Canterbury-Bankstown Council v Payce Communities Pty Limited

The contracts

1. By an Umbrella Agreement dated 12 September 2014, the Council granted Payce an option to require the Council to sell to it or its nominee a parcel of land described as "Lot 447" on which was located a senior citizens centre. A corresponding option was granted to the Council to require Payce to buy the lot.
2. If either option was exercised, the Umbrella Agreement required Payce to construct on Lot 447 and an adjacent lot owned by New South Wales Land and Housing Corporation (the Corporation) a number of buildings including a new senior citizens centre and a library in accordance with plans set out in schedule 1 to a Planning Agreement entered into between the Council, Payce and the Corporation. By cl 8.1 of the Umbrella Agreement, the Council and Payce acknowledged that the obligation to undertake that work required Payce to construct the library and senior citizens centre "to a warm shell finish".
3. Payce was also required to fit out the library and senior citizens centre in accordance with a document described as "the Fit Out Agreement", which formed schedule 2 of the Umbrella Agreement. The Fit Out Agreement was expressed in cl 9.2 of the Umbrella Agreement to come into force on the satisfaction of certain conditions precedent set out in cl 9.1, one of which was completion of the Purchase Contract for Lot 447. The balance of cl 9 of the Umbrella Agreement sets out a process for the design and development of the fit out to be undertaken in accordance with the Fit Out Agreement. Clause 9.6(e) provided: Upon completion of the design development process the draft design documentation as approved by both Council and Payce will become the final design documentation and will not be further amended except in accordance with clause 9.8 or because there are faults in the design documentation which requires rectification.
4. Clause 9.7 set out a procedure for determining the price of the fit out. It provided in effect that, on completion of the design documentation, the price for the agreed design was to be determined by an Independent Certifier (nominated under the Umbrella Agreement). If the price as determined by the Independent Certifier exceeded $1,520,000, the Council could elect to accept the increased price or could amend the design documentation and nominate a maximum price it was prepared to accept (which could not be less than $1,520,000).
5. Clause 10.2 of the Umbrella Agreement provided: Acknowledgement of amounts due Subject to the terms of the Other Transaction Documents concerning variation in price, and clause 4 and clause 9.7 of this agreement, the parties acknowledge that the following amounts are due under the Other Transaction Documents: From Council to Payce Early Works Agreement $150,000 Car Parking Contribution $370,000 Fit Out Agreement $1,520,000 Total $2,040,000

From Payce (or its nominee) to Council Lot 447 Purchase Contract $2,040,000 Total $2,040,000

The Fit Out Agreement falls within the definition of "Other Transaction Documents".

1. Clause 10.3 provided for a right of set off. Clause 10.4 dealt with variations. It relevantly provided: … (b) If under the Fit Out Agreement the amount payable by Council to Payce exceeds $1,520,000 then: (i) the first $1,520,000 under the Fit Out Agreement will be set off as contemplated by clause 10.3; and (ii) the amount in excess of $1,520,000 will be paid by Council to Payce progressively in accordance with clause 37 of the Fit Out Agreement.
2. The Fit Out Agreement consisted of a Formal Instrument of Agreement, General Conditions and a Specification.
3. Clause 2.1 of the Formal Instrument of Agreement provided: Documents comprising agreement It is agreed that in consideration of the payment of the contract sum by the Principal to the Contractor, the Contractor shall undertake the works in accordance with this agreement which is comprised by:- (a) the Umbrella Agreement; (b) this Formal Instrument of Agreement; (c) the General Conditions; (d) the Specification.
4. The General Conditions are those set out in AS4000-1997 General Conditions of Contract.
5. Clause 36.4 of the General Conditions provides: The [Principal] shall, as soon as possible, price each variation using the following order of precedence: a) prior agreement; b) applicable rates or prices in the Contract; c) rates or prices in a priced bill of quantities, schedule of rates or schedule of prices, even though not Contract documents, to the extent that it is reasonable to use them; and d) reasonable rates or prices, which shall include a reasonable amount for profit and overheads, and any deductions shall include a reasonable amount for profit but not overheads. That price shall be added to or deducted from the contract sum.
6. Clause 37.1 deals with progress claims. It provides: The Contractor shall claim payment progressively in accordance with Item 28. An early progress claim shall be deemed to have been made on the date for making that claim. Each progress claim shall be given in writing to the [Principal] and shall include details of the value of WUC [Work under the Contract] done and may include details of other moneys then due to the Contractor pursuant to provisions of the Contract. Item 28 states that progress claims are to be made on "The last day of each month for WUC done to the 25th day of that month".

Factual background

1. On or about 4 December 2015, the conditions precedent to the formation of the Fit Out Agreement were satisfied, with the result that the Fit Out Agreement came into effect.
2. The parties did not follow the procedure for agreeing the scope of the fit out work and the price in accordance with the Umbrella Agreement. Instead, the parties sought to reach agreement on the design of the fit out works in parallel with the design of the remainder of the Development. An agreement was reached on a proposed design, although there is evidence that the parties contemplated that further design work would need to be done in order to finalise the design. There was a dispute between the parties concerning the costs of the design on which they had agreed. That dispute was resolved on 24 February 2017 when the Council wrote to Payce referring to discussions in relation to the procedure set out in cl 9.6 and an offer made by Payce that "The Contract Price under the Fit Out Agreement will be $2,171,000 (Agreed Contract Price)" and that "In accordance with clause 10.4(b)(ii) of the Umbrella Agreement, Council will pay Payce the amount of $651,000.00 (being the difference between the original estimate … and the Agreed Contract Price) on a progressive basis in accordance with clause 37 of the Fit Out Agreement". The letter accepted that offer "[w]ith effect from the date of this agreement". It appears that work on the fit out then commenced without any final agreement on the design.
3. Practical completion of the work the subject of the Fit Out Agreement was achieved on 24 August 2018.
4. On 30 April 2019, Payce commenced the Construction List Proceeding seeking payment of $1,748,000 in respect of what were said to be 44 items of variation work and one item for builder's margin which Payce asserts is payable in accordance with cl 36.4 of the Fit Out Agreement.
5. On 19 September 2019, Payce served its final payment claim for the amount of $1,666,000 (including GST) on the Council pursuant to cl 37 of the Fit Out Agreement. The final payment claim includes a schedule listing each variation the subject of the claim in the Construction List Proceeding.
6. On 3 October 2019, the Council served a payment schedule in response to the payment claim stating the scheduled amount as Nil.
7. On 18 October 2019, Payce filed an adjudication application with the second defendant, which was served on the Council on 21 October 2019.
8. The Council lodged its adjudication response on 28 October 2019 and on 7 November 2019, after a request by the Adjudicator for an extension was refused by the Council, the Adjudicator delivered the Determination.

The submission based on two contracts

1. Relying on the decisions in Rail Corporation of NSW v Nebax Constructions, [2012] NSWSC 6 and Matrix Projects (Qld) Pty Ltd v Luscombe [2013] QSC 4, the Council contends that an adjudication determination can only be made in respect of one payment claim and a payment claim can only be made in respect of one contract. In the present case, the payment claim was made in respect of multiple contracts. According to the Council, it follows that the Determination is void.
2. In Rail Corporation of NSW v Nebax Constructions, [2012] NSWSC 6 at [44], McDougall J said: It seems to me that, because s 13(5) prevents (with a presently irrelevant exception for which subs (6) provides) the service of more than one payment claim per reference date per construction contract, and because the right to adjudication "of a payment claim" is clearly referable to a payment claim that complies with the various requirements of s 13, there can only be one adjudication application for any particular payment claim for any particular contract.
3. That proposition was applied by Douglas J in Matrix Projects (Qld) Pty Ltd v Luscombe [2013] QSC 4 at [17]. In that case, the parties signed a document described as a "Period Subcontract" by which Luscombe Builders agreed "to perform and complete … Works yet to be agreed". The works involved assisting victims of the Brisbane floods to rebuild their houses. Pursuant to the arrangement, Matrix Homes issued individual purchase orders in relation to at least nine properties which described the work to be undertaken. It also gave oral directions for work to be performed on another five properties. Luscombe Builders issued a single payment claim in respect of work done on the 14 properties, which was the subject of an adjudication determination. Douglas J held that the determination was void. There were separate contracts in respect of each property that came into existence when Luscombe Builders accepted the price and terms on which it was to perform work on each property. Consequently, there were 14 contracts. For the reasons given by McDougall J, progress claims in respect of those contracts could not be made the subject of a single payment claim.
4. In my opinion, the principle stated by McDougall J and applied by Douglas J has no application in this case. In this case, there were a number of documents governing the terms on which Payce was to carry out the fit out work on the library and senior citizens centre. But there was a single price for that work to be determined in accordance with the documents (as varied by any subsequent agreement between the parties) and the same work was governed by those documents. Whether the different documents should properly be characterised as different contracts or one contract does not matter. They were not separate contracts for the performance of different work. Consequently, they were properly characterised as a single contract for the purposes of characterising any payment claim made under them; and the payment claim which was the subject of the Determination was properly characterised as a single payment claim in respect of the relevant work.

The submission based on s 7(2) of the Act

1. Section 7(2) of the Act relevantly provides: This Act does not apply to - (a) … (b) (Repealed) (c) a construction contract under which it is agreed that the consideration payable for construction work carried out under the contract, or for related goods and services supplied under the contract, is to be calculated otherwise than by reference to the value of the work carried out or the value of the goods and services supplied.
2. It is not easy to follow the Council's argument based on this section.
3. The argument appears to have two strands. The first is that the work performed under the Fit Out Agreement was part of a broader agreement governed by the Umbrella Agreement. The consideration payable under the Umbrella Agreement was not calculated by reference to the value of the work performed. It involved a series of transactions including the transfer of property. The second is that, before the Fit Out Agreement could operate, the parties had to agree on the scope of work in accordance with the Umbrella Agreement. They never did so.
4. In my opinion, the argument must be rejected. The Fit Out Agreement came into effect on satisfaction of the last of the conditions precedent referred to in cl 9.1 of the Umbrella Agreement. The Fit Out Agreement governed the terms on which the fit out of the library and senior citizens centre was to be performed. It plainly provided in cl 37.1 of the General Conditions for periodic payments to be calculated by reference to the value of "WUC done". By the agreement recorded in the Council's letter dated 24 February 2017, the parties agreed a price for that work. The work was performed. There may be a question as to the scope of the work covered by the agreed price. But the fact that agreement on the scope of the work was not reached in accordance with the relevant terms of the Umbrella Agreement, does not alter the nature of the agreement on payment. For the purposes of the adjudication, it was a matter for the Adjudicator to determine how any dispute over the scope of the work the subject of the Fit Out Agreement was to be resolved.
5. Clauses 10.2 and 10.3 of the Umbrella Agreement provide for the setting off of various amounts payable by the parties in relation to the overall transaction. One of those amounts is the payment due in respect of the Fit Out Agreement of $1,520,000 (subsequently increased to $2,171,000) as varied in accordance with that agreement. But none of that alters the fact that periodic payments are to be made in accordance with the Fit Out Agreement calculated by reference to the value of work performed. Consequently, the exception stated in s 7(2)(c) does not apply.

Natural justice - determination on a basis not advanced by either party

1. The Council relies on two arguments in support of this ground. First, it submits that the Adjudicator determined the matter by reference to cls 9 and 10 of the Umbrella Agreement as well as the Fit Out Agreement, whereas both parties put their submissions on the basis of the Fit Out Agreement alone. Second, the Council submits that the Adjudicator determined the matter relying on an estoppel argument not advanced by Payce.
2. In relation to these issues, the Adjudicator said this: 76. Whilst I accept that Respondent's submissions that where the Contract provides a procedure for claiming variations, those procedures must [be] followed in order for entitlement to payment to arise, on the evidence included in the material properly provided, it appears to me that on the proper interpretation of clause 36 of the Contract and clauses 9 and 10 of the Umbrella Agreement, those procedures have been complied with. I note that: (a) The contract price that was agreed in February 2017 was provisional and subject to change having regard to the final design documentation; (b) The Umbrella Agreement and the Contract contemplated variations to the scope of the works after the 2015 Design and provisional contract price was accepted in February 2015; (c) There were substantial changes between the 2015 Design and the 2017 Design, the latter being the drawings and specifications that were ultimately used for construction; (d) The Respondent was actively involved in the ongoing design development process between the 2015 Design and the 2017 Design and were aware that there would be more cost for construction in line with the 2017 Design; (e) Verbal instructions for changes to the scope of works including the development of the 2017 Designs were recorded in meeting minutes and reflected in the ongoing development of the designs and specifications that culminated in the 2017 Design; and (f) The variations claimed were submitted to the [Principal] in July 2018 and the [Principal] approved the majority of them. 77. Even if I am wrong in my interpretation of the provisions of the Contract and the Umbrella Agreement and the correct interpretation is that the procedures have not been complied with, I would accept the Claimant's submissions that the Respondent is estopped from requiring strict compliance with the notice provisions in clause 36 of the Contract. I note my discussion below respect to estoppel. [Footnotes omitted]
3. In its submissions in support of its adjudication application, Payce explained the obligations on the parties as arising from cls 9 and 10 of the Umbrella Agreement as well as the Fit Out Agreement. In particular, in paras 1.40 to 1.46 it explained the process for the development of the design of the fit out in accordance with those clauses of the Umbrella Agreement. It then explained how the parties departed from that procedure. Plainly, the relevance of the clauses was drawn to the Adjudicator's attention and he was entitled to take them into account in forming a view on the parties' obligations.
4. The short answer to the Council's estoppel point is that, as is apparent from para [77] of the Adjudicator's determination, the Adjudicator did not rely on an estoppel. He simply advanced it as an alternative argument to the one based on the contract. Even accepting that the Council was not given an opportunity to address the argument based on an estoppel that was identified by the Adjudicator, that cannot amount to a denial of natural justice when the Adjudicator's conclusion did not depend on that argument.

Denial of natural justice - failure to give reasons

1. It was necessary for the Adjudicator to deal with a substantial number of general issues concerning the payment claim, a number of which went to the Adjudicator's jurisdiction. Having dealt with those and given reasons for his conclusions, the Adjudicator dealt with issues raised in relation to specific variations. The Adjudicator chose to do so by preparing a Scott's schedule which set out each variation claimed, the nature of the variation, the amount claimed, the scheduled amount in respect of that variation, the amount allowed for the variation in two expert reports, the adjudicated amount, and brief reasons for the adjudicated amount. In the body of his report, the Adjudicator stated that his analysis "includes consideration of the submissions and evidence duly made by the parties in respect to valuation of the variations" (para 120). In a number of cases, the Adjudicator gave as his reasons that he "accepted the Claimant's submissions" and then provided a reference to the relevant paragraphs of Payce's submissions.
2. The Council submits that it was denied natural justice because the Adjudicator gave no reasons for rejecting its submissions.
3. I do not accept that submission. Section 22(3) of the Act provides: The adjudicator's determination must - (a) be in writing; and (b) include the reasons for the determination (unless the claimant and the respondent have both requested the adjudicator not to include those reasons in the determination); (c) …
4. As Meagher JA (with whom Barrett AJA agreed) pointed out in Cockram Construction Ltd v Fulton Hogan Construction Pty Ltd [2018] NSWCA 107 at [34]: Paragraph (b) in its terms only requires that the adjudicator's determination "include the reasons for the determination", not that the reasons so included be adequate according to any objective criterion.
5. In my opinion, the approach taken by the Adjudicator satisfied the requirement of s 22(3). The Adjudicator set out his conclusion in relation to each variation. He explained that he had considered the parties' submissions and, in the case of the items in question, had decided to accept the submissions of Payce in relation to those items. They were the reasons for the Adjudicator's conclusions. It was not necessary for the Adjudicator to do more.

The cross-claim

1. Having regard to the conclusions I have reached, it is not necessary to consider Payce's cross-claim.

Orders

1. The orders of the Court are: 1. The proceedings (including the cross-summons) be dismissed; 2. The amount paid into Court by the plaintiff in the sum of $1,471,522.11 together with any interest thereon be paid to the defendant; 3. The plaintiff pay the defendant's costs of the proceedings.

DISCLAIMER - Every effort has been made to comply with suppression orders or statutory provisions prohibiting publication that may apply to this judgment or decision. The onus remains on any person using material in the judgment or decision to ensure that the intended use of that material does not breach any such order or provision. Further enquiries may be directed to the Registry of the Court or Tribunal in which it was generated. Decision last updated: 18 December 2019