Covecorp Constructions P/L v Indigo Projects Pty Ltd [2002] QSC 322

[1] The plaintiff contractor, which seeks summary judgment against the defendant, on about 28 August 1998 entered into a contract ("the earthworks contract") with the defendant proprietor under which the plaintiff agreed to carry out for the defendant earthworks for the defendant's shopping centre development at Keperra ("the project").

[2] On or about 5 November, the plaintiff and the defendant entered into a further contract ("the building contract") under which the plaintiff agreed to build the proposed shopping centre for the defendant. Disputes arose between the parties and the plaintiff claims in these proceedings moneys allegedly payable under payment claims 12 and 13, moneys in respect of delay costs and moneys in respect of variations. In the alternative, the plaintiff makes a number of claims for damages for breach of contract.

[3] The summary judgment application is confined to the sum of $261,908 (plus GST) being an amount by which the plaintiff asserts that payment certificates 12 and 14 issued under the building contract were understated. The pleadings, in broad terms, allege that the payment certificates are invalid because they were not issued in accordance with cl 42.1 of the General Conditions of Contract. The alleged critical deficiency in each, for present purposes, is that it "reduced the amount payable to the plaintiff by $261,908 being money said to be due from the plaintiff to the defendant under the earthworks contract".

[4] It is pleaded in the alternative that if payment certificates 12 and 14 were valid then the plaintiff nevertheless became entitled under either or both of those certificates to payment of the sum of $261,908.

[5] Payment certificates 12 and 14, issued under the hand of Graeme French, project manager, deducted $261,908 as overpayment "on bulk earthworks contract". The plaintiff denies any overpayment but argues that even if there had been such an overpayment it could not affect its right to payment under the building contract.

[6] It is argued that having regard to the wording of cll 42.1 and 42.10 of the General Conditions of Contract a set-off can be effected validly by the defendant only -

"(a) by the superintendent effecting the set-off in the payment certificate as an amount `due from the Contractor to the Principal arising out of or in connection with the Contract including but not limited to any amount due or to be credited under any provision of the Contract' under clause 42.1; or

(b) by the principal effecting the set-off from the payment certificate as an amount `due from the Contractor to the Principal otherwise than under the Contract' under clause 42.10."

"Payment Claims, Certificates, Calculations and Time for Payment

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

Within 14 days after receipt of a claim for payment, the Superintendent shall issue to the Principal and to the Contractor a payment certificate stating the amount of the payments which, in the opinion of the Superintendent, is to be made by the Principal to the Contractor or by the Contractor to the Principal. The Superintendent shall set out in the certificate the calculations employed to arrive at the amount and, if the amount is more or less than the amount claimed by the Contractor, the reasons for the difference. The Superintendent shall allow in any payment certificate issued pursuant to this clause 42.1 or any Final Certificate issued pursuant to clause 42.8 or a Certificate issued pursuant to clause 44.6, amounts paid under the Contract and amounts otherwise due from the Principal to the Contractor and/or due from the Contractor to the Principal arising out of or in connection with the Contract including but not limited to any amount due or to be credited under any provision of the Contract.

If the Contractor fails to make a claim for payment under clause 42.1, the Superintendent may nevertheless issue a payment certificate.

Subject to the provisions of the Contract, within 28 days after receipt by the Superintendent of a claim for payment or within 14 days of issue by the Superintendent of the Superintendent's payment certificate, whichever is the earlier, the Principal shall pay to the Contractor or the Contractor shall pay to the Principal, as the case may be, an amount not less than the amount shown in the Certificate as due to the Contractor or to the Principal as the case may be, or if no payment certificate has been issued, the Principal shall pay the amount of the Contractor's claim. A payment made pursuant to this clause shall not prejudge the right of either party to dispute under clause 47 whether the amount so paid is the amount properly due and payable and on determination (whether under clause 47 or as otherwise agreed) of the amount so properly due and payable, the Principal or Contractor, as the case may be, shall be liable to pay the difference between the amount of such payment and the amount so properly due and payable.

Payment of moneys shall not be evidence of the value of work or an admission of liability or evidence that work has been executed satisfactorily but shall be a payment on account only, except as provided by clause 42.8 ..." (emphasis supplied)

"The Principal may deduct from moneys due to the Contractor any money due from the Contractor to the Principal otherwise than under the Contract and if those moneys are insufficient, the Principal may, subject to Clause 5.5, have recourse to retention moneys and, if they are insufficient, then to security under the Contract."

[9] In order to determine whether the disputed sum was "due" by the defendant to the plaintiff it is necessary to go to cl 42.1 of the earthworks contract and the relevant payment certificate. The clause relevantly provides -

"At the times for payment claims stated in the Annexure and upon issue of a Certificate of Practical Completion and within the time prescribed by Clause 42.7, the Contractor shall deliver to the Superintendent claims for payment supported by evidence of the amount due to the Contractor and such information as the Superintendent may reasonably require. Claims for payment shall include all amounts then due to the Contractor under the Contract or for breach thereof.

Within 14 days after receipt of a claim for payment the Superintendent shall:

(a) issue to the Principal and to the Contractor payment certificate stating the payment which in the opinion of the Superintendent, is to be made by the Principal to the Contractor. The Superintendent shall set out in the Certificate the calculations employed to arrive at the amount and, if the amount is more or less than the amount claimed by the Contractor, the reasons for the difference.

(i) THE VALUE OF THE WORK CARRIED OUT BY THE CONTRACTOR IN THE PERFORMANCE OF THE CONTRACT AT THE TIME FOR A CLAIM FOR PAYMENT.

(ii) ANY MONEYS DUE TO THE CONTRACTOR UNDER ANY PROVISIONS OF THE T,

(iii) AMOUNTS WHICH THE PRINCIPAL IS ENTITLED TO DEDUCT FOR RETENTION MONEYS AND FOR THE ESTIMATED COST OF RECTIFYING DEFECTS OR OMISSIONS, AND

(i) CLAIMS FOR BREACH OF CONTRACT AND INTEREST ON OVERDUE PAYMENT, AND

(ii) THE MATTER OF ANY MONEYS DUE FROM THE CONTRACTOR TO THE PRINCIPAL AS SET-OFFS TOGETHER WITH SUCH ADVICE IN RESPECT OF (a) AND (b) AS THE SUPERINTENDENT DEEMS APPROPRIATE.

If the Contractor fails to make a claim for payment, the Superintendent may nevertheless issue a payment certificate.

Within 28 days after receipt by the Superintendent of a claim for payment or within 14 days of issue by the Superintendent of the Superintendent's payment certificate whichever is the earlier the Principal shall pay to the contractor the amount due to the Contractor and shall with the payment provide written particulars of how the payment AMOUNT DUE was calculated.

THE PRINCIPAL'S LIABILITY IS TO PAY THE AMOUNT DUE ASCERTAINED IN ACCORDANCE WITH CLAUSE 42.2. IN THE CALCULATION OF THE AMOUNT DUE TO THE CONTRACTOR, THE PRINCIPAL SHALL NOT BE BOUND TO ACCEPT THE AMOUNTS SHOWN IN THE CERTIFICATE OF THE SUPERINTENDENT IN RESPECT OF (a) (i), (ii), and (iii) above.

Payment of moneys shall not be evidence of the value of work or an admission of liability or that work has been executed satisfactory (sic) but shall be a payment on account only."

At any time and from time to time, the Superintendent may by a further certificate correct any error which has been discovered in any previous certificate, other than a Certificate of Practical Completion or Final Certificate."

[11] Clause 42.3 relates to retention moneys and clause 42.10 is in the same terms as 42.10 of the General Terms and conditions of the building contract quoted earlier.

Were the moneys deducted in payment certificates 12 and 14 moneys "due from the Contractor to the Principal" or "amounts due from the Contractor to the Principal"

[12] It is apparent that a payment certificate issued under cl 42.1 of the earthworks contract, as the concluding words of the clause make plain, is provisional only. The certificate does not purport even to be a determination by the superintendent of moneys due from the contractor to the principal and the principal is not bound by the superintendent's determination. The fact that a payment certificate under the building contract claims that certain moneys have been overpaid by the principal to the contractor thus does not confer any particular status on the claim of overpayment and it does not make those moneys "due from the Contractor to the Principal" within the meaning of cl 42.10 of the building contract.

[13] The meaning of "money due" in cl 42.10 of AS2124 (1986) was discussed as follows in Wulguru Heights Pty Ltd v Merritt Cairns Constructions Pty Ltd[1] by Davies JA -

"The argument that the amount claimed by the appellant is `moneys due' from the respondent pursuant to cl.42.10, which it is `entitled' to deduct under cl.42.2(b), has the fatal defect that the amount claimed is no more than that. It does not even have the benefit of a prima facie independent ascertainment as does the amount specified in the Superintendent's certificate. If the argument is correct it would mean that, by merely asserting a claim for an amount of damages the appellant could avoid the obligation which would otherwise arise under cl.42.1. The `moneys due' in cl.42.10 which give rise to an entitlement under cl.42.2(b) must, in my view, be more than merely an amount which the principal asserts the contractor is liable to pay."

[14] McPherson JA reached a similar conclusion stating [2] -

"The deduction which the Principal is authorised by cl.42.10 to make is a deduction `of any money due from the Contractor to the Principal'. The expression `money due' is not apt to describe a claim which, as regards liability, has not yet been determined, and, as regards quantum, has not yet been ascertained. The Principal's claim for damages for delay is an assertion of a liability which at present is entirely contingent in character.

[15] There is no reason why "moneys due" in cl 42.10 and "amounts ... due" in cl 42.1 should be given different meanings or a meaning different from that expressed in Wulguru Heights. For the reasons I have given, the alleged overpayment has no higher status than a claim by the defendant..

[16] I turn now to the question of whether the claimed set off is in respect of an amount "due from the Contractor to the Principal arising out of or in connection with the Contract". The question is resolved in the plaintiff's favour by the foregoing discussion which makes it unnecessary to decide whether if the claimed set off is for "money due" the money is due "in connection with the contract". I propose, however, to deal with the question as it has been fully argued.

[17] As appears from the following passage from the reasons of Wilcox J in Our Town FM Pty Ltd v ABT,[3] the words "in connection with" are capable of a broad meaning -

"The words `in connection with' have a wide connotation, requiring merely a relation between one thing and another. They do not necessarily require a causal relationship between the two things: see Commissioner for Superannuation v Miller (1985) FCR 153 at 154, 160, 163. They may be used to describe a relationship with a contemplated future event: see Koppen v Commissioner for Community Relations (1986) 11 FCR 360 at 364 and Johnson v Johnson [1952] P 47 at 50-51. In the latter case the United Kingdom Court of Appeal applied a decision of the British Columbia Court of Appeal, Re Nanaimo Community Hotel Ltd [1945] 3 DLR 225, in which the question was whether a particular court, which was given `jurisdiction to hear and determine all questions that may arise in connection with any assessment made under this Act', had jurisdiction to deal with a matter which preceded the issue of an assessment. The trial judge held that it did, that the phrase `in connection with' covered matters leading up to, or which might lead up to, an assessment. He said (at 639):

`One of the very generally accepted meanings of "connection" is "relation between things one of which is bound up with or involved in another"; or, again "having to do with". The words include matters occurring prior to as well as subsequent to or consequent upon so long as they are related to the principal thing. The phrase "having to do with" perhaps gives as good a suggestion of the meaning as could be had.'

[18] Mr Savage seeks to identify a relevant connection from the fact that the earthworks contract and the building contract together contract the entirety of the works for the construction of the shopping centre. It is further submitted that the two contracts "provided a timetable for completion of the work which was interdependent. The work was performed in overlapping stages" and that there is "a serious question to be tried as to whether on the proper construction of the agreement "in connection with the agreement", where it appears, "authorises deducting money owed from the plaintiff to the defendant under the related earthworks contract".

[19] In order for a sum to be capable of set off it must be due "in connection with the contract". It does not seem to me that a sum of money claimed under the earthworks contract, the terms of which are in no way interdependent with the building contract, and which is not even referred to in the building contract can be said to be due in connection with the building contract. The two contracts were entered into at different times and there is no suggestion that when the earthworks contract was entered into there was any agreement or arrangement between the parties concerning the entering into of the building contract. The subject moneys are claimed merely on the basis of overpayment under the earthworks contract. If there is a valid claim, it arises out of the administration of the earthworks contract. The connection between that and the building contract, to my mind, is very difficult to discern. In my view, there is not an arguable case of a sufficient relationship or connection for the subject moneys to come within the description of an amount "due from the Contractor to the Principal arising out of or in connection with the Contract".

The consequences which flow from an erroneous certificate

[20] Determination of the foregoing matters in favour of the plaintiff however does not entitle it to summary judgment. Its case is based on the premise that the part of the certificate found to be erroneous may be excised and the final amount of the certificate appropriately adjusted. No authority for such a proposition was cited. Mr Savage referred to Lubenham Fidelities and Investments Co Ltd v South Pembrokeshire District Council[4] in which it was held that the remedy of a contractor in respect of a deficient architect's interim certificate certifying the amount payable to the contractor lay in recourse to the dispute resolution and arbitration provisions of the contract and that it was not free, in effect, to re-write the certificate by deleting the parts of it found to be erroneous.

[21] The following conclusion was expressed in the judgment of the Court[5] -

"Whatever be the cause of the under-valuation, the proper remedy available to the contractor is, in our opinion, to request the architect to make the appropriate adjustment in another certificate, or if he declines to do so, to take the dispute to arbitration under clause 35. In default of arbitration or a new certificate the conditions themselves give the contractor no right to sue for the higher sum. In other words we think that under this form of contract the issue of a certificate is always a condition precedent to the right of the contractor to be paid."

[22] In my view, the issue of a payment certificate by the superintendent under cl 42.1 is also a condition precedent to the right of the contractor to be paid. The amount required to be paid is "not less than the amount shown in the Certificate". Under the clause the superintendent is required to perform an exercise of valuation so as to arrive at a conclusion which is not "evidence of the value of the work or an admission of liability or evidence that work has been executed satisfactorily" but concerns "a payment on account only".

[23] As was observed in Lubenham,[6] the application of cl 42.1 must "involve a degree of assessment by the architect based on personal opinion". There is an exception to the circumstances in which the issue of a payment certificate is a precondition to the right of payment in that cl 42.1 expressly provides that "if no payment certificate has been issued, the Principal shall pay the amount of the Contractor's claim". The exception is not relevant here as a payment certificate has issued and the plaintiff does not contend for the purposes of this application that, if it is invalid, it may be disregarded for the purposes of cl 42.1.

[24] In Lubenham, the contractor sought to avoid the problem caused by the essential role of the certificate by recourse to the principal discussed in Panamena Europea Navigacion (Compania Limitada) v Frederick Leyland & Co Ltd that "at common law, ... no person can take advantage of the non-fulfilment of a condition the performance of which has been hindered by himself".[7]

[25] In Panamena, a contract for the repair of a vessel provided that the ship owners would pay for the repairs upon "the ordinary commercial basis" after the issue of a certificate by the owner's surveyor that the work had been satisfactorily carried out. In breach of the shipowner's duty no certificate was issued. The surveyor was supported in this erroneous view by the ship owners. The contractor sued for a sum on account of work done to the vessel. It was held that, as the certificate was not issued through the default of the owner's surveyor, the contractor was absolved from the necessity of obtaining it and the contractor was entitled to recover the amount claimed in the action. This conclusion was arrived at by application of the principle which prevents a person from taking advantage of the non-fulfilment of a condition the performance of which has been hindered by himself and the related principle which "exonerates one of two contracting parties from the performance of a contract when the performance of it is prevented and rendered impossible by the wrongful act of the other contracting party".[8]

[26] Hickman Co v Roberts[9] is another leading case in which the same principle was applied. There, the architect under a building contract, which provided for payments to the builder to be made upon certification by the architect, having taken an erroneous view of his role, failed to issue a certificate. It was held that the proprietor was precluded from setting up as a defence to the action either that the issue of the certificate was a condition precedent to the bringing of the action or that the certificate was conclusive as to the amount of the claim. It was ordered, in the Court of Appeal, that the amount due to the builder should be determined by an official referee and that approach was upheld on appeal to the House of Lords.

[27] The principle in Hickman & Co v Roberts was considered by the Court in Lubenham to arise from "the presumed implication of a term in the ... contract". It was further concluded that the presence in the contract of a wide arbitration clause permitting arbitration on interim certificates removed the basis for implying such a term.

[28] The term was identified as one akin to that found by Scott LJ to exist in Panamena "that if and when it became known to the former [shipowners] their surveyor was departing from his proper function under the contract, it then became their duty to stop him and tell him what his function was thereunder".

[29] There are a number of decisions which hold that the question of whether the determination of a valuer appointed under a contract to determine a matter can be set aside for an error falling short of a failure to act in accordance with the terms of the contract depends on the express or implied terms of the contract.[10]

[30] These decisions are also authority for the proposition that the determination of such a valuer will not be set aside for mistake unless the mistake is such that the valuation fails to comply with the contract. As McHugh JA expressed the principle in Legal & General Life of Australia Ltd v A Hudson Pty Ltd,[11] in language which has been approved in a number of subsequent cases -

"[A] valuation which is the result of the mistaken application of the principles of valuation may still be made in accordance with the terms of the agreement. In each case the critical question must always be: was the valuation made in accordance with the terms of the contract? If it is, it is nothing to the point that the valuation may have proceeded on the basis of error or that it constitutes a gross over or under value. Nor is it relevant that the valuer has taken into consideration matters which he should not have taken into account or has failed to take into account matters which he should have taken into account. The question is not whether there is an error in the discretionary judgment of the valuer. It is whether the valuation complies with the terms of the contract." (emphasis added)

[31] In WMC Resources Ltd v Leighton Contractors Pty Ltd,[12] Ipp J, with whose reasons the other members of the court agreed, expressed the view that the principles stated by McHugh JA were capable of general application to discretionary valuations and were not dependent on the existence in the contract of a stipulation to the effect that the valuation was final and binding. That conclusion has been reached in other cases.[13]

[32] A discretionary valuation was identified by Ipp J in WMC Resources as one which called for the making of a discretionary judgment. Such a valuation was contrasted with ones which require a determination, for example, by a certifier under an engineering contract, on a mechanical basis with reference to "detailed fixed and objective criteria".

[33] In my view, certification by the superintendent under cl 42.1 involves a discretionary valuation. The contract contains no criteria which must be applied by the Superintendent and, that being the case, an assessment of "the value of work carried out by the contractor" necessarily requires the exercise of skill and judgment. The task, which is described in paragraph [22] above, is not mechanical in nature.

[34] I have found that the deduction of $261,908 was made in error in each of payment certificates 12 and 14. It does not follow, necessarily, from that conclusion however that the certificates are invalid. Whether they are invalid or not will depend, not merely on the existence of error, but on whether the error results in the certification failing to comply with the terms of the contract.

[35] My tentative view is that the payment certificates do not comply with the terms of the contract but, as this question was not addressed in argument, it is inappropriate that I decide it. Even if it were to be concluded that the subject certificates were invalid, it would not follow that the certificates could be treated as if they did not contain the erroneous deductions. Invalid certificates would not have any legal effect and the quantum of the progress claims would need fresh determination. Lubenham provides one approach to this problem as I have already discussed. A different view seems to have been taken in WMC Resources.

[36] In that case, Ipp J, after stating that the criteria for reviewing a valuation on the one hand and substituting the decision of the reviewing tribunal for that of the valuer on the other differed, addressed the question of whether, if the decision was set aside, the arbitrator was required to return the matter to the valuer. His Honours said - [14]

"In my view, guidance to this question is to be obtained by asking what would the position be if the appellant wrongfully refused to make a determination at all under cl14.2(b)(iv)? Were that to occur, it seems to me, the court would make a determination itself: see for example Brodie v Cardiff Corporation; and Neale v Richardson. The court would assume that, once the appellant had abnegated its duties by refusing to make an order, it would be the respondent's implied right under the contract to have the variations valued by the court.

Applying this reasoning to a case concerning a contract in the same terms as that presently under consideration, but without an arbitration clause, and assuming the proprietor makes a valuation that does not conform with the contract - so that it is properly set aside, it seems to me that the contractor would be entitled to have the variations valued by the court.

I do not think that the words `in its sole discretion' would prevent this result. True it is that it would be the proprietor's right, in the first instance, to determine the value itself, alone. But should its valuation be in breach of the contract, it seems to me that the contractor could claim an order from the court, declaring the value of the variations in question. Having breached the clause by valuing otherwise than required by the contract, the proprietor would not be entitled to perform the valuation again. If in a similar case the contract concerned provided for disputes thereunder to be resolved by arbitration, the arbitrator would have the same powers as the court."

[37] Under the building contract, as long as the requirements of cl 47.2 of the General Conditions of Contract as to the giving of a notice of dispute and mediation were met, either party could elect whether to arbitrate or litigate.

[38] Mr O'Donnell submits that the plaintiff's claim for the adjusted amounts in the certificate can be sustained by treating the certificates as containing admissions against interest. Having regard to the terms of cl 42.1, which make payment pursuant to a certificate provisional only and which preserve the rights of the arties to "dispute whether the amount so paid is the amount properly due and payable", I doubt the validity of the submission.

[39] There is also a question on the material before me of the status of the superintendent and of his ability to make admissions binding on the defendant. It may be the case that if the certificates are to be regarded as having been issued by the defendant, a party to the contract, the principles applicable to the setting aside of valuers' determinations may not be applicable.[15]

[40] A number of the questions raised above were not canvassed in argument. Principally, that was because the plaintiff sought judgment on the basis of an acceptance of the validity of the payment certificates, appropriately adjusted. There is an incongruity in that approach as the plaintiff's basic case is that the certificates were invalid and that, in consequence, the defendant was obliged to pay progress claims 12 and 13 without deduction. The amount claimed in respect of the certificates is in excess of $1,500,000. What would happen to the principal claim if I were to find against the claims 12 and 13 was not explained by Mr O'Donnell. Mr Savage argued that the finding would give rise to an estoppel and that may well be the case[16].

[41] The foregoing discussion makes it plain that the application for summary judgment cannot succeed. There are a number of uncertainties and matters requiring further investigation and I doubt that I have mentioned all of the possible problems. For example, there is controversy over the validity of the plaintiff's payment claims - are any defects in these waived if the payment certificates are to be treated as nullities?

[42] Mr O'Donnell QC, as a fall back position, invited me to make a number of declarations. I do not consider it appropriate that I do so but I see no good reason why I should not make a declaration or declarations concerning the inclusion in the payment certificates of the $261,908 deduction.

[43] I will hear submissions as to the form of declaration and costs.

[1] [1995] QCA 273; [1995] 2 Qd R 521 at 522-523.

[3] [1987] FCA 301; (1987) 16 FCR 465 at 479, 480.

[4] (1986) 33 BLR 46 (CA).

[7] [1947] AC 428 at 436.

[9] [1913] AC 229.

[10] See eg, Horwitz Graham Books Pty Ltd v Mid-City Centre Pty Ltd 1990) NSW Conv R 55-514; Strang Patrick Stevordoring Pty Ltd v James Patrick & Co Pty Ltd (1993) 32 NSWLR 583 and Holt v Cox (1994) 15 ACSR 313.

[11] (1985) 1 NSWLR 314.

[13] Strang Patrick Stevedoring Pty Ltd v James Patrick & Co Pty Ltd (1993) 32 NSWLR 583 and Holt v Cox (1994) 15 ACSR 313 at 333.

[16] Cf Vanramer Pty Ltd v Higgins (1991) 24 NSWLR 661