Galileo Miranda Nominee Pty Ltd v Duffy Kennedy Pty Ltd

Galileo Miranda Nominee Pty Ltd v Duffy Kennedy Pty Ltd - [2019] NSWSC 1157 - NSWSC 2019 case summary — Zoe

[7]

CONTRACT - Interpretation - where Principal takes work out of Contractor's hands prior to practical completion and contract does not expressly provide for return of security - whether Contractor entitled to the return of contractual security - where completion of works will necessarily be put in hands of further contractors - whether security extends to Principal's claim for unliquidated damages - security to ensure performance of Contractor's obligations extends post-termination. Legislation Cited: Building and Construction Industry Security of Payment Act 1999 (NSW), ss 4, 11, 14, 15(1), 16, 22(1), 23, 24(2), 25 and 27 Civil Procedure Act 2005 (NSW), s 100 Environmental Planning and Assessment Act 1979 (NSW), s 6.5(1)(c) Evidence Act 1995 (NSW), s 131 Cases Cited: Baker v Campbell (1983) 153 CLR 52; [1983] HCA 39 Booth v Trail (1883) 12 QBD 8 Bundanoon Sandstone Pty Ltd v Cenric Group Pty Ltd; TWT Property Group Pty Limited v Cenric Group Pty Limited [2019] NSWCA 87 Dura (Australia) Constructions Pty Ltd v Hue Boutique Living Pty Ltd (Formerly SC Land Richmond Pty Ltd) (No 3) (2013) 41 VR 636; [2013] VSCA 179 FPM Constructions v Council of the City of Blue Mountains [2005] NSWCA 340 Geraldton Building Co Pty Ltd v Christmas Island Resort Pty Ltd (1994) 12 BCL 64 Lainson Holdings Pty Ltd v Duffy Kennedy Pty Ltd [2019] NSWSC 576 Legal & General Life of Aust Ltd v A Hudson Pty Ltd (1985) 1 NSWLR 314; [1985] ANZ ConvR 108; (1985) NSW ConvR 55-237 Liversidge v Anderson [1942] AC 206 Mallinson v Scottish Australian Investment Co Ltd (1920) 28 CLR 66 Perini Corporation v Commonwealth [1969] 2 NSWR 530 Reg v Inland Revenue Commissioners, Ex parte Rossminster Ltd [1980] AC 952 Renard Constructions (ME) Pty Ltd v Minister for Public Works (1992) 26 NSWLR 234 Secured Income Real Estate (Australia) Ltd v St Martins Investments Pty Ltd (1979) 144 CLR 596; [1979] HCA 51 Service Station Association Ltd v Berg Bennett & Associates Pty Ltd (1993) 45 FCR 84; (1993) ATPR 41-266; [1993] FCA 445 Strike Australia Pty Ltd v Data Base Corporate Pty Ltd [2019] NSWCA 205 WMC Resources Ltd v Leighton Contractors Pty Ltd (1999) 20 WAR 489; [1999] WASCA 10 Texts Cited: J D Heydon, Cross on Evidence (11th ed, 2017, LexisNexis Butterworths) at [25375] Category: Principal judgment Parties: Galileo Miranda Nominee Pty Ltd (Plaintiff) Duffy Kennedy Pty Ltd (Defendant) Representation: Counsel: SG Finch SC/DAC Robertson (Plaintiff) F Hicks SC/SS Ahmed (Defendant)

[9]

Judgment

This judgment concerns a building project called "Palisade" at Miranda in Sydney. The development consists of two residential tower blocks containing 197 units. It was the subject of a design and construction contract dated April 2017 between Duffy Kennedy Pty Ltd ("DK", defined in the contract as "the Contractor") and Galileo Miranda Nominee Pty Ltd ("Galileo", defined in the contract as "the Principal"). The contract price was $66 million. This figure, and other figures in this judgment are exclusive of GST.
The contract provided, in the usual way, for a project manager, described as the "Principal's Representative", to decide upon, and certify, elements of the contract such as extensions of time and progress payment entitlements. The Principal's Representative appointed by Galileo for the purposes of the contract was Resource Co-ordination Partnership Pty Ltd ("RCP").
The original date for practical completion was in February 2019. This date was not met and Galileo imposed liquidated damages on DK for the delay. By the end of that month, however, according to DK's calculations, over 99.9% of the work, by value, had been done; the value of the remaining work was only about $56,000.
A critical remaining step was to obtain the issue of the occupation certificate. The principal certifier responsible for issuing the certificate under the Environmental Planning and Assessment Act 1979 (NSW), s 6.5(1)(c), was McKenzie Group Consulting (NSW) Pty Ltd ("McKenzie"; also referred to in the evidence as the "Principal Certifying Authority" or "PCA").
McKenzie's requirements for the issue of the occupation certificate were set out in a check-list. McKenzie updated that list during the course of the project. By March, controversy had arisen between DK and McKenzie over two of the requirements in the list.
The first controversy concerned fire protection in the building. Fire protection devices had to be installed wherever pipes, wires or other services penetrated through structural walls, ceilings or floors of the building. McKenzie's list required the contractor to provide a "penetration schedule" identifying each of these locations in the building (of which there were hundreds) and particulars for each location. DK's position was that the necessary information had been supplied or was otherwise available to McKenzie or Galileo, and DK should not be required to assemble the required schedule.
The second controversy concerned the balustrades on the external balconies on level 7 of the towers. Four balconies were involved, two for each tower. McKenzie wanted the height of the balustrades to be increased so as to comply with safety requirements of the Building Code of Australia ("BCA"). DK argued that McKenzie's interpretation of the BCA requirements was incorrect and no heightening was necessary.
The contract provided, in the usual way, for a system of progress payments which were subject to the Building and Construction Industry Security of Payment Act 1999 (NSW) ("the Act"). A progress payment of $323,000 was due in the third week of March. This payment was made by Galileo but it was made late. As a result of the delay, DK was entitled to interest. The amount of the interest was not large, being at most a few hundred dollars. Galileo's payment did not include anything for interest. On 28 March, DK gave notice of the suspension of works under the Act on the grounds that its progress payment had not been paid in full.
The contract provided, in the event of default by DK, for a procedure whereby RCP as the Principal's Representative could issue a notice requiring DK to remedy the default or show cause why the contract should not be terminated. If DK failed to show cause or to remedy the default to the satisfaction of RCP, Galileo was entitled either to terminate the contract or to take the remaining work out of the hands of DK.
On 29 March a default notice was issued pursuant to this provision and signed by both Galileo as Principal and RCP as Principal's Representative. The notice relied on four separate grounds of alleged default. One was DK's suspension of work. Another was DK's alleged failure to proceed with due diligence and in a competent manner so as to complete the works. This ground was based on the failure to comply with McKenzie's occupation certificate requirements concerning the penetration schedule and the balustrades. The other two grounds have not been pressed and it is not necessary to go into them for the purposes of these proceedings.
DK responded to the notice by making a show-cause submission. The response was issued on 12 April. Galileo was not satisfied with it. On 29 April Galileo issued a notice purporting to take the remaining works out of the Contractor's hands. I will refer to this as the "take-out notice".
The clause of the contract under which the take-out notice was issued required DK to deliver up drawings, certificates and other specified documents for the work done by it; and to secure and leave the site. The take-out notice demanded that DK comply with its obligations under this clause. In particular, the notice demanded that DK complete a penetration schedule in the form specified by Galileo and provide "settlement bags" for the units (the Contract specified that such a bag, containing keys, manuals and warranties, was to be produced for each unit so as to be handed over on settlement to the purchaser of the unit). The notice also required provision of copies of all of DK's contracts with sub-contractors on the project.
On 1 May DK replied, disputing the validity of the take-out notice and asserting that it was a repudiation of the contract. DK purported to accept the asserted repudiation and bring the contract to an end. DK demanded that Galileo return the bonds which had been provided by way of security for DK's obligations under the Contract.

[10]

Issues for determination

These proceedings were commenced by Galileo as plaintiff on 2 May. At that stage there was an issue about whether DK's staff had actually left the site. Galileo sought orders that DK leave and secure the site and that DK provide Galileo with all keys and electronic fobs giving access to the site or parts of it. Galileo also sought orders that DK complete Galileo's penetration schedule and provide copies of the sub-contractor contracts as well as settlement bags for each of the units.
The claims in these proceedings concern only some of the breaches of the contract alleged by Galileo. Galileo has foreshadowed claims for liquidated damages and for the recovery of the cost of having work completed by other contractors. Galileo's position is that these claims should be dealt with in the ordinary way through the mechanisms provided in the contract.
DK cross-claimed. It sought a declaration that it had validly terminated the contract on the ground of repudiation by Galileo on 1 May 2019; an order that the proceedings be referred for enquiry and report as to the damages arising from the repudiation of the contract and its termination; and an order that Galileo return the security bonds.
The proceedings were initially brought on an urgent basis. Galileo now accepts that DK has left the site and the claims for relief associated with this have fallen away. The parties also agreed on a regime for the delivery up of access keys and fobs, and for the provision of settlement bags, and no claims are now made about these matters in the proceedings (they are however the subject of foreshadowed contractual claims by Galileo against DK).
An interim occupation certificate was issued on 2 May, the day after the proceedings were begun, for both of the towers except for the four units affected by the balustrade issue. Closing submissions were made in writing and addressed orally on 9 August. As a result Galileo has been able to complete the sales of units and allow the purchasers into occupation. This took some of the urgency out of the proceedings. Shortly before the hearing, an interim occupation certificate was issued for the four remaining units on level 7. The hearing ultimately took place on 1, 2 and 3 July. This completed the evidence. Counsel lodged written submissions and addressed them orally on 9 August.
As a result of developments since the proceedings began, the only remaining relief sought by Galileo consists of an order that DK complete Galileo's penetration schedule and an order that DK provide Galileo with copies of its subcontracts. To establish its entitlement to this relief, Galileo must show that the take-out notice was valid. For its part, if DK is to succeed on its claim of repudiation, it must show that the take-out notice was invalid.
It is common ground that the take-out notice could not validly rely on an alleged breach of the contract by DK unless DK was in breach at the time that the show-cause notice was issued. Thus it is necessary to consider whether DK was actually in breach of the contractual provisions now relied upon by Galileo as at 29 March.
Galileo relies relevantly on two alleged breaches. The first alleged breach is that DK was not entitled to suspend works by reason of the outstanding progress claim interest. The second is that DK failed to proceed with due diligence and in a competent manner so as to bring the works to practical completion, by failing to comply with McKenzie's occupation certificate requirements. There are two relevant non-compliances: the failure to provide the penetration schedule and the failure to undertake the balustrade work. Thus there are three separate breach issues.
Even if it was in breach when the show-cause notice was issued, DK still attacks the validity of the take-out notice. DK makes two contentions. The first is that the show-cause notice was invalid. The second is that, even if the show-cause notice was valid, the take-out notice was not. The main question is whether the relevant contractual powers had to be, and were, exercised in good faith and reasonably.
For its part, Galileo contends that even if the take-out notice was invalid, it was not a repudiation of the contract. If this is correct, DK had no right to terminate.
In its List Response, DK put in issue whether, even if the take-out notice was validly issued, it was obliged to provide the penetration schedule and the copies of the sub-contracts. But this point was abandoned in final submissions; DK now accepts that if it fails in its challenge to the validity of the show-cause notice, Galileo is entitled to the relief it seeks. Nor did DK press its assertion that it was not required to produce these documents because of a lien for unpaid amounts under the Contract.
The final question concerns the contractual security. DK's contention is that, whether the take-out notice was valid or not, it is entitled to the return of the undertakings. For its part, Galileo's contention is that it is entitled to have the security remain in place.

[11]

Suspension of works

DK puts its case on suspension of works in two ways. First, DK contends that it had a statutory entitlement to suspend the works at any time when there was unpaid interest. Galileo's other argument relies on the terms of the contract. As will be seen below, the contract relevantly provided that a default notice could be issued if DK suspended works "without reasonable cause". DK contends that even if it had no statutory right to suspend, it had "reasonable cause" to do so.
There is no dispute as to the facts on this part of the case. They are established by documentary evidence.
The progress claim which resulted in the suspension was claim number 26. It was issued on 26 February 2019, claiming $1,010,161.72. RCP responded with a payment schedule acknowledging that the sum of $293,984.42 was due. It is common ground that, as a result, Galileo was liable under the Act to make payment of this sum, to which I will refer as "progress payment 26".
The payment was due on 19 March. Galileo initiated an electronic payment of the amount on 22 March, which was a Friday. Payment did not reach DK until the following Monday, 25 March.
On that day, 25 March, DK issued a notice to Galileo under s 16(2)(b) of the Act. The notice recited the background facts and stated that Galileo had "not made full payment as required under the Contract and the Act". DK went on to give notice of its intention to suspend carrying out work under the contract.
The next day, 26 March, Galileo wrote to DK stating that payment had been made on 22 March and enclosing proof of the payment instruction. Galileo stated that the default in payment had been remedied when the notice was issued and there was no entitlement to suspend the works. In response, DK stated that the payment had been made the previous day (this was in fact when it was received) but that the payment "was not in accordance with the contract". DK's email stated that the s 16(2)(b) notice "is valid and stands".
The two business days referred to in s 16(2)(b) expired at the end of 27 March. On 28 March, DK served a further notice, this time of actual suspension of the works. There appears to be no obligation under the Act to give notice of suspension, and the notice described itself as a notice under s 23(1), rather than s 27, but no point is taken about this.
The 28 March notice referred to the notice given on 25 March and recited that two business days had passed since the giving of the notice. It stated that DK was "immediately" suspending the carrying on of construction work. The suspension took effect on that day, although I was told that in fact DK continued to work on some aspects of the project.
Galileo's default notice (issued on 29 March) asserted DK had "wrongfully, and without reasonable cause" suspended the carrying out of the works before practical completion. By way of particulars the notice acknowledged that progress payment 26 had been delayed but stated that payment had been received on 25 March, and asserted that DK therefore had no entitlement under the Act to suspend the works.
DK's response to the show-cause notice (issued on 12 April) recited that on 12 March a payment schedule of $2,983,984.42 (exclusive of GST) had been served, which it described as the "scheduled amount"; that the scheduled amount had been due for payment on 19 March 2019; that Galileo had paid the amount plus GST; but that under cl 19.8 of the Contract Galileo was required to pay interest on overdue payments at the rate of 10% per annum.
The response stated that interest had accrued and remained unpaid in the sum of $177.20 and that this unpaid interest formed part of the scheduled amount. The response argued that on this basis, the scheduled amount had not been paid in full. It followed that DK had been, and was, entitled to suspend work. This was the first occasion on which DK explicitly stated that the failure to pay the interest had been the problem.
On 15 April, Galileo paid the interest amount of $177.20. But the works remained suspended. This remained the position up until the take-out notice was issued on 29 April.

[12]

Legislative provisions

The entitlement under the Act to interest on a late progress payment comes from s 11 which relevantly provides: Due date for payment (1) Subject to this section and any other law, a progress payment to be made under a construction contract is payable in accordance with the applicable terms of the contract. … (2) Interest is payable on the unpaid amount of a progress payment that has become due and payable at the rate: (a) prescribed under section 101 of the Civil Procedure Act 2005, or (b) specified under the construction contract, whichever is the greater. (3) If a progress payment becomes due and payable, the claimant is entitled to exercise a lien in respect of the unpaid amount over any unfixed plant or materials supplied by the claimant for use in connection with the carrying out of construction work for the respondent. …
The suspension of works is dealt with by Division 3 (s 27). Section 27 provides: Claimant may suspend work (1) A claimant may suspend the carrying out of construction work (or the supply of related goods and services) under a construction contract if at least 2 business days have passed since the claimant has caused notice of intention to do so to be given to the respondent under section 15, 16 or 24. (2) The right conferred by subsection (1) exists until the end of the period of 3 business days immediately following the date on which the claimant receives payment for the amount that is payable by the respondent under section 15 (1), 16 (1) or 23 (2). (2A) If the claimant, in exercising the right to suspend the carrying out of construction work or the supply of related goods and services, incurs any loss or expenses as a result of the removal by the respondent from the contract of any part of the work or supply, the respondent is liable to pay the claimant the amount of any such loss or expenses. (3) A claimant who suspends construction work (or the supply of related goods and services) in accordance with the right conferred by subsection (1) is not liable for any loss or damage suffered by the respondent, or by any person claiming through the respondent, as a consequence of the claimant not carrying out that work (or not supplying those goods and services) during the period of suspension.
DK's notice of intention for the purposes of s 27(1) was given under s 16 of the Act. That section relevantly provides: Consequences of not paying claimant in accordance with payment schedule (1) This section applies if: (a) a claimant serves a payment claim on a respondent, and (b) the respondent provides a payment schedule to the claimant: (i) within the time required by the relevant construction contract, or (ii) within 10 business days after the payment claim is served, whichever time expires earlier, and (c) the payment schedule indicates a scheduled amount that the respondent proposes to pay to the claimant, and (d) the respondent fails to pay the whole or any part of the scheduled amount to the claimant on or before the due date for the progress payment to which the payment claim relates. (2) In those circumstances, the claimant: (a) may: (i) recover the unpaid portion of the scheduled amount from the respondent, as a debt due to the claimant, in any court of competent jurisdiction, or (ii) make an adjudication application under section 17 (1)(a)(ii) in relation to the payment claim, and (b) may serve notice on the respondent of the claimant's intention to suspend carrying out construction work (or to suspend supplying related goods and services) under the construction contract.
The term "scheduled amount" used in s 16(1) and s 16(2) is defined (s 4) as: the amount of a progress payment that is proposed to be made under a payment schedule, as referred to in section 14.
Section 14 relevantly provides: Payment schedules (1) A person on whom a payment claim is served (the respondent) may reply to the claim by providing a payment schedule to the claimant. (2) A payment schedule: (a) must identify the payment claim to which it relates, and (b) must indicate the amount of the payment (if any) that the respondent proposes to make (the scheduled amount). …

[13]

Statutory entitlement to suspend

It appears that the interest calculated by DK may have been based on only the three days from 19 March to 22 March, rather than the period from 19 March to 25 March when progress payment 26 was actually received. As a result DK was actually entitled to more interest than the $177 claimed. It would follow that even after the $177 was paid DK had still not been paid in full.
Counsel for DK, however, took no point about this. Counsel conceded that once payment of the $177 was made on 15 April and three business days then passed, any right of suspension which DK might have had would have ceased. But counsel contended that at the date the show-cause notice was issued (29 March), DK was entitled to suspend and there was no breach at that point. On this analysis, it would have been necessary for Galileo to issue a fresh show-cause notice on 18 April once it had made the $177 interest. It did not do so.
Counsel for Galileo accepted that the effect of s 16 and s 27 is that an entitlement to issue a s 16(2)(b) notice arises once the principal fails to make a progress payment by the due date. The right continues even if payment is subsequently made. But once payment is made, after three days any right to suspend, or continue the suspension, ceases.
On this analysis, because payment was not made by the due date (19 March), DK was entitled to issue the s 16(2)(b) notice on 25 March. DK was also entitled to suspend work on 28 March because three business days had not then passed from payment being made on 25 March. But, on Galileo's analysis, the payment having been paid on 25 March, the right of suspension came to an end; the continued suspension from 29 March onwards was therefore a breach.
The issue between the parties was whether the interest was included in the amount which had to be paid to avoid suspension under the Act. I do not understand counsel to contest each others' analysis of what followed if the other succeeded on this issue.
The argument by counsel for DK was based on what counsel characterised as a need, where there is a failure to make a progress payment by the due date, to achieve a consistent operation of the remedial provisions of the Act. It was common ground that the starting point is s 27 which confers the right of suspension DK purported to invoke in this case. The right of suspension ends when the claimant "receives payment for the amount that is payable", relevantly, under s 16(1). Counsel submitted that s 16(1) does not in terms specify "the amount that is payable", but that under s 16(2)(a)(i), the claimant is entitled to recover the outstanding amount by way of court proceedings. Counsel submitted that in any such proceedings the claimant would be entitled to recover not only the principal amount unpaid but also the interest under s 11. Counsel argued that the right of suspension should work in an analogous way. Otherwise a claimant who had validly suspended could be forced back to work without the respondent paying the interest to which the claimant is entitled.
Counsel for Galileo submitted that this argument was based on a misunderstanding of the nature of any interest awarded in proceedings under s 16(2)(a)(i). Counsel argued that such interest is awarded in such proceedings under the Court's general power to award pre-judgment interest under the Civil Procedure Act, s 100. Counsel submitted that there is nothing in the Act itself which contemplates that a judgment obtained under s 16(2)(a)(i) is to contain interest under s 11.
In my view, this submission went a little too far. The entitlement to interest under s 11 must be enforceable by court proceedings if that proves necessary: Booth v Trail (1883) 12 QBD 8 at 10; Mallinson v Scottish Australian Investment Co Ltd (1920) 28 CLR 66 at 70. Separate proceedings could be brought but there is no reason why such a claim could not be combined with a claim for recovery of an unpaid progress claim under s 16(2)(a)(i).
Furthermore, where a party with a claim in civil proceedings has a legal entitlement, for instance by contract, to payment of interest at a particular rate, the court's power under the Civil Procedure Act is generally exercised so as to award interest at that rate. I think it is artificial to treat interest under the Civil Procedure Act as being in some way distinct from the statutory entitlement to interest under the Act.
Counsel for Galileo was however right in pointing out that the right to obtain judgment under s 16(2)(a)(i) is a right to obtain judgment for "the unpaid portion of the scheduled amount". And although s 16(1) does not use the words "amount that is payable", it refers in sub-paragraph (d) to the failure by the respondent "to pay the whole or any part of the scheduled amount". In my view it is quite clear that the reference in s 27(2) to "the amount that is payable under s 16(1)" is a reference to the "scheduled amount".
As we have seen, the term "scheduled amount" is a defined term and means the amount identified in the payment schedule as the amount of the payment "that the respondent proposes to make". At the time the scheduled amount is specified in the payment schedule, the time for payment has not arrived. The amount is one which the respondent "proposes to make". The Act should not be construed on the assumption that the respondent intends, at the point when the schedule is issued, to make a late payment. The natural reading is that the amount refers to the amount specified in the payment schedule only.
Furthermore, while analogous operation of the rights of suspension and the right to obtain a judgment counts for something, it is not the only contextual consideration. In practice, identifying the amount of interest due under s 11 may not be straightforward. The facts of this case illustrate that.
Nor is it just a question of counting the correct number of days. Section 11(1) refers to the rate prescribed in the contract and there may be cases where that gives rise to a dispute as to what the contract says. On DK's argument, the validity of a suspension (and consequential action under the contract) might depend on a dispute about the quantum of interest, where the answer would not be known until court proceedings had run their course. That would hardly be a workable interpretation to place on the Act. Above all, the parties need to know where they stand at the time that rights of suspension are invoked or are under consideration.
The need to quantify interest in a final way is implicitly recognised in the Act itself. As well as suspending works, or moving to obtain judgment, an unpaid claimant has the option of obtaining an adjudicator's determination (s 16(2)(a)(ii)). This results in a specified amount due defined as the "adjudicated amount" (s 22(1)) which must be paid by the due date (s 23(2)). If that amount is not paid, the authority to whom the adjudication application was made can provide an adjudication certificate which can then be filed as a judgment (ss 24 and 25). It is specifically provided in s 24(2) that if interest is due and payable on the adjudicated amount, the authority can be asked to specify the amount of interest payable in the certificate. If so specified, the interest is added to and "becomes part of" the adjudicated amount. The Act thus provides a mechanism whereby outstanding interest can be certified so that there is no possible debate about the amount.
Section 27(2) provides that a right of suspension exists if there is a failure to pay in full the amounts payable under ss 15(1), 16(1) or 23(2). If the adjudication procedure has been followed and a certificate specifying interest has been issued, the adjudicated amount under s 23(2), which must be paid in full if the suspension is to cease, may include interest. But there is no equivalent mechanism for determining the interest under s 16(1) (or s 15(1)) and including it in the amount payable. I think this tells against creating such a mechanism by implication.
Failure to pay the interest may be frustrating for a claimant but it would be an over-statement to suggest that the claimant has no remedy. The contract may, of course, oblige the respondent to pay interest on the outstanding payment claims. If so, the interest can be included in the next payment claim under the contract. Even if this approach is not available, the claimant has the option of seeking judgment or an adjudication certificate.
In my view, the better conclusion is that, for the purposes of s 27(2), the "amount that is payable" under s 16(1) is the amount specified in the payment schedule and does not include interest under s 11. It follows that DK was not entitled to continue the suspension of works after 28 March.

[14]

Suspension without "reasonable cause"

DK's contention is that if it is wrong in its construction of the Act, that construction was still reasonably open to it. DK submits that it acted in good faith and its suspension was therefore with "reasonable cause".
It is notable that DK did not specifically refer to the failure to pay interest in its correspondence with Galileo up to 29 March. All DK said in its correspondence was that "the amount due under the payment claim has not been paid in full". Nor is there evidence before the Court going to whether DK actually had reasonable grounds for believing that Galileo's failure to pay interest justified it in suspending the works. There was, for instance, no evidence before the Court that DK had obtained legal advice on the question. But I do not think this point should be decided on the onus of proof.
In my opinion the first question is whether "reasonable cause" includes DK's subjective reasoning process at all. In the famous case of Liversidge v Anderson [1942] AC 206, the House of Lords had to consider a regulation which allowed for detention if the Minister "has reasonable cause" to believe that the person was of hostile origin or associations and by reason of that it was necessary to exercise control over him. In his judgment, Lord Atkin said: It is surely incapable of dispute that the words "if A has X" constitute a condition the essence of which is the existence of X and the having of it by A. If it is a condition to a right (including a power) granted to A, whenever the right comes into dispute the tribunal whatever it may be that is charged with determining the dispute must ascertain whether the condition is fulfilled. In some cases the issue is one of fact, in others of both fact and law, but in all cases the words indicate an existing something the having of which can be ascertained. And the words do not mean and cannot mean "if A thinks that he has". "If A has a broken ankle" does not mean and cannot mean "if A thinks that he has a broken "ankle". "If A has a right of way" does not mean and cannot mean "if A thinks that he has a right of way". "Reasonable cause" for an action or a belief is just as much a positive fact capable of determination by a third party as is a broken ankle or a legal right. If its meaning is the subject of dispute as to legal rights, then ordinarily the reasonableness of the cause, and even the existence of any cause is in our law to be determined by the judge and not by the tribunal of fact if the functions deciding law and fact are divided.
Lord Atkin continued: Thus having established, as I hope, that the plain and natural meaning of the words "has reasonable cause" imports the existence of a fact or state of facts and not the mere belief by the person challenged that the fact or state of facts existed, I proceed to show that this meaning of the words has been accepted in innumerable legal decisions for many generations, that "reasonable cause" for a belief when the subject of legal dispute has been always treated as an objective fact to be proved by one or other party and to be determined by the appropriate tribunal.
After discussing the authorities his Lordship concluded: After all this long discussion the question is whether the words "If a man has" can mean "If a man thinks he has". I am of opinion that they cannot, and that the case should be decided accordingly.
Lord Atkin was dissenting, but his decision was vindicated by subsequent authority: Reg v Inland Revenue Commissioners, Ex parte Rossminster Ltd [1980] AC 952. Lord Atkin's comments on the ordinary grammatical import of a condition of "reasonable cause" are of general application, but it might be argued that the subject matter of the decision, concerning as it did the liberty of the subject, imposes some limitation on its application.
In the present case I am dealing with the construction of a commercial contract. It must be construed in a business-like way. I think that commercial considerations favour an objective test. The other party to the contract needs to know where it stands; that party has no means of knowing about the internal deliberations and thinking processes of the suspending party and should not have to resort to litigation to find out. Particularly is this so where a contractual power of suspension is in issue.
It follows, in my view, that whether or not DK had "reasonable cause" depends upon objective considerations, not on whether there was an arguable basis for its contention.
In this case, the amount of interest was minuscule in the scheme of things. Counsel for DK asserted that Galileo had been generally slow about making payment claims and as a result a substantial amount of money had accrued in interest over the course of the contract. I do not think this makes any difference. In my view the suspension of work remained completely disproportionate and the failure to pay interest did not constitute "reasonable cause".
I conclude that DK's suspension was in breach of the contract as at 29 March when the show-cause notice was issued, and DK remained in breach thereafter until the take-out notice was issued a month later.

[16]

Penetration schedule

Australian Standard 4072.1 in Appendix B provides that when the installation of a fire resistant ceiling system has been completed, the installer should provide written evidence to the building owner or building owner's representative that each such system is identical to a tested specimen and that each such system has been correctly installed in accordance with the manufacturer's installation instructions. This is to be provided in the form of a certificate or the like from the installer. Clause B3 then provides: B3 STATEMENT OF COMPLIANCE AND SCHEDULE Included on or attached to the certificate, form or statement of compliance should be a record of each installation giving the following information: (a) Project name and address. (b) Name, address and contact phone number of installing company or party. (c) Date of final inspection of installation. (d) Description of service or control joint. (e) Identification of the position of the installations, for example- (i) marked up drawings; (ii) sketches; and (iii) photographs. (f) Description of the system used or a schedule of systems. (g) Description of product or system used to maintain the FRL of the building element of each installation. NOTE: Each installation should be numbered for ease of identification on the drawing. (h) The FRL of the installation. (i) A unique number that references each installation.
The standard also contains, in figure B1, a "recommended format for listing penetrations and control joints" which it also describes as an "example". Figure B1 is reproduced below:
Figure B2 gives a sample statement of compliance. It is reproduced below:
BCA fire resistance provisions for service penetrations (BCA cl 3.15) contain requirements concerning testing and installation. The testing requirements include that the system is identical with a system tested in accordance with AS 4072.1. The installation requirement is set out in specification C3.15. The specification refers back to the testing requirements for the components but does not otherwise pick up the certification and recording procedures in AS 4072.1.
Attached to the contract was a lengthy document issued by RCP in April 2017 setting out the "Principal's Project Requirements" ("PPR"). Under the heading "Architectural", the PPR stated: The Contractor must deliver the Works in accordance with the Architectural documents, as noted in this PPR: … (b) The Architectural design must comply with the specific requirements outlined in the Development Consent as set out in the Contract…and all relevant standards and the Architectural design documents in the Annexures.
The architectural design documents included a specification for fire stopping. Under the heading "Submissions" this stated: General: Submit evidence of conformance with the recommendations of AS 4072.1. Appendix B. Certification: Submit a completed certification list and schedule for installed fire-stopped penetrations and control joints. - List form: To AS 4072.1 Figure B1. - Schedule form: To AS 4072.1 Figure B2.
The PPR also contained provisions dealing with the consultants on the project. These provided that the Principal would engage separately and pay the fees of, among others, the PCA. Clause 4.17(a) stated: It is the Contractor's responsibility to manage the PCA to procure and obtain the Construction Certificates and Occupation Certificates (including any interim occupation certificates as required by the Contractor). The Principal is responsible only for the costs associated with the PCA's provision of its scope of services as per the PCA fee proposal set out in the Annexures where the Contractor requires further inspections, and/or additional construction and occupation certificates, in addition to the allowance contained in the PCA's fee proposal, the Contractor is responsible for those costs. McKenzie's fee proposal was not in evidence, or, if it was, I was not referred to it.
Clause 4.33 stated: With the exception of those responsibilities of the Principal within the Contract, the Contractor will be responsible to procure and obtain all the Construction Certificates necessary and the Occupation Certificate for the Works. For clarity, this obligation will also include changes in design and construction methods nominated by the Contractor, Provisional Sum Items, clarifications and amendments or during the Design and Construction process as approved by the Principal and/or Principal's Representative. The Principal will engage the Private Certifier and is responsible for the payment for the Private Certifier professional services during the work under contract as set out in the Contract. It is the Contractors responsibility to manage the Private Certifier to procure and obtain all approvals and the Occupation Certificate.
In November 2017 McKenzie gave DK advance notice of what "would generally be required prior to the issue of the Interim/Final Occupation Certificate". This was in the form of a checklist. Item 13 was: Statement or certificate from the contractor responsible for the installation of fire seals, fire collars, fire pillows and fire dampers confirming that they have been installed in accordance with the BCA Clause C3.15 and Spec C3.15 and manufacturers specifications, including a schedule of the systems, fire rating achieved and relevant fire test report numbers. Test reports are to be provided for the systems utilised.
This checklist was incorporated in a document produced by McKenzie described as the "Occupation Certificate Proforma Package". I will refer to this as the "OC Package".
The OC Package was updated by McKenzie for DK as the project progressed. The earliest version of the Package in evidence was issued in October 2018. It contained several checklists. The relevant one was the first, which was entitled "Administrative and BCA Compliance Verification". Checklist item 12 was in the same terms as item 13 on the checklist from the letter of 22 November 2017 which I have quoted above.
The Package also included corresponding forms of installation certificates to be completed by the installer. One was for fire seals and collars and the other was for fire/smoke dampers. The form for fire seals and collars is reproduced below:
The fire seals, collars and dampers were actually installed by subcontractors. In evidence are completed installation certificates using the forms provided by McKenzie, and which were submitted in their completed form by DK to McKenzie. The certificates were lodged by being uploaded to a dropbox to which all interested parties had access.
Although the installation certificates had a field where the location was to be entered, the completed certificates in evidence do not contain precise locations. They only contain generic information identifying the nature of the locations where the penetrations occurred (such as "floor waste"). This became an issue between DK and McKenzie.
The earliest communications in evidence occurred on 12 March. At 9.19 am that day Mr Celarc sent an internal email to Mr Wilkins stating that McKenzie "needed to know the location of all penos". At 10.28 am Mr Wilkins forwarded Mr Celarc's email to Mr Edrees attaching a spreadsheet in the form of a schedule. Mr Wilkins' email stated: Can you please have the attached penetration schedule completed for the development nominating all the penetration locations and systems used.
About an hour later Mr Wilkins sent a further email to Mr Edrees attaching both the spreadsheet and a revised version of the OC Package. The email repeated the request to complete the penetration schedule which was attached. The Package checklist at item 12 was in the same terms as had previously been sent but the words "including a schedule of the systems" were bolded. The checklist had a column for comments against item 12. DK had previously identified the certificates having been provided for plumbing, electrical and mechanical. In response, McKenzie commented: Please provide a full penetration schedule nominating systems and locations and provide test reports for all systems used.
The spreadsheet schedule was in the form of a table which consisted of thirty-five columns, containing particulars for each penetration. The details required for each penetration included location details by reference to the as-built drawings; the building level; the grid reference, the location, and so forth. The particulars also included product and manufacturer details, and an installation check list which included space for a hyperlinked photograph of the installation; and inspection and certification details. The table covered 1,342 separate installations, and full completion of all of the particulars would have required approximately 54,000 entries.
Two days later, Mr Gladman wrote to Mr Wilkins as follows: Please note, this "Peno register" has never before been a requirement for O.C. We will not be completing it. … ● We have issued all pertinent Fire Sealing Certificates which covers all penetrations on the project ● McKenzies have undertaken numerous inspections through the life of the project, for which fire sealing was inspected ● There has been no previous request for this item for O.C. in the last 2 years, until yesterday Hence, if you require information on penetrations please consult the services trades' As-Built Documentation in conjunction with their Fire Seal certification.
A few hours later Mr Celarc responded. He stated that item 12 of the checklist had always required a penetration schedule and included a copy of the text, including the bolding. His email continued: The template we provided was a guide, a more simplified version can be used. For example, similar to the fire door schedule provided. This is a standard OC item which also assists with on-going maintenance as it allows contractors to identify all penetration types, what they are penetrating and the locations. Please see below example of a more simplified template which is acceptable to use. Each trade can complete to cover the penetration fire stopping relevant to their work. … Happy to discuss.
The "more simplified template" embedded in the email was as follows: Number Installation Reference Date of Installation Location of Penetration Size of Penetration Type of Penetration 1 E3.1 Level 00 Unit 1 20/12/2018 E3.1 Level 00 Unit 1 20mm Cable 2 E3.1 Level 00 Unit 2 20/12/2018 E3.1 Level 00 Unit 2 20mm Cable 3 E3.1 Level 00 Unit 3 20/12/2018 E3.1 Level 00 Unit 3 20mm Cable 4 E3.1 Level 00 Unit 5 20/12/2018 E3.1 Level 00 Unit 5 20mm Cable

[17]

Mr Gladman replied (underlining original): Schedules as per this item you reference and template you mention have already been provided. Please view the O.C. Dropbox including from the Services Trades for which have already been approved and closed out in the O.C. list at Essential Fire Safety Measures items 10. and 14. which covers your request.
Mr Gladman's reference to the "OC list" was to a different checklist, which identified essential fire safety measures. These specified fire dampers, fire seals and collars and identified the "standard performance" by reference to BCA and AS provisions. DK had annotated the checklist with references to the subcontractor's certificates which had been provided.
Mr Celarc responded: To satisfy item 12, a full schedule of every penetration in the building is required. This is not negotiable and provided on every residential project. Yes item 10 and 14 are closed out on the essential fire safety measures as the installation certificate covers off the Australian standards and BCA clauses.
On the following day, Friday 15 March, Mr Gladman replied: Your OC list has at item 12 always noted "a schedule of the systems", no question. However this CLEARLY refers to a schedule of the fire-sealing systems used on the project, e.g. the Electrician may use a number of systems such as fire caulking, fire pillows, fire collars, fire wrap etc for different applications on the project. At no time has there been referenced or noted for there to be a full schedule of every penetration on the project. In my 16 years in the construction industry, a schedule of this kind has never been a requirement for O.C. In DK's extensive experience, this is not 'provided on every residential project'. We also again reiterate, McKenzie Group inspected the project throughout the construction and viewed penetrations throughout structure, framing, rough-in and close-up stages. Fire Doors and Dampers require a full schedule. There is no legislative requirement for a full schedule of every penetration on the project. If McKenzie Group believe there is, please provide reference of this requirement re BCA 2016.
There was no immediate response from McKenzie. The following Monday, 18 March, McKenzie issued the next OC Package. The requirement in item 12 was unchanged.
On 20 March, Mr Pratt provided an updated response to the latest version of the OC Package. Against the requirement to provide a full penetration schedule in item 12 he wrote "email 15 March 2019". The same evening Mr Pratt sent an email to Mr Wilkins and Mr Hughes concerning outstanding items on the project. One of these was item 12 on the OC checklist. Mr Pratt wrote: Schedule of systems with locations as provided in proforma has been completed. COMPLETE
The following morning Mr Wilkins responded with McKenzie's comments. The comment for item 12 was: Incomplete as per previous correspondence. Further details required.
On 25 March McKenzie issued the next version of the OC Package. The requirement in item 12 was again unchanged.
On 26 March RCP issued a formal Principal's Representative Direction (numbered 56) under the contract. The direction stated: Further to the ongoing advice from the Principal Certifying Authority (PCA), the Contractor is directed to comply with the following instruction noted by the PCA as required to satisfy BCA compliance condition #12: "Provide a full penetration schedule nominating systems and locations and provide test reports for all systems used". In accordance with clause 4.19(a) and 4.33 of the Principal's Project Requirement's (PPR), "it is the Contractor's responsibility to manage the PCA to procure and obtain all approvals and the Occupation Certificate." The Contractor is also required to comply with the Fire Stopping section of the Architectural specification (Section 0182, 1.7 Submissions), which note the following requirements as issued to the Contractor as part of tender documentation: "Submit a completed certification list and schedule for installed fire-stopped penetrations and control joints. - List form: To AS 4072.1 Figure B1. - Schedule form: To AS 4072.1 Figure B2" The above-mentioned list and schedule forms of AS4072.1 are attached for reference, and clearly require the Contractor to maintain an itemised penetration schedule in addition to referencing systems used. The Contractor is directed to commence with resolving the compliance issue immediately, and to manage the PCA to procure and obtain all approvals and the Occupation Certificate in accordance with its Contractual obligations.
On the same day RCP issued a further Principal Representative's Direction (numbered 57). The direction relevantly stated: Further to the ongoing advice of the Principal Certifying Authority (PCA), the Contractor is directed to satisfy the remaining outstanding conditions as noted in the latest Occupation Certificate Proforma Package issued by McKenzie Group dated 25th March 2019 and in accordance with the following clauses of the Principal's Project Requirement's (PPR):
PRD 57 then quoted from PPR cll 4.17A and 4.33 (set out at [79] above) and noted that a number of items in the BCA check list remained outstanding, including item 12.
These formal directions were followed by email correspondence between Mr Gladman and Stephen Hughes of RCP about the penetration schedule requirement. This correspondence culminated in the following exchange on 27 March: Mr Hughes: It is the Contractor's responsibility to complete documentation of the works. As fire stopped penetrations have been installed throughout the job, I take it section 1.2 of the spec has been addressed. The direction is referring to the submission requirements post design i.e. the requirement to submit a completed certification list and schedule for installed fire-stopped penetrations and control joints in the form attached to the direction. Mr Gladman: Completion of documentation has nothing to do with it. The allowance under the contract as you are stating is to schedule pennos as were documented. Where is it documented? This is the allowance under the contract. As for McKenzie Group, we reiterate. The requirement has always been to provide 'a schedule of the systems'. This has been previously provided. And McKenzie Group have previously inspected the project throughout its life, inclusive of reviewing penetrations. The requirement only risen recently to have a 'full penetration schedule nominating systems and locations' is quite clearly therefore an addition to the contract, not to mention a critical delay to the project from the PCA.
There was no further reply from RCP before 29 March when the default notice was issued.
In his affidavit evidence, Mr Pearce explained why the compliance certificates, on their own, did not contain all the relevant information, nor bring it together in a convenient form. He stated that the preparation of a penetration schedule of the sort requested by McKenzie in this case is common practice. On the other hand, Mr Pratt stated that in 25 years in the construction industry he had never been required to complete such a schedule.
Mr Pratt also said in his affidavit that at the time no one from McKenzie ever informed him that the reports and certificates which had been provided by DK "were in any way inadequate or that more specific testing reports or information was required". But under cross-examination he conceded that: (1) McKenzie had made it clear that the certificates already provided were inadequate, and a further schedule bringing the information together was required; (2) McKenzie had made it clear from 14 March that this requirement was non-negotiable; (3) Nevertheless, DK was refusing to prepare such a schedule.
I was not impressed by Mr Pratt's evidence on this issue. What he said in his affidavit was plainly incorrect and his evidence under cross-examination was marked by repeated prevarication and stone-walling. I think it is clear that Mr Pratt understood what McKenzie wanted but decided that DK would not comply.
Mr Pearce was cross-examined about the issue of the interim occupation certificate in May following the take-out notice. He acknowledged that he considered that the building was safe for occupation and he would not have issued the certificate otherwise. I deal with the significance of this evidence below.

[18]

Balustrades

The relevant requirement of the BCA is in clause D2.16. That provides: D2.16 Barriers to prevent falls (a) A continuous barrier must be provided along the side of- … (iii) a floor, corridor, hallway, balcony, deck, verandah, access bridge or the like; and … If the trafficable surface is 1 m or more above the surface beneath (c) A barrier required by (a) must be constructed in accordance with Table D2.16a.
Table D2.16(a) relevantly provides that the minimum barrier height is one metre. Heights are measured "vertically from the surface beneath".
The table also provided under the heading "Barrier Climbability" that: Any horizontal or near horizontal elements between 150mm and 760mm above the floor must not facilitate climbing.
The design for the level 7 balustrades consisted of a railing barrier on top of the outer lip of the balcony. On the balcony side, below the barrier, was a horizontal concrete hob. The top of the hob was 280 millimetres above the surface of the balcony.
In December 2017, McKenzie issued construction certificate 3, which required the top of the balustrade to be 1,130mm above the surface of the balcony. This meant that the top of the balustrade was 850 millimetres above the top of the hob.
In a way not explained in the evidence, the height of the balustrade was re-raised as an issue. In July 2018 Megan Noble of Kann Finch, the architects, wrote to Mr Celarc enclosing a section drawing of the level 7 balustrades including the hob. Ms Noble stated that Kann Finch did not consider the hob to be a "climbable object" for the purposes of BCA D2.16. Mr Celarc replied later that day. He said: I have reviewed the attached detail, as the horizontal section of the hob falls with the 150mm - 760mm zone where no horizontal elements are permitted, this would be considered able to facilitate climbing and not meet the requirements of D2.16.
Mr Celarc took the position that the balustrade height had to be raised to 1,280 millimetres so as to maintain a height of 1,000 millimetres from the top of the hob. There is no evidence that there was any disagreement from Kann Finch, but no alteration was made to the height of the balustrade when it was constructed by DK.
An annotated picture of one of the balustrades is reproduced below.
This picture shows the balustrade as it was in May 2019 when the change required by McKenzie had been carried out. As originally constructed by DK, the railing was 150 millimetres lower. The concrete hob can be seen below the railings.
The balustrade height issue was noted by Mr Celarc in inspection reports in October 2018 and again in mid-February 2019. The inspection reports included a checklist of items which McKenzie required to have rectified, and which were crossed off as they were dealt with. One of the items consisted of the level 7 balcony balustrades.
On 26 February, Mr Pearce inspected the works. Mr Pratt was there. According to Mr Pearce (and his evidence was not disputed) he and Mr Pratt had a conversation to the following effect: Pearce: Because of the nature of the vertical sections of the balustrade, the hob behind those sections creates a climbable feature within a zone identified in clause D2.16 of the BCA making the balustrade non-compliant. Pratt: I don't agree with that.
There was also correspondence between McKenzie and DK about the issue. An email exchange had begun on 21 February and continued after the inspection on 26 February. On 1 March Mr Celarc wrote to Mr Pratt repeating that because of the hob the balustrade did not comply with BCA clause D2.16. The email stated that the issue had to be rectified on site prior to an occupation certificate for that portion of the site being issued. It went on to ask for Mr Pratt to confirm when the item had been rectified to allow for further inspection. DK apparently took no action.
The list of inspection items was specified as item 37 in the Administrative and BCA Compliance Verification checklist contained in the OC Package. In the OC Package issued on 12 March 2019 (see [87] above) item 37 stated: Items identified in McKenzie Group inspection reports are to be satisfied.
This was repeated in the OC Package issued on 18 March. Mr Pratt's email of 20 March (see [97] above) stated that item 37 had been "completed" and referred to an email of 8 March 2019. That email is not in evidence (or if it is I was not referred to it). Mr Pratt's email to Mr Wilkins and Mr Hughes later on 20 March (see [97] above) stated: Refer to Balustrade with certificates and explanation already provided. COMPLETE
The "certificates and explanation already provided" appear to have been a reference to the correspondence which culminated in Mr Celarc's email to Mr Pratt of 1 March (see [120] above). Mr Wilkins' response on 21 March was: Incomplete as per previous correspondence and inspection reports.
In the OC Package for 25 March 2019 checklist item 37 stated: Inspection items closed out. Only remaining item is the rectification of the non-compliant balustrades.
PRD 57, issued on 26 March and dealing with the obtaining of the occupation certificate (quoted at [101] above), noted that checklist item 37 was outstanding. No action appears to have been taken in response by DK before the default notice issued on 29 March.

[19]

Contractual provisions

Clause 9 dealt with the Contractor's obligations. It relevantly provided: 9.1 Carrying out the work under the Contract (1) The Contractor will carry out and complete or cause to be carried out and completed all of the work required so as to design, construct and complete the Works in a proper and workmanlike manner and bring the Works to Practical Completion on or before the Date for Practical Completion.
Practical Completion was defined so as to include the provision of various documents to the Principal's Representative. One of these was the occupation certificate (item 17, number 4).
DK's obligation was to procure the issue of the occupation certificate from McKenzie, not merely to take reasonable steps to obtain it. The obligation was an absolute one. This was accepted by counsel for DK.
Clause 9.2 contained eight warranties given by the Contractor to the Principal. Warranty (a) was: At all times the Contractor is and will be suitably qualified and experienced, and will exercise due skill, care and diligence in the execution and completion of the work under the contract in a manner that is diligent, proper and workmanlike;
The Contract expressly required (cl 9.1(7)(c)) the Contractor to construct the works so as to comply with the requirements of the PPR. It also imposed additional specific obligations on the Contractor concerning compliance with "Legislative Requirements". The relevant definition was: (36) Legislative Requirements includes: (a) Acts, ordinances, regulations, by-laws, orders, awards and proclamations of the Commonwealth and the State or Territory in which the work under the Contract or any part thereof is being carried out. (b) certificates, licences, consents, permits, approvals and requirements of organisations: (i) having jurisdiction in connection with the carrying out of the work under the Contract and the Works; and (ii) which in any way govern, regulate, control or effect any aspect of the work under the Contract; …
The Contractor was obliged: (1) "to execute and complete the work under the Contract … so that the Works when completed and the work under the Contract, is [sic] … comply with … the requirements of the … Legislative Requirements" (cl 9.1(2)(d)); (2) in designing and contracting the works to cause all relevant obligations, duties or stipulations contained in all relevant Legislative Requirements to be complied with and satisfied (cl 9.1(4)); and (3) to "satisfy all Legislative Requirements" (cl 11.1(1)).

[21]

Reasonableness or error by PCA

The role of McKenzie as PCA under the Contract may be compared with that of a third party who is appointed under a contract to value an asset. In Legal & General Life of Australia Ltd v A Hudson Pty Ltd (1985) 1 NSWLR 314 at 335D-336A McHugh JA expounded the law which applies where such a valuer's decision is said to be erroneous. His Honour stated that the essential question in such a case is whether the valuation, whether erroneous or not, complies with the terms of the contract. He said (at 335 [D]-[E]): … it is easy to imply a term that a valuation must be made honestly and impartially. It will be difficult, and usually impossible, however, to imply a term that a valuation can be set aside on the ground of the valuer's mistake or because the valuation is unreasonable. The terms of the contract usually provide, as the lease in the present case does, that the decision of the valuer is "final and binding on the parties". By referring the decision to a valuer, the parties agree to accept his honest and impartial decision as to the appropriate amount of the valuation.
It follows that ordinarily an allegation of error will not be sufficient to deprive the valuation of contractual effect. If the valuation, on the face of it, answers the description in the contract then: … 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.
McHugh JA's statement of principle has subsequently been treated as authoritative: Strike Australia Pty Ltd v Data Base Corporate Pty Ltd [2019] NSWCA 205 at [106]-[107]. It has also been extended to cases involving the exercise of judgment or discretion other than valuation: WMC Resources Ltd v Leighton Contractors Pty Ltd (1999) 20 WAR 489 at 500 [42], [44]; Dura (Australia) Constructions Pty Ltd v Hue Boutique Living Pty Ltd (Formerly SC Land Richmond Pty Ltd) (No 3) (2013) 41 VR 636 at 644 [17]. In Lainson Holdings Pty Ltd v Duffy Kennedy Pty Ltd [2019] NSWSC 576 at [39], Hammerschlag J recently applied the principle to an expert determination under a building contract. It is also not limited to cases where the contract expressly provides for the decision to be "final and binding": WMC at 500 [41].
In Legal & General, the valuer was a third party who had no connection to either of the parties to the contract. In my view, McKenzie's position is analogous. It was employed by Galileo in the sense that Galileo retained and paid it to act as PCA. But it was an independent professional firm exercising a statutory function. In deciding what its requirements were for the issue of an occupation certificate, McKenzie was in no way subject to any direction from Galileo.
In the present case, commercial considerations support the application of the Legal & General principle with particular force. The contract could become unworkable if the Contractor, faced with a decision from the PCA, could continue to argue the toss on the grounds of alleged error or unreasonableness. That would make nonsense of the absolute obligation on the Contractor to obtain the occupation certificate.
This approach does not leave the Contractor completely at the mercy of an unreasonable or erroneous approach being taken by the PCA. As will be seen, in its response to the default notice DK in effect sought to take the issue up with McKenzie indirectly. DK proposed that Galileo, relying on its contractual relationship with McKenzie, write to McKenzie putting forward the points raised by DK and asking for McKenzie to provide information and explanation in response. DK contended that Galileo was obliged to do this under the contractual obligation of co-operation which it owed to DK.
It is true that the Principal owed the Contractor an obligation to co-operate with the Contractor in order to allow the Contractor to undertake the works: see Secured Income Real Estate (Australia) Ltd v St Martins Investments Pty Ltd (1979) 144 CLR 596 at 607 per Mason J. It is not impossible that in some circumstances that duty of co-operation could require the Principal to exercise contractual rights against a third party. Whether Galileo had any relevant contractual rights against McKenzie, and if so, whether it was required to exercise them in the way DK suggested, is another question. In particular, I find it difficult to see that DK would have been entitled to require Galileo to interrogate McKenzie about the grounds for its decision. But it is not necessary to go into this further for present purposes.
McKenzie's position on the penetration schedule had been made completely clear by mid-March. Its position on the balustrade issue was clear well before that. McKenzie had made up its mind. The time for DK to ask Galileo to take the issue up with McKenzie had long passed by 29 March. In fact DK did not even mention the idea before it surfaced in DK's response to the default notice on 12 April.
In Legal & General, McHugh JA suggested at 335F that the third party valuer could, if the valuation was undertaken negligently or otherwise wrongfully, be sued directly by the party affected. The measure of damages would be the increased burden which that party had to bear as a result of the third party's negligence. But it is not necessary to consider whether such a claim would be available to DK against McKenzie in this case. Even if such a claim were available, Galileo would have no liability for any wrongful conduct on McKenzie's part.
It follows that in my view DK's allegation of unreasonableness or error against McKenzie is no answer to the claim against it of breach of its obligations to obtain the occupation certificate. But in case I am wrong in that view I will now consider whether DK's allegation is made out on the facts.
As to the penetration schedule, in my opinion it is clear that the requirements of AS 4072.1 which are picked up by the Contract impose two separate documentation obligations. One is to obtain a certificate from the installer to the effect that the installation has been properly done. The other is to produce a summary. This distinction is reflected in AS 4072.1 itself, in the distinction between the schedule of penetrations (cl B3 and Figure B1) and the statement of compliance (cl B4 and Figure B2). That distinction was picked up by the PPR which expressly required a summary schedule as well as the compliance statements.
The requirement for a penetration schedule is perfectly understandable. Such a schedule does not, of course, itself contain the confirmation that the installations have been done correctly; such confirmation is provided by separate certificates. But the schedule does bring together information about penetrations which plainly could be useful in the future management of the building.
In my opinion, therefore, a penetration schedule is directly required by the provisions of the contract. In any event it was not unreasonable for McKenzie to require the provision of such a schedule. There was clearly a rational and arguable basis for doing so.
Counsel for DK pointed out that the absence of a penetration schedule had not prevented the issue of the interim occupation certificate. It may be accepted, as Mr Pearce conceded in cross-examination, that he considered the building was safe to occupy without a penetration schedule. But this goes nowhere. The purpose of the penetration schedule is for record-keeping not safety as such. It was clearly reasonable to require the schedule to be provided after occupation began, so long as it was provided eventually.
Counsel for DK pointed out that the requirements in Figure B1 were illustrative. Counsel submitted that it was excessive to require DK to provide extensive details, including photographs, of scores of installations which had already been done.
This submission attributed a rigidity of approach to McKenzie which it did not in fact exhibit. While it is true that completion of the full spreadsheet provided by McKenzie on 12 March would have required over 50,000 entries, McKenzie subsequently indicated that the spreadsheet was only a guide and a lesser amount of information could be provided. McKenzie's "more simplified template" of 14 March did not insist upon the provision of hyperlinked photographs for every installation. In fact, the form of schedule specified in the take-out notice, and which McKenzie agreed to accept, was less extensive still.
DK could have negotiated with McKenzie following 12 March with a view to limiting any excessive and unnecessary provision of information. DK chose not to do so, and instead refused as a matter of principle to provide a penetration schedule. In my view this was a clear failure by DK to execute the works in accordance with its obligations under the contract.
As to the balustrades, McKenzie's position was that the top of the hob was the "surface beneath" for the purposes of the application of BCA cl D2.16. As the top of the hob was at 280 millimetres, the top of the balustrade needed to be raised to 1,280 millimetres to maintain the one thousand millimetre distance. In arguing that this was wrong, counsel for DK focused on the definition of the climbing exclusion zone in Table D2.16(a). Counsel observed that the climbing exclusion zone only starts at 150 millimetres above floor level. Thus the top of the barrier (at 1,000 millimetres above the floor) only needs to be 850 millimetres above the lowest point of the climbing exclusion zone. This meant, according to the argument, that all that was necessary was to have the top of the balustrade 850 millimetres above the top of the hob. As the top of the hob was at 280 millimetres, the specification of the top of the balustrade at 1130 millimetres in December 2017 had been the correct approach. Counsel submitted that, on McKenzie's approach, if there was a climbable object the top of which was at 150 millimetres (in accordance with the climbing exclusion zone requirement) the top of the barrier would need to be 1,150 millimetres rather than the 1,000 millimetres specified. That could not be correct.
In my view this argument has some force. But in the end I do not think that the position taken by McKenzie was manifestly erroneous or unreasonable. The requirements of BCA cl D2.16 in the circumstances were somewhat ambiguous. Even if McKenzie was obliged to act reasonably, in my view it did not fail to do so.
Counsel for DK submitted that to increase the height of the balustrades was a variation, and that DK was not entitled to undertake this work without a formal variation being issued by the Principal's Representative. But even if this is correct, the fact is that DK was refusing to undertake the work. Had DK genuinely been concerned about the need to have a variation, it could readily have approached RCP for this purpose. That would be an incident of its obligation to proceed with the works with reasonable diligence. DK's position was clear. It did not want to raise the height of the balustrades and was taking the position that it did not have to do so. In my view this was a breach of contract.

[22]

Timing of obligation to attain Practical Completion

The contract required the occupation certificate to be obtained by the date of practical completion; it was one of the conditions for the achievement of practical completion. Counsel for DK argued however that DK had a claim for extensions of time which meant that the Court had to approach the question of breach on the footing that it was unclear whether practical completion had yet been reached. Counsel submitted that the extension claimed would have put the date for practical completion back to July.
As we will see, DK referred in its show-cause response of 12 April to the reconsideration on 11 April of claims for extension of time which had already been considered by RCP, and to further claims based on notices of delay. It was not, however, very clear on the evidence what the position was on 29 March. There was no evidence (or at least none I was taken to) that those claims had yet been made at that date.
Counsel for DK submitted that it was established by authority that if liquidated damages were imposed for failing to reach practical completion by the contractual date but subsequently the time was extended, those damages had to be repaid. Counsel submitted that the same principle should apply in the present case. But on both sides counsel cited no authority on the question. I was invited to deal with it as a matter of principle.
If DK's argument were correct, a contractor might, by doing no more than foreshadowing a claim for extension, put the date of practical completion in limbo and escape responsibility for failure to comply with time limits in the meantime. This would be commercially intolerable as it would mean that the parties would not know where they stood. In my opinion, DK's argument is unsound.
By 29 March, on the timetable under the contract the works were well beyond the date of completion. It is not necessary to consider what would have happened if DK had actually made an application for an extension of time which should have been dealt with by then (the Contract required such applications to be determined within 20 business days: cl 17.3(1)). This is not the case. In my view it was too late for DK to argue the toss. DK's obligation at that point was to comply with McKenzie's requirements.

[25]

Default notice

The default notice took the form of a letter to DK on the letterhead of Galileo. At the foot the letter had two signatures; on the left a signature for RCP as Principal's Representative and on the right a signature for Galileo.
The notice identified the relevant breaches of contract as follows: 1. wrongfully and without reasonable cause suspended the carrying out of the Works before Practical Completion; 2. failed to proceed with the Works with due diligence or in a competent manner, in breach of its warranties under clauses 9.1(1), 9.1(2)(a), 9.1(4) and 11.1; …
The notice then went on to provide particulars of these alleged breaches. Concerning suspension, the particulars acknowledged Galileo's delay in making the progress payment but argued that there was no right of suspension because payment had been received on 25 March when the notice of intention to suspend was given.
Concerning the failure to proceed, the notice observed that the date for practical completion had been 18 February and that there were various items to be completed in order to obtain the occupation certificate and achieve practical completion. These were identified in formal directions number 56, 57 and 58. DK was therefore said to be in breach of the contractual provisions identified.
The notice concluded: The Contractor is required to show reasonable cause in writing why the Principal should not exercise a right referred to in clause 24.1(8) of the Contract, and deliver such notice to the Principal by hand or by Registered Post by 5.00 PM on 12 April 2019 to: … If the Contractor fails: 1. to show cause to the Principal by the date and time stated in this Notice; or 2. to show reasonable cause why the Principal should not terminate the Contract or take the remaining work out of the hands of the Contractor, the Principal reserves its rights under clause 24.2(1) of the Contract to immediately suspend payment, terminate the Contract or take work out of the hands of the Contractor, without limitation and without prejudice the Principal's other rights under the Contract or at law.

[26]

Issue of default notice

On 27 March, which was two days after the s 16(2)(b) notice had been given and one day after RCP had issued its directions, Ms Jumikis wrote to Mr Hughes: I thought I would alert you to the fact that we are currently working with our lawyers to draft a Show Cause Notice to send to Duffy Kennedy. This Notice needs to be sent by RCP as the Principals Representative. As soon as we finalise the draft I will forward to you to send to Brisbane for review. Could you please let Russell know that it is coming and advise us if RCP have any issues with this course of action. We believe this is the best way to ensure that Duffy Kennedy know we are serious about remedying their current stop work situation.
Mr Hughes alerted Mr Martoo and Ms Smith and in response to her request from Mr Martoo, provided him with a copy of the contract, identifying the relevant clauses as 24.1(8) and (9).
At 4.00 pm on 28 March Ms Jumikis emailed Mr Hughes: Please see attached the draft Show Cause notice. Can RCP review this as a matter of urgency and advise us if he have any issues. We would like to get this out tonight if possible.
The draft notice contained the allegation of failure to proceed with due diligence and in a competent manner in substantially the same form as the letter was ultimately issued. It did not say anything about the suspension of works.
At 4.55 pm Ms Jumikis received DK's notice of suspension. She forwarded it to Mr Hughes at 5.36 pm, saying: I have spoken to MO about this latest notice. It is their view that DK do not have the right to give such notice and it puts them in an even worse position. The right to serve such a notice needs to be refuted in the Show Cause Notice as it bolsters our position. Accordingly, I would ask RCP to review the draft notice they have tonight with the knowledge that a further paragraph will be provided in the morning and then the Notice can be sent. We will then reach out to DK to meet on Monday.
At 6.07 pm Mr Dibben sent to Mr Martoo (with a copy to Ms Smith) his comments. Mr Martoo's email also contained a link to a folder containing the contractual documents and notices. Mr Dibben attached a copy of the letter in its original form (that is, not including the suspension). The comments quoted from various provisions of the contract and noted that relevant factual assertions were correct.
This was provided in response to a request from Mr Martoo: Hi Stephen, Thanks for the note below. As discussed it is essential that RCP now collates electronic copies of all documents referenced in the draft letter such that we can verify the accuracy of the statements being made including dates, amounts, contract clauses etc. If these documents can be copied into a new folder specific to this correspondence for our reference. Mark, Can you please review and check each of these reference documents against the draft letter and verify back to me that the information stated in the draft letter is in fact accurate. The above process is not looking necessarily to verify the legal interpretation of the contract (although happy to receive any observations if you feel there may be errors) however, more particularly to verify the accuracy of reference data as quoted in the letter. I look forward to your further advice on this matter such that we can consider further the signing of the letter.
The following morning Ms Jumikis sent a series of emails to Mr Hughes and Mr Dibben attaching copies of various supporting documents. An updated version of the show-cause notice was circulated at 10.45 am. This referred to the suspension of works. At 11.12 am Ms Jumikis reported to her colleagues at Galileo: Also, the letter will go out from Galileo as RCP would need to get external legal advice in order to put it on their letterhead. They will co sign it however.
At 11.16 am Mr Dibben reported to Ms Jumikis that RCP was happy to counter-sign the document on Galileo's letterhead. At 12.06 pm, Ms Jumikis sent an execution copy of the letter to RCP. At 12.26 pm Mr Martoo responded: Please find attached the requested letter which has been signed by RCP where indicated. As noted, RCP has signed the letters as Principal's Representative. We note that the correspondence has been prepared by Galileo Miranda Nominee Pty Ltd on the basis of their own legal advice.

[27]

Response to default notice

In its response of 12 April to the default notice, DK responded to the first alleged breach (concerning suspension) by arguing that the unpaid interest form part of the scheduled amount under the Act. DK relied on s 27 of the Act, arguing that it was not in breach because it was exercising a statutory power under that section.
Responding to the second alleged breach (concerning the bringing of the works to completion by the date of practical completion) DK began by identifying three points: 17. The Alleged Second Breach is unreasonable and fails to take into consideration: (a) The dispute regarding a number of claimed EOTs that the Contractor disputes as having been assessed wrongfully and not in accordance with the Contract - the outcome once those claimed EOTs are properly assessed in accordance with the Contract are that the date for Practical Completion is adjusted to a date in June 2019. (b) In addition to the already submitted claims for EOTs, the Principal is aware of other events outside of the Contractor's control and influence which will entitle the Contractor to claim EOTs. Those being: (i) the domain works; and (ii) the unexplained change in certain opinions held by Principal Certifying Authority (PCA). (c) In any event, the Principal has overlooked that it has not itself done all that is required of it under the Contract and in failing to do so - the Principal has contributed to the delays in reaching Practical Completion. By force of the prevention principle, the Principal cannot obtain a benefit from its own breach.
The response went on to deal in more detail with the first and second points concerning extensions of time. DK asserted that nine applications for extension of time had been "wrongfully assessed". DK noted that on 11 April RCP had purportedly re-assessed the claims, but did not accept that the re-assessments were "accurate or correct".
The response also stated that there were three additional notices of delay which would be the subject of extension of time claims. One of these was a notice concerning "OC issue delay by PCA & Principal". The dates of these notices do not appear from the response and the notices themselves were not in evidence (or if they were, I was not referred to them).
The response then dealt with the third point. It stated: 30. The PCA and the Principal have convened a number of meetings between them in respect of the issue of the Occupation Certificate. Those meetings have been in the nature of the Principal managing the PCA for the purpose of obtaining an Occupation Certificate. 31. The Contractor did not request the PCA or the Principal convene those meetings. 32. There has been no notice given under the Contract to the Contractor which would entitle the Principal to lawfully take those works out of the hands of the Contractor. 33. It follows that the Principal has wrongfully taken works out of the hands of the Contractor by managing the PCA and attending on meetings with the PCA in the absence of the Contractor. 34. The Principal notes that the Contractor's ability to "manage the PCA", has been impeded by the Principal's conduct. 35. The Contractor reserves its rights in relation to the Principal's conduct in dealing with the PCA.
The response next relied on the proposition that a party in default under a contract is not entitled to take advantage of its own wrong, to which the response referred as the "prevention principle". The response referred to relevant legal authority and continued: 40. The Contractor is required to manage the PCA for the purposes of obtaining an Occupation Certificate. The Principal is required to and has engaged the PCA. 41. The Contractor has not been appointed (formally or otherwise) as the agent for the Principal in any dealings with the PCA. The Contractor has not been provided with a copy of the agreement between the Principal and the PCA. 42. It is an implied term in the Contract that the Principal must reasonably co-operate and not otherwise interfere with the Contractor's management of the PCA in obtaining the Occupation Certificate. The Principal is in breach of that term of the Contract. 43. The Contractor: (a) hereby requests the Principal provide a copy of the agreement between it and the PCA; (b) intends to prepare a letter to be sent by the Principal to the PCA which will (amongst other things, which will be expanded upon after having received a copy of the aforementioned agreement): (i) make time of the essence in the PCA's performance of both its contractual and statutory obligations; (ii) request the PCA explain why it considers it appropriate or necessary in order for it to fulfil its statutory function to "go behind" any of the certificates given particularly having regard to s. 6.30 of the Environmental Planning and Assessment Act 1979 (NSW); (iii) request the PCA explain why it has changed its opinion in respect of the balustrades; (iv) request that the PCA revise and update the "Occupation Certificate Proforma Package" (currently dated 25 March 2019) to reflect any updated view or position (c) hereby request that the Principal and Principal's Representative provide to the Contractor notes of all meetings between the Principal and the PCA at which the Contractor was not present.
Under the heading "Reaching Practical Completion" the response continued: 44. Without limiting anything else set out in this response, the Contractor has also given reasonable consideration to the matters set out in the "Occupation Certificate Pro-forma" ... and generally the work that is required to be done to achieve Practical Completion under the Contract. 45. The Contractor has analysed the work that is required to be done in order to achieve Practical Completion under the Contract and has set out those works in Schedule 2 to this response. 46. The Contractor has shown cause that is not in breach as alleged in the Alleged Second Breach or in the alternative, that to the extent that any part of the Alleged Second Breach is correct (which is denied), those alleged parts of the Alleged Second Breach have either been remedied or the Contractor has reasonably shown cause how it will remedy the parts of the Alleged Second Breach.
Schedule 2 set out what was described as a "Practical Completion Checklist". Referring to the final certificate of occupation, the checklist stated: Stephen Hughes from RCP has had access to the O.C. Dropbox for some months, for whom the PCA also has access. All Authority certs are located therein, as summarised via the PCA.
In essence, DK was here taking the position that the certificates already provided sufficiently complied with McKenzie's requirements. So far as the penetration schedule was concerned, this was simply a repetition of the position DK had already put, unsuccessfully, to McKenzie.

[29]

Issue of take-out notice

It will be recalled that the default notice required a response by 12 April. At 4.05 pm on 11 April, Mr Marshall wrote to Mr Dibben and Mr Hughes: Further to our discussion this afternoon, unfortunately we no longer have any confidence that a sensible resolution can be reached with DK. We therefore need to consider the next available course of action which will be to enforce step in rights pursuant to the show cause notice issued. These rights will be triggered following a period of 'reasonable consideration' of their anticipated response which we expect to receive by COB tomorrow (deadline under the contract). It will depend somewhat on the substance of the DK response however based on the expected reply, Mills Oakley believe the weekend plus 2 days allows sufficient time for 'reasonable consideration' so step in rights will likely trigger around Tuesday next week. This will not be a termination of the contract - rather we will be taking control of works to achieve PC & OC and the contractor remains on the hook for LD's and other obligations. We will have the right to access contractor securities to undertake this work.
Mr Marshall continued: In addition to the PC Checklist that you have, Mills Oakley have listed what they believe to be outstanding items for PC in their advice to us which I have attached for your information. It largely aligns with the checklist but I would like it cross referenced to the checklist for completeness please. In a practical sense these are our thoughts in regard to immediate actions required in order to hit the ground running come Tuesday/Wednesday next week. ● RCP to advise regarding an appropriate builder to complete outstanding works and ascertain availability to take over if we need to step in on Tuesday. … … ● RCP to review the penetration schedule and put together a list of consultants required to complete, these consultants to be contacted asap re availability over the next few weeks; ● As-Builts & commissioning reports to be obtained via lawyers - RCP to confirm that they do not have any of these documents already; … ● 4 balconies- RCP to contact certifier asap and confirm their endorsement of the proposed 'lifting' of the balustrade to achieve compliance (ie need certainty that proposed design will be signed off); The as builts, commissioning reports and penetration schedule are absolute essentials for settlements. …
The show cause response was delivered to Galileo's offices at about 3.30 pm on 12 April. Ms Duggan then forwarded it to Mr Marshall, among others. Mr Marshall sent it on to Mr Dibben and Mr Hughes at RCP at 3.42 pm.
A subpoena was served on RCP requiring it to produce its records concerning the show-cause response. It was an agreed fact that apart from an email sent on 15 April from Mr Hughes to representatives of RCP and Galileo attaching a PC checklist status issued as part of PRD58, there was "no written communication or record of any review, consideration or determination in respect of the show cause response".
In cross-examination, Mr Dibben was asked about the requirement for a penetration schedule. In response, he volunteered that in the week or so prior to the issue of the take-out notice, RCP formed the view that DK would not comply with McKenzie's requirements, either for the penetration schedule or the balustrades. He added that a representative of DK had stated in a "dispute meeting" that the balustrades complied with the design and that DK had already provided all the information for the penetration schedule and nothing more was required. The precise date of the "dispute meeting" was not clear from Mr Dibben's evidence, but there were a number of meetings between representatives of the parties prior to the issue of the take-out notice where the disputes between the parties, and potential resolution of those disputes, were canvassed.
Counsel for DK put to Mr Dibben the "dispute meeting" was held on a without prejudice basis. Mr Dibben did not accept this. Counsel did not ask for the evidence to be struck out.
Subsequently, both Mr Pratt and Mr Hughes gave evidence that they considered the meeting in question was conducted on a without prejudice basis.
The take-out notice was drafted by MO. A draft was sent to Mr Hughes and another of his colleagues at RCP (Mr Dibben was away on leave that week, although he said he remained in touch) at 10.18 am on Wednesday 24 April. The list of requirements for DK to undertake was less extensive than the final notice but the draft notice was otherwise in the same form.
At 1.22 pm on Friday 26 April Mr Hughes reported to Mr Dibben that letters were to be sent to the contractor shortly and that RCP had been asked to line up another company, CD Constructions, to assess taking over as the contractor. At 2.04 pm Ms Duggan sent what was described as the final draft of the take-out notice. She stated that the notice needed to be "co-signed" by RCP and that it would be going out on Galileo's letterhead.
About an hour later Mr Hughes forwarded the letter to Mr Martoo and Ms Smith, with a copy to Mr Dibben. At 4.41 pm Ms Smith responded: I've had a read through this - presume it is all ok as the Principal's lawyer has drafted it. My only comment would be that the timeframes for action by the contractor seem very short given what they have to do in 7 days… I've attached a copy of the contract for your reference. Hard copy of Steve's email and attachments on your chair. Perhaps also worth advising Galileo that you are on leave from next week and now that MD is a Director he is authorised to sign?
At 7.05 am on the morning of Sunday 28 April Mr Dibben emailed Mr Martoo: I have read through the notice and believe it is ok to issue. Can you please advise if it is ok to sign today so I can advise Galileo, I will be unable to sign the letter as I have a meeting with Woolworths tomorrow morning at their head office. If you need to discuss give me a call anytime today. Steve can you coordinate with Russell to sign the letter first thing Monday Morning.
At 11.36 am Mr Martoo responded: I have been through the documents provided on Friday by Stephen [Hughes] (and I am aware that Jenny [Smith] has also reviewed them.) Having reviewed the drafting provided by Galileo's lawyers I have no issues with the signing of the Take Out Notice if this is the action Galileo wish to follow as the Principal. I will be in the Brisbane office Monday and Tuesday and able to sign the document when it has been provided on Galileo letterhead. Noting that I will be away on leave from Tuesday night this week for several weeks it may be worth advising Galileo that if the Principal's Representative signature is required in the future that you will be best placed to do this now that you are a director of RCP. Obviously you will need to confer with Jenny & Ian on any matters as they arise to confirm the RCP position from a contractual viewpoint.
Mr Martoo was clearly proceeding on the basis that he would be signing the notice. But an email from Mr Martoo to Ms Smith records that later in that afternoon Mr Dibben rang having been approached by Mr Marshall to have the letter signed by Mr Dibben on the Sunday afternoon so that it could be delivered first thing on Monday morning and therefore no further action was required.
In his evidence before me, Mr Dibben insisted that he signed the letter under his own authority as director. I do not think this is correct. It is clear from the emails which I have quoted that everyone concerned was proceeding on the basis that the decision to sign was made by Mr Martoo (with advice from Ms Smith and Mr Dibben) and that Mr Dibben signed on this basis.

[30]

Contractual provisions

Clause 24 of the contract deals with default by the Contractor. Clause 24.1 provides for the giving of a notice of default: 24.1 Default by Contractor Without limiting any other right or remedy of the Principal, if the Contractor is in breach of its obligations under the Contract including: (1) without reasonable cause, suspending otherwise than in the manner provided by clause 23 the carrying out of the Works before Practical Completion; (2) failing to proceed with the Works with due diligence or in a competent manner; (3) refusing to comply with a written direction from the Principal's Representative; (4) refusing or persistently neglecting to comply with any written notice from the Principal's Representative given at any time requiring the Contractor to remove defective work or improper materials or goods incorporated in the Works; (5) failing to provide any security required by the Contract; (6) failing to provide evidence that it has effected and maintained all insurances in accordance with the Contract; or (7) providing false documentary evidence of payment of its subcontractors, or is otherwise in breach of the Contract, the Principal's Representative may issue to the Contractor a written notice specifying the event of default, having regard to the nature of the default, requiring the Contractor to; (8) show cause why the Principal should not terminate the Contract or take the remaining work out of the hands of the Contractor; or (9) remedy the default.
The consequences of failure to comply with a clause 24.1 notice are dealt with in cl 24.2: 24.2 Rights of the Principal (1) If: (a) the Contractor falls to show cause or remedy the default to the satisfaction of the Principal's Representative within 10 Business Days after receipt of the notice under clause 24.1; or (b) the Contractor is subject to an Insolvency Event, the Principal may immediately suspend all further payments to the Contractor under the Contract and, without prejudice to any other right or remedy the Principal might have, by further written notice given to the Contractor: (c) terminate the Contract; or (d) take the remaining work out of the hands of the Contractor, in which case no further payment will become due to the Contractor under the Contract. (2) In the circumstances set out in 24.2(1)(c) or 24.2(1)(d) the Contractor must: (a) provide to the Principal's Representative copies of all the Design Documents (as at the date of termination) and other documents, information, materials and the like produced by the Contractor for the Works; (b) as soon as possible and in a safe manner remove from the Works all its Temporary Works and Construction Plant which the Principal's Representative has notified the Contractor in writing is not required to remain on the Site for completion of the Works by others; (c) leave the Site in a safe and secure condition; (d) delivery to the Site any plant and materials intended for the Works which are not yet incorporated; and (e) if required by the Principal's Representative, assign or novate to the Principal the benefit of any agreement or warranty entered into by the Contractor with any subcontractor. (3) The Principal may: (a) engage others to complete the Works; and (b) take possession of and use the Contractor's Temporary Works and Construction Plant to complete the Works, and any amount properly incurred by the Principal in completing the Works which is in excess of the Contract Price will be a debt due and owing from the Contractor to the Principal. (4) The Principal may sell any of the Contractor's Temporary Works and Construction Plant and apply the proceeds of sale to any amount owed by the Contractor to the Principal under clause 24.2(3).
It is clear on the terms of cl 24.2(1) that the ultimate decision to terminate is one made by the Principal, not the Principal's Representative. This brings into play clause 30.11, which provided: Whenever the Principal is required to act reasonably, what is reasonable under the circumstances is to be judged having regard to the terms of the Contract. Except where it is expressly stated that the Principal must act reasonably, in exercising a right, power or function under the Contract, the Principal may decide whether and in what manner it does so in its own discretion and is under no obligation to consider the interests of any other person or party, including the Contractor.
Clause 30.11 has the effect of excluding any possibility of the Principal's decision under cl 24.2(1) being subject to some sort of implicit limitation based on reasonableness or an obligation to consider the contractor's interest. This was acknowledged by counsel for DK; he accepted that, if the default notice was validly issued and RCP was validly dissatisfied with the response, the take-out notice would have been valid.
Default clauses of the present type are common in building contracts and are also common in other commercial contexts. But, apart from the FPM Constructions decision referred to at [219] below, I was not taken by either party to any authority bearing on DK's submissions concerning the validity of the default notice and the take-out notice. Nor was I taken to any authority bearing on the role of the Principal's Representative in the procedure. I was invited to deal with DK's submissions as a matter of general principle.

[31]

Role of the Principal's Representative

Clause 7 of the contract deals with the obligations of the Principal. Clause 7.1, 7.2, and 7.3 deal with the Principal's Representative. Clause 7.1(1) provides: The Principal must ensure that at all times there is a Principal's Representative and that the Principal's Representative acts in accordance with the Contract.
This clause puts into express form an obligation which would probably be implied in any event: see Perini Corporation v Commonwealth [1969] 2 NSWR 530 at 541-545.
Clause 4.4 deals with notices. Subclause (1) provides: Any notice or other communication to be given by the Principal to the Contractor under the Contract must be in writing and be signed by the Principal's Representative and may be given or served by delivery to the address of the Contractor referred to in clause 4.4(3).
A fundamental purpose, if not the fundamental purpose, of having a Principal's Representative is to provide a single and authoritative channel of communication from the Principal to the Contractor. This is shown by the fact that cl 4.4(1) requires all communications on behalf of the Principal to be made through the Principal's Representative.
Under the contract, the Principal's Representative is required, as is conventional, to rule on claims for extension of time and to certify progress claims. It can be assumed that in the course of doing so the Principal's Representative will develop a familiarity with the course of execution of the works, and the technical issues involved, which the Principal itself may lack. The Contract is structured so as to ensure that when it receives communications on behalf of the Principal, the Contractor will receive those communications from someone who will be speaking the Contractor's language.
In the present case Galileo appointed RCP, an independent organisation with expertise in project management, as its Principal's Representative. That is commonplace in construction contracts of the present type. But it should be noted that the contract itself contains no requirement that the Principal's Representative be in some way independent of the Principal. To the contrary, cl 7.1(1) makes it clear that the Principal is responsible for the actions of the Principal's Representative. In theory, the Principal could appoint one of its own employees as the Principal's Representative under the contract. The position of the Principal's Representative should therefore be contrasted with the position of the PCA who, although paid by the Principal, exercises an independent function.

[32]

Validity of default notice

Counsel for DK advanced two arguments for why the default notice was not valid. The first was that it was not "issued" by the Principal's Representative. The second was that the Principal's Representative had not given adequate or proper consideration to whether the notice should be issued.
As to the first argument, it is true that RCP was obviously unwilling to have the notice go out on its own letterhead. The precise reason for this does not clearly appear in the evidence, but I do not think it matters. In ordinary parlance, to "issue" a document means to release, or authorise release, of it. By signing the notice, RCP took responsibility for its content. The fact that it was not on RCP's letterhead does not, in my opinion, affect this. RCP was prepared for the document to be sent to DK in the form in which it was sent as a statement made (albeit it jointly) by RCP. In my view RCP issued the document in the relevant sense. I reject this argument.
Turning to the second argument, counsel for DK pointed out that RCP did not formulate the default notice itself. All it did was to review the notice which had been prepared by MO, suggest some minor changes, and provide the necessary signature. Counsel characterised this as acting at the behest of Galileo.
Clause 24.1 does not impose any express limitation on the issue of the notice by reference to the judgment or satisfaction of the Principal's Representative. Still less did it impose any standard of care on the Principal's Representative. All the Principal's Representative had to do was to issue the notice. The question is whether, by implication, additional requirements were imposed.
In FPM Constructions v Council of the City of Blue Mountains [2005] NSWCA 340, the Court of Appeal had to consider a provision in a building contract enabling the principal to give a show-cause notice. Basten JA (with whom Beazley JA agreed) said (at [164]): … the first limb of the provision requires that the contractor commit a "substantial breach" of the contract. That might be seen to be an objective requirement, not satisfied by the view formed by the principal, despite the fact that the consequence which follows is that the principal is empowered to give a show cause notice. On another view, the right to give such a notice should not depend upon a conclusion as to the existence or otherwise of a substantial breach, the purpose of the notice being to give the contractor an entitlement to demonstrate that no substantial breach has taken place. Arguably, if the contractor demonstrates to the satisfaction of the principal that no such breach has taken place, the result should be that the power to terminate the contract is not engaged, rather than that the notice is invalid. Accordingly, the better construction may be that a principal is entitled to issue the notice if it is satisfied, in good faith, that there has been a substantial breach by the contractor and a notice issued in those circumstances will be valid.
But the parties in the present case agreed that the requirement in cl 24.1 that the Contractor be in breach should be read literally. They also agreed that if the Contractor is not actually in breach when the default notice is issued, no take-out or termination action taken by the Principal is valid. This means that the potentially "better construction" referred to by Basten JA is not available.
For this reason, the issue of a default notice under cl 24.1 does not itself depend on the exercise of any judgment by the Principal's Representative. Furthermore, the issue of such a notice does not itself have any effect on the Contractor's rights. It is at most a precondition to a debate about whether the Principal should be entitled to terminate the contract or take the work out of the Contractor's hands.
On the other hand, the right to terminate a contract for breach is an important and valuable right of any contracting party. Clause 24 gives the Principal a right of termination but the practical effect of the show cause procedure is to impose conditions on its exercise. A court should not be too ready to treat alleged deficiencies in the default notice as invalidating the procedure. To do so risks creating a one-sided contract where a Principal's ability to terminate for breach can be stymied after the event by perceived technical failures in the default notice.
It follows, in my view, that the contract leaves little if any room for enquiry about the process by which the Principal's Representative issues the notice. The important requirement is that the notice identifies the breach. This the notice did.
After the notice was issued, DK simply went on and responded, as a matter of substance, to the allegations made in it. DK never suggested that there was anything in the notice which it did not understand. Nor did DK take any point at the time about the fact that the notice was issued on the letterhead of Galileo and signed by Galileo as well as RCP. It might have been argued that, by responding in this way, DK waived any objection to the validity of the notice, but as this was not raised by Galileo it does not need to be considered further. The important point for present purposes is that the commercial purpose of cl 24.1 was achieved despite the alleged deficiencies in the default notice.
For these reasons, I do not think that any obligation should be implied into cl 24.1 which would require the Principal's Representative, in issuing the default notice, to act "in good faith" or "honestly" or "reasonably". But in case I am wrong in this view, I will consider whether RCP's conduct in issuing the notice would have breached any such obligation.
In my view, the fact that the default notice was drafted by Galileo's lawyers, MO, does not matter. The important point is that the relevant officers of RCP did consider the provisions of the contract and concluded that DK was in breach in the respects identified in the draft notice. It was not suggested to Mr Dibben or to Mr Hughes in cross-examination that they did not actually believe that DK was in breach. The view that DK's suspension of performance and its failure to comply with McKenzie's requirements constituted a breach of contract was reasonably open; indeed, on my findings it was correct. In my view there was no lack of honesty, good faith or reasonableness.
For these reasons, I reject DK's arguments about the default notice. The notice was valid.

[33]

Issue of take-out notice

It appears from email communications between MO and Galileo that RCP was asked to countersign the take-out notice in order to comply with cl 4.4(1) of the Contract. Clause 4.4(1) was a mechanical provision which simply required all communications from the Principal to the Contractor to go through the Principal's Representative. The clause did not itself require the Principal's Representative to bring any independent judgment to bear. But it is clear on the facts that RCP did consider whether it should give its imprimatur to the take-out notice, and decided to do so.
I did not understand this to be disputed by counsel for DK. Counsel's contention was that in reaching its conclusion RCP was required to act "honestly, reasonably and/or in good faith". Counsel submitted that RCP did not consider the question independently or objectively. RCP just acted, in counsel's submission, at Galileo's request.
These contentions give rise to two issues. The first is whether there is any such requirement that the Principal's Representative's opinion be framed honestly or in good faith or reasonably; the second is, if so, whether it was satisfied in this case.
On the first issue, counsel for Galileo submitted that, if the issue of the notice required the exercise of some judgment by RCP (as it plainly did), then it could not be challenged by DK in these proceedings. Counsel invoked the Legal & General principle.
In Dura (above at [136]) the Victorian Court of Appeal applied the Legal & General principle to a certification by a superintendent under a building contract. The Court endorsed the earlier decision in WMC (above at [136]) in which the Western Australian Full Court applied the principle to sustain a valuation made for the purposes of a mining engineering contract where, pursuant to the terms of the contract, the valuation was done by the principal itself. The Full Court specifically rejected any requirement that the decision be made by an independent third party before the principle would operate: see at 20 WAR at 501 [45].
Although counsel for Galileo did not refer to these authorities, at first sight they appear to support Galileo's submission. But on analysis a potential obstacle emerges.
In Service Station Association Ltd v Berg Bennett & Associates Pty Ltd (1993) 45 FCR 84 at 94 Gummow J (then sitting in the Federal Court) said: Where one party has an express power the exercise of which will significantly affect the interests of the other party (eg by cancellation of their supply contract) if the holder of the power is satisfied that a certain state of affairs exists, the words of the contract are fairly readily construed (and the more so when the parties have given such a power to a third party) as requiring a reasonable as well as honest state of satisfaction; …
In making this statement, his Honour relied on, among other authorities, the decision of the Court of Appeal in Renard Constructions (ME) Pty Ltd v Minister for Public Works (1992) 26 NSWLR 234. In that case the Court held that the exercise by the principle of a power to take the works out of a contractor's hands was governed by implied obligations of good faith and reasonableness. Subsequently, the Court has recognised a general duty of good faith and reasonableness in all commercial contracts: see, in a construction context, Bundanoon Sandstone Pty Ltd v Cenric Group Pty Ltd; TWT Property Group Pty Limited v Cenric Group Pty Limited [2019] NSWCA 87 at [154]-[156].
On the face of it, there seems to be some tension between this principle and the Legal & General principle. But on analysis it may be possible to reconcile them. The Legal & General principle is always subject to contractual provisions, express or implied, which specify the requirements for the decision in question. Usually, a determination undertaken as part of the execution of the contract will not attract any implied term beyond an obligation of honesty (and impartiality, if carried out by a third party). But in the case of the exercise of a power of termination, or something comparable such as a power to take works out of contractor's hands, the principle stated by Gummow J will come into play. However it is not necessary to pursue this idea any further now.
In the present case, for the Principal's Representative to be satisfied with the Contractor's show-cause response does not itself involve the exercise of a power to terminate the contract or take the work out of the Contractor's hands. That remains ultimately a separate step for the Principal. But it is intimately connected with the exercise of such a power. In such circumstances, I think it is particularly significant that, according to Gummow J, the implication of a requirement of reasonableness is stronger in the case of a third party than a contractual party. And if there is a requirement of reasonableness, then by cl 7.1(1), liability for breach attaches directly to the Principal.
Given the strong course of authority at appellate level in this State, I think it is doubtful if, at best, whether it is open to me to uphold Galileo's submission. In the circumstances, I propose to proceed on the assumption that cl 24.2(1) imposes an obligation on the Principal's Representative to act in good faith and reasonably in forming a state of dissatisfaction with the Contractor's show-cause response, and ask whether RCP breached that obligation.
Counsel for DK submitted that Mr Marshall's email of 11 April (and RCP) had decided, even before receiving DK's response to the default notice, to take the work out of DK's hands. Counsel relied in particular on the inverted commas around the phrase "reasonable consideration". Counsel submitted that this showed a lack of good faith.
Obligations of good faith and reasonableness required an open mind on DK's response to the show cause notice, but not a blank one. There was nothing wrong in Galileo making plans in advance against the possibility that the show cause response would prove unsatisfactory. Both Ms Jumikis and Mr Dibben denied in cross-examination that there had been a pre-judgment of the show-cause response. I see no reason to doubt their evidence. Nor am I satisfied that Mr Marshall used inverted commas for any other reason than to indicate that a formal contractual procedure had to be followed. I reject DK's submission on this point.
I turn then to the remaining questions about whether RCP acted in good faith and reasonably in endorsing the issue of the take-out notice. In answering these questions, it is important to focus on what opinion RCP was obliged to form.
The first point to note is that cl 24.1 permits the default notice to call on the Contractor either to remedy the default or to show cause. If the former option is chosen, then the Contractor may comply simply by remedying the default. No representations are necessary. Another feature is that, as we have seen, the parties adopted a construction of cl 24.1 which required that the Contractor actually be in default at the time the notice was issued. If in reality the Contractor is not in default, then the notice is of no effect, and no further action or representation is, in theory, required.
Nevertheless, I do not think that the show-cause procedure should be too compartmentalised. I see no reason why the Contractor should not show cause by successfully persuading the Principal's Representative that, despite the statement in the default notice, the Contractor is not actually in default. I also think that the Contractor might "show cause" by remedying the default even if not expressly called upon to do so. But it is important to bear in mind that the scope of showing cause is wider than this. It clearly extends to situations where the Contractor is actually in breach and has not remedied the breach. In such circumstances it must still be open to the Contractor to be able to "show cause" in an appropriate case. An example which comes immediately to mind is a case where the contractor is able to persuade the principal's representative that the breach in question is not a significant one, for instance, because it will not delay the completion of the project.
Galileo's default notice required only that DK show cause concerning the defaults identified. It did not expressly require that those defaults be rectified. This is somewhat curious because all of the relevant defaults which were alleged were, at least potentially, capable of being rectified. Certainly the suspension could have been lifted immediately. It might also have been possible to complete the penetration schedule and the works on the balconies required by McKenzie within the ten business day period.
No point, however, was taken about the form of the default notice. Had DK chosen to do so, it could have immediately lifted the suspension and begun work on the penetration schedules and balustrades. DK could then have showed cause at the end of the ten business day period on the basis that it had either rectified the defaults or was attempting to do so.
DK did not take this course. Instead it responded to the default notice presented a series of arguments to the effect that it was not in breach.
Counsel for DK pointed out that the show-cause response stated that there had been insufficient time to comply with the PRDs before 29 March. Counsel also pointed out that the response did not say that DK would not comply. But nor did the response say that DK would comply. The point about there being insufficient time to comply with the PRDs might have been correct as at 29 March, but would not necessarily have been correct as at 12 April. In my view a fair reading of the response was that DK was taking the position that it was not in breach and that was that.
So far as the alleged default involving the suspension of works was concerned, the question of breach was essentially a question of law. The decision makers at RCP were well aware that the take-out notice was based on advice from MO, which presumably included advice on whether the position taken by DK in its show-cause response was valid. There is no evidence that the RCP decision makers considered this issue by obtaining advice themselves, but I do not think it is necessary to do so. RCP had no reason to second guess MO's opinion in that regard and RCP, not having legal expertise, is unlikely to have been unable to contribute anything to the process had it sought some more detailed advice. In my view, there was no lack of reasonableness or good faith in RCP declining to be satisfied that DK had shown cause on this point.
Addressing the second question, namely whether there was a breach in failure to comply with McKenzie's requirements concerning the penetration schedule and the balustrades, gave rise to a preliminary point. Counsel for DK argued that for the purposes of answering this question, it was not open to RCP to take account of what had been said in the "dispute meeting" to which Mr Dibben referred in his evidence. This was because, so counsel submitted, the meeting was conducted on a without prejudice basis.
Counsel's argument attacked the use of allegedly without prejudice communications, not as evidence in curial proceedings, but as part of the procedure laid down by cl 24.2. Although reference was made to provisions of the Evidence Act 1995 (NSW), s 131, that provision applies only in curial proceedings: s 4. It does not apply to a non-curial procedure such as that under cl 24.2. Counsel's argument must therefore be that for RCP to rely upon something said in a without prejudice meeting in some way fell foul of the common law rules concerning privilege over without prejudice communications.
But in my view the fact that the meeting was conducted on a without prejudice basis is irrelevant when it comes to considering the validity of action taken in reliance, or partial reliance, on what was said at that meeting for contractual purposes. Legal professional privilege has been recognised as being more than a rule of evidence: it is a substantive legal right: Baker v Campbell (1983) 153 CLR 52. But although without prejudice privilege has been recognised for a long time in the common law but is now enshrined in the Evidence Act, it has not been recognised as a substantive legal right in the same sense. The rule that without prejudice communications are privileged is simply a rule of evidence. It applies only in curial proceedings to prevent the admission of evidence, and even in such proceedings, it only applies when objection is made. In my view it had no application to RCP when RCP was considering the question raised by cl 24.2.
If I had been of a contrary view, it would have been necessary to consider whether in fact without prejudice privilege applied. I am prepared to accept that the meeting was held on a without prejudice basis. But even so, that does not necessarily mean that everything said at it would be privileged.
At common law the privilege does not apply to an admission which is "casually made" in the course of a meeting but does not involve the communication of settlement proposals: see, J D Heydon, Cross on Evidence (11th ed, 2017, LexisNexis Butterworths) at [25375]. In view of my conclusion that without prejudice privilege is not relevant for present purposes, I do not need to consider this point further.
In any event, I do not think that Mr Pratt's statement at the meeting added anything that RCP did not already know. Even before the issue of the default notice, DK's position was that it was aware of McKenzie's requirements but disagreed with them and did not intend to comply with them. That position was reiterated in the response to the default notice. Neither there or at any stage up to that point had DK indicated that it would comply with the requirements. That remained the position in the response to the default notice despite the lapse of further time. In forming the view that DK was not prepared to comply with McKenzie's requirements, RCP was not acting in bad faith or unreasonably. That conclusion was inevitable.
It would have been better had RCP focused specifically on the contractual question which was whether it was satisfied that DK had shown cause. Once RCP was so satisfied, whether a take-out notice should be issued was purely a matter for Galileo. Dealing with the two together ran the risk of some confusion of thought.
Even so, in my opinion, the position was sufficiently clear. DK was refusing to take any action to rectify the issues raised in the default notice. It was in effect asserting that it had no obligation to do so. RCP was aware of DK's position and was aware that MO had advised, by implication, that Galileo was justified in issuing a take-out notice on the basis of continuing default. In my opinion, in the circumstances of this case, that was sufficient. It was not necessary for RCP to obtain its own advice on the question. RCP had no reasons to question MO's advice, and did not act in bad faith in doing so. The advice was not objectively unreasonable; indeed on my findings it was correct. DK's challenge to the take-out notice fails.

[35]

Recovery of security

Provision of security by the Contractor is dealt with in cl 18.2 of the contract: 18.2 Provision of Security by Contractor (1) Within 5 Business Days after the Contract Date the Contractor must provide Security in the amount specified in Item 28 as security for the performance of the Contractor's obligations under the Contract. The Principal may refuse to make any payment otherwise due under the Contract until the Contractor has fully complied with its obligations to provide this Security. (2) The Contractor must maintain the Security at the amount specified in Item 28 until the Security is required to be returned in accordance with the Contract.
Reduction and release of the security, and recourse to the security once provided, are dealt with in clauses 18.4 to 18.6: 18.4 Reduction of Security at Practical Completion Subject to any right of the Principal to then access the Security, within 15 Business Days after the later of: (1) the Contractor providing the Principal's Representative with 2 originals of the properly completed Deed of Release for Practical Completion in the form contained in Schedule C - Section 1 which is executed and enforceable against the Contractor; (2) the Contractor complying with all its obligations under clause 20.4; and (3) the issue of the Certificate of Practical Completion, the Principal will reduce the Security then held to the amount stated in Item 29. 18.5 Release of Security at Final Completion Subject to the exercise of any right of recourse that the Principal may have to the Security, within the later of: (1) the Contractor providing the Principal's Representative with 2 originals of the properly completed Deed of Release for Final Completion in the form contained in Schedule C - Section 2 which is executed and enforceable against the Contractor; (2) 15 Business Days after the issue of the Final Certificate under clause 22.2; and (3) the date on which all Defects identified during the Defects Correction Period have been rectified. the Principal will release the balance of the amount then held as Security. 18.6 Recourse (1) The Principal may convert Security (including Security provided under clause 19.9) into cash and apply those proceeds as it sees fit if the Principal has incurred or might in the future incur any liability, costs, expenses, losses or damages of any kind as a consequence of any act, default, breach or omission of the Contractor. (2) The Contractor is not entitled to and must not seek an injunction against or otherwise restrain the Principal from making a demand or payment under any undertakings provided as Security (or any Security provided under clause 19.9) or the use to which the proceeds of such a demand can be put.
The Contract does not expressly provide what is to happen with the security if the Principal takes the work out of the hands of the Contractor prior to practical completion. Counsel for DK submitted that it cannot have been contemplated that the security would continue to be available to the Principal in such a case. Counsel emphasised that work in the present case was over 99% complete at the point the take-out notice was issued.
This observation requires some emphasis. Once the works have been taken out of the Contractor's hands, the completion of the works will be put in the hands of another contractor and a fresh contract will be entered into. The Contractor may be asked to complete the work according to exactly the same specification and timetable as the Contractor out of whose hands it has been taken, but that is not necessarily so. The criteria and timing for practical completion may be quite different, and so may it be for the issue of the final certificate. Strictly speaking, if the works are taken out of the Contractor's hands then "Practical Completion" and the issue of a Final Certificate in the terms of the contract can never take place.
In these circumstances, counsel for DK put forward two arguments. The first was that as a matter of construction of cl 18.2 the security provided did not apply once a take-out notice was issued. Alternatively, counsel argued that a term should be implied that following the issue of a take-out notice the Contractor was entitled to retrieve the security.
I was not referred to any authority which directly considers the interpretation of the security provisions in a case where work is taken out of the Contractor's hands. But counsel for DK did refer me to Geraldton Building Co Pty Ltd v Christmas Island Resort Pty Ltd (1994) 12 BCL 64. That was a decision of the Full Court of the Supreme Court of Western Australia in a case where the principal terminated the building contract before practical completion and claimed an award of unliquidated damages for breach of contract. The contractor had provided security in the form of a bank guarantee and contended that he was entitled to have the guarantee delivered up and cancelled on termination of the contract. That contention was rejected by the Full Court.
One of the arguments for the Contractor was that, as a matter of construction, the security did not apply to the Principal's claim for unliquidated damages upon termination. But the Full Court pointed out that the contract required the Contractor to provide "security for its performance of this agreement". The Court considered that accepting the Contractor's argument would involve the security being for something less than "due performance" of the Contractor's obligations under the agreement, and thus inconsistent with the clause requiring the provision of the security: at 72.
In my view, this reasoning provides guidance in the present case. Clause 18.2 of the Contract describes the security as "being provided as security for the performance of the Contractor's obligations under the Contract". Counsel for DK argued that once the works were taken out of DK's hands, it was no longer performing any obligations under the Contract, but I cannot agree. DK's obligation to execute the works ceased, but it was still in contractual relations with Galileo. It still had ongoing obligations, including the provision of the documents it was required to provide under cl 24.2. The contract in the Geraldton case also contained provision for the works to be taken out of the hands of the contractor in certain circumstances, and it is clear from the analysis by Franklyn J at 72-73 that his Honour assumed that this was an ongoing source of potential liability to the Contractor which was intended to be covered by the security. Moreover, as the Full Court held, the security also covered any past breaches of the contract: see at 74.
In the Geraldton case counsel for the contractor emphasised that termination of the contract before the date for practical completion would deprive the contractor of the reduction of the security on practical completion and the further release of security when the final certificate was issued. But for the Full Court this was not sufficient reason to read down the reference to the security being for "due performance" of the contract. Counsel for the Contractor had mounted an argument that a term would be implied entitling the Contractor to return of the security in the event of termination. But it had been conceded that, if the Court concluded (as the Full Court did) that the security attached to the obligation to pay unliquidated damages, then the implication could not be sustained.
It is easy to see why this concession was made. If the security attached to a claim for damages on termination, then the putative implied term would have flown in the face of the express provisions of the contract. In my view, the position in the present case is similar. Once it is accepted that the security covers liabilities during the period after the take-out notice, as well as accrued liabilities up to that point, the implication contended for becomes impossible.
Of course, this does not mean that the security can never be retrieved if the works are taken out of the Contractor's hands. There may be an implication that, if the works are taken out of the Contractor's hands, the security must be returned within a time which is reasonable in the circumstances. But it is not necessary to consider this in the present case. It is clear from the evidence that Galileo considers that it has claims against DK and that it intends to pursue them. DK's contention in these proceedings is that upon the issue of the take-out notice Galileo's entitlement to hold the security ceases. For the reasons which I have given, I reject that contention.

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Judgment (37 paragraphs)

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Cases Cited (17)

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