state–of–the–art’ products
and practices, or leading–edge
technology and practices that may
arise from within each sectoral
interest.
Is the ‘industry sector interest
group’ nominating an employee
whose regular responsibilities
involve commercial, promotional
or technical support, or seeking
interested, available and qualified
personnel from within its sector?
If the latter, what selection criteria
are adopted? The nominees of its
major corporate supporters, from
its semi–retired members, or driven
individuals with particular pet
interests?
OUTCOME OF STANDARD
DEVELOPMENT PROCESS
Australian Standards are
published documents that set out
specifications and procedures with
the aim of ensuring that products,
services and systems are safe,
reliable and consistently perform
the way they were intended
to. They establish a common
language which defines quality
and safety criteria acceptable to a
broad range of interested parties.
All Australian Standards are
expected to deliver a net benefit to
the Australian community, taking
into consideration:
• public health and safety;
• social and community impact;
• environmental impact;
• competition; and
• economic impact.7
These are an appropriate set of
expectations to strive for in terms
of net benefit to the community at
large. However, it is submitted that
Standards should not introduce
or engender provisions that have
implicit or explicit negative impacts
on the status quo of the above
listed community considerations.
Nor are, nor should, Standards be
a channel for back–door social
engineering.
In essence, by documenting
norms in a common language,
Standards enable the community
and industry to seek and
contract for goods and services
on a level playing field. They
specify minimum acceptable
requirements pertaining to the
majority of transactions that were
anticipated in conceiving and
scoping the particular Standard.
The minimum acceptable
requirements may address
safety, quality and reliability, with
implications for environmental
impact and public health and
safety considerations. The ability
to contract for goods and services
on a level playing field of minimum
acceptable requirements is
good for competition within the
marketplace, with implications
for society at large through the
ensuing economic benefits.
However, establishing such
norms as the basis for putting
out to tender and contracting for
goods and services, also sets the
technical basis for which these
goods or services are priced and
the commercial terms of offer.
The upside of Standards is that
the common forms of transaction
for normal goods or services do
not require a critical evaluation
of the specific circumstances
in order to establish alternate
applications or project specific
requirements or basis of design.
This efficiency streamlines the
process of scoping the goods and
services sought and being offered,
enables proceduralisation and
standardisation of their delivery
and removes uncertainty in the
technical requirements for delivery
and acceptance criteria.
The downside can arise on
the infrequent occasions when
the Standards, or particular
elements of a Standard, may not
be adequate or appropriate for
the circumstances in question.
If not recognized and accepted
upfront by either the client or
the engineer, the request for
tender may be an inadequate
or unsound basis upon which to
price and apply regular terms of
offer. Thereafter, once the scope
and commercial terms of contract
are agreed, the momentum of
the works will overwhelm the
unnatural tendency to query
the adequacy or applicability of
the industry accepted Standard
which is applied in most regularly
contracted goods or services.
Professionals generally accept that
appropriate procedures have been
applied in the drafting, review and
adoption of a Standard, so that it
represents the ‘state–of–the–art’.
On what informed or qualified
basis would the regular practitioner
be aware of the specific basis of
each provision of the Standards,
background research and
deliberations of the Technical
Committee and its individual
members? In the authors’ view,
it is commercially impractical
and contrary to the professional
objective of Standards for a user
to review the project specific
circumstances to assess the
applicability and adequacy of
each and every provision of a
contractually specified Standard.
STATUTORY
SIGNIFICANCE OF
CODES AND STANDARDS
As issued by Standards Australia,
a private non–government
organization, Australian Standards
have no intrinsic statutory
significance. Certain individual
Standards achieve statutory force
when they are incorporated into
legislation. Many Standards are
never incorporated into legislation,
and thus have no statutory
significance.
Typically Standards are
incorporated indirectly via
subordinate legislation, as
illustrated by the following Victorian
example in the context of domestic
housing.
The Building Act 1993 (Vic) lists
as one of its main purposes:
‘to regulate building work and
building standards’. The Building
Act empowers the Governor in
Counsel to make Regulations in
respect of, inter alia: ‘building
permits, occupancy permits and
temporary approvals, including
the duration of permits and
approvals and the matters to be
complied with by the relevant
building surveyor before a permit
or approval can be issued’.8
The Building Regulations 1996
(Vic) includes amongst its
objectives: ‘provide for matters
relating to the accreditation of
building products, construction
methods, designs, components
and systems connected with
building work’.9
The Building Code of Australia
(BCA) is incorporated in the
Building Act 1993 (Vic) via the
Building Regulations 1996 (Vic):
‘The BCA is adopted by and forms
part of the Regulations as modified
by this Part’.10
The BCA adopts a number of
Australian Standards by listing
specific editions in Table 1.4.1,
including the following examples
relevant to design:
... does compliance with
the current applicable
standard mean that the
designer has discharged
his/her contractual duty
of care? Might something
more be required? Does
the designer need to
anticipate how the design
standards may evolve?
• AS1170 Structural Design
Actions
• AS1657–1992 Fixed Platforms,
Walkways, Stairways and
Ladders—Design, Construction
and Installation (SAA Code
for Fixed Platforms Walkways,
Stairways and Ladders)
• AS2870–1996 and 2011
Residential slabs and footings
• AS3600–2009 Concrete
Structures
• AS4055–2006 Wind Loads for
Housing
• AS4100–1998 Steel Structures.
When an engineering failure is
investigated by a government
body, it will first seek to verify
that the design, operation or
equipment complies with the
prevailing Australian Standard, or
another recognised international
Standard, if there is no appropriate
Australian Standard. Notices of
failure to comply and rectification,
fines, shut–down notices, or
progression to litigation, often
result from an identified failure
to meet recognised Standards.
In the authors’ experience in
litigation, the prevailing Standard is
frequently used as the fundamental
measuring stick of engineering
adequacy. Often this is done
on the advice of inspectors or
practitioners, who may have little
knowledge as to the background
and basis of development of the
Standards they are citing, the
operating paradigm for which they
were conceived, or indeed the
suitability of all the code provisions
to the circumstances to which they
are being applied.
In these circumstances, Standards
are implicitly assumed as
embodying the ‘state–of–the–art’,
where non–compliance is, prime
facie, a fundamental breach of the
duty of care by the professional
practitioner.
CONTRACTUAL
SIGNIFICANCE OF
CODES AND STANDARDS
Many contracts specify that
particular applicable Codes
and Standards form part of the
contract.
For example the Federation
Internationale des Ingenieurs–
Conseils Conditions of Contract
for Plant and Design Build and
Conditions of Contract for EPC/
Turnkey Projects (FIDIC Silver
Book) provides as follows:
5.3 Contractor’s Undertaking
The contractor undertakes that
the design, the contractor’s
Documents, the execution and
the completed works will be in
accordance with:
…
the documents forming the
contract
…’
5.4 Technical Standards and
Regulations
The design, the contractor’s
documents, the execution and
the completed works shall comply
with the Country’s technical
standards, building, construction
and environmental Laws, Laws
applicable to the product being
produced from the works, and
other standards specified in
the Employer’s Requirements,
applicable to the works, or defined
by the applicable laws.’
…
‘Employer’s Requirements’ means
the document entitled employer’s
requirements, as included in the
contract, and any additions and
modifications to such document
in accordance with the contract.
Such document specifies the
purpose, scope and/or design
and/or other technical criteria, for
the works.
In addition to these overarching
requirements in the FIDIC General
Conditions, it is common for
employers to specifically nominate
an extensive list of Standards
and Codes of Practice in the
Particular Conditions that the
designer is required to comply
with. In these circumstances,
compliance with Standards is a
contractual obligation, in addition
to obligations that might arise from
a duty of care.
DUTY OF CARE IN
DESIGN
COMMON LAW
There are many judicial statements
on the standard of the common
law duty of care that a professional
person must comply with, e.g.
Where you get a situation which
involves the use of some special
skill or competence … the test is
the standard of the ordinary skilled
man exercising and professing to
have that special skill. A man need
not possess the highest expert
skill … it is sufficient if he exercises
the ordinary skill of the ordinary
competent man exercising that
particular art.11
And in somewhat more detail:
… a professional man should
command the corpus of
knowledge which forms part of
the professional equipment of the
ordinary member of the profession.
He should not lag behind other
assiduous and intelligent members
of his profession in knowledge of
new advances, discoveries and
developments in his field. He
should have such awareness as an
ordinarily competent practitioner
would have of the deficiencies in
his knowledge and the limitations
in his skills. He should be alert
to the hazards and risks inherent
in any profession or task he
undertakes to the extent that other
ordinarily competent members of
his profession would be alert. He
must bring to any professional task
he undertakes no less expertise,
skill and care than other ordinarily
competent professional would
bring, but need bring no more. The
standard is that of the reasonably
average. The law does not require
of a professional man that he be a
paragon, combining the properties
of polymath and prophet.12
The message in these statements
to designers is clear: be up
to date with the knowledge
of the profession in your area
of expertise, and know your
limitations!
STATUTORY MODIFICATION
OF THE COMMON LAW
The Parliaments of the Australian
States and Territories have
legislated significant statutory
modifications to the common
law of negligence since the turn
of the century. Some of these
statutory modifications are directly
applicable to an engineer’s duty of
care.
For example, the Wrongs Act 1958
(Vic) contains the following relevant
sections:
59 Standard of Care for
Professionals
(1) A professional is not negligent
in providing a professional
service if it is established that the
professional acted in a manner
that (at the time the service was
provided) was widely accepted in
Australia by a significant number
of respected practitioners in the
field (peer professional opinion) as
competent professional practice in
the circumstances.
care in giving that warning or other
information.
(2) However, peer professional
opinion cannot be relied on for
the purposes of this section if the
Court determines that the opinion
is unreasonable.
Arguably, this is a subjective
standard that does not provide
the same measure of predictability
that section 59 provides in relation
to the ‘peer professional opinion
standard’.
(3) The fact that there are differing
peer professional opinions
widely accepted in Australia by a
significant number of respected
practitioners in the field concerning
a matter does not prevent any one
or more (or all) of those opinions
being relied on for the purposes of
this section.
(4) Peer professional opinion
does not have to be universally
accepted to be considered widely
accepted.
(5) If, under this section, a Court
determines peer professional
opinion to be unreasonable, it must
specify in writing the reasons for
that determination.
60 Duty to Warn of Risk
Section 59 does not apply to a
liability arising in connection with
the giving of (or the failure to give)
a warning or other information
in respect of a risk or other
matter to a person if the giving
of the warning or information is
associated with the provision by
a professional of a professional
service.
Section 60 thus contains an
important carve–out from the ‘peer
professional opinion standard’—it
does not apply in relation to the
duty to warn of a risk. That duty is
somewhat unhelpfully articulated
as follows:
50 Duty to Warn of Risk —
Reasonable Care
A person (the defendant) who
owes a duty of care to another
person (the plaintiff) to give a
warning or other information to the
plaintiff in respect of a risk or other
matter, satisfies that duty of care
if the defendant takes reasonable
There are three potential sources
for requiring a duty of care in
design:
(1) an implied or express term
in the designer’s contract of
engagement that the design will
be prepared with reasonable skill,
care and diligence;
(2) a tortious duty of care under
the common law that is generally
co–extensive with the contractual
obligation to exercise due care in
preparing the design; and
(3) statutory provisions on duty of
care that codify and perhaps limit
common law rules.
IS THERE AN
OBLIGATION FOR AN
ENGINEER TO COMPLY
WITH A CODE OR
STANDARD?
It is suggested that there are
three possible sources of such an
obligation:
(1) a mandatory statutory
requirement, such as incorporation
of a Standard in legislation, e.g.
the Building Act cites Building
Regulations, which cites BCA
which cites Standards;
(2) a mandatory express provision
of the contract to comply with a
Standard, e.g. FIDIC Silver Book;
and/or
(3) a duty of care arising from
either or both a contractual
or tortuous duty to exercise
reasonable skill, care and
diligence in carrying out
engineering.
The statutory or contractual
obligations to comply are known
and unexceptional.
However the issue of compliance
arising from an engineer’s duty of
care is less clear. It is contended
that in most cases compliance
satisfies the ‘peer professional
opinion standard’. Arguably, a
Standard documents the ‘state–of–
the–art’ of the ordinarily competent
professional, whereby:
• it is the product of a formal,
structured process;
• the Technical Committee
responsible is deemed competent
in the relevant fields;
• a broad and disparate
spectrum of interested parties
are represented on the Technical
Committee;
• the published Standard is the
result of consensus between the
Technical Committee members;
• a broad range of community
interests are considered in
establishing the appropriate
balance between conflicting
requirements; and
• amendments can be made, and
communicated to the profession,
if there are advances in the ‘state–
of–the–art’ or deficiencies or errors
in the Standard identified after
publication.
It should be borne in mind that
Standards prescribe minimum
requirements. Hence, any
non–compliance with minimum
specified criteria would need
to satisfy the ‘reasonable
professional’ test:
Would the non–compliance be
‘widely accepted in Australia by a
practitioners in the field (peer
professional opinion) as competent
professional practice in the
circumstance?
An engineer’s conscious decision
not to follow the requirements of
a Standard may create additional
risks for their client. This is
equally applicable to a conscious
decision to substantially exceed a
... in respect of
conventional infrastructure,
a Standard represents the
‘state–of–the–art’ endorsed
by the profession, and
compliance with it is
consistent with acting ‘in a
manner that ... was widely
accepted in Australia by
a significant number of
respected practitioners in
the field ... as competent
circumstances’.
Standard’s minimum requirements
just as it is not to achieve them.
There are cases in which an
engineer has been found to be
negligent in preparing a costly
design that substantially exceeded
a Standard’s requirements. Thus,
there are risks and potential
consequences if a Standard is not
complied with. A prudent engineer
electing not to comply with a
Standard would therefore be well
advised to warn their client of the
risks and ensure that the client
acquiesced in the decision.
It should also be noted that the
provisions of Standards and Codes
of Practice are not suited to ‘mix
and match’ clauses from different
documents. Like a contract, a
Standard needs to be construed
as a whole document in which the
individual provisions are integrated
into an overarching conceptual
framework.
For example, the limit state design
of steel structures in accordance
with AS4100 Steel Structures Code
needs to be carried out for loads
derived from AS1170 Structural
Design Actions. It could be quite
unsafe to design a structure to
AS4100 for loads derived from
a Standard that was based on
inconsistent assumptions in
respect of partial factors for
material strength.
IS COMPLIANCE WITH
A CODE OR STANDARD
SUFFICIENT?
The authors’ proposition is as
follows: in respect of conventional
infrastructure, a Standard
represents the ‘state–of–the–art’
endorsed by the profession, and
compliance with it is consistent
with acting ‘in a manner that (at the
time the service was provided) was
widely accepted in Australia by a
practitioners in the field (peer
professional opinion) as competent
circumstances’.
In other words, compliance
with a Standard in the design
of conventional infrastructure is
an exercise of ‘the ordinary skill
of the ordinary competent man
exercising that particular art’. It is
not suggested that this proposition
would be valid in respect of major
hazard facilities, or structures
involving new or untested
concepts.
Highly skilled practitioners, or
academics specializing in a
particular field, may consider that
the provisions of a Standard are
inadequate, or are not ‘state of the
art’ in the context of ‘leading edge’.
The authors suggest that that does
not immediately translate to the
‘state–of–the–art’ of the ordinarily
competent practitioner.
Standards are living documents,
regularly updated either by
specific amendments to particular
provisions (which can occur when
a significant deficiency becomes
known), or by a general revision
to incorporate advances in the
‘state of the art’. A major revision
of a Standard may require the
profession to undertake retraining
to adopt new approaches. The
profession usually accepts such
revised Standards as an evolution
of the ‘state of the art’ of the
ordinarily competent practitioner.
However, before a Standard is
formally revised and re–issued,
there may have been a number
of draft revisions in progress at
various times, and circulated for
comment. Such draft revisions
typically receive wide exposure in
the technical community as part
of the transparent and consensual
process of Standard preparation,
but they are by no measure
adopted prior to the ‘official’
revision.
Do the provisions of a draft
revised Standard issued for
review immediately translate to the
‘state–of–the–art’ of the ordinarily
competent practitioner? The
authors submit that it does not;
by their nature ‘draft’ revisions are
circulated for comment and review,
and the finally adopted provisions
in the revised Standard may bear
little relation to the draft provisions,
or the inclusion of subtle changes
in a draft may significantly alter its
interpretation and application to
particular circumstances.
The situation may be different if it
was universally accepted in the
profession that certain provisions
of a Standard were deficient. In
that case, the ordinarily competent
practitioner would be aware of the
deficiencies, and in the exercise
of her/his duty of care, would
make appropriate provision in the
design (Note: A clear distinction
is made between the profession
adopting Amendments or Warning
Notices pertaining to an existing
Code or Standard, as opposed
to observing the provisions of an
incomplete or unadopted Draft
version of a Code of Standard that
has been distributed for comment).
However if the inadequacy of
certain provisions of a Standard
was controversial, section 59(3)
of the Wrongs Act 1958 (Vic) (or
equivalent in other States) could
provide a defence supporting
compliance: ‘The fact that there
are differing peer professional
opinions widely accepted in
Australia by a significant number
of respected practitioners in the
field concerning a matter does not
prevent any one or more (or all) of
those opinions being relied on for
the purposes of this section’.
A CASE STUDY
BHP COAL PTY LTD &
ORS V O&K ORENSTEIN &
KOPPEL AG
Some of the issues discussed
above in relation to an engineer’s
duty of care in respect of
compliance with Standards
and Codes were highlighted
in BHP Coal Pty Ltd & Ors v
O&K Orenstein & Koppel AG13
(Goonyella case).
This case concerned the total
collapse of a Bucket Wheel
Excavator (BWE) at the Goonyella
mine in Central Queensland.
Design, supply and installation of
the BWE took place between 1978
and 1981. In November/December
1984 grounding of the bucket
wheel due to misoperation of the
BWE caused buckling damage to
the rear tower flanges. The owner
arranged for an engineer from
O&K (the designer and supplier of
the BWE) to inspect the damage
and prepare an on–site emergency
repair proposal. The repair of the
buckling and addition of eight
stiffeners was executed by a third
party under the supervision of an
O&K supervisor, primarily there
for stabilisation of the balanced
machine before and after the
repair works.
Sometime after the repair was
completed, fatigue cracks in the
steel columns started to propagate
from the repair welds at the ends
of the added stiffeners.
Between 1985 and 1999 TKEA
carried out bi–annual inspections
of the BWE structure, with the
final inspection in March 1999. In
March 2000 the BWE collapsed.
There was a Mine Warden’s Court
Inquiry into the collapse in 2002,
and in 2003 BHP initiated legal
proceedings against O&K and
TKEA.
The court hearing occupied a total
of 120 sitting days between April
2007 and February 2008.
In his judgment, McMurdo J found
that, in respect of the design of
the repair stiffeners, O&K had
breached its duty of care and
had engaged in misleading or
deceptive conduct in breach of the
Trade Practices Act. He also found
that, in respect of the inspection
of the BWE after the repair work
had been completed, TKEA had
breached its contract, breached
its duty of care and had engaged
in misleading or deceptive
conduct in breach of the Trade
Practices Act. The misleading and
deceptive conduct ruling will not
be discussed further herein, as
it is not germane to the theme of
this paper, which is covered by the
other part of the ruling.
The negligence case against O&K
ultimately hinged on the judge’s
findings in respect of detailed
aspects of the design of the
welding of the repair strengthening
stiffeners, the location of the
fatigue cracks that ultimately
propagated sufficient to cause
complete collapse of the BWE.
The upper stiffener terminations
terminated in an area with bending
stresses higher than further up the
tower. The design of these upper
stiffener terminations was awkward
and increased the local stress.
The judge found that if the
engineer had made proper fatigue
stress calculations he would have
identified that the upper stiffener
terminations were in a critical
spot. Further, if the engineer had
identified the problems caused
by the chosen details, he could
without problems have extended
the stiffeners to the end of the
tower or designed a better detail
that would not have been as
susceptible to fatigue.
The contract for construction of the
BWE required it to be constructed
according to the operative
German Standard specific to
BWEs at the time, BG60. This
was still the operative standard
for BWEs used by O&K in 1984,
although a draft revision had
been circulated for discussion
within the drafting Committee in
1984. ISO 5049 was an alternative
international standard applicable
to mining machinery (including
BWEs, though this was not its
predominant area of focus) that
resulted in lower fatigue strengths
of welded joints than BG60.
The welded detail of the upper
stiffener termination implemented
(FI) had adequate fatigue strength
according to BG60, but not
according to ISO 5049. ISO 5049
was developed for application to
the design of bulk–ore handling
machinery, such as stackers,
reclaimers, bucket–wheel
reclaimers and ship loaders, where
the load duty handling excavated
material in stockyards and the like,
is more consistent than bucket–
wheel excavators digging hard
material directly from the earth.
• O&K knew that ISO 5049
specified lower allowable fatigue
stresses; ‘ISO 5049 should have
alerted an engineer to the risk
of using only BG60’. [Although
ISO 5049 includes BWEs in its
scope, it was not in general use
by the industry for the design of
BWEs as was BG60, where there
are significant differences in load
duties between the two codes.
Also ISO 5049’s fatigue S–N curve
for the FI category was significantly
more conservative than BG60 and
BG86.]
As such, the fatigue load duty
provisions of ISO 5049 was aligned
to a more uniform load duty
spectrum, which was not the case
for fatigue load duty provisions in
the design codes that were mostly
in use of BWEs (including BG60
and its successor BG86).
McMurdo J expressed his findings
on this Standard issue as follows:
McMurdo J considered the
following issues relevant to
his conclusion that BG60 was
unreliable as a standard with which
to design the FI welded detail. [The
authors’ comments on these issues
are in square brackets.]
• BG60 was ‘being challenged by
some and officially reviewed’ in
1984 and was replaced by BG86
in 1986. [It should be noted that
the fatigue provisions of the 1984
Draft were more onerous than
BG60 and were not adopted in the
final Standard BG86. The welded
repair details complied with the
requirements of BG60 and BG86
but would have failed the 1984
Draft.]
• BG60 did not take dynamic
loads into account, although this
was not necessarily a prevalent
professional opinion in 1984.
[BG60 did not include a specific
dynamic load factor on the
statically determined loads in its
load case combinations, as did
BG86, but BG86 was actually
calibrated against BG60 to
produce similar design outcomes.]
... But I do not accept that a
reasonable engineer would have
been obliged to give up a long–
standing code (BG60), if otherwise
considered to be reliable merely
because some engineers, however
eminent, were publishing an
opinion suggesting otherwise ...14
... I am not satisfied that such
an engineer would have thought
that BG60 overstated the fatigue
strength of an FI detail ...
However, any reasonable engineer
in his position should have
doubted the reliability of BG60.
After all there was a review of
BG60 which had been put in place
by the relevant West German
authority. The review committee
had been constituted, made up of
leading engineers from the major
manufacturers and academics.
… All of that amounted to more
than a professional opinion
being ventilated occasionally in
published journals or seminars.
… In the midst of that review
the reasonable engineer in [the
designer’s] position could not have
said to himself at the same time
that BG60 was reliable.
... Because BG60 was unreliable,
that margin for error should
not have been accepted as
reasonable ...15
COMMENTS ON
PRACTICAL DESIGN
ENGINEERING ASPECTS
OF JUDGMENT
Merely because a Standard is
under review by an eminent
Committee, which as part of its
remit is to update/modernise
the code, with respect it does
not follow that ‘a reasonable
engineer should have doubted the
reliability of BG60’. The ultimate
‘official’ revision, BG86, was in
fact calibrated to BG60 because
that had been found to produce
reliable designs that had adequate
fatigue service lives.
If no notices of warning or
amendments to the Standard
had been issued, even during
the Standard review phase, what
if any basis was there for the
conclusion that ‘a reasonable
engineer should have doubted the
reliability of BG60’? Indeed many
Standards are subject to regular
periodic review (with draft revisions
in the public domain)—does this
automatically oblige the design
engineer to consider the current,
unamended version as suspect
and potentially ‘unreliable’?
What would have been the legal
standing of the design engineer
in adopting the provisions of
an interim draft Standard that
was still subject to considerable
deliberation by the Committee?
In the case of the fatigue
provisions of the 1984 Draft, these
were ultimately rejected by the
Committee in the final issue of
BG86. Arguably, design of an
entire machine to the 1984 draft
provisions would have ultimately
proved to have been unnecessarily
conservative and added
unwarranted cost.
Design Codes are intended to be
inherently conservative in their
provisions, as they are intended to
apply to the majority of applicable
systems for which they have been
developed.
Factors of safety are applied to
and allowable stresses are used
in conjunction with conservatively
compounded design loads. In
the case of fatigue, the design
load combinations are used in
conjunction with lower bound S–N
curves used for design purposes.
When in design is it appropriate
to apply even more conservative
factors of safety over and
above accepted and current
codified values in Standards?
Such additional conservatism
has commercial and feasibility
implications for the client to whom
the engineer owes a duty of
care. Thus, if there was no valid
basis to conclude that ‘BG60 was
unreliable’, why then should the
codified ‘margin for error.. not have
been accepted as reasonable. …’?
Even if there was some concern
as to the adequacy of the codified
factors of safety, what would be
an acceptable technical basis for
employing higher values? (e.g.
+5%, +10%, +25% ...?
If the Standard is unreliable but
you can’t put your finger on it, what
is a ‘reasonable’ fix?). If a designer
arbitrarily adopted, say an
additional 10% margin for safety,
to cover some unquantifiable
reservations, and then the
structure still failed at some time
in the future, would the Court
view this as the prudent act of a
reasonable engineer, or an ill–fated
guess in the absence of a more
technically supported engineering
design decision.
At the heart of engineering
design codes, there is an intent
to provide inherent conservatism,
not to sail close to the wind and
thereby court regular failure. This
enables engineers to make safe
design decisions with a degree of
comfort that they do not in most
circumstances need to question
the basis and applicability of
the codes they are relying upon.
The professional training of
engineers, whilst not eliminating
the prospect of codes being
limited, or occasionally in error, is
largely skewed towards engineers
practicising their profession
by following the provisions of
the many codes that apply to
their sector. Most engineers are
‘code practitioners’ not ‘code
questioners’. If codes have
required constant questioning,
then the engineering profession
has over the years progressively
amended and improved the
deficient elements of such codes.
This has involved drawing on
the expertise and experience
from other countries with similar
codes, and this has reduced the
instances where codes need to
questioned. The profession would
have a fundamental problem were
there a Court implied requirement
that on all occasions the ‘code
practitioners’ should become
‘code questioners’.
CONCLUSION
The genesis of Standards, the
common law and relevant statutory
provisions suggest that engineers
should generally be able to rely
on current relevant Standards and
Codes of Practice when designing
conventional infrastructure.
practicing professional as to
what is an acceptable degree of
conservatism.
The judgment in the Goonyella
case contains some surprising and
salutory warnings for practicing
engineers:
• There may be an obligation to
question, monitor and understand
the reliability of current codes in
light of ‘potential’ amendments.
• There may be an obligation to
consider other Standards than
those specified in the contract,
and if more conservative apply
such provisions.
REFERENCES
1. New Dictionary of Civil
Engineering (2005)
2. Ibid
3. Standards Australia website:
www.standards.org.au
4. Ibid
5. Ibid
6. Ibid
7. Ibid
8. Section 261(1)(a)
It would be chaotic for the majority
of the engineering profession
undertaking design on a daily
basis if they were not able to
rely upon current Codes and
Standards. There is neither the
time nor the fees for designers to
undertake a critical review of the
provisions of design Codes and
Standards for conventional and
well understood infrastructure for
which they have been written.
9. R101
If in hindsight Courts judge that
the conservatism in design Codes
and Standards is inadequate,
this brings into question the
‘professional consensus’
underlying their development
and status within the engineering
profession and as the basis
of construction contracts. It
provides no guidance to the
15. Ibid [160]–[162]
10. Building Regulations 1996 (Vic)
R109
11. Bolam v Friern Hospital
Management Committee [1957] 1
WR 582 HL, 586 per McNair J
12. Eckersley v Binnie & Partners
(1988) 18 Con LR 1
13. [2008] QSC 141
14. Ibid [157]
Donald Charrett and Andrew Potts’
paper is based on the authors’
presentation to the Society of
Construction Law Conference
in Sydney on 3 August 2013.
Reprinted with permission.
CONTRACTS
GOOD FAITH
IN CONTRACT
PERFORMANCE—HAS
THE LAW CHANGED?
SUMMARY
Tom Grace, Partner
The reaches of the Trade
Practices Act 1974 (Cth) and
the Competition and Consumer
Act 2010 (Cth) exemplify the
nature and extent of the way in
which lawmakers have sought to
ensure that parties cannot hide
unsatisfactory conduct behind
the facade of a contract without
the obligation to avoid misleading
and deceptive conduct, or
unconscionable conduct. Without
doubt, there have been significant
changes in the past and this paper
looks at recent case law to assess
whether those changes continue
to occur.
Jock Hamilton, Associate
Fenwick Elliott Grace, Adelaide
The doctrine of good faith in the
performance of contracts has
been gradually developed over the
last few decades.
In this paper we examine the
doctrine of good faith and its
implication into commercial
contracts. The effects of this new
view of the doctrine of good faith
are becoming clearer now and it is
timely for lawyers to consider the
impacts on their clients and their
contracts. The paper notes the
particular practical impact on the
commercial construction sector of
this emerging doctrine.
PERFORMING THE
CONTRACT IN GOOD
FAITH
INTRODUCTION
Commentary on good faith in
the performance of contractual
obligations is abundant.1 In this
paper we trace the history of the
development of the doctrine and
conclude by examining the recent
application of the principle in
Alstom v YDMRL,2 decided in April
2012 by Justice Bleby.
To give context, we consider the
evolution of implied good faith in
other Australian jurisdictions before
concluding that to a large extent
Justice Bleby has not sought to
change the test for the implication
of the good faith duty. Rather, we
conclude the Alstom decision sets
a high water mark in construction
law in terms of how far reaching
can be the impact of the good faith
doctrine.
THE EVOLUTION OF THE
DOCTRINE OF GOOD FAITH
Before discussing Alstom in
detail, it is useful to re–cap on
the evolution of good faith in the
performance of contracts as well
as briefly summarise relevant
cases with respect to implied
terms.
Good faith in Australia is a
common law doctrine, usually
implied by law,3 although some
commentators have suggested
Courts have implied a duty of
good faith by fact. By way of brief
summary, terms may be implied
by fact subject to the five–pronged
test set out by Privy Council in BP
Refinery (Westernport) Pty Ltd v
Hastings Shire Council:4
(1) it must be reasonable and
equitable;
(2) it must be necessary to give
business efficacy to the contract
so that no term will be implied if the
contract is effective without it;
(3) it must be so obvious that ‘it
goes without saying’;
(4) it must be capable of clear
expression; and
(5) it must not contradict any
express term of the contract.5
Terms implied by law, traditionally,
apply to specific types of contract.
For example, sale of goods
contracts have an implied term
at law that the goods will be of
merchantable quality.6 Thus, there
firstly must be such an identifiable
type of contract and secondly,
such a term needs to be implied
into all contracts within that type or
class.
In Liverpool City Council v Irwin,7
the Court used a ‘necessity’ test
to determine whether a term
should be implied as a matter
at law. The landlord of a high
rise residential dwelling building
sought to absolve himself of
liability to maintain lift and stair
access facilities. Applying the
necessity test, the Court implied
a term into tenancy agreements
that the landlord would maintain
the lifts and stairs because life as
a tenant was ‘not possible’ without
the ‘essentials’ of the lift and stair
facilities.8
McHugh and Gummow JJ
in Byrne v Australian Airlines
Ltd9 subsequently considered
that the necessity test should
apply in circumstances where
‘unless such a term [is] implied,
the enjoyment of the rights
conferred by the contract would
or could be rendered nugatory,
worthless, or, perhaps be seriously
undermined’.10
Historically, judiciaries in Australia
have not always been clear about
whether good faith is implied in
fact or in law. We consider some
cases below.
In the 1953 case Carr v Berriman,11
the High Court considered an
architect’s ‘absolute discretion’
in administering a building
contract. As is usual, the architect
was acting as an agent for the
principal–owner. A dispute
arose when the owner sought to
unilaterally exclude certain works
from the contract, seeking to
rely on the architect’s apparently
unfettered discretion to administer
the works.
Fullagar J disagreed, holding that:
[Those words] do not, in my
opinion, authorise him to say that
particular items so included shall
be carried out not by the builder
with whom the contract is made
but by some other builder or
contractor. The words used do not,
in their natural meaning, extend
so far, and [vest] a power in the
architect to hand over at will any
part of the contract to another
contractor would be a most
unreasonable power, which very
clear words would be required to
confer.12
Upon a dispute arising, the
superintendent terminated the
contract in accordance with the
clause above.
Note the lack of a formal reference
to an implied term of good faith
in this context. Notwithstanding,
some academics have suggested
that Fullagar J’s judgment was
a ‘good faith interpretation’,13
presumably in its infancy.
When the litigation reached the
New South Wales Court of Appeal,
Priestley JA held there were
‘terms implied by law’16 that the
principal would exercise its powers
reasonably:
RENARD AND THE MINISTER
OF WORKS
In any event, the implied term
of good faith was considered
by Priestley, Meagher and
Handley JJA in the landmark
New South Wales case of Renard
Constructions (ME) Pty Ltd v
Minister for Public Works.14
The principal (Minister for Public
Works) engaged Renard to
construct pumping stations near
Gosford on the NSW Central
Coast.
The contract between the
two parties provided the
superintendent (nominated by
the principal) with relatively broad
termination powers:
... if the contractor defaults in the
performance or observance of any
covenant, condition or stipulation in
the contract or refuses or neglects
to comply with any direction as
defined in clause 23 but being one
which either the principal or the
superintendent is empowered to
give, make, issue or serve under
the contract and which is issued or
given to or served or made upon
the contractor by the principal in
writing or by the superintendent
in accordance with clause 23, the
principal may suspend payment
under the contract and may call
upon the contractor, by notice in
writing, to show cause within a
period specified in the notice why
the powers hereinafter contained
in this clause should not be
exercised.15
The contract can in my opinion
only be effective as a workable
business document under which
the promises of each party to
the other may be fulfilled, if the
subclause is read in the way I have
indicated, that is, as subject to
requirements of reasonableness.17
Priestly JA then drew parallels
between good faith and
reasonableness: ‘[t]he kind of
reasonableness I have been
discussing seems to me to have
much in common with the notions
of good faith’,18 and thus the nexus
between reasonableness and
good faith appears to have been
born.
Priestly JA further considered good
faith by reference to community
expectations:
... people generally, including
judges and other lawyers, from all
strands of the community, have
grown used to the courts applying
standards of fairness to contract
which are wholly consistent with
the existence in all contracts of a
duty upon the parties of good faith
and fair dealing in its performance.
In my view this is in these days the
expected standard, and anything
less is contrary to prevailing
community expectations.19
SIR ANTHONY MASON’S
THREE NOTIONS
A year after the Renard decision in
a speech at Cambridge University,
Sir Anthony Mason considered
extra–judicially that good faith
‘embraced no less than three
notions’:20
(1) an obligation on the parties
to cooperate in achieving the
contractual objects (loyalty to the
promise itself);
(2) compliance with honest
standards of conduct; and
(3) compliance with standards
of conduct which are reasonable
having regard to the interests of
the parties.
OTHER CASES
Finn J recognised the traction
an implied duty of good faith
was gaining in his discussion in
Hughes Aircraft Systems Int’l v
Airservices Australia:21 a ‘more
open recognition [of an implied
term of good faith] in our own
contract law is now warranted’.22
Sir Anthony Mason’s three notion
test was referred to with some
approval by the Court in the 1998
case of Alcatel Australia Ltd v
Scarcella.23 Sheller JA stated:
If a contract confers power on a
contracting party in terms wider
than necessary for the protection
of the legitimate interests of that
party, the courts may interpret
the power as not extending to
the action proposed by the party
in whom the power is vested or,
alternatively, conclude that the
powers are being exercised in
a capricious or arbitrary manner
or for an extraneous purpose,
which is another [way] of saying
the same thing. Thus, a vendor
may not be allowed to exercise
a contractual power where it
would be unconscionable in the
circumstances to do so: Pierce Bell
Sales Pty Ltd v Frazer (1973) 130
CLR 575 at 587.24
In 1999, Finkelstein J in Garry
Rogers Motors v Subaru25 held
that while good faith involved not
acting ‘capriciously’, the doctrine
was nevertheless tied with
acting reasonably: ‘provided the
party exercising the power acts
reasonably in all the circumstances
the duty to act fairly and in good
faith will ordinarily be satisfied’.26
Interestingly, Finkelstein J noted
that an implied term of good faith
‘would not operate so as to restrict
actions designed to promote the
legitimate interests of that party’.27
Towards the turn of the millennia,
Courts were differing on their
interpretation of the Renard
decision. For example, in Aiton
Australia Pty Ltd v Transfield Pty
Ltd28 Einstein J, agreeing with
Stapleton LJ, sought to distinguish
between the implied duty of
reasonableness and that of good
faith:
... the inter–relationship of and
difference between good faith and
reasonableness is subtle but of
great importance. A requirement
to satisfy a standard of reasonable
behaviour is more demanding than
the requirement of good faith.29
Conversely and at about the same
time, Byrne J of the Victorian
Supreme Court commented in Far
Horizons Pty Ltd v McDonald’s
Australia that:30
I do not see myself as at liberty to
depart from the considerable body
of authority in this country which
has followed the decision of the
New South Wales Court of Appeal
in Renard. I proceed, therefore, on
the basis that there is to be implied
in a franchise agreement a term of
good faith and fair dealing which
obliges each party to exercise
the powers conferred upon it by
the agreement in good faith and
reasonably, and not capriciously
or for some extraneous purpose.
Such a term is a legal incident of
such a contract.31
BURGER KING
In 2001, the Court in Burger
King v Hungry Jack’s summed:
‘[the Renard decision made] no
distinction of substance between
the implied term of reasonableness
and that of good faith’.32 The
Court in Burger King provides
an instructive discussion on the
evolution of good faith up to 2001.
Burger King had granted non–
exclusive rights to Hungry Jack’s
to develop fast food franchise
restaurants under the marketing
banner of Burger King, in
accordance with the parties’
Development Agreement.33
Pursuant to the Development
Agreement, Hungry Jack’s was
required to open at least four new
Burger King restaurants per year.
For a variety of reasons, the
parties’ commercial relationship
deteriorated.34 In 1995, Burger
King effectively barred Hungry
Jack’s from fulfilling its obligations
to develop new franchises
by ‘withdrawing financial and
operational approval from Hungry
Jack’s’.35 Burger King also froze
Hungry Jack’s ability to recruit third
party franchises.
In 1996, Burger King then sought
to terminate the Development
Agreement for Hungry Jack’s
failure to develop the requisite
number of new restaurants.
Hungry Jack’s maintained that it
was unable to fulfil its contractual
obligations by virtue of Burger
King’s lack of support as
mentioned above.
The Court held that:
... there is such an extraordinary
range of detailed considerations,
particularly in relation to whether
operational requirements have
been satisfied...unless there
was an implied requirement of
reasonableness and good faith,
Burger King could, for the slightest
of breaches, bring to an end the
very valuable rights which Hungry
Jack’s had under the Development
Agreement.36
The Court also considered the
balancing act between Burger
King’s own ‘legitimate interests’
and acting reasonably (as
discussed in Garry Rogers Motors
v Subaru above):
That does not mean that Burger
King Corporation is not entitled
to have regard only to its own
legitimate interests in exercising
its discretion. However, it must not
do so for a purpose extraneous
to the contract — for example, by
withholding financial or operational
approval where there is no basis
to do so, so as to thwart Hungry
Jack’s rights under the contract.37
Note that the Court did not find that
Burger King had a fiduciary duty
to Hungry Jack’s, but rather that
Burger King’s discretion under the
Development Approval:
... could not be used for a
purpose foreign to that for which
it was granted, such as to thwart
[Hungry Jack’s] right to develop
and ultimately procure a situation
where the Agreement could be
terminated.38
Notwithstanding the variety of
cases since Renard considering
the implied duty of good faith, an
element of uncertainty remained
post Burger King. In 2006, Gyles
J, in the Federal Court case of City
of Sydney v Goldspar Australia
Pty Ltd39 noted that there was a
‘bewildering variety of opinions in
the authorities and commentaries
as to the implication of terms as to
reasonableness and good faith in
commercial contracts’.40
It is against this relatively imprecise
background, and without any
directly relevant High Court
authority, that we consider the
Alstom decision.
ALSTOM V YDMRL—GOOD
FAITH ASPECTS
THE FACTS IN MORE DETAIL
The Alstom decision extends over
460 pages, covering an extensive
range of contract law principles
and considering a remarkable
number of authorities. Flinders
Power Partnership (FPP) engaged
Alstom as head contractor to
refurbish part of the Playford
Power Station at Port Augusta
(project) pursuant to a ‘Turnkey
Refurbishment Contract’ for
approximately $150 million (head
contract).
A ‘Turnkey Contract’ is common
in the construction industry where
a principal engages a head
contractor to design and build a
project with relatively little further
input from the principal. Often the
head contractor then engages
a number of subcontractors as
required.
Alstom then subcontracted about
one fifth (approximately $33.88m)
of the head contract works to
YDMRL (subcontract).
The refurbishment was a complex
project involving ‘thousands
of activities’:41 YDMRL was to
supply and install some electrical
equipment before allowing
Alstom to complete various other
associated works around that
equipment. After Alstom’s had
carried out some work, YDMRL
was to again work around the
same areas on the site for
the final phase of the project.
Accordingly, there was an obvious
interdependence on one party’s
ability to perform works dependant
on the other party’s predecessor
activity of works.
To manage the interdependences
and complexities generally, the
head contract specified the use of
programming software, Primavera
P3 (program). A primary objective
of the program was to allow the
parties to determine the ‘critical
path’ of the works. The ‘critical
path’ is the sequence of activities
from start to finish whose duration
determines the overall project
duration.42 If a certain activity or
part of an activity is on the critical
path, then the critical part of the
activity needs to be completed43
before the subsequent activity can
be commenced. Obviously, if there
is a delay to a critical activity then
there is likely to be a delay to the
completion of the entire project.44
Contrast this with a delay to a
non–critical activity which would
not prevent further critical works
being undertaken at the same time
and therefore would be unlikely to
delay the project as a whole.
While both Alstom and YDMRL
used Primavera to adjust ‘on–site
changes’ to their own individual
works schedule, the program
could also be used as a form
of communication, where both
parties could reflect their individual
requirements, progress and
forecasts within an integrated
version of the program. Primavera
contains logic links within its data
output, such that the software is
capable of showing activities that
are on the critical path. If there is
to be a known delay to a future
activity (for example construction
materials being delayed in
customs) that future delay can
be programmed into the software
to analyse whether the delay
means that works would best be
rearranged into a new sequence
to avoid the completion date being
extended for the full time period
that the materials are delayed in
customs.
There are always delays in
construction projects, and where
information is not provided to
subcontractors about future
delays, there is a likelihood
of inefficient deployment of
resources. Ideally, in order to
facilitate the integration of both
parties’ works schedules, Alstom
would have regularly provided
an updated master program to
YDMRL showing all the logic links
and delays that were known to
Alstom in respect of the entire
project.
While Alstom maintained it was not
expressly obliged to provide its
master program to YDMRL, doing
so would have been immensely
helpful to YDMRL’s planning
because YDMRL, in many
circumstances to a large extent,
relied on Alstom completing critical
activities before YDMRL could
undertake some of its own critical
path activities.
The Project was ultimately delayed
and Alstom was liable to FPP for
a considerable amount by way
of liquidated damages. Alstom
settled its dispute with FPP. Alstom
then sought to claim approximately
$20m from YDMRL for delays
and other claims. YDMRL denied
liability for Alstom’s claims and
counterclaimed for variations and
disruption costs (among other
claims) for approximately $11m.
In its pleadings, YDMRL’s
position was that, without relevant
information being passed down
from Alstom’s master program,
YDMRL was unable to forecast its
own critical path works effectively,
and so its own works schedule
was merely ‘hypothetical’:45
... without regular access to
Alstom’s programs, or at least to
frequent and updated interface
information from Alstom with
appropriate logic links, it was
impossible for YDRML to prepare a
useful critical path program. It was
therefore impossible for YDRML,
through the regular supply of its
updated programs, to indicate
reliably when YDRML activities
on which Alstom was dependent
would be completed. This applied
throughout the period of the
contract.46
YDMRL further argued that its
future programming requirements
were essentially ‘little more than
guesswork’47 in the absence of
accurate programming information
from Alstom.
In failing to provide YDMRL with
Alstom’s updated master program,
YDMRL maintained that Alstom
breached an implied term of law
that Alstom had a duty to co–
operate and a duty to act in good
faith.
Alstom sought to rely on a lack of
an express contractual framework
binding it to supply copies of
its master program to YDMRL.
Rather, Alstom’s position was that
YDMRL ‘could and did prepare its
own critical path program without
Alstom’s aid. If YDMRL were
delayed for any reason, such as
access, in carrying out an activity
on its critical path, it could give
notice of delay and claim an EOT
in accordance with the terms of
the [Sub]contract, which it did not
do’.48
In submitting this argument, Alstom
suggested YDMRL could manage
its dates and critical path as a
‘stand–alone’ program: ‘If YDRML
were delayed, that delay was to be
assessed against the critical path
in YDRML’s program. If Alstom
were delayed, that delay would be
assessed against the critical path
in Alstom’s program’.49
THE COURT’S FINDING ON
IMPLICATION OF GOOD
FAITH
Bleby J rejected this contention
of Alstom finding it ‘superficial ...
misconceived and impracticable’.50
Bleby J, citing established
authority,51 emphasised that the
duty to co–operate was not limited
to merely allowing the other ‘party
to perform its obligations under the
contract but extends to requiring
each party to the contract to do
all such things as are necessary
on their part to enable the other
party to have the benefit of the
contract’.52
In relation to the obligation to act
in good faith, Bleby J referred to
the leading authorities discussed
above.
However, Bleby J went further,
agreeing with Finn J, who in obiter
in GEC Marconi Systems Pty Ltd
v BHP Information Technology Pty
Ltd53 considered that all contracts
should be subject to the implied
term of a duty of good faith and fair
dealing.54
Consider the contrast between this
notion (that an implication of good
faith should be implied as a matter
of law to all commercial contracts),
and the traditional understanding
of implied terms as a matter of law
in relation to an identifiable class of
contracts. Bleby J appears to have
departed from this concept. To that
end, Bleby J said at paragraph
596, when referring to universally
implying an obligation to act in
good faith:
I consider that it is a term to be
implied in every commercial
contract, despite doubts
expressed in some earlier
cases that it was to be implied
unequivocally as a universal
term.55
Bleby J noted that ‘universal
implication is supported by the
American Restatement (Second)
of Contract (1981),56 and is part
of the law of contract in Europe,
the United States, Canada, New
Zealand, China, Japan and other
parts of the world’.57
Bleby J further cited the 2009 case
of United Group Rail Services
Ltd v Rail Corporation of New
South Wales58 where the Court of
Appeal, after referring to Renard,
Burger King and Alcatel said that
‘good faith, in some degree or
to some extent, is part of the law
of performance of contracts’59 in
support of universal implication
into contracts of an obligation to
act in good faith.
In any event and notwithstanding
the above, Bleby J considered
the subcontract was ‘of the type
of contract where it must be
implied’.60
Bleby J ultimately referred to good
faith as the ‘glue’ to the contractual
terms:
The Playford refurbishment was
a complex project involving
thousands of interrelated activities
to be conducted by these
two parties. Their respective
contractual and operational
requirements demanded a high
degree of co–operation and
reliance upon the good faith of
each other. Without that glue to
cement the contractual terms their
relationships were likely to, as
they did, break down. That in itself
is a compelling indication of the
existence of an implied obligation
to act reasonably and in good
faith.61
Reference was also made to the
fact that, in the absence of an
implied duty of good faith, YDMRL
would be ‘unable to perform its
contract effectively’:
Without an obligation to act
reasonably and in good faith
on the part of Alstom, YDRML
would be unable to perform its
contract effectively. The absence
of such an obligation would allow
a situation to arise where, for
example, YDRML might not even
know what a particular Relevant
Scheduled Date was to which it
was required to work, because that
information was being withheld
by Alstom. It would also allow a
situation where YDRML might not
know which, if any, of YDRML’s
work was on the critical path for a
Relevant Scheduled Date. In such
circumstances YDRML would be
deprived of the contractual benefit
to which it was entitled under the
contract.62
WHAT ALSTOM SHOULD
HAVE DONE
From a practical viewpoint and
perhaps the most striking aspect
of Justice Bleby’s decision is
what Alstom ought to have done
if it was to perform its contractual
obligations in accordance with an
implied duty of good faith:
I do find, however, that the implied
obligation to co–operate, the
implied obligation not to prevent
or hinder YDRML’s performance of
the EC&I contract and the implied
obligation to act in good faith had
the following effects, in this case:
That Alstom was required to
provide regularly to YDRML its
updated and accurate works
program showing at least all
logic links to YDRML activities,
all relevant interface and access
information and the critical paths
to the respective Milestone Dates,
and particularly the Relevant
Scheduled Dates;
That that should have been
provided whenever any material
changes occurred which might
affect YDRML’s program; and,
That the programs provided should
have been in Primavera P3 form
and in a format capable of being
integrated with YDRML’s own
Primavera P3 program.63
Bleby J went on to find that some
express terms of the subcontract
supported implying a term of good
faith. However, he noted that the
considerations mentioned above
were ‘sufficient in themselves to
justify the necessary implication’64
and so no further analysis of the
express terms supporting this
implication is presently necessary.
Justice Belby was critical of
Alstom’s possible motives for
failing to pass on its updated
master program to YDMRL,
suggesting that, on a ‘less
generous’ view, Alstom may have
withheld the master program to
‘conceal’ the effect of its own
delays which may have entitled
YDMRL to make an EOT claim.
CONSEQUENCES FROM
ALSTOM
In our view, the Alstom decision
applies the duty of good faith,
implied as a matter of law,
consistently with the trend since
Burger King. The fundamental
tests as they currently stand
in Australia have not changed
materially. However, it is significant
that Bleby J considers the duty to
perform contractual obligations
in good faith is implied into all
commercial contracts.
It effectively means that in many
projects similar to the Playford
Refurbishment Project, head
contractors would be prudent to
ensure their master program is
conveyed to a subcontractor in a
workable form (as opposed to a
PDF) from the outset and regularly,
so the subcontractor can integrate
the head contractor’s information
with the subcontractor’s own works
program.
The practical difficulty that
arises, as recognised by Bleby
J at paragraph 641, is that
changing circumstances may
change the interests of the head
contractor such that it would be
preferable to effectively withhold
certain information from their
subcontractors. Might there be
cases where it is in the ‘legitimate
interests’ of the head contractor to
withhold such information without
it breaching any implied duty of
good faith? Such determinations
would require finely balancing
relevant considerations and will
necessarily turn on individual facts.
WILL THE CHANGE REMAIN?
As emphasised by Bleby J, other
jurisdictions have statutorily
implied and/or codified the
implication of good faith. This is
not the case in Australia, where
the doctrine of good faith remains
entrenched in the common law.
To date, there is a lack of High
Court direction on what the implied
duty of good faith actually entails.
In Royal Botanic Gardens and
Domain Trust v South Sydney City
Council65 the Court acknowledged
the good faith doctrine but failed
to consider it in detail, citing
the circumstances of that case
were an ‘inappropriate occasion’
to consider the issue. There is
little doubt that some detailed
High Court discussion would be
welcome by lower courts and
academia.
DRAFTING AND
NEGOTIATING CONTRACTS
AND THE IMPLICATION OF
GOOD FAITH
The implication of terms has
always been subject to any
express term to the contrary.
Parties who wish to be excused
from acting in good faith might
incorporate an appropriate
express term into their contract.
However, the other contracting
party would be unlikely to be
advised to enter into such a
contract unless the contract was
written in such a manner that it
could not be misinterpreted. In
our view, it would be commercially
unrealistic to attempt to negotiate
such a term. Further, efforts to
withhold the tide of judicial thinking
are frequently frustrated by the
Courts and it is generally more
acceptable when approaching the
Court for an award of damages,
to be coming from the position of
higher moral ground.
In the alternative, parties might
seek to incorporate into their
contracts a more detailed set of
requirements as to function. In the
construction industry in respect
of programming information,
such requirements would for
example include setting out
the precise nature and extent
of the information that is to be
exchanged.
The recommendations adopted
by the UK Society of Construction
Law are referred to with approval
in Alstom. The Society’s Delay and
Disruption Protocol is an excellent
reference point for parties requiring
a workable set of rules governing
the production and exchange
of programming information in
construction projects.
CONCLUSION
The law of contract has developed
over the last two decades in
Australia, particularly in respect
of the requirement for good faith
in the performance of contract.
However, the High Court has not
yet found a suitable vehicle to
express a determinative view on
the topic.
The Alstom decision arises from
a particular set of facts that may
be distinguishable from other
construction projects. However,
the history of the progression of
the law reveals that particular
sets of facts often introduce a
new approach to the law that
then resounds to impact on more
general situations.
It remains to be seen whether
higher courts agree with Bleby
J when he says that it is a
term to be implied in every
commercial contract’66 or whether
the factual matrix will decide
whether implication of the term is
appropriate.
In the interim, prudent lawyers will
operate on the assumption that the
changes set out in this paper will
remain. At least in South Australia,
the precedent is now clearly
established.
REFERENCES
1. See, for example, Ms Elisabeth
Peden and Mr Bill Dixon
2. Alstom Ltd v YDMRL Pty Ltd
[2012] SASC 49
3. Terms can also be implied
by custom but the threshold
test is high and circumstances
limited. That consideration is
presently outside the scope of
this discussion. Note that whether
a duty of good faith is implied by
fact or law has been the subject
of considerable judicial comment,
although the trend supports an
implication at law.
4. BP Refinery (Westernport) Pty
Ltd v Hastings Shire Council 180
CLR 266
5. Ibid 283
12. Ibid [347]
13. Our understanding of Ms
Peden’s argument is that this
case indicates that good faith
is inherent in contract law and
therefore no implied duty of good
faith is necessary. Elizabeth
Peden, ‘Implicit Good Faith – or
do we still need an implied term of
Good Faith’, (2009) 25 Journal of
Contract Law.
14. Renard Constructions (ME)
Pty Ltd v Minister for Public Works
(1992) 26 NSWLR 234
15. Renard Constructions (ME)
Pty Ltd v Minister for Public Works
(1992) 26 NSWLR 234, 273
16. Ibid 273, 257 – 263
17. Ibid 258F
18. Ibid 273
19. Ibid 268
20. Sir Anthony Mason, ‘Contract
and its relationship with equitable
standards and the doctrine of
good faith’—The Cambridge
Lectures 1993, Canadian
Institute of Advanced Legal
Studies, Cambridge University
(an amended version under
the title ‘Contract, Good Faith
and Equitable Standards in Fair
Dealing’, submitted 30/9/99)
appears in (2000) 116 Law
Quarterly Review 66–94.
21. Hughes Aircraft Systems
International v Airservices Australia
[1997] FCA 558
6. Such terms are predominantly
now statutorily implied in
jurisdictions across Australia.
22. Ibid as discussed in Burger
King Corporation v Hungry Jack’s
Pty Ltd [2001] NSWCA 187, at
[158]
7. Liverpool City Council v Irwin
[1977] AC 239
23. Alcatel Australia Ltd v Scarcella
& Ors [1998] NSWSC 483
8. Ibid 254
24. Ibid 368
9. Byrne v Australian Airlines Ltd
(1995) 185 CLR 411
25. Garry Rogers Motors
(Australia) Pty Ltd v Subaru
(Australia) Pty Ltd [1999] FCA 903
10. Ibid 450
11. Carr v J A Berriman Pty Ltd
(1953) 89 CLR 327
26. See Burger King Corporation
v Hungry Jack’s Pty Ltd [2001]
NSWCA 187 [172]
27. Garry Rogers Motors
(Australia) Pty Ltd v Subaru
(Australia) Pty Ltd [1999] FCA 903,
at [37]
28. Aiton Australia Pty Ltd v
Transfield Pty Ltd [1999] NSWSC
996
44. Note this may be subject to
any acceleration works.
45. Alstom Ltd v YDMRL Pty Ltd &
Anor [2012] 49, at [544]
46. Ibid, at [521]
47. Ibid at [523]
29. Ibid [133]
48. Ibid at [527]
30. Far Horizons Pty Ltd v
McDonald’s Australia Ltd [2000]
VSC 310
49. Ibid at [547]
31. Ibid [120]
32. Burger King Corporation v
Hungry Jack’s Pty Ltd [2001]
NSWCA 187, at [169]
33. Note there were several
agreements in place between the
parties. For present purposes,
we focus on the Development
Agreement.
50. Ibid at [547]
51. Butt v McDonald (1896) 7 QLJ
68, 70–71
Anor [2012] 49, at [570]
Anor [2012] 49, at [586]
55. Alcatel Australia Ltd v
Scarcella (1998) 44 NSWLR 349,
369; Vodafone Pacific Ltd v Mobile
Innovations Ltd [2004] NSWCA
15, [188]–[189]; Esso Australia
Resources Pty Ltd v Southern
Pacific Petroleum NL [2005] VSCA
228, [25]
35. Burger King Corporation v
Hungry Jack’s Pty Ltd [2001]
NSWCA 187, at [38]
Anor [2012] 49, at [596]
37. Ibid at [185]
38. Ibid [187]
39. Council of the City of Sydney v
Goldspar Australia Pty Ltd [2006]
FCA 472
40. Ibid [166]
Anor [2012] 49, at [548]
42. The Society of Construction
Law Delay and Disruption Protocol,
October 2002, 54
43. Some critical path activities
only need to be commenced
before the subsequent activity
starts, others need to be
completed.
Tom Grace and Jock Hamilton’s
paper was presented at Legalwise
Seminars on Contract Law:
Risks and Disputes in Adelaide
on 19 June 2013. Reprinted with
permission.
53. GEC Marconi Systems Pty Ltd
v BHP Information Technology Pty
Ltd (2003) 128 FCR 1, 208–209
34. Burger King sought to expand
its direct operations in Australia
and this was obviously not in
Hungry Jack’s interests. In doing
so, Burger King sought to enter
into an agreement with Shell
Service Stations to the exclusion
of Hungry Jack’s; commercial
relations suffered.
36. Ibid at [183]
66. Alcatel Australia Ltd v
Scarcella (1998) 44 NSWLR 349,
369; Vodafone Pacific Ltd v Mobile
Innovations Ltd [2004] NSWCA
15, [188]–[189]; Esso Australia
Resources Pty Ltd v Southern
Pacific Petroleum NL [2005] VSCA
228, at [25]
56. Section 205
58. United Group Rail Services Ltd
v Rail Corporation of New South
Wales (2009) 74 NSWLR 618
59. Ibid at 635 as discussed by
Bleby J in Alstom Ltd v YDMRL Pty
Ltd & Anor [2012] 49, at [593]
Anor [2012] 49, at [596]
Anor [2012] 49, at [597]
62. Ibid at [598]
63. Ibid at [606]
64. Ibid at [609]
65. Royal Botanic Gardens and
Domain Trust v South Sydney City
Council [2002] HCA 5
ELECTRONIC TRANSACTIONS
HIT ‘SEND’ AND
HOPE—PROBLEMS
WITH CONTRACTUAL
NOTICES BY EMAIL
INTRODUCTION
Owen Hayford, Partner
Email has become the preferred
means of sending written
communications in business. It’s
fast, cheap and convenient. So
it is no surprise that people are
using email to send purchase
orders, payment claims and other
contractual notifications. Nor is it
any surprise that parties want their
contracts to permit the use of email
for contractual communications.
Betina Friedeberg, Senior
Associate
Clayton Utz, Sydney
Using email to send contractual
notices can be risky, but there are
things you can do to reduce the
risks.
However, the use of email for
contractual communications is
fraught with legal and technical
risks. As such, it’s important that
people understand these risks and
take appropriate steps to manage
them. This article explains the risks
and how they can be managed.
WHEN IS YOUR EMAIL
TAKEN TO HAVE BEEN
RECEIVED?
The time at which a contractual
notice is taken to have been
received can have important
contractual consequences. The
time for payment often runs from
the date a claim for payment is
received. Contractual options,
such as an option to renew or
extend a lease, must typically be
exercised by giving written notice
by a particular date. Claims for
extra money or extra time under
a contract can be barred if not
given within time. Accordingly, it
can be critical for the sender of
a contractual notice to be able to
demonstrate when the notice was
received by the recipient.
Most written contracts include a
clause dealing with contractual
notices. The clause will usually set
out addresses to which notices
can be hand delivered, posted or
faxed. It will also generally include
a provision stating that the notice is
deemed to have been received by
the recipient:
• if it is hand delivered, at the time
it is so delivered;
• if it is sent by fax, at the time in
the place to which it is sent which
is equivalent to the time shown
on the transmission confirmation
report produced by the machine
from which it is sent; and
• if it is sent by pre–paid post, on
the third business day after the
date of posting to an address
within Australia, and on the fifth
business day after the date of
posting by airmail to an address
outside Australia.
It has also become increasingly
common for such clauses to
include an email address to which
notices can be sent, and to specify
when a notice sent by email will
be deemed to have been received
by the recipient. However, for
the reasons explained below,
there is no universally accepted
formulation for the deemed time of
receipt of emails.
RULES FOR TIME
OF RECEIPT UNDER
THE ELECTRONIC
TRANSACTIONS ACTS
Legislation has been enacted,
at the Federal level and in each
Australian State and Territory,
dealing with emails. This
legislation provides some rules
for determining when emails have
been received. In short, the rules
are:
• if the recipient has provided the
sender with its email address,
the time of receipt is when the
email enters the recipient’s mail
server (unless the parties agree
otherwise); and
• if the recipient has not provided
the sender with its email address,
the time of receipt is when it
comes to the attention of the
recipient (unless the parties agree
otherwise).
These rules seem sensible on first
blush, but if you are the sender
of the email, how will you prove
the time at which the email was
received by the recipient’s mail
server if you don’t request and
receive a ‘delivery receipt’ from
the recipient’s server? Most people
don’t regularly request ‘delivery
receipts’. And even if you do,
the recipient can set up his or
her email system so that delivery
receipts are never issued, even if
you request one.
What if the sender gets a response
from the recipient’s email server
saying that the email could not be
delivered because it exceeded a
specified number of megabytes?
Alternatively, what if the sender
gets an ‘out of office’ response, or
an automated response advising
that the recipient has left the
organisation?
In each case, the sender will
have evidence that the email
has entered the recipient’s mail
server, and so the recipient will be
deemed to have received the email
at the time the sender received the
response (if not earlier). But is this
result fair for the receiver?
You might consider it is, because
the recipient’s organisation can
allow the email to pass through
its firewall, and can arrange for
someone to read the recipient’s
emails while the recipient is on
leave or after the recipient has left
the organisation. But if you’re the
recipient and you fail to take such
steps, there is a significant risk that
you or your organisation will be
deemed to have received emails
that haven’t made it to your inbox,
or that you haven’t read.
ALTERNATIVE RULES
FOR THE TIME OF
RECEIPT OF EMAIL
You can depart from the legislated
rules for the time of receipt of
emails by specifying alternative
rules in your contract. Many parties
do this. Alternative rules for the
deemed receipt of emails which
are often adopted include:
• the time the email is sent by the
sender; or
• a specific period after the time it
is sent by the sender.
There are issues with both of these
alternative rules.
For the time of sending option,
while emails are often received
within seconds of being sent,
delays can occur. Is it fair for the
recipient to be deemed to have
received the email before it has
been received by the recipient’s
email server?
For the specific period option,
there remains the risk that the
email is not received within the
specified period, or ever. Also, if
the specified period is lengthy,
for example 24 hours (as is
often specified), then there is a
significant risk that senders will
forget this rule and assume that
the email is received the moment
(or shortly after) it is sent. Senders
of emails can be easily caught
out and the consequences of
a late notice can be drastic, as
demonstrated by some recent
court cases.
SOME RECENT
COURT CASES—
WITH UNEXPECTED
OUTCOMES!
THE BAUEN CASE—EMAIL
CAUGHT IN SPAM FILTER
In Bauen Constructions Pty Ltd
v Sky General Services Pty Ltd
[2012] NSWSC 1123, the Supreme
Court of New South Wales had to
determine the time of receipt of an
email containing an adjudication
response under the Building and
Construction Industry Security
of Payment Act 1999 (NSW)
(BCISPA). The adjudication
response was sent by email on
21 June 2012 to the adjudicator.
However, the adjudicator was
unaware of the email until
12 September 2012, when it
discovered the email was caught
in its spam filter.
The court decided that the
word ‘lodged’ in section 20 of
the BCISPA meant ‘presented’
or ‘received’, and relied on the
legislated rules in the Electronic
Transactions Act to establish that
receipt was when the email was
capable of being retrieved by
the recipient, meaning it was not
necessary for it to be opened or
read. Accordingly, the adjudicator
had received it, and was able to
access it, when the email was
caught by its spam filter on 21
June 2012, which meant Bauen
had lodged the adjudication
response in time.
Luckily for the sender, the recipient
of the email disclosed evidence
that the email had been caught in
its spam filter and, therefore, had
been received by the recipient’s
email server. Had the recipient not
done so, the sender may not have
been able to prove that it had been
sent in time.
THE REED CASE—TIME OF
RECEIPT OF EMAIL
Reed Constructions Pty Limited
v Eire Contractors Pty Limited
[2009] NSWSC 678 considered
a construction contract for
civil works based on a NSW
Government standard contract,
GC21, which permitted service
by email. The time of receipt of an
email attaching a payment claim
was crucial to the validity of an
adjudicator’s determination under
the BCISPA.
The New South Wales Supreme
Court considered the legislated
rules discussed above. The court
concluded, applying these rules,
that a payment claim could be
served by email and that the time
of receipt was when the email was
received by the recipient’s email
server.
The recipient of the email wanted
the court to conclude that the email
was received on 6 November, and
not 7 November as determined
by the adjudicator. There was
Email has become the
preferred means of sending
written communications
in business. It’s fast,
cheap and convenient.
So it is no surprise that
people are using email
to send purchase orders,
payment claims and other
contractual notifications.
Nor is it any surprise
that parties want their
contracts to permit the use
of email for contractual
communications.
evidence before the adjudicator
and the court that the email was
sent by the sender on 6 November,
and that it was read by the
recipient on 7 November. However,
the recipient failed to produce
any evidence that the email
was received by its email server
any earlier than 7 November.
Consequently, the court refused to
overturn the adjudicator’s decision
that the email was received on 7
November, and the adjudicator’s
determination against the recipient
was upheld.
While this case is not an example
of a sender being unable to prove
the time at which an email was
received by the recipient’s server,
it does illustrate how the deemed
time of receipt of an email notice
can be critical to the outcome of a
claim.
A SOLUTION—
AUTOMATIC RECEIPT
NOTIFICATIONS
There is at least one way to avoid
the difficulties identified above,
but it requires the agreement of
both parties and some technical
skills. The solution requires
each contracting party to set
up its email system so that it
automatically issues a delivery
receipt notification upon receipt of
an email from another contracting
party. The parties would then state
in their contract that emails are
deemed to be received at the time
shown on the automatic receipt
notification received by the sender.
An automatic receipt notification
is different to a delivery receipt,
as it is automatically generated
and sent by the recipient’s email
system, whether or not the sender
has requested it. The automatic
receipt notification can be set
up so it only generates a receipt
once an email has passed
through the firewall and arrived
in the recipient’s inbox, thereby
overcoming the problem of emails
being deemed received if they are
caught in the recipient’s firewall.
Where the sender and recipient
are in different time zones, the
deemed time of receipt requires
careful consideration. Even if each
party usually conducts its business
in the same time zone, there may
be occasions when you want to
send a communication from a
different time zone. Accordingly,
the contract should specify the
deemed time of receipt as the
time in the place to which the
email is sent equivalent to the time
shown on the sender’s automatic
receipt notification (unless
received outside of business
hours in that place, in which case
it is deemed to be received at
the commencement of the next
business day).
CONSIDER USING A
CONTRACT SPECIFIC
MAILBOX
Sending automatic receipt
notifications will generate a lot of
email traffic if the recipient receives
a lot of emails. Accordingly, you
may want to set up your email
system so that automatic receipt
notifications are only sent when
emails are received from specified
senders.
To address this issue, you
may wish to establish a
contract specific mailbox (e.g.
contractnotices@company.com.
au) so that all email traffic for a
particular contract goes to and
from the contract specific mailbox.
This approach also has the
advantage of:
• enabling you to give alternative
persons access to the mailbox as
circumstances demand;
• eliminating the need to change
the email address if the person
nominated to send and receive
contractual notifications is
replaced during the life of a
contract; and
• allowing tailored firewall and
email size restrictions.
ONUS ON SENDER
With automatic receipt
notifications, the onus is on
the sender to ensure that it
receives and retains the receipt
notification so that it can prove
the time of receipt. If the sender
does not receive the automatic
receipt notification, the onus
is on the sender to resend the
communication, perhaps by an
alternative method, or confirm that
the recipient did in fact receive the
message.
Some companies set up their
contract specific mailboxes to
automatically send a test email at
regular intervals to check whether
the recipient’s automatic receipt
notification function is working. If
an automatic receipt notification is
not received within a predefined
period of time, an alert is sent
to a designated employee to
investigate.
ATTACHMENTS TO
EMAILS
It’s not uncommon for people
to receive email attachments in
a form which they cannot open
without the relevant software. Such
a situation recently came before
the Supreme Court of Western
Australia in the case of Triple M
Mechanical Services Pty Ltd v
Ellis (unreported 2 May 2013,
BC201302298). In this case,
an adjudicator to a security of
payment claim decided that the
attachments to an email (which
was received in time) were
received out of time because the
adjudicator could not open the
attachments.
The attachments were sent
as RAR files the first time and
again as a ‘YouSendIt’ link, both
within time, and then as hard
copies the following day, out of
time. The court was critical of
the adjudicator’s reasoning for
disregarding the attachments
because reliable applications
were readily accessible free of
charge which would have allowed
the adjudicator to open the
attachments.
The court could not, however,
overturn the adjudicator’s decision
because it was not reviewable.
To avoid such situations and
provide greater certainty, you
should consider recording
the agreed formats for email
attachments in your contracts, so
that you can ensure you have the
software required to open and read
any attachments which you’ll be
deemed to have received.
CONSIDER LIMITING
EMAIL TO FORMAL
COMMUNICATIONS
Another risk associated with
email communications is their
informality. People seem to think
more carefully before signing
letters or forms than they do
before hitting the send button on
an email. We’ve all said things in
emails that perhaps we wouldn’t
have said in a letter or other,
more formal, communication. In
most contexts, the consequences
of such indiscretions are
minor. But in the case of
contractual communications,
the consequences can be very
significant indeed.
Accordingly, you may consider
mitigating this risk by including a
provision in your contracts which
states that:
• contractual communications
can only be sent by email if the
communication is in the form of a
PDF of a letter or document which
has been signed by someone who
is authorised to do so;
• only the signed document (and
any other attachments to the email
which are referred to in the signed
document) will be treated as a
communication for the purposes of
the contract; and
ON–LINE DOCUMENT
MANAGEMENT AND
COMMUNICATION TOOLS
If you expect to have a large
number of communications
under a contract, you may wish
to consider utilising an online
document management and
communication tool. There are
many products now available
which allow contracting parties
to transmit and store documents
electronically. Many of these
products have sophisticated
mechanisms for recording the
time at which documents were
sent, received and read, which
overcome many of the issues
associated with emails.
WHAT SHOULD YOU DO?
There is no simple answer to the
question of when a contract should
deem a notice sent by email
to have been received. Some
approaches, such as the time it
is sent by the sender, work for the
sender, but can be unfair to the
recipient. Others, such as the time
it is received by the recipient’s
server, can work for the recipient,
but can be unfair for the sender.
Further, there are numerous risks
which you should consider before
signing contracts which permit
the use of email for contractual
communications. If you want to
use email for contractual notices,
you should include appropriate
provisions in your contracts to
enable you to manage these risks.
Owen Hayford and Betina
Friedeberg’s article was previously
published in (2013) 16 (8) Inhouse
Counsel 147. Reprinted with
permission kindly granted by
LexisNexis Australia.
• the text in the body and subject
line of an email will not form part of
the contractual communication.
SECURITY OF PAYMENT
THREE EARLY
SECURITY OF
PAYMENT CASES IN
SOUTH AUSTRALIA
Robert Fenwick Elliott,
Barrister
Howard Zelling Chambers,
Adelaide
The Building and Construction
Industry Security of Payment Act
2009 (SA) (closely modelled on
the NSW Act) was enacted in
December 2009, but challenges
under it have only just started
reaching the courts. In part, this is
because the Act does not apply
to contracts entered into before
10 December 2011, and in part
because it has taken a while for
potential cases to work their way
through the system. But there
have now been three cases which
provide an early indication of the
reception that the Act has received
from the courts.
The Adelaide Interior Linings
case first came before the District
Court as Romaldi Constructions
v Adelaide Interior Linings [2013]
SADC 39 (3 April 2013). Judge
Barrett granted an injunction
restraining the enforcement of
the determination for $51,219.83,
saying:
I find that there is a real risk of the
defendant’s inability to repay the
adjudication sum if the injunction is
not granted. I find that the balance
of convenience favours the
granting of the injunction.
The decision was remarkable,
because there had been no
challenge to the determination
itself in the sense of any claim
that it was without jurisdiction,
or in breach of natural justice,
or subject to judicial review—
the application by the losing
respondent was simply on the
basis that the claimant had not
demonstrated that it would have
the financial resources to repay the
sum awarded at the conclusion of
full court proceedings to recover
it. The order for an injunction was
conditional on the respondent
paying the determined amount into
court.
It is not unheard of for a court
to stay enforcement of a
determination pending the hearing
of a challenge or exceptionally
where there is a high level risk
of insolvency, but there was no
challenge here and the decision
was based on much looser
evidence of financial means and
would—if followed—have had
the effect of undermining the very
purpose of the legislation: it is very
frequently the case that a claimant
under the legislation would be
unable to prove its ability to afford
full–scale proceedings, either in
the courts or by way of arbitration.
And that was the principal basis
on which the decision was
reversed on appeal as Adelaide
Interior Linings Pty Ltd v Romaldi
Constructions Pty Ltd [2013] SASC
110.
Justice Anderson said:
The respondent, having elected
not to challenge the validity of the
adjudication, cannot be permitted
to circumvent the objects of the
Act by taking its own action to
prevent the adjudication certificate
from being issued.
Further, on the evidence, the
Supreme Court was dismissive of
the District Court’s relaxation of the
usual insolvency test, finding that:
... the information does not
approach a high level of likelihood
of insolvency using that as the test.
It is understood that Romaldi has
sought permission to appeal the
case further to the Full Court.
The second case to come before
the Supreme Court was Built
Environs Pty Ltd V Tali Engineering
Pty Ltd & Ors [2013] SASC
84 (3 June 2013), in which a
determination for $579,420.90 plus
GST and costs was challenged
on multiple grounds, of which two
succeeded.
The first concerned an issue
that arises not infrequently, and
exposes an inherent weakness in
the approach of many adjudicators
who are trained not to call for
conferences and not to invite
further submissions. It arises in this
way:
(1) A claimant puts in a payment
claim.
(2) The respondent puts in a
payment schedule. In this case,
the payment claim asserted a right
to deduct liquidated damages.
(3) The claimant puts in an
adjudication application with
submissions. Under the legislation,
there is no express prohibition on
the submissions including new
matters that were not included in
the payment claim. In this case,
they included a submission that
the respondent had prevented
completion, so as to negative
its entitlement to the liquidated
damages that would otherwise be
deductable.
(4) The respondent puts in an
adjudication response that must
be limited to matters raised in the
payment schedule. The payment
schedule in this case did not
refer to the prevention issues
(and indeed could not possibly
have done so, because the issue
had not then been raised). The
adjudication response does
not therefore deal with the new
matters.
Thus, unless an adjudicator in
these circumstances allows the
respondent to respond to the new
matters by way of conference
and/or further submissions, the
determination will be made without
the respondent having had any
opportunity at all to rebut the
new matters. In this case, the
adjudicator declined to allow
further submissions on the new
matters, and accordingly his
determination was found to be in
breach of natural justice, and set
aside on that basis.
It was also set aside on another
basis. The manager of the
nominating authority, Mr Sain, was
also the chief executive officer of
Edward Sain Associates, which
had been advising the claimant
as to its claim. Justice Blue
found that the test of reasonable
apprehension of bias applies not
only to the adjudicator, but also to
the ANA:
For the reasons given above, a
fair minded lay observer would
regard the identity of the person
selecting the decision maker to be
as important as the identity of the
decision maker himself or herself.
The determination was also
thus nullified on that basis. The
judge thus found it unnecessary
to decide on the judicial review
challenges based on error of law
alleged by the respondent, and
preferred not to do so since they
‘may arise in the determination
by arbitration or litigation of the
ultimate rights of the parties’.
This last consideration arose again
in Kennett v Janssen (Supreme
Court of South Australia 30 July
2013). The adjudicator, Adrian
Ashman (D4), had been appointed
by Adjudicate Today (D3), and
made a determination in favour of
J & S Janssen Bricklayers Pty Ltd
(D2). The respondent asserted that
its contract was not with D2, but
with Mr Janssen personally (D1),
and challenged the determination
on multiple grounds, including
the absence of any construction
contract with D2. D3 and D4 put
in limited appearances, agreeing
to be bound by the outcome,
and D1 and D2 indicated that
they did not wish to be heard on
the respondent’s claims that the
determination be declared void or
quashed.
Since the issue of the identity of
the contracting party (D1 or D2)
was a live issue in the underlying
dispute, the respondent, as plaintiff
in the Supreme Court proceedings,
elected to pursue its challenge
to the determination by way of
summary judgment application
on just one of its other grounds,
namely that D4 was not an eligible
person within the meaning of
regulation 6 of the Building and
Payment Regulations 2011 (SA).
Since D4 did not hold either a
relevant degree or a supervisor’s
license, his only possible eligibility
arose under regulation 6(b)(ii):
a subjective test; that is, that
it is a matter for the Council to
determine what is sufficient to
qualify a person for admission as
an associate and it is not possible
for the Court to identify objectively
what those requirements are.
There is also a requirement that
the candidate be elected. For
these reasons, the court found D4
to be ineligible, and declared the
purported determination invalid
and void.
These early cases suggest that the
courts in South Australia are not
taking an uncritical approach to
the legislation. The state’s courts
have a history of taking a relatively
jealous view of their jurisdiction,
and there is no sign that they
will be minded to turn a blind
eye to relevant shortcomings in
adjudicators’ determinations.
(ii) is, or is eligible to be, a member
(other than a student member)
of any 1 or more of the following
professional bodies:
…
(D) The Institute of Arbitrators and
Mediators Australia;
…
D4 was not a member of IAMA,
but asserted that he was eligible
to be at least an associate
member of IAMA. Justice Blue
found otherwise; article 8 of
AIMA’s Constitution imposes a
requirement for candidates for
associateship that (as found by the
court):
… the Council has to deem that
they have such knowledge of,
and interest in, the subject of
arbitration, mediation and/or
adjudication as the Council deems
sufficient to qualify him or her
for admission as an associate. It
seems to me that that imposes
CONTRACTS
PROPORTIONATE
LIABILITY IN THE
BUILDING AND
CONSTRUCTION
INDUSTRY FOLLOWING
HUNT & HUNT V
MITCHELL MORGAN
Jaclyn Smith, Lawyer
Corrs Chambers Westgarth,
Melbourne
INTRODUCTION
each party could be liable for
in the event of a dispute. It also
has the potential to cut ‘across
carefully negotiated allocation of
risk’.5 Unless it is contracted out
of, proportionate liability replaces
the contractual risk allocation as
arrived at between the parties in
their contract to the extent that the
two are inconsistent. If the regime
is contracted out of, there can
be gaps exposed in the parties’
insurance cover, and while this is
an area heavily commented upon
it will not be discussed in this
article.6
This article will examine the
development of the proportionate
liability regime focussing on how
it applies to the building and
construction industry, particularly
in light of the recent High Court of
Australia decision in Hunt & Hunt v
Mitchell Morgan Nominees Pty Ltd
(Hunt & Hunt v Mitchell Morgan).3
It is highly relevant to discuss the
regime as it applies specifically to
this industry given that it was within
that context that the regime was
first introduced in Australia.4 While
these industry–specific regimes
have been abrogated following
the introduction of the general
proportionality liability regime,
their initial existence symbolises
the significant impact that issues
surrounding apportionment and
concurrent wrongdoers have
on the Australian building and
construction industry.
Aside from the direct impact that
the regime has on the contractual
risk allocation, the policy behind
the regime makes a legitimate
attempt to make dispute resolution
a more fair and equitable process.
The effect of the regime, however,
is not intended to ‘do more by way
of apportionment than in theory
could previously be achieved
by contribution’ under joint and
several liability.7
Proportionate liability, as it
is utilised across Australian
jurisdictions, remains an
inconsistent,1 thus ineffective,
means of allocating risk despite
the ambitious policy attempt
to make damages awarded
against multiple defendants more
equitable. Despite the practical
issues with the application
of the regime, the focus on
apportionment of loss between
concurrent wrongdoers is ‘sound
and now entrenched in the
Australian legal framework’.2
Within the building and
construction industry there is
a high degree of emphasis on
the pre–allocation of risk either
contractually, through tort law or
through insurance. Proportionate
liability is a relatively unknown
variable entirely dependent upon
an act or omission, that causes a
party loss, occurring. It is a risk
that is unable to be allocated
under a contract beyond the
general allocations already in
place, particularly in regard to
the quantum of damage that
The recent High Court decision
in Hunt & Hunt v Mitchell Morgan
has confirmed the role that the
statutory proportionate liability
regime has in disputes with
multiple parties causing the loss
claimed.8 It is the first judgment
handed down by the High Court
that involves a detailed analysis of
the proportionate liability regime,
the New South Wales legislation in
particular.9 The decision clarifies
the meaning of ‘damage or loss
that is the subject of the claim’
in the legislation and further use
of ‘damage’ in the legislative
provisions.
The uncertainty surrounding the
expression of ‘damage or loss’ has
been a source of considerable
speculation since the introduction
of the regime across the Australian
jurisdictions, and while the Hunt &
Hunt v Mitchell Morgan decision
adds to the definition there is still
room for further clarification.10
This article will work through
the case history of this
particular dispute as a means of
demonstrating the development
that the law has taken on this point
in particular. It will also look at
the impact of the decision on the
building and construction industry
and attempt to anticipate its impact
on contractual risk allocation.
The discussion will focus on the
application of the regime in the
court hierarchy, and will not touch
on its role in arbitral proceedings
as it is now relatively settled that
the regime will not apply in such
instances.11
This article will also examine the
current status of the proportionate
liability regime in Australia by
conducting a comparative analysis
of its application across several
jurisdictions with a particular
emphasis on the utility, or
otherwise, of the contracting out
provisions. It will look at the second
draft model provisions drafted
by the Standing Committee of
Attorney’s–General (SCAG)12 and
comment on the effectiveness of
the proposed reforms, particularly
in regard to contracting out.
Following the discussion on
Australia’s own law reform
surrounding proportionate liability,
this article will look at the current
reforms under consideration in
New Zealand.
While New Zealand still uses
joint and several liability, their
Law Commission is proposing to
move to a proportionate liability
regime, specifically mentioning the
Australian model as an example of
how it can be applied in practice.
This comparison is still a live topic
because Australia too is still in
the process of reforming, and
hopefully nationally unifying, its
proportionate liability regime.
PROPORTIONATE
LIABILITY IN AUSTRALIA
BRIEF BACKGROUND TO
THE REGIME
Each State and Territory
enacted proportionate liability
legislation, which is similar but
not uniform,13 between 2004
and 2005 in response to a crisis
in the insurance industry in the
early 2000s.14 The crisis was
typified by a growing number of
actions against professionals,
particularly auditors, who were
being singled out as targets for
negligence actions not because
of their culpability (which might
be small) but because they were
insured and had the capacity to
pay large damages awards. One
consequence was a sharp risk in
insurance premiums payable by
professionals.15
The legislation was enacted upon
the recommendation of the Davis
Report16 and in the draft form
prepared by the SCAG in July
1996,17 which principally sought
the abolition of joint and several
liability in Australia for all economic
loss.18 Since that time, a second
draft of model provisions has been
released for consultation and these
are currently under consideration
by SCAG.19
The legislation applies to claims for
property damage or economic loss
from a failure to take reasonable
care, and also in relation to
misleading and deceptive
conduct.20 The regime seeks to
limit a Court’s award of damages
in such claims to amounts that
solely reflect the tortfeasor’s
responsibility. Under joint and
several liability, a defendant could
be liable for an entire judgment
made against all defendants that
contributed to a loss, despite
personally only having a nominal
percentage of the responsibility.21
ELEMENTS OF
PROPORTIONATE
LIABILITY
At a legislative level, there are
two essential elements to the
regime that are shared across all
Australian jurisdictions. To enliven
the regime there first needs to be
an apportionable claim. This is
a claim for either economic loss
or property damage under tort,
contract or statute, arising from a
failure to take reasonable care.22
Secondly, there needs to be
concurrent wrongdoers, namely
two or more parties whose acts or
omissions have contributed to the
loss in dispute.23 It is this second
element that has caused the most
confusion since the introduction of
the proportionate liability regime,
and is the area that this article will
focus on.
Various cases across the
jurisdictions have grappled with
multiple tortfeasors and what
‘damage or loss’ they are required
to have contributed to in order to
become concurrent wrongdoers,
most notably for discussion in
this article is that in Hunt & Hunt v
Mitchell Morgan. One of the initial
hurdles that must be established
by a plaintiff is that the tortfeasor
is legally liable to them for the
relevant damage or loss.24
The legal uncertainty created
by the wording of the legislative
provisions was clarified by
Besanko J of the Federal Court in
Shrimp v Landmark Operations
Ltd.25 His Honour held that
‘caused’ in the definition of
concurrent wrongdoer ‘should be
read as meaning such as to give
rise to a liability in the concurrent
wrongdoer to the plaintiff’.26 The
effect of this jurisprudence is that
to be a concurrent wrongdoer the
tortfeasor must have caused the
loss or damage that is the subject
of the plaintiff’s claim and be
liable to the plaintiff for that loss or
damage.27
In the context of the building and
construction industry this becomes
most relevant when parties look
to use deeds of warranty or
tripartite agreements, or on a more
immediate level, when parties are
considering which contract model
to use for their project. While such
warranties and agreements would
provide the contractual nexus
for subcontractors to be liable
to a principal,28 they have also
been noted to ‘erode the single
point responsibility the principal
intended to create by entering into
the head contract.29
This is demonstrated in the
example of a consultant designing
a building for a contractor who
has a design and construct
arrangement with the principal,
and the consultant having to sign
a warranty as to the design of a
building in favour of the principal.30
Years after completion, the building
collapses and the principal sues
the contractor, who in turn joins the
consultant as a co–defendant.31
By virtue of the warranty
agreement the consultant is 100
per cent liable for the principal’s
loss, without such an agreement
the proportionate liability regime
would be likely to apportion
the loss caused between the
contractor and the consultant.32
The warranty bypasses the
responsibility of the contractor
under the head contract and
provides a mechanism for the
principal to directly bring action
against the consultant without
needing to utilise the head
contract.33
The situation could be further
complicated if the consultant is
insolvent by the time the building
collapses, transferring the risk of
being able to recover from the
consultant to the principal and
allowing the contractor to avoid
any contribution obligations.34
Instead of utilising a design
and construct model to ensure
the principal has ‘single line
accountability,’ it places it in
a similar risk category as a
construction management model.35
The advantage of a design
and construct model, from a
defendants perspective, is the
potential for loss to be apportioned
between subcontractors and
head contractors, despite this
not being the intention of the
model.36 As the example above
demonstrates, proportionate
liability may attempt to be more
equitable in how it apportions
liability, but its application
introduces new complexities into
the already complex arrangement
of a construction project. Given the
ambiguity that this has caused, it
is unsurprising that this has been
identified as one of the key areas
for reform.37
CONTRACTING OUT
The lack of national uniformity
means that proportionate liability is
inconsistently38 used or commonly
contracted out of in jurisdictions
that expressly permit it, those
being New South Wales, Tasmania
and Western Australia. Contracting
out essentially means that parties
to a contract can expressly choose
to opt–out of the proportionate
liability regime and instead revert
to the joint and several liability
approach in the instance that that
multiple tortfeasors cause the
plaintiff’s loss. This encourages
‘forum shopping’ at the time of
entering into a contract, which
enables parties to choose a
jurisdiction for their contract that
allows for contracting out of the
regime.39
For example, if a project is
constructed in Victoria, the
contractor is from Victoria also but
the owner is from NSW, the parties
could legitimately agree to choose
NSW as the jurisdiction of their
contract. On the other hand, if all
parties and the project were based
in Victoria, there would be no
legitimate reason to choose NSW
as the jurisdiction of the contract.
NSW is used in this example as it
is one of the few jurisdictions that
allow contracting out, and this is
commonly done for construction
projects that have a connection to
that jurisdiction. Contracting out
has also been noted as an attempt
to ‘avoid a multiplicity of claims
arising when something goes
wrong’.40
In Tasmania, there is no need to
make specific reference to the
legislation in order to exclude
the regime from applying to the
contract.41 All that is necessary
is a contractual allocation of
liability that is worded in a manner
inconsistent with the regime.42
Practical suggestions as to how
to draft a contracting out clause
have been articulated by Owen
Hayford in his carefully considered
analysis of the regime’s impact
on contractual risk allocation.43
Hayford’s draft clause both
articulates that the regime is
excluded from applying to the
contract as a whole, and also
that it cannot be relied upon
by the parties.44 Interestingly,
Hayford’s clause also provides
that the contractor indemnify
the principal against any loss or
damage that is not recoverable in
the event that the contracting out
is unsuccessful and the regime
applies to the contract.45 While this
is effectively ensuring that even if
the contracting out is unsuccessful
the effect of it still applies to the
contract, it also removes the
benefits of the regime from the
contractors reach.
One way to negate the contracting
out provision in those jurisdictions
that allow is to have it set aside
on the grounds that it is contrary
to public policy.46 An example of
when this setting aside can occur
is where a project and parties
are all located in Queensland yet
the law of another jurisdiction is
chosen to govern the contract
purely to avoid the application of
the Queensland law.47
SUGGESTED REFORM ON
CONTRACTING OUT
Several suggestions have come
forward, namely from the SCAG,
to reform the proportionate
liability regime in a way that
ensures a more nationally
consistent approach is applied.
These reforms have focussed
on contracting out, and either
allowing48 or disallowing49 it
universally, or coming to a
compromise where it is only
allowed to apply to certain types of
contracts.50
Universally allowed v universally
not allowed
The first reform proposed by the
SCAG is that the legislation be
uniformly amended to expressly
allow for contracting out across
the jurisdictions.51 The second
option is the polar opposite of
this, to universally and expressly
disallow contracting out of the
regime.52 It seems contrary to the
policy behind the regime to allow
parties to contract out of it, and the
SCAG have noted that contracting
out subverts the purposes of the
legislation.53
In an all or nothing reform, if
it were simply disallowed in
all jurisdictions, a vast portion
of issues surrounding forum
shopping could be eliminated.
Similarities can be drawn within
the building and construction
industry to the way that the
security of payment provisions
work and their applicability, albeit
in forms not yet uniform, across
jurisdictions. The impetus behind
the security of payment reforms
was that they were essential to
the commercial operation of the
building construction industry,
and so the various State and
Territory Acts have been enacted
without allowing for the statutory
regime to be contracted out of.54
The suggested reforms to the
disallowance of contracting out
of proportionate liability reflect
a similar sense that, unless
uniformly applied, their purpose
will be ineffective for contracting
parties. Within the context of
the building and construction
industry, contractors in particular
would welcome the prohibition
of contracting out as a way to
ensure that they are not liable for
downstream risk associated with
subcontractors and are able to
benefit under the regime.
Contracting out only allowed for
contracts in excess of $5–10
million
The third option for reform
proposed by the SCAG would see
contracting out prohibited except
for agreements in excess of an
applicable threshold value, such
as $5–10 million.55 The quantum
suggested reflects the value that
large infrastructure contracts
typically exceed, those beyond
that value being the type of
projects necessitating contractual
risk allocation.56
The danger with attaching a
monetary qualifier on the ability
to enliven contracting out in any
given contract is that the value of
the contract might not always be
clear, thus creating uncertainty
as to whether contracting out
can be applied.57 On a more
positive note, for projects under
this threshold value parties will not
feel the ‘commercial pressures to
relinquish the protection offered
by the proportionate liability
provisions’.58
Contracting out only for non–
professionals or the provision of
non–professional services
An option proffered by Tony
Horan, in his report reviewing the
proportionate liability regime, is
that contracting out be allowed
in all jurisdictions and only not
permitted for contracts dealing
with professionals or the provision
of professional services.59 While
this does not go as far as the
first two all–or–nothing options
put forward by the SCAG in
terms of eliminating any chance
of inconsistencies in contracts,
it would mean that contracts
formed within the building and
construction context, as they deal
predominantly with professionals
or the provision of professional
services, would not be able to be
contracted out of.
This suggested reform is in
line with the policy behind
proportionate liability, and supports
the concept that professionals
are intended beneficiaries of the
regime via reduced insurance
premiums.60 While this reform is
likely to be welcomed by parties
operating in the building and
construction industry, in so far
as contracts for professionals
and professional services are
concerned, it would not resolve
issues beyond the industry with
the inconsistent application of
contracting out. There are no
foreseeable problems with the
application of this reform because
the experience in the building
and construction industry is fairly
established when it comes to
identifying when a person qualifies
as a professional.61 There is also
an express standard of care
for professionals defined in the
legislation itself.62
The policy behind this reform
option is much the same as the
SCAG’s third option involving a
value threshold, in that contracts
involving professionals or for
professional services are likely to
require contractual risk allocation.
This option also removes the
pressure from a non–professional
party to a contract, such as in a
domestic building contract where
a home owner directly contracts
with a contractor, to contract out
when they may not understand the
implications of doing so.
IMPLICATIONS OF THE
REGIME IN PRACTICE
The proportionate liability regime,
despite commencing over a
decade ago, is still observed
to be wreaking havoc in the
allocation and management of
risk, particularly on construction
projects.63 While the concept of
the regime commenced from a
‘sensible starting proposition’
it is the poor execution of the
legislation that has been most
critiqued.64 There have been
several cases brought before
courts, across the jurisdictions
that have challenged the practical
application of the regime.
Case law dealing with the
intricacies of the regime has
provided ‘much–needed guidance’
over the years since its inception.65
The reliance on clarification by
the common law illustrates the
complex legal framework that
the statutory regime creates.
While there are some general
observations that can be made
about the application of the regime
and its particular impact on the
building and construction industry,
there are also specific issues
including quantum of damages
and the ability to recover an award
of damages that warrant due
consideration.
REQUIREMENT FOR JUDICIAL
DETERMINATION
One of the practical implications
of the regime is that the parties
in dispute will require a judicial
determination to allocate the
proportion of loss they are liable
for, unless they have either
contracted out of the regime or
have allocated for apportionment
in their contract. Where there is
only one wrongdoer, the contract is
likely to have expressly accounted
for where a particular area of
risk will fall. For example, under
a design and construct contract
it is the contractor who bears
design risk.66 In a situation where
there are concurrent wrongdoers,
such as the contractor and a
subcontractor, because the owner
is not in a direct contractual
relationship with a subcontractor
the proportionate liability regime
provides a mechanism for the
owner to be able to recover from
the subcontractor in the event
that loss is caused where that
subcontractor owed the principal a
legal liability.
CONCURRENT WRONGDOERS
MUST BE LIABLE TO THE
PLAINTIFF
This discussion highlights a
category that was in desperate
need of clarification, that being
whether or not a plaintiff could
bring action under the regime
against a tortfeasor who owed
them no legal liability. The
judgment of Besanko J in
Shrimp v Landmark Operations
Ltd67 clarifies this position and
subsequent decisions have
cemented this jurisprudence.68
Under the Commonwealth,
Queensland, New South Wales
and Victoria statutory regimes,
to be a concurrent wrongdoer
defendants are required ‘to have
a independent legal liability to the
plaintiff’.69
This means that unless a particular
duty is owed by a party in contract,
tort or under the misleading and
deceptive conduct provisions, they
cannot be held to be a concurrent
wrongdoer. In the construction
context, this means that principals
cannot join a subcontractor as a
concurrent wrongdoer in an action
unless the subcontractor has
provided an additional warranty,
is contractually bound, has a duty
to prevent pure economic loss, or
has a duty under misleading and
deceptive conduct law.
Proportionate liability does
not circumvent the existing
requirements surrounding privity
of contract and does not interfere
with the existing law to provide
additional avenues of recovery
where they did not exist under joint
and several liability.
A practical example of this, and
one where it is the contractor
who is the plaintiff, is where a
contactor brings action against
a principal for the provision of
inaccurate tender information
prepared by an architect or
engineer.70 The principal will only
be able to apportion its loss to that
architect or engineer where it can
demonstrate that the architect or
engineer had an independent and
direct liability to the contractor.71 In
the absence of a contract or direct
warranty between the contractor
and the architect or engineer,
the only duty that the architect or
engineer can owe to the contractor
would lie in a duty to prevent
pure economic loss or under the
misleading and deceptive conduct
provisions.72
RISKS OF RECOVERY PASSED
TO PLAINTIFF
One of the key points of
different between the use of
joint and several liability and the
proportionate liability regimes is
the shifting of risk of a defendant
being unable to pay because
of insolvency, bankruptcy or
untraceability is moved from the
co–defendants to the plaintiff.73
The plaintiff and defendant role
will not always be allocated
to principal and contractor
respectively, but there is opinion
in the industry that principals are
more likely to be plaintiffs in claims
between it and a contractor arising
out of the contractor’s failure
to take reasonable care when
under a duty to do so.74 It is this
assumption that supports the view
that principals are largely going
to be in favour of contracting out,
and for contactors to welcome the
application of the regime.75
In situations where one co–
defendant fits into one of those
categories, it is no more fair or
reasonable to place that risk on
the plaintiff than it is to place
it on the other co–defendants.
Industry opinion has suggested
‘considerations of prejudice to
plaintiffs weigh less strongly than
the value of limiting the liability
of defendants according to their
share of responsibility’.76
The only advantage shifting this
risk to the plaintiff is that recovery
is at least attempted to be made
from all defendants, not just those
with the financial ability to pay if an
award of damages is made against
them. It also acts as an incentive
for plaintiffs to bring their action
against all potential defendants in
the one proceeding. The ability of
a plaintiff to recover an award of
damages made in their favour may
also be affected in the way that
they bring their action initially.
Depending on which jurisdiction
they are in might impact who they
do, and do not, bring their action
against. This is a particularly
important consideration because
one of the key points of difference
across the jurisdictions is the
approach taken by the courts to
wrongdoers that are not a party to
the proceedings.
While the Commonwealth, New
South Wales, Queensland,
Northern Territory and Australian
Capital Territory all allow their
courts discretion in whether to
have regard to the liability of
non–party wrongdoers, Victorian
courts are expressly prohibited
from having regard to the liability of
non–parties with the exception of
parties that are dead or insolvent.77
Western Australia, South Australia
and Tasmania are at the other
end of the spectrum again and
mandate that regard must be
had to liability of non–party
wrongdoers.78
These significant jurisdictional
differences can have major
repercussions, particularly for
defendants who are seeking to
apportion loss amongst other
wrongdoers. It places an onus on
them to join other wrongdoers to
the action against them so that
they can actually benefit from the
proportionate liability regime and
do not end up shouldering 100 per
cent of an award of damages if
one is made against them.
ABILITY TO RECOVER AN
AWARD
One benefit of the proportionate
liability regime for head
contractors, insurers and other
parties with deep pockets is
that they no longer bear the
entire liability for loss caused to
a principal in instances where
multiple parties have failed
to exercise reasonable care.
Subcontractors are now also
exposed to liability where they
have been a concurrent wrongdoer
causing the loss suffered by the
principal, though only in situations
where they have owed a duty of
care to the plaintiff.79 As such, the
principal, not the head contractor,
can now carry the risk that this
subcontractor may be unable to
pay its proportion of the principal’s
loss.80
Proportionate liability
is a relatively unknown
variable entirely dependent
upon an act or omission,
that causes a party loss,
occurring ... Unless it
is contracted out of,
proportionate liability
replaces the contractual
risk allocation as arrived at
between the parties in their
contract to the extent that
the two are inconsistent.
In theory, this is beneficial because
it means that each party will only
be responsible for the loss that it
had a share in causing, and they
will not be burdened with carrying
risk that is in disproportion to their
actual role in the act or omission
causing the loss.
From a commercial perspective
this may encourage parties, both
principals and contractors, to enter
into projects and utilise guarantees
and tripartite agreements to ensure
that avenues for recovery are not
limited to those available under the
head contract.
From a project finance
perspective, the balance sheet
of large contractors will no longer
be exposed as the sole source
of recovery when multiple parties
on a project contribute to the
same loss or damage, so such
contractors may be more likely
to demand such warranties and
tripartite agreements described
above. The practical implications
of the regime tell a different story,
particularly for principals who are
now precluded from recovering
the entirety of their loss from just
one of the concurrent wrongdoers.
Where one of the concurrent
wrongdoers is insolvent, bankrupt
or unable to be located, this
means that a plaintiff is not able
to recover their proportion of the
loss and can only pursue the other
concurrent wrongdoers for their
respective proportion of the loss
cause. While this is in line with the
policy behind the regime81 it does
not necessarily promote principals
entering into project agreements
with contractors that they have not
had a commercial relationship with
already, for fear of not being able
to recover in the event of a dispute.
It also reduces the appetite of
project financiers from lending
to projects and reduces activity
as a result of this. Commercial
relationships draw on more than
just the balance sheets of the
contracting parties, and the risk of
non–performance or non–payment
on a project is already high
enough without considering the
risks associated with contracting
with an unknown entity.
UNKNOWN QUANTUM OF
DAMAGES
One of the major highlights of
the regime from a defendant’s
perspective is that it can
reasonably anticipate that the
quantum of damages, if such an
award is made against it, will be
limited to its contribution to the
loss or damage suffered by the
plaintiff. By the same token, one
major downside of the regime is
that the risk allocation between the
parties is not known until the actual
act or omission in question causes
a plaintiff’s loss. Unless the parties
have dealt with apportionment in
their contract, the actual quantum
of a party’s liability is not realised
until a court judgment is made.
As there are infinite combinations
of causality and degrees of risk
that could take place on any given
construction project, the proportion
that any given party to a project
will be liable for cannot genuinely
be allocated for at the time that a
project commences.
In the same sense, the doctrine of
privity of contract limits the scope
of who can be accounted for in the
initial contractual risk allocation.
For example, a head contract
would be unable to allocate the
risk that would be associated with
specific contractors used in a
subcontractual relationship, aside
from allocating the entire risk to
the contractor under a design
and construct arrangement.
Unlike other categories of risk
in construction projects that can
be traditionally allocated to the
party best able to manage it,
proportionate liability represents
an unknown quantum and
contractually unallocatable
category for parties to a project
and has been described as the
‘death of certainty’ for contractual
risk allocation.82
MEASURING UP TO
EXPECTATIONS?
While the proportionate liability
regime was intended to rectify
serious issues concerning
insurance, particularly professional
indemnity insurance, it is
questionable whether the practical
effect of the legislation achieves
this lofty ambition. As has been
identified throughout this article
in the discussions surrounding
contracting out, the biggest
hurdle to the regime achieving its
intended purpose is the lack of
uniformity across jurisdictions. The
inconsistencies as to contracting
out cause particular problems,
namely in the exposure to risk that
it can create.
In the building and construction
industry this is best demonstrated
on projects across different
jurisdictions and with parties
from different jurisdictions. Where
contracting out is allowed, parties
may be exposed to a gap in what
their policy covers and what they
agree to pay out in the event of
an apportionment claim. This
is because ‘insurance policies
typically do not provide cover for
any liability accepted over and
above that which is provided
for by the proportionate liability
legislation’.83 Insurance policies
typically state that liability is limited
to that which would be available
absent a contract. In the context
of negligence a contract which
limits the operation of the regime,
through contracting out, changes
the liability profile which would
have been available absent a
contract.
JUDICIAL
CLARIFICATION OF
‘DAMAGE OR LOSS’
While there are several aspects
of the legislative provisions that
have caused disputes across the
jurisdictions, the recurring one of
most significance recently is the
phrasing of ‘the damage or loss
that is the subject of the claim’.84
Recent Court of Appeal decisions
in Victoria and NSW have adopted
a narrow interpretation of the
expression, equating it with ‘the
same damage’ provision enabling
parties to seek contribution from
other parties.85 While the Hunt &
Hunt v Mitchell Morgan decision
of the High Court dealt expressly
with the New South Wales
jurisprudence, the decision in St
George Bank v Quinerts Pty Ltd
(Quinerts)86 was the last word on
proportionate liability in Victoria
prior to the recent High Court
ruling.
ST GEORGE BANK V
QUINERTS PTY LTD87
The case concerned a unit that
had been overvalued by the
valuer (Quinerts), and on the
basis of that valuation the bank
(St George) had loaned a sum
of money to the buyer of the unit
(the borrower) in excess of what
the unit was actually valued at.88
The bank sued the valuer alleging
that it would never have loaned
the money to the buyer if the
unit had been correctly valued.89
While the valuer’s negligence was
accepted, the focus of the dispute
centred on the definition of the
loss or damage that the bank had
suffered. The bank argued it was
the entire amount that it loaned the
buyer, and the valuer argued that
it was the amount actually loaned
minus the amount that the bank
would have been prepared to loan
the buyer if the valuation had been
accurate.90 The trial judge found in
favour of the valuer’s argument, but
refused to apportion loss between
the valuer and the borrower on the
grounds that they caused different
losses to the bank.91
The relevant aspect of the
judgment in this case, for the
purposes of proportionate
liability, pertained to the valuer’s
unsuccessful cross appeal for
liability to be apportioned.92 As
has been mentioned earlier in
this article, Nettle JA held that the
regime was not ‘intended to do
more by way of apportionment
than in theory could previously be
achieved by contribution’.93
To be successful under
contribution the loss or damage
caused by both tortfeasors must
have been the ‘same damage’
as the ‘loss or damage that is the
subject of the [plaintiff’s] claim’.94
His Honour arrived at this decision
following an interpretation of the
terms based on their plain and
ordinary meaning,95 based on
judicial opinion in previous cases,96
and agreed that the ‘legislative
context did not justify an expansive
interpretation of ‘the same
damage’’.97 The loss the borrower
caused was their failure to repay
the money under the loan, and
the valuer’s damage was causing
the bank to ‘accept inadequate
security from which to recover the
amount of the loan,’ so were clearly
not the same damage as required
under his Honour’s interpretation of
the legislation.98 The requirement
that the loss or damage the subject
of the claim be the same damage
as required under contribution
is what limits the scope of this
judgment to be of assistance to
subsequent defendants.
WOODS V DE GABRIELE99
While this case pre–dated the
appeal decision in Quinerts, it
is useful to note the outcome
of the dispute as it is one of the
few decisions from the State
jurisdiction to actually expand
upon the interpretation of
proportionate liability. Quinerts
may have restrained the scope
available to defendants to benefit
from the statutory regime,100 but
this decision raised the possibility
of proportionate liability applying to
all claims under services contracts
due to the implied term in those
contracts that services will be
performed with reasonable care
and skill.101
This clarified some of the
‘considerable uncertainty’
that surrounded the impact
proportionate liability would
have on risk allocation under
professional services contracts.102
It also supports the substance
of a claim being more powerful
than its form, and the notion that
the type of claim or the manner in
which it is pleaded will not prevent
the Victorian proportionate liability
applying to a particular situation.103
HUNT & HUNT V
MITCHELL MORGAN
Counsel for Hunt & Hunt described
the decision of the High Court
as one that ‘breathes life back
into laws that were severely
constrained after the Courts of
Appeal in Victoria and New South
Wales had limited the practical
operation of those laws’.104
Following the discussion above
regarding the Quinerts decision, it
is understandable why defendants
across all jurisdictions would share
this view.
Despite these advances in
interpretation of the legislation,
takes the clarification a much
needed step further, allowing
greater scope for defendants to
benefit from the regime.105 This
case, and others that expand
on the practical application
of proportionate liability, are
necessary to clarify the ‘sufficiently
unsettled’ questions of law that are
raised by the statutory provisions
across the Acts, such as those
surrounding the onus of proof in
proportionate liability claims.106
The majority decision is so
important because the Court of
Appeal decision was effectively
undermining the policy behind the
proportionate liability reforms. It
was placing professional service
providers ‘solely in the firing line
again in circumstances where
other wrongdoers lacked financial
resources’.107 In some respects
it was a decision that the regime
needed in order to move forward in
its jurisprudential development.
THE FACTUAL AND CASE
HISTORY
The dispute concerned funds
that had been transferred to Mr
Caradonna, with the assistance
of his solicitor Mr Flammia
(collectively, ‘the fraudsters’),
on the security of a mortgage
provided to him and his business
associate, Mr Vella, by Mitchell
Morgan.108 Caradonna had forged
Vella’s signature on the mortgage
documents, and Flammia had
dishonestly certified them, to
acquire the mortgage.109
The debt owed to Mitchell Morgan
was secured by these mortgage
documents and a loan agreement
that had been drawn up by
Mitchell Morgan’s solicitors, Hunt
& Hunt.110 By the time proceedings
were initiated, both fraudsters were
bankrupt so action was brought
against Mr Vella by Mitchell
Morgan in the New South Wales
Supreme Court.
Due to the forged nature of the
documents, Mr Vella was not liable
for Mitchell Morgan’s loss. Hunt
& Hunt were also joined in that
proceeding for their breach of their
duty of care to Mitchell Morgan.
They were found to be negligent
for not drafting a mortgage
that could ‘obtain the benefit
of indefeasibility despite being
procured by fraud’.111
as making enquiries about the
authenticity of the mortgage
documents or using a particular
form, and concluded that this
burden was ‘not very great’.117
The crux of the appeal process
was debating the quantum of
the loss or damage that Mitchell
Morgan suffered that could be
apportioned, if at all, to Hunt &
Hunt.
His Honour found that Mitchell
Morgan’s claim against Hunt &
Hunt was an apportionable one,118
and Hunt & Hunt’s liability was
limited to 12.5 per cent of Mitchell
Morgan’s loss.119 Interestingly,
Young CJ did not articulate what
exactly the loss was that Hunt &
Hunt and the fraudsters caused.
His Honour continues his analysis
of apportionment by looking at how
the fraudster, Flammia, caused
Hunt & Hunt’s loss, that loss being
defined as the 12.5 per cent that
they have to contribute to Mitchell
Morgan’s loss.120
It is worth examining the case
history to gain insight into the full–
circle that the decisions travelled
in, and the potentially drastic
outcomes for the regime more
broadly if the Court of Appeal
decision had been the final word
in the dispute. The judgments at all
three stages of the process display
a tendency to deliberate the true
meaning of ‘damage or loss’ in
its legislative context, the majority
judgment in the High Court
drawing much of its logic from the
trial judgment of Young CJ.
TRIAL JUDGMENT
Hunt & Hunt argued that the
fraudsters were concurrent
wrongdoers within the meaning
of the proportionate liability
regime, and that their own liability
should be limited to a proportion
of the loss that reflects their
responsibility for Mitchell Morgan’s
damage.112 In assessing Hunt &
Hunt’s claim for apportionment,
his Honour highlighted that
professional advisers such as
solicitors are neither insurers113 nor
‘superhuman’ in their abilities114
and are not obliged to warn
commercially sophisticated clients
of risks which a reasonable person
would assume that client was
aware of, such as the risk of fraud
in these circumstances.115
Failing to draft a mortgage that
adequately dealt with the risk of
fraud was quite another matter.116
Young CJ also undertook an
analysis of the steps that Hunt &
Hunt and Flammia would have
needed to have undertaken
to avoid the risk of harm, such
This application of the regime
tends towards an approach for
contribution that would have
existed under joint and several
liability, less an apportionment
of the same loss or damage that
Mitchell Morgan were claiming.
Aside from such discussions the
actual explanation that his Honour
provided was criticised in the
Court of Appeal as being ‘not
very revealing’.121 The mentions
made by his Honour of the
damages claimed by Mitchell
Morgan against Hunt & Hunt
are for the financial value of the
forged mortgage plus interest.122
This is picked up in the majority
judgment of the High Court and
could partly explain their emphasis
on the difference between loss or
damage and damages made by
way of an award, though this will
be discussed later in this article.
This judgment is particularly
critical to an analysis of the High
Court’s decision as it was cited by
the majority judgment as finding,
without a doubt, that ‘Hunt & Hunt
was a wrongdoer whose actions
were a cause of Mitchell Morgan’s
inability to recover the monies it
advanced’.123
NEW SOUTH WALES
COURT OF APPEAL
The basis for Mitchell Morgan’s
appeal to the New South Wales
Court of Appeal was that Hunt
& Hunt were not concurrent
wrongdoers with the fraudsters
and therefore they should not
have had their liability limited.124
Their successful appeal turned
on the judicial interpretation of the
wording in the legislation of the
same loss or damage, and the loss
caused by Hunt & Hunt was held
to have been caused without any
part played by the fraudsters.125
Giles JA based his analysis on
the fact that Mitchell Morgan’s
relevant loss for the purpose
of the legislative provision ‘the
damage or loss that is the subject
of the claim,’ was economic
loss.126 Although, as the majority
judgment in the High Court points
out, this merely draws points
to the ‘immediate effects of the
fraudsters’ conduct and of the
negligence of Hunt & Hunt’,127
not the actual loss that Mitchell
Morgan suffered. This identification
of the loss or damage as Mitchell
Morgan’s paying out of money that
they would not otherwise have had
to128 should not have been equated
with the actual loss or damage
itself.129
That this definition is not
clarified until much later in the
judgment, when Giles JA raises
the distinction, is surprising.130
His Honour does conclude by
stating the relevant economic loss
suffered by Mitchell Morgan to be
‘not having the benefit of security’
over the property that was the
subject of their mortgage.131
Due to the acts or omissions of
the fraudsters not being a cause
of this loss, his Honour held
that they were not concurrent
wrongdoers and thus Hunt & Hunt
were liable for the entirety of that
loss.132 Following the discussion in
Quinerts it is evident that this case
was determined under the same
interpretation of the authorities.
Their Honours of the High Court
majority judgment looked at the
practical implications of Giles JA
finding Mitchell Morgan to have
incurred a loss simply by virtue
of entering into their negligently
drawn mortgage, and found that
at that point no loss had actually
occurred.133
Their Honours held that the
more correct interpretation of
the legislation, and the one that
correctly measures when Mitchell
Morgan’s damage began to
accrue, was to consider Mitchell
Morgan’s economic loss and
damage as commencing when the
money became unrecoverable.134
The policy rationale behind this is
that it would be ‘unjust to compel a
plaintiff to commence proceedings
before the existence of his or her
loss is ascertainable’.135
HIGH COURT OF
AUSTRALIA
MAJORITY JUDGMENT
The key issue in Hunt & Hunt’s
appeal to the High Court, as
identified in the joint majority
judgment, was the ‘proper
identification’ of the loss or
damage that Mitchell Morgan
claimed against Hunt & Hunt136
and whether there was another
party whose acts or omissions
caused that loss or damage.137
After being found to be liable for
100 per cent of the damage or
loss by the Court of Appeal, Hunt
& Hunt sought relief from the High
Court in terms of an apportionment
of this loss or damage. It was
already established, and not
disputed, that Mitchell Morgan’s
claim against Hunt & Hunt was
an apportionable one for the
purposes of the statutory regime.138
As previously mentioned, their
Honours placed particular
emphasis on the importance
of correctly identifying loss or
damage, ‘damage’ being the
‘injury and other foreseeable
consequences suffered by a
plaintiff’ that are fundamentally
different to ‘damages’ which
are claimed by way of
compensation.139 This emphasis
was particularly necessary
given that Mitchell Morgan did
not expressly state what loss or
damage it was that they were
claiming, and also because Hunt
& Hunt alleged that it had been
incorrectly classified by the Court
of Appeal.140 Mitchell Morgan only
stated that their loss and damage
was continuing and included the
sum they advanced and other
expenses.141
It is from this that their Honours
inferred Mitchell Morgan’s claim
to be for the inability to recover
the monies it had advanced.142 On
this basis, while the claims against
the three named concurrent
wrongdoers were based on
different causes of action, they
each were ‘founded on Mitchell
Morgan’s inability to recover
the monies it advanced and the
acts or omissions of all of them
materially contributed to Mitchell
Morgan’s inability to recover that
amount’.143 This is a much broader
interpretation of the legislation,
and applies a causative approach
rather than limiting a defendant’s
recovery to that which would have
been available under contribution.
The line of authorities cited by
their Honours reflected that under
causation it was enough that a
defendants conduct be one of the
causes that caused the loss or
damage suffered by the plaintiff.144
With this loss defined as Mitchell
Morgan’s inability to recover
monies, the relevant test to be
applied to both Hunt & Hunt and
the fraudsters was whether their
conduct or omissions materially
contributed to that loss.145 Even
if the loss or damage had been
defined in the same way in the
Court of Appeal, the approach
taken there was so narrow that
both parties would have only
been found to be concurrent
wrongdoers if their acts or
omissions were the same.
Given the complexities of
commercial arrangements,
particularly in situations similar to
those in this instance, it is highly
unlikely that any two parties
would be able to be concurrent
wrongdoers under such a strict
application of the law.
DISSENTING MINORITY
JUDGMENT
Bell and Gageler JJ, in a joint
dissenting judgment, upheld the
approach to defining the phrase
‘damage or loss’ as used by the
Court of Appeal. In their view, the
relevant loss or damage that Hunt
& Hunt caused was the lack of a
security for the loan.146 While their
Honours drew the same distinction
between damage or loss that
is the subject of the claim, and
damages that form an award of
compensation,147 the judgment
differs in regard to the definition of
the act or omission that caused the
respective loss or damage that is
the subject of the claim.148
While the majority judgment
favoured a broad causation based
approach, the minority focussed
on the causation which results in
legal liability and whether each
wrongdoer was a contributor to
that same loss or damage.149
As the fraudsters had no role
in causing the lack of security
suffered by Mitchell Morgan, their
Honours held that they were not
concurrent wrongdoers with Hunt
& Hunt.150
IMPLICATIONS OF
THE DECISION FOR
THE BUILDING AND
CONSTRUCTION INDUSTRY
The decision in Hunt & Hunt v
Mitchell Morgan has a broad
impact on the proportionate
liability regime generally, but also
has some specific implications
for the Australian building and
construction industry. Many
aspects of the judgment and
what it represents in practice are
implications of the proportionate
liability regime itself. While the
decision does not revolutionise
the impact of the regime, it does
provide confirmation of the
interpretation of ‘same loss or
damage’.
It by no means settles the way that
the phrase should be interpreted
and applied in future cases, this
issue being compounded by
the Court’s 3:2 split. The split
highlights the ‘complexities’ at play
in determining whether tortfeasors
are concurrent wrongdoers,
and is a reminder to parties to
‘carefully analyse claims against
wrongdoers’.151 However, it does
give breadth to the direction
the law is taking in regards to
interpreting legislative provisions,
and return the progression of the
law to the position it was taking
following the trial judgment in this
same dispute.152
On a broad level this decision
has been described as a ‘victory
of substance over form’ that will
be welcomed by professional
indemnity insurers of parties but
frowned upon by financiers and
similar parties seeking to recover
their losses.153 This is in line with
the response to proportionate
liability more generally, but its
impact is heightened in the wake
of this decision because of the
re–broadening of the scope for
joining concurrent wrongdoers to
an action.
For the industry specifically there
is also an increased risk of parties,
such as subcontractors, being
found to be concurrent wrongdoers
with a contractor where they have
provided a direct warranty or
guarantee to the principal or are in
a direct contractual arrangement
with the principal. This is because
the entering into a direct warranty
arrangement or a direct contract
creates a duty of care obligation
in a situation where such a duty
would not have ordinarily have
existed, as discussed above
While this may be a quality that
assists subcontractors and
suppliers at the tender application
level and may make their bids
more attractive to both contractors
and principals alike, it is adding
a risk onto the subcontractor or
supplier where non–compliance or
breach of the duty of care arises.
THE EXPERIENCE IN
NEW ZEALAND
While the proportionate liability
regime has a broad reach within
the Australian jurisdictions and is
influencing the operation of similar
regimes domestically,154 it is also
being used as a comparative
model in the current New Zealand
proposal to reform their joint and
several liability regime. Australia
has developed the most extensive
proportionate liability regime,
while other international models
in jurisdictions including Canada,
the United States, South Africa and
Ireland have limited their reform
to the liability of professional
advisors.155
The New Zealand Law Commission
is currently investigating a
proposed reform to alter their
joint and several liability regime
to a proportionate liability model,
and are drawing on the Australian
experience as part of this
study.156 The particular impact of
proportionate liability on Australia’s
building and construction industry
is of significance in the New
Zealand context because of the
complex litigation involving leaky
building cases that they are
experiencing.157 In the course of
the study, it was observed that
under joint and several liability and
proportionate liability, the burden
of risk is merely shifted between
the parties without reducing the
complexity of proceedings.158
This concern is mirrored in the
Australian context,159 the most
appropriate example demonstrated
in Gunston v Lawley160 where
Byrne J commented that the
owners’ fairly straightforward
claims were transformed into
a complex and doubtless
expensive suite of proceedings, a
phenomenon which is regrettably
a not uncommon product of the
proportionate liability regime now
in force.161
While this observation suggests
that the utility of the proportionate
liability regime is constrained
by the complexities it operates
within, it does highlight an area of
the Australian experience that is
currently under consideration itself
for reform.
CONCLUSION
While the Hunt & Hunt v Mitchell
Morgan decision represents the
first High Court judgment on
proportionate liability, the 3:2
split indicates that the regime is
still marred by uncertainty and a
divergence in legal opinion. This is
evident not just in the differences
between the majority and minority
judgments, but also the tests each
applied to enliven when ‘damage
or loss’ is caused by concurrent
wrongdoers. The direction that
the High Court is likely to take
if another proportionate liability
dispute came before it is certain
to the extent that subsequent
decisions are bound by the
doctrine of precedent, but the
narrow split in legal opinion does
raise a glimmer of uncertainty.
solidifies the place that the regime
has within Australian jurisdictions.
The particular fact matrix of Hunt &
Hunt v Mitchell Morgan typifies the
type of disputes that benefit from
the application of apportionment
of damage and demonstrates
how beneficial the regime is for
defendants. Within the building
and construction industry, for
large scale projects with multiple
contractual arrangements the
decision shifts risk downstream
and confirms that each party is
only liable for their contribution to
the loss or damage suffered.
Reflecting on the decisions
leading up to the final High
Court judgment, it is interesting
to see how varied the quantum
of apportionment can be
depending on how the phrase
‘loss or damage’ is interpreted.
The New South Wales Court of
Appeal judgment, if left as the final
authority in this matter, set a very
narrow precedent for interpreting
the clause and one that would
have severely hampered the ability
of defendants to apportion loss to
other wrongdoers.
The Court found Hunt & Hunt
liable for 100 per cent of the loss
they caused Mitchell Morgan and
denied their claim apportionment.
For plaintiffs, that decision would
have placed them in a relatively
similar position to that which they
held under the joint and several
liability regime, perhaps even
improved it given the intricate
separation of the loss or damage
suffered by Mitchell Morgan.
In both the Supreme Court and
High Court decisions the judicial
interpretation of the legislative
expression expanded the ability
to apportion loss, which is why the
decision is particularly welcomed
from a defendant’s perspective.
The fact that Hunt & Hunt’s liability
changed from 100 per cent to
12.5 per cent shows the scope
and capacity of the law in this area
to vary immensely in its practical
application depending on the
judicial interpretation given. This
dramatically different figure is
enough to highlight the immediacy
required for reform of the
regime, in particular an express
clarification in terms similar to
that expressed by the majority
judgment.
It will be interesting to observe
the further development of
proportionate liability in the State
and Territory jurisdictions following
the High Court decision in Hunt &
Hunt v Mitchell Morgan, and any
further guidance the High Court
provides on the application of the
regime will be eagerly anticipated.
Planning and Assessment Act
1979 (NSW) section 109ZJ
For the building and construction
industry, the most immediate
impact of this decision will be that
defendants, namely contractors,
will once again look to the regime
as a broad protection and a means
of limiting their liability to that which
they have personally caused. Until
further legislative reform takes
place though, it is highly unlikely
that this decision will change the
views of parties on either side of a
construction project to alter their
perspective on contracting out of
the regime.
5. Patrick Mead, ‘Current trends
in risk allocation in construction
projects and their implications for
industry stakeholders’ (2006) 22
Building and Construction Law
407, 424
The results of the SCAG
consultation have the capacity
to drastically shift the liability
landscape in Australia, and
with the focus on reforming
contracting out provisions for
contracts of a certain value and
contracts involving professionals
or professional services, there is
great potential for the building and
construction industry to benefit
under such reforms.
It is the legislative, not the
jurisprudential development, that
will be of most utility both generally
and specifically within the building
and construction industry.
REFERENCES
1.See Tony Horan, Proportionate
Liability: Toward National
Consistency (Report for National
Justice CEOs, 2007)
2. David Ulbrick and Edward
Harrison, ‘Enforcement of upstream
duties relating to OHS in Victoria:
Lessons from proportionate
liability?’ (2012) 28 Building and
Construction Law 176, 186
3. Hunt & Hunt v Mitchell Morgan
Nominees Pty Ltd [2013] HCA 10
4. See e.g. Building Act 1993
(Vic) section 131; Environmental
6. See e.g. Adeline Pang, ‘Building
protection into professional risk:
The operation of professional
indemnity insurance in
construction’ (2007) 18 Insurance
Law Journal 68
7. St George Bank Ltd v Quinerts
Pty Ltd [2009] VSCA 245, [58]
(Nettle JA)
8. [2013] HCA 10, above n 3 at
[10]–[15] (French CJ, Hayne and
Kiefel JJ)
9. Ivan Griscti, ‘Developments in
proportionate liability: The High
Court rules on ‘same damage or
loss,’ (2013) Australian Insurance
Law Bulletin (April/May) 66, 66
10. See e.g. Nick Rudge and
Anne–Marie Wholley ‘Proportionate
liability legislation: Further judicial
guidance on its application’
(2008) Australian Construction
Law Bulletin 20(3) 28; David
Rodighero, ‘Proportionate liability:
An update on who is a ‘concurrent
wrongdoer’’ (2008) Australian
Construction Law Bulletin 20(3) 26
11. See e.g. Andrew Stephenson,
Jey Nandacumaran and
Sarah Southwell, ‘Commercial
arbitration—A proportionate
liability–free zone?’ (2013)
Australian Construction Law
Newsletter (149) 50; Ashley Jones,
‘All blown out of proportion?
Contracting out and proportionate
liability in Queensland.’ (2011)
Newsletter (141) 6; David
Levin, ‘Proportionate liability in
arbitrations in Australia: Resolution
of some uncertainties,’ (2013) 29
Building and Construction Law 230
12. The Standing Committee of
Attorneys–General transitioned to
the Standing Council on Law and
Justice on 17 September 2011, but
for consistency and the fact that all
reports are still authored under the
title SCAG, it is this title that will be
utilised throughout this article.
13. Owen Hayford, ‘Proportionate
liability—Its impact on contractual
risk allocation’ (2010) 26 Building
and Construction Law 11, 13
14. Standing Committee of
Attorneys–General, Proportionate
Liability Regulation Impact
Statement (September 2011), 4
15. BHPB Freight Pty Ltd v Cosco
Oceania Chartering Pty Ltd (No
2) [2008] FCA 1656, [4]–[5]
(Finkelstein J)
16. JLR Davis Inquiry into
the Law of Joint and Several
Liability: Report of Stage Two
(Commonwealth and New South
Wales Attorney–Generals, 1995)
Attorneys–General, Draft Model
Provisions to Implement the
Recommendations of the Inquiry
into the Law of Joint and Several
Liability, (1996).
Negligence and Apportionment
of Liability) Act 2001 (SA), Part 3;
Civil Liability Act 2002 (Tas), Part
9A; Wrongs Act 1958 (Vic), Part
IVAA; Civil Liability Act 2002 (WA),
section 4A and Part 1F
35. Phillip Greenham, Kate Morrow
and Shelley Naylor, ‘Single line
accountability! Proportionate
liability and joint and several
liability’ (2011) 6 (1) Construction
Law International 6, 10
21. Ian Bailey and Matthew Bell,
Construction Law in Australia
(Lawbook, 3rd ed, 2012), 153.
36. Ibid
22. Wrongs Act 1958 (Vic) section
24AF; Law Reform (Contributory
Negligence and Apportionment of
Liability’ Act 2001 (SA) section 3(2)
(a); Civil Liability Act 2003 (Qld)
section 28(1); Civil Liability Act
2002 (Tas) section 43A(1); Civil
Liability Act 2002 (WA) section
5AI; Civil Liability Act 2002 (NSW)
section 34(1)
23. Wrongs Act 1958 (Vic) section
24AH; Law Reform (Contributory
Negligence and Apportionment of
Liability’ Act 2001 (SA) section 3(2)
(b); Civil Liability Act 2003 (Qld)
section 30; Civil Liability Act 2002
(Tas) section 43A(2); Civil Liability
Act 2002 (WA) section 5AI; Civil
Liability Act 2002 (NSW) section
34(2)
24. Shrimp v Landmark Operations
Ltd (2007) 163 FCR 510
37. Tony Horan, Proportionate
Justice CEOs, 2007), 112
38. Jennifer Galatas, ‘Top Ten
Issues in Construction Law
for 2012’ (2012) Australian
Construction Law Newsletter (143)
21, 23
39. Hayford, above n 13, 28
40. Ray Giblett and Scott Laycock,
‘Proportionate Liability—Still
causing insurance havoc’ 23
(6) Australian Construction Law
Bulletin (September 2011) 83, 83
41. Aquagenics Pty Ltd v Break
O’Day Council (2010) 26 BCL 263,
[71] (Tennent J).
42. (2010) 26 BCL 263, above n
41 at [71] (Tennent J). See e.g.
Peter Voss, Leigh Warnick and
Camilla Wayland, ‘Proportionate
liability and contractual risk’ (2011)
Bulletin (Dec/Jan) 90, 91
18. Commonwealth of Australia,
Inquiry into the Law of Joint and
Several Liability: Report of Stage
Two, (1995), 34
25. (2007) 163 FCR 510, above n
24
26. (2007) 163 FCR 510, above n
24 at [62] (Besanko J)
Attorneys–General, Consultation
Draft: Proportionate Liability Model
Provisions (15 September 2011).
27. (2007) 163 FCR 510, above n
24 at [59]–[62] (Besanko J)
45. Ibid
20. See Competition and
Consumer Act 2010 (Cth) Part
VIA, ss 87CB–87CI; Australian
Securities and Investments
Commission Act 2001 (Cth) Part
2, Division 2, Subdivision GA, ss
12GP–12GW; Corporations Act
2001 (Cth), Part 7.10, Division 2A,
ss 1041L–1041S; Civil Liability
Act 2002 (NSW) Part 4; Civil Law
(Wrongs) Act 2002 (ACT), Chapter
7A; Proportionate Liability Act
2005 (NT); Civil Liability Act 2003
(Qld); Law Reform (Contributory
28. James Morgan–Payler,
‘Proportionate liability in building
cases: Possible erosion of single
point responsibility for principals’
(2006) 18 Australian Construction
Law Bulletin (3) 49, 50
29. Ibid at 51
30. Ibid at 50
31. Ibid
32. Ibid
33. Ibid
34. Ibid
44. Ibid
46. Ashley Jones, ‘All blown
out of proportion? Contracting
out and proportionate liability in
Queensland.’ (2011) Australian
Construction Law Newsletter (141)
6, 9.
47. Ibid
48. SCAG, above n 14, 37
50. SCAG, above n 14, 39–41
54. See e.g. New South Wales,
Parliamentary Debates, Legislative
Assembly, 29 June 1999, ’Second
Reading Speech for Building and
Payment Bill’ (Morris Iemma)
74. Ibid 24–25
78. Ibid
98. [2009] VSCA 245, at n 7 at [76]
(Nettle JA)
79. (2010) 26 BCL 263, above n 41
99. [2007] VSC 177
81. Commonwealth of Australia,
Inquiry into the Law of Joint and
Several Liability: Report of Stage
Two, (1995), 33
100. Pearsall, Boomer and Ursino,
above n 85, 134
59. Anthony Horan, Proportionate
Justice CEOs, 2007) 113
60. Bailey and Bell, above n 21,
281
61. See e.g. Gunston v Lawley
(2008) VR 33, 37 (Byrne J)
62. See e.g. Civil Liability Act 2002
(NSW) section 5O
63. Giblett and Laycock, above n
40, 83
64. David Ulbrick, ‘Tradies and
the Trade Practices Act‘ (2009) 25
Building and Construction Law 8,
25
65. David Rodighiero,
‘Proportionate liability: An
update on who is a ‘concurrent
wrongdoer’’ (2008) Australian
Construction Law Bulletin 20(3)
26, 26
75. Ibid 25
76. Greenham, Morrow and Naylor,
above n 35, 8
77. Ibid
82. Andrew Stephenson,
’Proportional liability in Australia—
The death of certainty in risk
allocation in contract’ (2005)
International Construction Law
Review 64
84. See e.g. Civil Liability Act 2002
(NSW) section 34(2)
85. Angela Pearsall, Kate Boomer
and Anthony Ursino, ‘Proportionate
liability: High Court broadens
scope of ‘same damage’ test:
Hunt & Hunt Lawyers v Mitchell
Morgan Nominees Pty Ltd,’
(2013) Australian Civil Liability
(Newsletter) (May) 134, 134.
86. [2009] VSCA 245, at n 7
87. [2009] VSCA 245, at n 7
66. See e.g. Standards Australia,
General conditions of contract for
design and construct (AS 4902–
2000) cl 2.2
88. [2009] VSCA 245, at n 7 at [1]
(Nettle JA)
67. [2007] FCA 1468
90. [2009] VSCA 245, at n 7 at [1]–
[2] (Nettle JA)
68. See e.g. Gunston v Lawley
[2008] VSC 97
89. [2009] VSCA 245, at n 7 at [1]
(Nettle JA)
69. Rodighiero, above n 65, 27
91. [2009] VSCA 245, at n 7 at [3]–
[4] (Nettle JA)
70. Richard Wilkinson, ‘Risky
business: Compiling a tender
package,’ (2008) 24 Building and
92. [2009] VSCA 245, at n 7 at
[53]–[98] (Nettle JA)
93. [2009] VSCA 245, at n 7 at [59]
(Nettle JA)
71. Ibid
94. [2009] VSCA 245, at n 7 at [63]
(Nettle JA)
72. Ibid
95. [2009] VSCA 245, at n 7 at [68]
(Nettle JA)
96. Royal Brompton Hospital NHS
Trust v Trustees WA Ltd [2002] 1
WLR 1397
97. [2009] VSCA 245, at n 7 at [72]
(Nettle JA)
101. Woods v De Gabriele [2007]
VSC 177, [58] (Hollingworth J)
102. James Ioannou, ‘Construction
industry be warned’ (2012) 28
Building and Construction Law
394, 397–398
103. Woods v De Gabriele [2007]
VSC 177, [58] (Hollingworth
J); Richard Wilkinson, ‘Risky
business: Compiling a tender
package,’ (2008) 24 Building and
104. Peter Stockdale and Travis
Toemoe ‘Proportionate liability–
Restored to working order’ (4 April
2013) King & Wood Mallesons
Alerts http://www.mallesons.com/
publications/marketAlerts/2013/
Pages/proportionate–liability–
restored–to–working–order.aspx.
above n 85, 134
106. Barbara McDonald,
‘Proportionate liability in Australia:
The devil in the detail,’ (2005) 26
Australian Bar Review 30, 50
107. Georgie Farrant and Elizabeth
Huckerby, ‘First High Court
decision in relation to proportionate
liability provides comfort to
professional services providers,’
(2012) Inhouse Counsel (May) 92,
92
108. [2013] HCA 10, above n 3 at
[2] (French CJ, Hayne and Kiefel
JJ)
109. [2013] HCA 10, above n 3 at
JJ)
110. [2013] HCA 10, above n 3 at
JJ)
111. Vella v Permanent
Mortgagees Pty Ltd [2008]
NSWSC 505, [466] (Young CJ)
112. [2008] NSWSC 505, above n
111 at [470] (Young CJ)
113. [2008] NSWSC 505, above n
111 at [492] (Young CJ)
114. [2008] NSWSC 505, above n
111 at [499] (Young CJ)
115. [2008] NSWSC 505, above n
111 at [504]–[505] (Young CJ)
116. [2008] NSWSC 505, above n
111 at [507] (Young CJ)
117. [2008] NSWSC 505, above n
111 at [534] (Young CJ)
118. [2008] NSWSC 505, above n
111 at [575] and [588] (Young CJ)
119. [2008] NSWSC 505, above n
111 at [598] (Young CJ)
131. [2011] NSWCA 390, above n
121 at [44] (Giles JA)
149. [2013] HCA 10, above n 3 at
[97] (Bell and Gageler JJ)
132. [2011] NSWCA 390, above n
150. [2013] HCA 10, above n 3 at
[100]–[101] (Bell and Gageler JJ)
133. [2013] HCA 10, above n 3 at
[31]–[33] (French CJ, Hayne and
Kiefel JJ)
above n 85, 136
134. [2013] HCA 10, above n 3 at
JJ)
135. [2013] HCA 10, above n 3 at
JJ)
136. [2013] HCA 10, above n 3 at
JJ)
137. [2013] HCA 10, above n 3 at
JJ)
138. [2013] HCA 10, above n 3 at
JJ)
120. [2008] NSWSC 505, above n
111 at [603]–[613] (Young CJ)
139. [2013] HCA 10, above n 3 at
[2013] HCA 10, [24] (French CJ,
Hayne and Kiefel JJ)
121. Mitchell Morgan Nominees
Pty Ltd v Vella [2011] NSWCA 390,
[29] (Giles JA)
140. [2013] HCA 10, above n 3 at
JJ)
122. [2008] NSWSC 505, above n
111 at [680] (Young CJ)
141. [2013] HCA 10, above n 3 at
JJ)
123. [2013] HCA 10, above n 3 at
JJ)
124. [2011] NSWCA 390, above n
125. [2011] NSWCA 390, above n
126. [2011] NSWCA 390, above n
127. [2013] HCA 10, above n 3 at
JJ)
128. [2011] NSWCA 390, above n
129. [2013] HCA 10, above n 3 at
JJ)
130. [2011] NSWCA 390, above n
121 at [38] and [41] (Giles JA)
142. [2013] HCA 10, above n 3 at
JJ)
143. [2013] HCA 10, above n 3 at
JJ)
144. [2013] HCA 10, above n 3 at
JJ)
145. [2013] HCA 10, above n 3 at
JJ)
146. [2013] HCA 10, above n 3 at
147. [2013] HCA 10, above n 3 at
148. [2013] HCA 10, above n 3 at
152. Vella v Permanent
Mortgagees Pty Ltd [2008]
NSWSC 505
153. Griscti, above n 9, 67
154. See e.g. David Ulbrick and
Edward Harrison, ‘Enforcement
of upstream duties relating to
OHS in Victoria: Lessons from
proportionate liability?’ (2012) 28
Building and Construction Law 176
155. Greenham, Morrow and
Naylor, above n 35, 10
156. New Zealand Law
Commission, Review of Joint and
Several Liability: Issues Paper
32, <http://www.lawcom.govt.nz/
project/review–joint–and–several–
liability>
157. Ibid at [6.12]
158. Ibid at [6.14]
159. Greenham, Morrow and
Naylor, above n 35, 8
160. [2008] VSC 97
161. Gunston v Lawley [2008] VSC
97, at [5] (Byrne J)
Jaclyn Smith’s article is based
on an essay originally prepared
for the Melbourne Law Masters
subject Construction Dispute
Resolution. The author thanks
Andrew Stephenson for his
helpful feedback on the essay as
submitted for that subject.
ARBITRATION
ARBITRATION IN
AUSTRALIA—
SUPREME COURT
SUPPORTS DOMESTIC
ARBITRATION
IRRESPECTIVE OF THE
PROSPECT OF SPLIT
PROCEEDINGS
Geoff Hansen, Partner
Jennifer Galatas, Senior
Associate
Herbert Smith Freehills,
Melbourne
INTRODUCTION
In recent years, the landscape
for domestic and international
commercial arbitration in Australia
has changed dramatically. At
the domestic level, all Australian
States and Territories except for
the Australian Capital Territory
(ACT) have now embraced
substantially similar arbitration
legislation commonly referred to as
the uniform Commercial Arbitration
Acts.
At the Federal level, significant
amendments have been made to
the International Arbitration Act
1974 (Cth) governing international
commercial arbitrations. These
legislative changes were
primarily aimed at increasing
the efficiency of the arbitration
process and making arbitration
in Australia more attractive. Many
of these changes have significant
implications for parties considering
which dispute resolution regime
to include in their commercial
contracts, as well as those
parties who have already entered
into commercial arrangements
containing arbitration clauses.
The Victorian Supreme Court
has recently been provided
with an opportunity to consider
the operation of the domestic
arbitration regime and in particular,
the provisions designed to remove
the discretion of the Courts in
considering an application for
a stay of Court proceedings
where there is a valid arbitration
agreement.
A BRIEF RECAP ON THE
AUSTRALIAN SYSTEM
FOR INTERNATIONAL
AND DOMESTIC
COMMERCIAL
ARBITRATIONS
Australia has a ‘dual track’
system for international and
domestic commercial arbitrations.
International arbitrations are
governed by the International
Arbitration Act (IAA), whereas
domestic arbitrations are governed
by State or Territory–based
arbitration legislation.
The IAA adopts and applies
the UNCITRAL Model Law
on International Commercial
Arbitration (Model Law), the
Convention on the Recognition
and Enforcement of Foreign
Arbitral Awards 1958 (New York
Convention), and the Convention
on the Settlement of Investment
Disputes Between States and
Nationals of Other States (ICSID
Convention).
Recent amendments to the IAA
in 2010 were aimed at further
supporting and improving the
conduct of international arbitration
by, for example, clarifying that the
Model Law is now the mandatory
‘supervisory procedural law’ for
international arbitration (section
21 of IAA) and more closely
aligning the position with respect
to recognition and enforcement of
arbitration agreements and awards
with the Model Law and the New
York Convention.
At a domestic level, all States and
Territories (except for the ACT)
have now introduced uniform
Commercial Arbitration Acts
(uniform CAAs). The key objective
of the changes introduced by
this legislation was to modernise
the domestic arbitration regimes
and bring them in line with
international best practice by
basing the legislation on the
Model Law. It was envisaged
that this would create national
consistency in the regulation
and conduct of international and
domestic commercial arbitration
and ultimately increase confidence
in the arbitration system both in
Australia and overseas.
The effect of the legislative
changes introduced by the uniform
CAAs is far–reaching. Some of the
key changes introduced by this
legislation concern:
Australia has a ‘dual track’
system for international
and domestic commercial
arbitrations. International
arbitrations are governed
by the International
Arbitration Act ... whereas
domestic arbitrations are
governed by State or
Territory–based arbitration
legislation.
(a) confidentiality of arbitration
proceedings—in contrast with
the position with respect to
international arbitrations which
provides an ‘opt–in’ regime, the
uniform CAAs impose a statutory
duty of confidence (subject
to certain exceptions), unless
otherwise agreed by the parties;
(b) limited rights of recourse—
appeals are limited to errors of law
and require the agreement of the
parties (either in their arbitration
agreement or subsequently) and
leave from the Court; and
(c) enforceability of arbitration
agreements—previously the Courts
had a discretion whether to stay
Court proceedings commenced in
circumstances where an arbitration
agreement existed. This has
been replaced by a mandatory
requirement that the Courts
must grant a stay of any Court
proceedings unless the relevant
arbitration agreement is found to
be ‘null and void, inoperative or
incapable of being performed’
(this is similar to the provision that
appears in the IAA and the Model
Law).
This provision was recently
considered by the Victorian
Supreme Court in Lysaght Building
Solutions Pty Ltd v Blanalko Pty Ltd
[No 3] [2013] VSC 435 (Lysaght v
Blanalko).
LYSAGHT V BLANALKO
FACTS
Blanalko Pty Ltd (Blanalko)
engaged Lysaght Building
Solutions Pty Ltd (Lysaght) to
undertake various design and
construction works in Penfield,
South Australia pursuant to a
contract based on Australian
Standard Contract AS4300–1995.
The contract was governed by
Victorian law and contained a
dispute resolution clause (clause
47) which:
(a) provided two alternative paths
for dispute resolution following the
issuing of a notice of dispute (one
path requiring the parties to meet
and the other path requiring the
superintendent to make a decision
prior to the parties meeting),
both ultimately concluding with
the dispute being referred to
arbitration; and
(b) expressly carved out claims for
payment due under the contract.
Lysaght sought payment of various
progress payment claims in
relation to works undertaken, which
Blanalko failed to pay. Lysaght
sought summary judgment with
respect to its payment claims. In
response, Blanalko filed a defence
denying liability and issued a
counterclaim alleging various
breaches of contract and seeking
payment of certain amounts said to
be owing to it. Blanalko separately
sought summary judgment with
respect to its claims.
Lysaght applied for a stay of the
matters referred to in Blanalko’s
counterclaim pursuant to section
8 of the Commercial Arbitration
Act 2011 (Vic) (Act) which is
the relevant provision in Victoria
requiring that a Court:
... must ... refer the parties to
arbitration unless it finds that
the agreement is null and void,
inoperative or incapable of being
performed.
In response, Blanalko argued
that the dispute resolution clause
constituted a ‘non–exclusive
arbitration clause’ and therefore
section 8 of the Act did not apply
as it only operated where the
parties had clearly contracted to
an arbitration to the exclusion of
the Courts.
DECISION
Justice Vickery of the Supreme
Court of Victoria granted the
application for a stay with respect
to those disputes that did not fall
within the carve out in the contract
for payment claims.
In reaching this decision, Justice
Vickery observed that the word
‘must’ in section 8 of the Act:
... removes the court’s discretion to
refuse to grant a stay, and renders
the provision mandatory….This
means that if the requirements of
the section are met the Court has
no choice but to grant a stay of the
proceeding before it and refer the
matter to arbitration (at [125[).
The Court observed that in some
cases, such as the current case
where payment claims were
expressly carved out:
... [t]his may result in some
inefficiencies in case
management…arising from the
potential for litigation on the same
project being conducted before
different tribunals. Nevertheless
the statutory meaning is clear (at
[126]).
Further, the Court rejected
Blanalko’s contention that
the dispute resolution clause
constituted a non–exclusive
arbitration clause, observing that
irrespective of which alternative
was invoked by the parties once a
notice of dispute had been served,
if the dispute remained unresolved
within 28 days of service of the
notice or the date on which the
superintendent gave their decision,
the dispute:
... shall be and is hereby referred
to arbitration.’
The Court commented that:
... provided these pre–conditions
have been met, the parties have
expressed a clear intention in
their written agreement that
an outstanding dispute, in the
circumstances described,
is required to be referred to
arbitration, and is not to be heard
and determined by a Court (at
[142]).
IMPLICATIONS
This is an important decision for
a number of reasons. It is one of
the first reported judgments on
the construction of the legislative
provisions requiring the Courts
to grant a stay in the context of
an arbitration clause based on
clause 47 of the AS4300–1995
standard form contract (which is a
reasonably popular standard form
contract in Australia).
arbitration for at least some of their
disputes can no longer expect
the Courts to intervene and refer
all disputes to one forum (i.e.
litigation) where there is a valid
arbitration agreement.
The Court’s decision to grant
a stay on the facts of the
case clearly accords with the
legislature’s intention to limit
the discretion of the Courts. In
addition, the approach of the
Court in seeking to construe the
arbitration agreement as a whole
and refusing to accept a narrow
and pedantic interpretation of
the arbitration clause is likely
to provide additional comfort to
commercial parties that the Courts
will not readily seek to overturn
agreements to arbitrate.
The decision is, however, also an
important reminder for commercial
parties to carefully consider all
provisions in their arbitration
agreement (particularly provisions
in standard form contracts) and
in particular, whether they intend
to resolve certain disputes (in this
case, payment claim disputes)
using other methods of dispute
resolution.
In some cases, there may be good
reason why parties would prefer
to resolve particular disputes
using an alternative method. For
example, valuation disputes may
be well suited to expert appraisal
or expert determination depending
on the circumstances. However, in
many cases, it may be undesirable
to split the proceedings as there
is a significant risk that this may
result in inconsistencies and
increased time and cost.
Ultimately this is a matter that
requires careful consideration
as parties who have selected
SECURITY OF PAYMENT
DO YOU HAVE A
STANDING TRADE
CREDIT AGREEMENT
TO SUPPLY
CONSTRUCTION
SERVICES OR
MATERIALS?
Alisa Taylor, Senior Associate
Kimberly Moore, Senior Lawyer
Meyer Vandenberg Lawyers,
Canberra
INTRODUCTION
A new New South Wales Supreme
Court decision has confirmed that
you cannot use the security of
payment regime to enforce multiple
invoices under a standing order
contract in the same payment
claim or same adjudication.
The decision is also relevant
to claims made under the ACT
security of payment legislation.
THE CASE
On 11 April 2013, the NSW
Supreme Court handed down
its decision in Class Electrical
Services v Go Electrical [2013]
NSWSC 363.
Go Electrical (Go) and Class
Electrical (Class) had a standing
contract under which Class
would issue purchase orders to
Go, and Go would then supply
construction goods to Class. Go
issued a single $1.8m payment
claim to Class under the Building
and Construction Industry Security
of Payment Act 1999 (NSW) (the
Act) seeking payment of several
outstanding invoices for separate
purchase orders.
The claim went to adjudication and
Go was awarded the full amount
of its claim. Class appealed to the
NSW Supreme Court. Class’ key
argument was that because the
payment claim referred to multiple
separate contracts in the one
claim it was invalid. Class argued
that as a result the adjudicator’s
determination was void and that
Go was not entitled to recover
payment.
THE LAW
Under the Act (and equivalent
ACT legislation) an adjudicator
cannot make a decision unless all
of the technical requirements of
the Act have been met. One such
requirement is that the right to
claim payment under the Act must
come from a single construction
contract.
... an adjudicator cannot
make a decision unless
all of the technical
requirements of the Act
have been met. One such
requirement is that the
right to claim payment
under the Act must come
from a single construction
contract.
This has been confirmed in a
number of cases, including:
• Rail Corporation of NSW v Nebax
Constructions [2012] NSWSC 6,
in which Nebax (the contractor)
served five payment claims
simultaneously for construction
of platform resurfacing works at
different train stations, all dated the
same date. Nebax then made a
separate adjudication application
for each payment claim. The Court
decided that ‘there can only be
one adjudication application for
any particular payment claim for
any particular contract’.
• Matrix Projects (QLD) Pty Ltd v
Luscombe & Ors [2013] QSC 4, in
which Luscombe (the builder) had
a ‘period subcontract’ with Matrix
Homes for undetermined building
work, the scope and locations
of which would be agreed at a
later date. Luscombe ultimately
completed building work on
instruction from Matrix Homes at
a range of locations over a nine–
month period. Some work was
completed under the terms of the
period subcontract, with individual
purchase orders made as required
by Matrix, and some on a ‘do
and charge’ basis after verbal
requests. Luscombe issued one
payment claim for all of the work,
and specifically referred in the
payment claim to the fact that there
were multiple contracts. Citing
Rail Corporation, the Queensland
Supreme Court decided that
the fact that the payment claim
covered multiple contracts was
‘fatal to its validity’.
In Class Electrical Services, Go
argued that there was a single
credit agreement that covered
all of the purchase orders, and
this meant that there was just
one construction contract. Class,
on the other hand, argued that
the credit agreement was not
a construction contract for the
provision of construction work or
related goods and services (as
required by the Act), but simply an
overarching agreement to provide
credit.
The court agreed with Class,
finding that, although the individual
purchase orders were each a
separate construction contract
under the Act, and the credit
agreement setting out the broad
terms was not a construction
contract.
If this is the case, then you can
only issue one payment claim per
reference date and any others
will be invalid. If you are in doubt,
it is important to check with a
lawyer–particularly if you are on the
receiving end of a payment claim.
The court therefore held that the
adjudicator’s decision was void
and unenforceable.
WHAT DOES CLASS
ELECTRICAL SERVICES
MEAN WHEN I’M TRYING
TO GET PAID?
If you have a standing contract
where:
• your clients sign up to
broad terms for the supply of
construction–related goods
or services not referring to a
particular project, quantity or price;
and
• once signed, your client
submits purchase orders from time
to time as required, with the terms
of the credit arrangement applying
to all purchases,
then it is likely that each
purchase order will be a separate
‘construction contract’ for the
purposes of the Act.
If you issue a payment claim for
multiple purchase orders, it will be
invalid. Each purchase order must
be dealt with as if it is a separate
contract, which means a separate
payment claim and a separate
adjudication application.
However the terms of each
contract need to be looked at
separately. It is possible that if your
overarching terms of credit actually
specify details such as timing,
quantity, quality and cost for the
items to be supplied, it might be
a construction contract under the
Act.
SECURITY OF PAYMENT
THE CURATE’S EGG
REVISITED
Philip Davenport, Solicitor
Sydney
In ‘Adjudications and the curate’s
egg’ (2011 #141 ACLN at 38) I
asked the question: If only part of
an adjudicator’s determination is
bad, must the claimant lose the
whole of the adjudicated amount?
I contrasted the approach of the
Queensland Supreme Court and
the NSW Supreme Court. I was
critical of the approach of the NSW
Supreme Court.
Subsequently, Basten JA in the
NSW Court of Appeal in Cardinal
Project Services v Hanave [2011]
NSWCA 399 referred to the
curate’s egg at [52] where he said:
If the determination is indeed
legally ineffective in all respects,
it would be doubtful whether the
Court could condition declaratory
relief (or an order setting aside
the decision) upon the applicant
making such payment as would
be required by the determination
if validity could be determined
part by part, like the curate’s
egg. Accordingly, the underlying
assumption was inconsistent with
the total invalidity for all purposes.
The issue arose again in BM
Alliance Coal Operations v BGC
Contracting (No 2) [2013] QSC
67 where Applegarth J in the
Queensland Supreme Court
found that the respondent had
only established one of three
jurisdictional errors by the
adjudicator.
Since the error related to
approximately $4 million (which
the claimant agreed to repay to the
respondent) of the approximately
$28 million assessed as the
progress payment, Applegarth J
refused to declare the adjudicator’s
decision void. The result was
that the claimant was able to
recover as a progress payment
the balance of approximately $24
million.
By contrast, in Anderson
Street Banksmeadow v Helcon
Contracting Australia [2013]
NSWSC 657 Stevenson J in the
If only part of an
adjudicator’s determination
is bad, must the claimant
lose the whole of the
adjudicated amount?
NSW Supreme Court considered
the decision of Applegarth J &
came to the opposite conclusion.
At [17] Stevenson J said that
he was initially attracted to the
approach of Applegarth J in BM
Alliance Coal Operations but at
[18]–[19] he said:
However, on reflection, I have
some to the conclusion that in
light of what fell from the Court
of Appeal in Brodyn Pty Ltd t/as
Time Cost and Quality v Davenport
[2004] NSWCA 394 I cannot
accept that submission.
In Brodyn, Hodgson JA (with
whom Mason P and Giles JA
agreed) held that a determination
made in breach of the rules of
natural justice is void, and not
merely voidable.
At [22] Stevenson J said that he
could not see any basis upon
which would not accede to the
respondent’s application that he
should make a declaration that
the determination is void even
assuming that he has a discretion.
Stevenson J does not cite what it
is in Brodyn that precluded him
from accepting the submission.
I can’t see anything in Brodyn to
support Stevenson J’s conclusion.
Hodgson JA referred to ‘void and
voidable’. Hodgson JA did not say
that the fact that an adjudication
determination is void means that
the court must make necessarily
make a declaration to that effect.
Anderson Street was decided
on 30 May 2013 before State of
NSW v Kable [2013] HCA 26 was
decided by the High Court on 5
June 2013. The High Court took a
quite different view to that of the
NSW Court of Appeal on ‘void and
voidable’. Had Stevenson J had
the benefit of reading the judgment
in Kable, he might have come to a
quite different conclusion.
Briefly, in Kable, Levine J in the
NSW Supreme Court, purporting
to act under an Act that was
subsequently held to be invalid,
ordered the detention of Mr Kable.
The question for the High Court
was what effect, if any, the decision
of Levine J had in the period
before the Act was held to be
invalid. The NSW Court of Appeal
held that the order of Levine J was
void and Mr Kable was entitled to
damages for false imprisonment.
In Kable at [22] the majority in the
High Court said:
The difficulties associated with
using words like ‘void’ and
‘voidable’ in connection with
administrative actions have long
been recognized. Writing in 1967,
H W R Wade said that:
[T]here is no such thing as
voidness in an absolute sense,
for the whole question is, void
against whom? It makes no sense
to speak of an act being void
unless there is some person to
whom the law gives a remedy. If
and when that remedy is taken
away, what was void must be
treated as valid, being now by law
unchallengeable. It is fallacious
to suppose that an act can be
effective in law only if it has always
had some element of validity from
the beginning. However destitute
of legitimacy at its birth, it is
legitimated when the law refuses
to assist anyone who wants to
bastardise it. What cannot be
disputed has to be accepted.
The point is that Applegarth J in
BM Alliance recognised that if he
refused to make the declaration
of invalidity of the adjudicator’s
decision, the claimant could
enforce it. Once the respondent
has no remedy, the adjudication
decision is in law unchallengeable.
That is consistent with the High
Court’s approach. Stevenson
J erred in finding that he had
no alternative but to make the
declaration of invalidity.
In R v Commonwealth Court of
Conciliation and Arbitration; Ex
parte Ozone Theatres (Aust) Ltd
[1949} HCA 33] and in later cases
the High Court has recognised
that a Court may exercise judicially
its discretion to decline to grant
relief where the circumstances
make it just that the remedy should
be withheld. This is such a case.
The order which I propose to
make takes account of both the
policy underlying the granting of
relief in the exercise of the Court’s
supervisory jurisdiction to correct
jurisdictional error and the statutory
context in which the application for
such relief was made. The orders
proposed by BGC are appropriate
to remedy the jurisdictional
error, whilst permitting BGC to
retain the amount which would
have been awarded to it if the
second respondent had made
his adjudication decision free of
jurisdictional error. Such a course
advances the policy of the Act.
The particular circumstances of the
case make it just that I decline to
declare the decision void, subject
to the condition that BGC pay BMA
that part of the award which was
affected by jurisdictional error,
together with interest and GST.
A declaration is an equitable
remedy. The very reason why
the Court has a discretion as to
whether it will make a declaration
is so that the Court can do
what is just. Perhaps, following
Kable, the NSW Supreme Court
will see its way to decline to
make the declaration where the
circumstances make it just that
the declaration should be withheld
even though the adjudication
determination is void.
At [48] Applegarth said:
BUILDING REGULATION
UNCERTAIN TIMES
AHEAD—THE
QUEENSLAND
BUILDING SERVICES
AUTHORITY NO
LONGER!
Ren Niemann, Partner
Goran Gelic, Lawyer
Allens Linklaters, Brisbane
IN BRIEF
The Queensland Government
recently launched its ‘Ten Point
Action Plan’ which it proposes
will restructure the regulation of
Queenland’s construction industry.
As part of that process, the
Queensland Building Services
Authority will be replaced by
the Queensland Building and
Construction Commission.
HOW IT AFFECTS YOU
There are no immediate changes
to building law compliance
obligations. Until the extent of the
changes and their commencement
are known, it is ‘business as usual’.
All participants in the construction,
energy and resource sectors in
Queensland will need to carefully
monitor this space. Some of
the changes, if implemented in
their current form, could have a
significant impact on the regulatory
framework.
WHAT WILL HAPPEN
AND WHEN?
In response to the
recommendations from the
Inquiry into the Operation and
Performance of the Queensland
Building Services Authority 2012
undertaken by the Transport,
Housing and Local Government
Committee, the Queensland
Government has issued the Ten
Point Action Plan for restructuring
the regulation of the Queensland
construction industry.
It is proposed the Queensland
Building and Construction
Commission (the QBCC) will be
responsible for giving effect to
this plan. The changes proposed,
together with their timeframe, are
set out below.
All participants in the
construction, energy
and resources sectors in
Queensland will be, to
some extent, affected by
the proposed changes.
Industry participants will
need to be familiar with
the proposed changes
and ensure they are in a
position to appropriately
respond to them.
TIMEFRAME FOR COMMENCEMENT
Immediate changes (expected to
commence end of 2013)
RELEVANT ‘ACTION’
Replace the Queensland Building Services Authority (the BSA) with
the QBCC.
Establish an appropriate commission structure with functional
business units (e.g. licensing) headed by their own general
managers.
As soon as possible changes
Establish appropriate mechanisms of review. It is proposed that the
QBCC will establish an internal review unit and procedures for review
of insurance decisions and homeowner complaints to reduce the
number of applications for review being made to QCAT.
Develop an improved suite of domestic building contracts (with a
view to providing a more fair and equitable base for consumers and
licensees).
Review the current system of licensing and compliance (particularly
the difficulty with section 42 of the Queensland Building Services
Authority Act 1991 (Qld) (the QBSA Act).
Develop improved education and training for home owners and
consumers.
Progressive changes (subject to industry
consultation). It is anticipated that these
changes may take up to 12 months after the
appointment of the QBCC.
In conjunction with the current industry review of the Building and
Construction Industry Payments Act 2004 (Qld), consider the
development and implementation of a rapid domestic adjudication
model to fast track building disputes with mandated response
timelines.
Retain the Queensland Home Warranty Scheme but review the
scheme to provide greater definition and clarity.
Review the role of private certifier with emphasis on probity, conflict
of interest, quality and appropriate penalty regimes for failure to
perform.
Expand the licensing role of the new QBCC.
COMMENTARY
The introduction of the QBCC
to replace the BSA is the most
significant change to the industry
regulator since its inception
some 22 years ago. Many of the
proposed functions of the QBCC
will be significantly different to that
of BSA. The QBCC, for example,
will have a stronger focus on
licensing, certification and dispute
avoidance and management.
One of the key changes flowing
from the Ten Point Action Plan
are the proposed amendments to
section 42 of the QBSA Act. It is
proposed that section 42 will be
revised to make it clear that there
will be no breach of the Act if the
‘building work’ is carried out by an
appropriately licensed builder (this
is contrary to the current position
which requires a company to be
licensed even though the company
may contract with a registered
building company to perform the
‘building work’). The Government
has acknowledged that the
current approach to section 42
may at times lead to unintended
consequences.
The Queensland Government is
already starting to give effect to
the Ten Point Action Plan. Recently,
the Queensland Government
introduced the Queensland
Building Services Authority
Amendment Bill 2013 (Qld)
which aims to give effect to the
‘immediate’ changes.
the proposed changes and
ensure they are in a position to
appropriately respond to them.
That said, until we fully know the
precise nature of the changes
and their commencement, it is
‘business as usual’ for the time
being. This is definitely a space to
monitor carefully.
Ren Niemann and Goran Gelic’s
article was previously published
in Allens Linklaters’ Construction
& Major Projects—June 2013.
Reprinted with permission.
All participants in the construction,
energy and resources sectors
in Queensland will be, to some
extent, affected by the proposed
changes. Industry participants
will need to be familiar with
SECURITY OF PAYMENT
SECURITY
OF PAYMENT
LEGISLATION MAY NOT
APPLY TO CONTRACTS
FOR WORKS
INVOLVING MINING
PLANT
Scott Laycock, Partner
Rohan Dias, Solicitor
Gadens, Sydney
THE APPLICABILITY OF
SECURITY OF PAYMENTS
LEGISLATION TO THE
MINING SECTOR—THE
STORY SO FAR
Security of payment legislation,
such as the Building and
Construction Industry Payments
Act 2004 (QLD) (Act), will not
apply to a contract unless some
of the work under the contract
satisfies the Act’s definition of
‘construction work’ or ‘related
goods and services’.
We previously reported on two
Queensland Court of Appeal cases
(HM Hire Pty Ltd v National Plant
and Equipment Pty Ltd & Anor
[2013] QCA 6 and Thiess Pty Ltd v
Warren Brothers Earthmoving Pty
Ltd & Anor [2012] QCA 276), from
which we learned that the ‘mining
exclusions’ to the Act’s definition
of ‘construction work’ (at section
10(3)) is to be interpreted narrowly,
and will only exclude from the
Act’s application contracts for
works involving the direct physical
extraction of materials.
Accordingly, it was found in those
cases that contracts relating to
the construction of access roads,
dams and drains at the Burton
Coal Mine were caught by the Act.
It followed that contracts for works
at mining sites, other than for works
involving the direct extraction of
minerals, were capable of being
caught by the Act.
However, in an apparent
contradiction, the Queensland
Supreme Court in the case of
Agripower Australia Ltd v J & D
Rigging Pty Ltd [2013] QSC 164
found that a contract involving the
dismantling of mining plant (such
as baghouses, storage tanks and
kilns) originally installed for the
purposes of a mining lease will not
attract the Act’s operation.
This article will consider the
reasoning adopted by the court
in arriving at its decision in
Agripower and the implications for
participants in the mining sector.
DISPUTE
The case relates to mining plant
(including mixing tanks, storage
bins, baghouses, a large kiln,
electrical motor control centre
and cabling, two kiln baghouses
and corresponding screw
conveyors) originally installed by
the mining lease holder at the
Skardon River Mine in Cape York,
Queensland. Agripower Australia
Ltd (Agripower) purchased this
plant, and engaged J & D Rigging
Pty Ltd (J & D) to dismantle it and
transport it from the mining site to
its new destination (contract).
J & D issued a payment claim
under the Act for the dismantling
works, and the claim proceeded
to adjudication. The adjudicator
found in favour of J & D. Agripower
appealed the adjudicator’s
decision, arguing that the Act
did not apply to contract as the
contract work was not ‘construction
work’ as defined by section 10 of
the Act.
The definition of ‘construction
work’ under section 10 of the Act
relevantly includes:
(a) the construction, … demolition
or dismantling of buildings or structures, whether permanent or
not, forming, or to form, part of the
land;
(b) the construction, … demolition
or dismantling of any works
forming, or to form, part of land,
including walls, roadworks,
powerlines …
Agripower submitted that the
contract works did not satisfy this
definition because the works did
not ‘form part of the land’.
DECISION
The Court agreed with Agripower,
concluding that the mining plant
did not ‘form part of the land’ as
required.
In arriving at this conclusion, the
court found:
(1) From its definition under the
Acts Interpretation Act 1954
(Qld) and its meaning under the
common law, the word ‘land’
included estates and interests in
land (which are essentially certain
legal rights in respect of land). (2) At common law, something
may be attached to land so that
it becomes part of the land (i.e.
becomes a fixture), and whether
that thing becomes a fixture
depends essentially upon the
objective intention with which
it was put in place. Relevant
factors to this are the purpose
of annexation and the degree
annexation. (3) There is nothing in the
language of the Act to displace
the meaning of ‘land’ under the
Acts Interpretation Act 1954 (Qld),
or to suggest that buildings or
structures, works or fittings may
form part of the land under that
Act when they would not do so at
common law. (4) From section 10 of the Mineral
Resources Act 1989 (Qld) and
common law principals relating
to mining tenements set down by
the High Court, a ‘mining lease’
(which essentially grants the holder
the right to remove minerals from
specified land) is not ‘land’ and
does not give rise to an estate or
interest in the subject land.
Applying the above findings to the
facts of the case, the Court held:
(1) The purpose for which the
mining plant was initially put in
place on the land was for the
mining lease (which, from 4 above,
is neither ‘land’ nor and ‘interest
in land’), rather than to add some
additional feature to the land the
subject of the mining lease, and
accordingly it could not be said
that it ‘formed part of the land’ as
required by the Act. (2) This conclusion is supported by
the fact that the Mineral Resources
Act 1989 (Qld) actually mandated
the removal of the mining plant
prior to the expiration of the mining
lease. However, consistent with
the terms of section 10 of the Act
and the common law concept
of forming part of the land,
permanence is not a necessary
or decisive criterion, but merely a
relevant factor. (3) To the extent that the plant
being physically attached to the
land might have been a relevant
consideration, the plant was
affixed to the land for the mere
purpose of stabilisation for efficient
operation.
Since the mining plant could not
be said to ‘form part of the land’,
the dismantling of that plant was
not ‘construction work’ within the
meaning of the Act. Accordingly,
the Act was held to not apply to
the contract.
IMPLICATIONS
APPLICABILITY TO OTHER
STATE JURISDICTIONS
Though the Court’s reasoning
involves Queensland specific
legislation, it would seem that
the reasoning will be at least
relevant in all jurisdictions since
it focused keenly on the common
law concept of fixtures. However,
that reasoning may be overridden
if the concepts of ‘land’ or ‘mining
leases’ are given a materially
different definition under the
legislative regimes of the different
states. For example, the Western
Australian Interpretation Act
1984 defines ‘land’ in a similarly
broad fashion to the Queensland
legislation; however, in addition to
expressly including ‘estates’ and
‘interests’ in land, it also expressly
includes ‘buildings and other
structures’.
So a similar case in Western
Australia might have turned on a
question not asked by the Court in
Agripower, namely, what physical
requirements are necessary for
something to be considered a
‘structure’ on a parcel of land.
Further, there is a growing
difference between states in their
courts’ approaches to interpreting
the Act. For example, the Chief
Justice of the NSW Supreme Court
held in Edelbrand Pty Ltd v H M
Australia Holdings Pty Ltd [2012]
NSWCA 31 that the Act should be
given a more liberal interpretation
in favour of claimants on the basis
that it is remedial legislation,
however Queensland courts have
expressed a reluctance to follow
suit (see Agripower at [37]–[42]).
Accordingly, NSW courts may
adopt a broader interpretation to
the definition of ‘construction work’
in a similar case.
CAN AGRIPOWER BE
RECONCILED WITH HM
HIRE AND WARREN
BROTHERS?
It is very difficult to reconcile these
cases. In HM Hire and Warren
Brothers, the subject works (the
construction of dams, drains
and access roads) were also
constructed for the purposes of
mining leases, yet the Act was
found to apply. Unfortunately, in
those cases, whether or not the
works ‘formed part of the land’
was not a major point in dispute
between parties.
While it is difficult to speculate,
the key distinction between those
cases and Agripower might be
the fact that the mining plant in
Agripower, by its physical nature
(being something which could
be dismantled, carried off, and
reassembled at another site), had
the capability of being regarded
as personal property as opposed
to realty (the same could not be
said for dams, drains and access
roads), and therefore lent itself
to an analysis analogous to the
common law doctrine of fixtures
to determine whether it relevantly
‘formed part of the land’.
CONCLUSION
The decision in Agripower should
come as good news for mining
principals in Queensland (and
potentially in other jurisdictions)
as it limits their exposure to the
Act’s onerous regime in relation
to contracts for works involving
mining plant. However, due to
the apparent and yet unresolved
contradiction with previous
Queensland Court of Appeal
cases, and the uncertainty as to
whether the same principles will
apply Australia–wide, principals
under mining related contracts
must remain vigilant to ensure they
respond to all claims which on their
face purport to be made under the
Act with a payment schedule that
complies with the Act.
Scott Laycock and Rohan Dias’
article was previously published on
the Gadens website—September
2013. Reprinted with permission.
COMPETITION LAW
IMPACT OF
COMPETITION LAW ON
THE CONSTRUCTION
INDUSTRY
Malcolm Chin, Partner
Minter Ellison Lawyers, Hong
Kong
Miranda Noble, Senior
Associate
Minter Ellison Lawyers,
Melbourne
The new Competition Ordinance,
which prohibits anticompetitive
conduct affecting Hong Kong,
applies to all sectors and levels
of the Hong Kong economy. This
article, drawing on overseas
examples, provides a practical
look at the potential impact of
the new law on the construction
industry in Hong Kong.
ANTI–COMPETITIVE
CONDUCT IN THE
INDUSTRY
The construction industry has been
a common target for competition
regulators in other jurisdictions. A
number of significant enforcement
proceedings relating to cartel
conduct have been brought
over the years, in particular for
price fixing (including cover
pricing, where pre–determined
unsuccessful bidders submit
an artificially high price so that
the pre–determined successful
bidder’s price would come under),
market sharing and bid–rigging.
In many of those cases, penalties
and other consequences were
ordered against both companies
and individual executives.
Lessons can be learnt from these
cases and other action taken by
regulators.
For example, in 2012 the
Australian competition regulator
(the Australian Competition and
Consumer Commission) took the
step of writing to more than 2,500
executives in the construction
industry to raise awareness of
cartel conduct and the potential
consequences for engaging in
such conduct, as well as offering
the executives the chance to apply
for immunity if they revealed their
involvement in a cartel.
TENDER PROCESSES &
COVER PRICING
Anti–competitive conduct
frequently occurs through bid,
tender and request for proposal/
quotation processes. Overseas
examples demonstrate how such
processes raise real risks of bid–
rigging, market sharing and price
fixing (particularly, cover pricing
and bid rotation) in the industry.
They underscore the importance
of acting independently in relation
to all decisions about tender/bid
participation, pricing and terms.
Of interest to those running a bid
or tender, overseas examples also
highlight the need to implement
procurement processes which
detect and prevent possible
collusion amongst suppliers,
including training procurement
staff to be on the lookout for
suspicious bidding practices.
For example:
JAPAN
Companies have been heavily
fined for engaging in bid–rigging
in relation to harbour engineering
works, offshore works (including
dredging operations), various
engineering works and tunnel
ventilation construction for a
highway. The companies agreed
which company would be the
designated successful bidder for
each tender and cooperated so
that the designated successful
bidder could win the tender.
AUSTRALIA
Penalties of more than AUD20
million were imposed against
three pre–mixed concrete
suppliers for engaging in
cartel conduct by agreeing,
during more than 50 meetings
and telephone conversations,
on pricing in relation to large
government construction projects,
and agreeing not to compete
for specified customers or on
specified major projects. In
another case, building companies
were penalised for cover pricing
in connection with tenders for
four government building projects
(despite certifying in their bids that
they had not discussed prices with
other tenderers).
SINGAPORE
Fourteen electrical and building
works companies were fined for
bid–rigging after they colluded
to submit bids for electrical or
building works projects for various
properties. Typically, the company
that was interested in winning
the project would request for a
cover bid from at least one other
company. The requesting company
would inform other companies of
its bid price so that the latter could
submit higher quotes. In some
instances, the requesting company
even prepared the quotations for
the other companies.
UNITED KINGDOM
Over 100 construction companies
were fined more than GBP100
million for engaging in bid–rigging
activities in respect of nearly
200 tenders for a wide range of
building projects, largely involving
cover pricing. In some cases,
the successful bidder paid an
agreed sum of money to the
unsuccessful bidders (known
as a ‘compensation payment’)
facilitated by the raising of
false invoices. Demonstrating a
continued focus on the industry,
the UK competition regulator (the
Competition Commission) also
recently arrested seven people as
part of a separate investigation into
a suspected cartel for the supply
of construction products.
In Hong Kong, cartel conduct
in the construction industry has
been the subject of litigation,
even before the enactment of
the Competition Ordinance. A
2010 case concerned cartel
conduct by a group of suppliers
of stainless steel gates. The
suppliers, who were the only
contractors approved by the
HK Housing Authority to supply
gates for the Authority’s projects,
agreed between themselves on the
minimum prices for tenders to be
submitted to the main contractors
of the Authority.
When a main contractor would
invite tenders from some or all
of the suppliers, they would then
designate one supplier who would
put in a tender at the agreed
minimum tender price. If the other
suppliers put in a tender, they only
did so at a higher price in order
to enhance the chances of the
designated supplier obtaining the
contract.
Although the court was unable to
take action given the absence of
a competition law in Hong Kong
at the time, it was nevertheless
critical of this conduct,
commenting that:
... the Housing Authority and the
main contractors were cheated into
believing that the tendering system
was working and the market forces
were at play. They also thought
that the prefixed minimum tender
price was a genuine lowest bid
given by a tenderer. The Housing
Authority in the end had to pay
what the cartel had decided rather
than what the market dictated,
and it still thought that the market
was working through the tendering
process.
LONG ESTABLISHED
BEHAVIOUR
Many overseas cases involving
cartel conduct in the construction
industry relate to conduct which
took place over a long period of
time. Such behaviour is likely to
have been entrenched in the way
that companies did business and
widely accepted as the norm,
despite its illegality. In some
instances the parties may not
have knowingly broken the law. To
the extent that this may currently
be occurring in Hong Kong,
companies must take action to
break away from and discontinue
any established arrangements
which would fall foul of the
Competition Ordinance before it
comes into full effect.
In Europe, 17 producers of pre–
stressing steel were fined a total
of EUR269 million for operating
a cartel that lasted 18 years.
Through more than 550 cartel
meetings, the companies agreed
to fix individual quotas and prices,
allocate clients and exchange
sensitive commercial information.
In another cartel lasting more than
11 years, eight companies in the
concrete reinforcing bars sector
were fined over EUR83 million for
fixing various elements of price,
and limiting or controlling output
and sales.
INDUSTRY
ASSOCIATIONS
Overseas experience confirms
that participation in an industry
association can raise risks,
particularly in relation to decisions
or other steps taken by the
association to influence the
conduct and activities of members
(for example, the issuing of
recommendations relating to price
or suggested fee schedules),
and by providing a readily
available forum for discussion
and information exchange among
competitors.
Being attune to potential
competition risks in relation to
participation in any association
and knowing how to respond in
the face of such risks (for example,
leaving a meeting if inappropriate
discussion takes place) is key to
avoiding a potential breach.
In Australia, penalties were
imposed against construction
companies tendering for a
government construction contract
who, before submitting their bids,
met at an industry association
and agreed that the successful
bidder would pay the unsuccessful
bidders an ‘unsuccessful
tendering fee’. In another case,
three companies were fined for a
price fixing arrangement and for
engaging in a collective boycott.
They had agreed, through annual
negotiations with a roof tilers
association, to fix the rates paid
to roof tile contractors and to only
engage the services of roof tile
contractors who were members of
the association.
INFORMAL MEETINGS
Anti–competitive agreements do
not need to be in writing and can
often occur outside formal settings.
Caution must be exercised
at social events and informal
meetings where competitors are
present, since these can create
high risk environments for cartel
conduct.
Referred to as the ‘Coffee Club’,
participants in a cartel who
installed fire sprinkler and fire
alarm systems met regularly
over coffee at hotels, cafes and
various sporting and social clubs
agreed who would win particular
tenders, who would not submit a
tender for a particular job, or who
submit a tender with a cover price.
They were ultimately fined more
than AUD14 million. In another
case, suppliers of plastic pipes
for water and sewerage systems,
and pipe fittings and valves met in
restaurants and cafes, where they
agreed to increase prices, limit
discounts, collude on tenders and
to avoid competing for each other’s
customers. They were also fined.
ABUSE OF MARKET
POWER
Another key prohibition under the
Competition Ordinance provides
that those with a ‘substantial
degree’ of market power may
not abuse that power in an anti–
competitive way. Participants in the
construction industry in a strong
market position (such as a high
market share) should exercise
caution before engaging in any
conduct which may be perceived
as an abuse of market power. This
includes predatory or exclusionary
conduct such as a refusal to
supply, price discrimination or
tying/bundling goods and services.
In Australia, BHP was found to
have abused its market power
when it refused to supply a type of
steel known as ‘Y bar’ (used in the
making of star picket fence posts)
at competitive prices to another
company wishing to supply star
picket fence posts. BHP was found
to have taken advantage of its
market power in steel to prevent
the competitor from entering the
market for the supply of star picket
fences.
PROTECTION FROM
ANTI–COMPETITIVE
CONDUCT
While competition law regulates
conduct of your business, it also
regulates the conduct of others.
The Competition Ordinance should
therefore be viewed as protecting
participants in the construction
industry (including you) from anti–
competitive behaviour by other
parties such as suppliers and
competitors.
Businesses who are victims of anti–
competitive behaviour will be able
to lodge complaints with the Hong
Kong Competition Commission
(HKCC) and potentially prompt
an investigation and proceedings.
They may also take private action
for loss or damage incurred once
the HKCC has taken action or
received an admission from the
party breaching the law.
For instance, a principal calling
for bids for a new project who
suspects that bidders have
colluded in making their bids,
could refer such conduct to the
HKCC for investigation. Equally,
a company whose competitor
contacts them and proposes a
course of action that would breach
the new law (eg proposing that
they cover price on an upcoming
project) could notify the HKCC of
that attempted breach.
In the UK, construction companies
were affected as a result of
cartel conduct by six recruitment
agencies who supplied candidates
to construction companies. The
agencies had engaged in cartel
conduct in relation to the supply of
candidates, including collectively
boycotting an intermediary and
agreeing to fix the fee rates to be
charged to certain construction
companies, driving up staffing
costs. Such conduct would be
reportable to the HKCC.
CONFESSING TO ANTI–
COMPETITIVE CONDUCT
In many of the cases outlined
above, one or more parties to
the anti–competitive conduct
were granted leniency in their
punishment by the regulator
in return for cooperation and
disclosure. Like most competition
regulators, the HKCC also has
the power to enter into ‘leniency
agreements’, offering an offender
immunity from penalty proceedings
in exchange for cooperation in an
investigation or legal proceeding.
By rewarding disclosure and
cooperation, these leniency
arrangements are intended
to encourage parties to come
forward and confess to their illegal
conduct. Details of the HKCC’s
approach to leniency will be
announced by the HKCC in due
course.
Those in Hong Kong’s construction
industry need to be aware of
the HKCC’s leniency program.
Appropriate procedures should
be put in place to ensure that any
possible breach of the Competition
Ordinance is promptly reported
to management and escalated
as needed, so that legal advice
can be sought as to whether an
application for leniency can or
should be made. Since leniency
policies often provide the greatest
benefit to the first applicant
through the regulator’s door, acting
quickly can be critical.
COMPLIANCE IS
CRITICAL
The best defence to protecting
your business and staff from
involvement in anti–competitive
conduct and a breach of the
Competition Ordinance is
ensuring that adequate and
effective compliance systems
are in place. Among other steps,
staff in high risk areas in the
construction industry (such as
those responsible for tendering/
procurement, pricing, contracting
or participating in an industry
association) should receive
tailored training so that they have a
solid understanding of the law and
its practical application.
With the HKCC now formed, taking
proactive compliance steps is a
priority.
Malcolm Chin and Miranda Noble’s
article was previously published
in Minter Ellison Lawyers’
Construction Law Asia—June
2013. Reprinted with permission.
CASE NOTE
NEW SOUTH WALES
COURT OF APPEAL
FINDS DEFECTS DUTY
Peter Pether, Partner
Adam Wallwork, Partner
Jennifer Turner, Special
Counsel
King & Wood Mallesons,
Sydney
In the present case, the building
involved was a serviced apartment
block. Accordingly, it was outside
the protection afforded by the
Home Building Act (NSW).
McDougall J held, following his
other reasons in Star of the Sea,
that the builder did not owe a duty
of care to the Owners’ Corporation
and dismissed the Owners’
Corporation claim. The Owners’
Corporation appealed.
THE COURT OF APPEAL
The Court of Appeal judgment
overturns the reasoning of
McDougall J. It is troubling in
several respects including:
In a judgment dated 25 September
2013 in The Owners—Strata Plan
No 61288 v Brookfield Australia
Investments Ltd (2013) NSWCA
317, the NSW Court of Appeal has
found that a builder owed a duty
to exercise reasonable care in the
construction of a building, to avoid
causing an Owners’ Corporation
to suffer loss resulting from latent
defects in the common property
which were structural, constituted
a danger to persons or property
in the vicinity or made those
apartments uninhabitable.
Along the way, the Court found the
builder owed a concurrent duty
in tort to a developer with whom
it had a detailed written building
contract, although both were major,
sophisticated corporations. This is
a surprising judgment, which will
rightly concern the construction
industry in Australia.
BACKGROUND
In Star of the Sea [2012] NSWSC
712, McDougall J had found that
a builder did not owe a duty of
care to an Owners’ Corporation
in constructing a residential
apartment block. At least part of
the reasoning in Star of the Sea
was that Parliament had legislated
in the Home Building Act (NSW) for
a system of warranties to protect
residential owners from defects.
(1) The legislature has imposed
a statutory protection regime for
defects in residential dwellings but
has chosen not to impose such a
scheme on serviced apartment or
commercial buildings.
(2) The Court of Appeal relies
heavily on the High Court’s
judgment in Bryan v Maloney
(1995) 182 CLR 609, which has
been trenchantly and appropriately
criticised. Courts have avoided
following Bryan v Maloney and
have distinguished it.
Court of Appeal’s ultimate finding
that the builder owes a duty of care
to the Owners’ Corporation—the
successor in title to the developer.
One anticipates that the builder
will give very serious consideration
to an appeal to the High Court of
Australia over this decision. In the
interim, builders should note that
there will be a concurrent duty in
contract and tort in design and
construct contracts unless the
duty is expressly excluded. One
anticipates that until the High Court
has an opportunity to deal with the
Court of Appeal’s judgment, there
will be an increase in claims in
tort and concurrent claims in tort
and contract, concerning defects
in both residential and non–
residential buildings.
Peter Pether, Adam Wallwork and
Jennifer Turner’s case note was
previously published on the King
& Wood Mallesons website—
September 2013. Reprinted with
permission.
(3) The Court of Appeal
acknowledges that the High
Court in Perre v Apand Pty Ltd
(1999) 198 CLR 180 has held that
vulnerability is now a key indicia
of whether a duty of care exists.
However, at para 120 the Court of
Appeal finds that a builder owes
a duty of care to a developer in
circumstances where both are
major sophisticated commercial
parties who have entered into a
detailed written building contract
which regulates, among other
things, how defects are to be dealt
with.
(4) That finding, that a commercial
developer who lets a detailed
contract to a builder, is owed a
concurrent duty of care by the
builder is surprising in the face of
concepts of vulnerability and is
a necessary springboard for the
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construction - Meyer Vandenberg Lawyers

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