Hawkesbury City Council v The Civil Experts Pty Ltd trading as TCE Contracting

Background

1. On 31 March 2022, the Council and TCE entered into a construction contract by which TCE agreed to design and construct urgent repair works to a broken sewer line that serviced the township of Windsor, New South Wales. The contract price was described as "Cost + 25%". The day after the contract was signed, TCE provided the Council with a schedule setting out the rates that would be charged for persons working on the job and for plant and equipment used on the job.
2. Prior to March 2023, TCE submitted a number of progress claims none of which was expressed to be a payment claim under the Act. Those claims were dealt with in accordance with the procedure set out in the construction contract which involved certification by the Superintendent under the contract and payment by the Council of the certified amount.
3. On 20 March 2023, TCE sent Mr Lachlan McClure, the Superintendent under the contract and the Manager, Project Delivery for the Council, and a number of other employees with the Council, an email which relevantly said: Please find attached February 2023 Progress Claim. Please note in the spreadsheet I have updated/added the following new tabs to the previous claim, for clarify [sic] ● Summary Total - Summary tab outlining: ○ The total claim to date ○ The total certified to date ○ Updated Offsite Overheads cost ○ Claim for this month, which includes February 2023 costs as well as previously uncertified amounts which TCE are of the opinion they are entitled to claim. ● Summary Feb23 - Summary tab showing the costs for February 2023 only. ● Works Breakdown - summary tab showing cost breakdown for each "variation" ○ In the following tabs, I have colour coded all costs to the relevant works ("variations") undertaken ● February 2023 tabs for: ○ TCE Personnel ○ TCE Plant and Equipment ○ Materials and Consumables • The invoice numbers are referenced in the description cell. ○ Subcontractors and Consultants • The invoice numbers are referenced in the description cell.
4. The attached spreadsheet contained a large number of tabs. On opening the spreadsheet, it is necessary to scroll left to find the tab marked "Summary FEB23". A copy of the contents of that tab is Annexure A (249031, pdf) to this judgment. Scrolling left again, the next tab is marked "Summary TOTAL". A copy of the contents of that tab is Annexure B (181929, pdf) to this judgment.
5. The Council did not serve a payment schedule in response to that claim.
6. On 10 May 2023, TCE wrote to Mr McClure stating: We refer to the payment claim, Progress Claim 011, issued to you on 20 March 2023 (Payment Claim). Hawkesbury City Council (HCC) has failed to provide a payment schedule within the time allowed by the Building and Construction Industry Security of Payment Act 1999 (NSW) (Act). In light of HCC's failure to issue a payment schedule within the time allowed under the Act, the amount claimed under the Payment Claim became due and payable on 12 April 2023. HCC has failed to pay the full amount under the Payment Claim and, pursuant to section 15(2)(a)(ii) of the Act, TCE is entitled to make an adjudication application pursuant to the Act. In light of the above and pursuant to section 17(2) of the Act, TCE hereby puts you on notice that it intends on making an adjudication application in accordance with the Act.
7. Mr McClure replied to that letter on 17 May 2023. In that reply he said: The purpose of this letter is to confirm as per Clause 42.1 with respect to the AS2124 Contract executed between Hawkesbury City Council ("the Principal") and TCE Contracting Pty Ltd ("the Contractor") accepted 19 January 2022 and executed 30 March 2022 and the schedule pp6 of agreement, a monthly payment claim by TCE Contracting Pty Ltd cannot be paid until receipt of a Payment Certificate from the Superintendent, and that this payment shall be made 15 business days from its receipt.
8. On 31 May 2023, TCE, through its solicitors, lodged an adjudication application with the second defendant.
9. In relation to the claim for offsite overheads and preliminaries, the adjudication application stated: CALCULATION OF OFFSITE OVERHEAD AND PRELIMINARIES 68. The offsite overhead and preliminaries relate to the costs incurred by the Claimant on the day-to-day operations of the business which do not relate directly to a particular project. These costs are allocated to a project on a percentage of total income for the business. Such a calculation is consistent with the calculations performed by the Claimant's accountant contained in the Excel Spreadsheets marked MEK02 annexed to the statutory declaration of Mr Mohamad El-Khaled (TCE's Accountant). 69. The calculation performed by Mr El-Khaled is further supported by the expert Quantity Surveyor report dated 2 May 2023 and prepared by Mr Michael Dakhoul. Mr Dakhoul confirms that the calculations prepared by Mr El-Khaled with respect to the offsite overhead and preliminaries are correct. Mr Dakhoul explains the calculation at paragraphs 4.1 to 4.4 of his expert report. 70. Mr Dakhoul, in his report, concludes that the offsite overheads attributable to the works completed by the Claimant at the Site total the amount of $1,580,073.00 excluding the 25% margin and GST. After applying the margin, the total offsite overhead is $1,975,091.53. The Claimant submits that this amount is higher than the amount claimed in the Payment Claim (being $1,949,674.58 including margin) and the difference will be claimed in subsequent payment claims issued by the Claimant. Right to Claim Offsite Overheads and Preliminaries in Payment Claims 71. The Claimant submits that the offsite overheads and preliminaries were payable under the Contract by virtue of the fact that the Contract was a "cost-plus contract" meaning all costs incurred by the Claimant were to be paid by the Respondent with a further margin for profit to be added. In this regard, the Claimant is entitled to claim the offsite overheads and preliminaries as monies owing under each payment claim. 72. His Honour, in the case of Coordinated Construction Co. Pty Ltd v J.M. Hargreaves (NSW) Pty Ltd & Ors, at paragraph 44, found that offsite overheads are properly regarded as part of the price of the totality of the construction work. His Honour made the following comments: [44] If they represent off-site costs (such as office overheads) or other on-site costs, it may be a question of fact and degree whether they are for construction work carried out or for related goods and services supplied. They would in my opinion properly be regarded at least as part of the price for the totality of the construction work when completed. And it would seem artificial to say that they are excluded from the Act if they are not referable to work that has already been carried out, particularly when s.9(b) refers to the value of construction work undertaken to be carried out and related goods and services undertaken to be supplied. However, it is not necessary in this case altogether to exclude the possibility that some delay damages claimed under this contract might possibly not be for construction work carried out or related goods and services supplied within the definition of "claimed amount" in s.4; but it is certainly not obvious that this is so in relation to any of the claims in this case.
10. In a statutory declaration sworn on 31 May 2023, Mr Mohamad El-Khaled explained how he calculated the amount for overheads for the periods 1 July 2021 to 30 June 2022, 1 July 2022 to 31 December 2022 and 1 January 2023 to 31 March 2023. In substance, he extracted from TCE's accounting software the total amount incurred by TCE in respect of all overheads including all office expenses, insurance, bank fees, software subscriptions and the salary and allowances paid to senior management and accounts payable personnel during each period. In the case of senior management, he only took 70 percent of their costs on the basis that 30 percent of their time related to specific projects. He then calculated the percentage of TCE's total turnover which comprised of income from the Council project and applied that percentage to the total overhead costs to arrive at a figure for outside overheads attributable to the work done under the contract.
11. The Adjudicator considered whether all TCE's costs were properly included. He concluded: 53. While the Claimant has applied a broad interpretation of 'cost' for the purpose of recovery, it is not so broad as to strain credulity. So far as I can discern it has done no more than tally up the costs of all types incurred by it in advancing the contract works and securing payment.
12. In relation to quantum, the Adjudicator said: 61. … Mr El-Khaled, the Claimant's accountant has explained the calculation of the overheads in his declaration. I am satisfied that the overhead calculations apportioned to the current project are appropriate.

The claim under the ACL

1. The Council submits that the payment claim was misleading in two respects. First, it says that it was misleading because it did not clearly state that it was a payment claim under the Act in circumstances where no previous payment claim under the Act had been made. Second, it submits that it was misleading because it did not clearly state that the amount of the claim included a claim for offsite overheads (including the 25 percent margin) of $1,949,674.58.
2. In my opinion, both submissions must be rejected. Section 13(2)(c) of the Act states that a payment claim "must state that it is made under this Act". That requirement has been interpreted as a requirement that the payment claim must include a notice that objectively makes it clear that the claim is made under the Act: see Walter Construction Group Ltd v CPL (Surry Hills) Pty Ltd [2003] NSWSC 266 at [82]-[83] per Nicholas J.
3. In the present case, the covering email to the payment claim clearly drew the reader's attention to the Summary TOTAL tab and the Summary FEB23 tab. The contents of both those tabs were immediately visible when displayed electronically. Both pages state that the claim is a payment claim under the Act. On the printed versions attached to this judgment, the print is small and difficult to read. But it is easier to read in the electronic version. Each page contains a limited amount of information. In that context, it seems to me that the statements are sufficiently clear to come to the reader's attention.
4. In any event, as TCE points out, nothing turns on this issue. It was clear from TCE's correspondence dated 10 May 2023 that the progress claim made on 20 March 2023 was a payment claim for the purposes of the Act. In view of the Council's failure to respond to the claim, TCE elected to make an adjudication application under s 15(2)(a)(ii) of the Act. As a consequence of that election, under s 17(2)(b) of the Act, the Council was entitled to serve a payment schedule within 5 business days after receiving the correspondence dated 10 May 2023. It chose not to do so. Consequently, any loss it suffered arose from that failure and not any misleading or deceptive conduct on the part of TCE.
5. As to the second point raised by the Council, the covering email to the progress claim clearly directed the Council's attention to the Summary TOTAL tab and the Summary FEB23 tab and explained that the total claim to date was included in the former tab and the latter tab showed "the costs for February 2023 only". Moreover, on the Summary FEB23 tab, next to the amount claimed, was a note that stated "*Note - refer to 'Summary TOTAL' tab for total claim for this month". Read together, a reader could not reasonably have believed that the total amount claimed was the amount shown in the Summary FEB23 tab.

Did the claim relate to construction work?

1. The Council submits that the work in respect of which the offsite overheads were charged - such as accounting and administrative services, insurance and office supplies - were not construction work or related goods or services, with the result that the charges for the provision of those services were not capable of adjudication under the Act.
2. In my opinion, that submission rests on a misconception. It was open to the parties to agree how TCE would be remunerated for the construction work that it did. Any amount that is properly characterised as a payment for that work may form part of a payment claim under the Act. As Sackville AJA (with whom Leeming, Payne and White JJA and Emmett AJA agreed) explained in Seymour Whyte Constructions Pty Ltd v Oswald Bros Pty Ltd (in liq) (2019) 99 NSWLR 317; [2019] NSWCA 317 at [228]: In short, a progress payment is an amount that a contract requires to be paid as part of the total price of the construction work. [footnote omitted] See also Southern Han Breakfast Point Pty Ltd (in liq) v Lewence Construction Pty Ltd (2016) 260 CLR 340; [2016] HCA 52 at [68] per Kiefel, Bell, Gageler, Keane and Gordon JJ.
3. In the present case, the Council agreed to pay "Cost + 25%" for the construction work. As the adjudicator observed, "cost" was not defined in the contract. In the absence of any submissions from the Council to the contrary, the adjudicator interpreted the reference to "cost" as a reference to all the costs incurred by TCE (other than legal fees) in carrying on its construction business. Whether that is the correct interpretation of the construction contract or not, it was an interpretation open to the adjudicator and is not reviewable by this Court: see Probuild Constructions (Aust) Pty Ltd v Shade Systems Pty Ltd (2018) 264 CLR 1; [2018] HCA 4. The result of that interpretation is that the Council agreed to pay a proportion of all TCE's costs for the construction work that TCE agreed to do. Those costs, therefore, properly formed part of the payment claim.

Did the adjudicator act arbitrarily or capriciously?

1. The Council put this ground of challenge to the adjudication determination in various ways, but essentially what was alleged that the adjudicator acted so unreasonably or irrationally in quantifying the amount of offsite costs that were recoverable under the construction contract that he failed to carry out his statutory task.
2. I cannot accept that submission. As I have said, the adjudicator concluded that, on the correct interpretation of the contract, TCE was entitled to recover all its costs, including offsite costs, that were reasonably referable to the construction work under the contract. That necessarily required the adjudicator to apportion the offsite costs between different projects carried out by TCE. In the absence of any submissions from the Council, the adjudicator accepted the method of apportionment contended for by TCE. That method of apportionment was not obviously irrational or arbitrary. On the contrary, it was reasonable to seek to apportion the costs by reference to the proportion that the income TCE earned under the contract bore to its total income. It was obviously necessary to identify the relevant costs to which that proportion should be applied. The adjudicator had an explanation of how that was done by TCE's accountant and the evidence the accountant gave was supported by an expert report from a quantity surveyor.
3. It is true that the accountant had to make estimates in order to carry out the apportionment exercise. So, for example, it was necessary to apportion the time of senior management between work that related to all projects or general work relating to the business and work that related to specific ones. The accountant chose to apportion 70 percent of the time to work relating to all projects and general work. He did not give any reasons for doing so. However, in the absence of any other material, it was not irrational for the adjudicator to accept that apportionment in circumstances where it was made by someone who could be expected to have a detailed knowledge of the business.
4. It may be that there were errors in the method of apportionment or the calculation of the amount to which it should be applied. But it was not for the adjudicator to check each calculation. Rather, the question for the adjudicator was whether he should accept the unchallenged evidence and submissions made by TCE on the issue. On their face, that evidence and those submissions did not appear to be irrational or arbitrary. On the contrary, they appear to represent a reasonable attempt to arrive at an estimate of that proportion of the offsite costs that could be attributed to the project. The fact that there may have been a better method to achieve that result (not that the Council suggested one) and that the method required estimates to be made does not make the approach that was adopted irrational or arbitrary. Consequently, it was not irrational or arbitrary for the adjudicator to accept TCE's evidence and submissions on that issue.

Orders

1. It follows that the Council's summons must be dismissed with costs and that the amount held in Court pending the determination of these proceedings should be paid to TCE. The orders of the Court, therefore, are: 1. The summons be dismissed with costs; 2. The amount paid into Court by the plaintiff on 6 July 2023 and any interest thereon be paid to the defendant.

Amendments 23 August 2023 - Annexures A and B inadvertently omitted DISCLAIMER - Every effort has been made to comply with suppression orders or statutory provisions prohibiting publication that may apply to this judgment or decision. The onus remains on any person using material in the judgment or decision to ensure that the intended use of that material does not breach any such order or provision. Further enquiries may be directed to the Registry of the Court or Tribunal in which it was generated. Decision last updated: 23 August 2023