Lahey Constructions Pty Ltd v The State of New South Wales

Court of Appeal (NSW)|2021-03-23|Before: Bathurst CJ, Bell P, Gleeson JA, Henry J

Solicitors: Salim Rutherford Lawyers (Appellant) HWL Ebsworth Lawyers (Respondent) File Number(s): 2020/278937 Decision under appeal Court or tribunal: Supreme Court of New South Wales Jurisdiction: Equity Division - Technology and Construction List Citation: [2020] NSWSC 1158 Date of Decision: 28 August 2020 Before: Henry J File Number(s): 2020/123334

HEADNOTE [This headnote is not to be read as part of the judgment] The appellant, Lahey Constructions Pty Ltd (Lahey), entered into two contracts (together, the Contracts) with the respondent, the Minister for Education for the State of New South Wales (the Department), for the performance of building and construction works upgrading Manly Vale Public School and Bardia Public School. The Contracts incorporated the New South Wales Government GC21 (Ed 2) General Conditions of Contract. The terms of the Contracts included identical provisions concerning the expert determination of issues that were unable to be resolved between the parties. Subject to certain exceptions, the determination of the expert was to be treated as final and binding. One exception was where the monetary value of the determination exceeded the threshold amount of $500,000. In such event, either party was entitled to bring litigation challenging the expert determination. In assessing whether the threshold amount had been achieved, cl 71.8.2 required that the amount of the determination be calculated without having regard to any amount that had been paid under the Building and Construction Industry Security of Payment Act 1999 (NSW) (SoP Act). The parties referred for expert determination disputes Lahey had raised under the Contracts. The Department in turn raised defences, cross-claims and set-offs, as well as its own claims. During the expert determination process, but separately to that process, Lahey served SoP Act payment claims on the Department. These payment claims included the matters that Lahey had raised for expert determination under the Contracts. Following adjudication of the payment claims under the SoP Act, the Department made payments to Lahey. The expert determined that the Department was entitled to either "set-off" or to "repayment" of the amount it had paid to Lahey pursuant to the adjudications. Lahey brought proceedings in the Technology and Construction List of the Equity Division of the Supreme Court in relation to the issues that had been referred to the expert for determination. The Department successfully sought an order for summary dismissal of the proceedings. The primary judge (Henry J) concluded that the expert determination for each of the Contracts was final and binding because on the proper construction of cl 71.8.2, the value of their disputes did not exceed the threshold amount of $500,000 for either contract. Lahey sought leave to appeal from the decision of the primary judge, asserting that the primary judge erred in her construction of the expert determination clause. Held, granting leave to appeal and allowing the appeal (per Gleeson JA; Bathurst CJ and Bell P agreeing): Applying settled principles of contractual construction, clause 71.8.2 of the Contracts required that any payment made under the SoP Act, and not only some of the payments, be disregarded when calculating the determined amount by the expert for the purposes of the jurisdictional provision. This construction was supported by the text of clause 71.8.2: [51]-[52]; and by the context, which included that payments made under the SoP Act are interim or provisional in nature, subject to the parties' rights under the construction contract: [53]-[56]. Further, the primary judge's construction would create a perverse incentive for Lahey not to resort to making progress claims under the SoP Act for fear that it would lose the possible right to litigate disputes about important matters in terms of monetary significance: [64]-[65]. Electricity Generation Corporation v Woodside Energy Ltd (2014) 251 CLR 640; [2014] HCA 7; Mount Bruce Mining Pty Ltd v Wright Prospecting Pty Ltd (2015) 256 CLR 104; [2014] HCA 37; Australian Broadcasting Commission v Australasian Performing Right Association Ltd (1973) 129 CLR 99; [1973] HCA 36; Southern Han Breakfast Point Pty Ltd (in liq) v Lewence Construction Pty Ltd (2016) 260 CLR 340; [2016] HCA 52; Probuild Constructions (Aust) Pty Ltd v Shade Systems Pty Ltd (2018) 264 CLR 1; [2018] HCA 4 referred to. On the proper construction of clause 71.8.2, the threshold amount of $500,000 had been achieved and Lahey was not precluded from bringing litigation in relation to the disputes under either contract: [68]-[69].

Judgment

BATHURST CJ: I agree with the orders proposed by Gleeson JA and with his Honour's reasons. I also agree with the additional reasons of Bell P.
BELL P: I agree entirely with the reasons for judgment of Gleeson JA. What follows assumes familiarity with his Honour's judgment and the contractual provisions in issue.
The provisional nature of payments under the Building and Construction Industry Security of Payments Act 1999 (NSW) (the Security of Payments Act), even after an adjudication under that Act, supplies the obvious reason for the parties' agreeing to exclude ("without having regard to") such payments from the calculation of the amount required to be paid following the Expert determination for the purposes of ascertaining whether or not the contractually specified monetary threshold had been exceeded. If the amount exceeded the specified contractual threshold, the parties agreed that the expert's determination would not be final and binding so as to preclude litigation. That makes perfect commercial sense and it is not difficult in such circumstances to understand why the parties, commercially, would wish to preserve the right to litigate with all that that right entailed (including rights of appeal).
The outcome of any such litigation may mean that any adjudicated amounts paid under the Security of Payments Act were either too great, too small or accurate (in the sense that the summary adjudication predicted the amount ultimately determined by a court) but the litigation, unlike a Security of Payments Act adjudication, would determine the amount on a non-provisional basis. There obviously could not be double recovery.
In the present case, it is plain that the difference between what the appellant claimed and the amount that the expert found it was entitled to greatly exceeded $500,000. The extent of this difference was masked, however, and critically taken below the contractual threshold of $500,000, by the approach contended for by the Department and accepted by the primary judge. That approach effectively treated amounts adjudicated upon and provisionally paid under the Security of Payments Act as finally determined amounts to be adjusted by reference to the expert's determination. These amounts were not "backed out of" the calculation to determine whether the threshold amount had been exceeded.
This was in my view contrary to what was clearly intended by the language of clause 71.8.2.2. It also produced the commercial anomalies to which Gleeson JA draws attention in his judgment. As his Honour points out, on the primary judge's approach, there would be a perverse incentive in a government contract for a builder not to take advantage of beneficial legislation such as the Security of Payments Act for to do so would imperil the builder's ability subsequently to go to Court to claim amounts as owing in circumstances where, as in the present case, the true difference between the parties' respective positions ran into the many millions of dollars.
The interpretation favoured by the primary judge could also operate harshly against the Department and preclude it from litigating a dispute where the difference in the value of the dispute between the parties exceeded $500,000 in circumstances where an adjudicated amount under the Security of Payments Act serendipitously approximated the value of the builder's claim before the expert.
One would not lightly suppose that commercial parties would intend such consequences or that their rights to litigate would be dictated by the outcome of a summary adjudication process under the Security of Payments Act designed not to determine liability on a final basis but to facilitate provisional payment for cashflow purposes.
For the above reasons and those given more fully by Gleeson JA, I agree that leave to appeal should be granted, the appeal allowed, the orders of the primary judge set aside and that the Department should be ordered to pay the appellant's costs at first instance and on appeal. The matter should be remitted for the purposes of the determination of the appellant's claim.
GLEESON JA: This application for leave to appeal concerns the proper construction of an issue-resolution clause in two building contracts that were entered into between Lahey Constructions Pty Ltd (Lahey), as contractor, and the Minister for Education for the State of New South Wales (the Department), as principal, for the performance of building and construction works upgrading Manly Vale Public School (MV contract) and Bardia Public School (Bardia contract) (together, the Contracts). The Contracts incorporated the New South Wales Government GC21 (Ed 2) General Conditions of Contract (the General Conditions).
The terms of the Contracts included identical provisions concerning expert determination of issues that were unable to be resolved between the parties: General Conditions, cl 71. Subject to certain exceptions, the determination of the expert was to be treated as final and binding. One exception where litigation was permitted was for determinations exceeding the threshold amount of $500,000. In assessing whether the threshold amount had been met, cl 71.8.2 required that the determined amount be calculated without having regard to any amount that had been paid pursuant to the Building and Construction Industry Security of Payment Act 1999 (NSW) (SoP Act).
A person (the expert) appointed under the provisions of the Contracts to provide an expert determination of issues in dispute between Lahey and the Department made a determination in relation to each contract which Lahey said was not binding on it. Lahey said that the threshold amount for litigation following an expert's determination had been achieved for each contract.
Lahey brought proceedings in the Technology and Construction List of the Equity Division of the Supreme Court in relation to the issues that had been referred to the expert for determination. The Department successfully sought an order for summary dismissal of the proceedings: Lahey Constructions Pty Ltd v Department of Education [2020] NSWSC 1158. The primary judge (Henry J) concluded that the expert determination for each of the Contracts was final and binding because, on the proper construction of cl 71.8.2, the threshold amount of $500,000, before litigation was permitted, had not been met for either contract.
Lahey seeks leave to appeal from those orders. Leave to appeal is required because a summary dismissal order is interlocutory: Supreme Court Act 1970 (NSW), s 101(2)(e); Wickstead v Browne (1992) 30 NSWLR 1 at 11; Macatangay v State of New South Wales (No 2) [2009] NSWCA 272 at [10]-[13]. This is a proper case for the grant of leave; the matter raises a question of general importance concerning the construction of a standard form contract which is utilised widely in the building and construction industry, especially in public works.
For the reasons given below I have concluded that the primary judge erred in her construction of cl 71.8.2. When the payments made under the SoP Act are disregarded, as required by cl 71.8.2, the determination for both Contracts exceeded the threshold amount of $500,000 which had to be met before litigation was permitted. Accordingly, leave to appeal should be granted, the appeal should be allowed, and the orders made by the primary judge for summary dismissal and costs should be set aside. The matter should be remitted to the Technology and Construction List for directions for the further conduct and hearing of the proceedings.

The Contracts

It is only necessary to refer to the provisions of the General Conditions which have immediate relevance to the appeal.
Clause 48 provided for variations to the contract works. The Principal can instruct the Contractor to undertake variations or they can be proposed by the Contractor. Disputes about variations can be raised as issues and dealt with under the issue-resolution process contained in cll 69 to 72 of the General Conditions.
Clause 63 provided that the Principal may withhold, deduct or set-off a sum claimed by the Principal in connection with the Contract or any other contract between the Principal and the Contractor, against any amount to which the Contractor is otherwise entitled in connection with the Contract.
Clause 71 provided for the appointment of an Expert to determine issues that were unable to be resolved between the parties. Clause 71.6 provided that in response to any issue referred to the Expert by a party under cl 70.3, the other party may raise any defence, set-off or cross-claim. Subject, relevantly, to the following provisions of cl 71.8, a determination of an Expert was to be treated as final and binding (see cl 71.7): .8 Neither party may commence litigation in respect of the matters determined by the Expert unless the determination: .1 does not involve paying a sum of money; or .2 requires one party to pay the other an amount in excess of the amount stated in Contract Information item 54, calculated without having regard to: .1 any interest that may be payable; and .2 any amount that has been paid pursuant to the Building and Construction Industry Security of Payment Act 1999 (NSW).
The reference to "item 54" in the "Contract Information" is an error. It is common ground that it should have read "item 55", which specified the amount of $500,000 as the threshold which had to be met for the purposes of cl 71.8.2, before litigation was permitted.
Clause 71.5 provided that an expert appointed under cl 71 was to follow the Expert Determination Procedure set out in Schedule 5 to the Contract. Of relevance to this appeal are the following parts of the Procedure: 1 Questions to be determined by the Expert .1 For each Issue, the Expert must determine the following questions, to the extent that they are applicable to the Issue and unless otherwise agreed by the parties: .1 Is there an event, act or omission which gives the claimant a right to compensation, or assists in otherwise resolving the Issue if no compensation is claimed: .1 under the Contract, .2 for damages for breach of the Contract, or .3 otherwise in law? .2 If so: .1 what is the event, act or omission? .2 on what date did the event, act or omission occur? .3 what is the legal right which gives rise to the liability to compensation or resolution otherwise of the Issue? .4 is that right extinguished, barred or reduced by any provision of the Contract, estoppel, waiver, accord and satisfaction, set-off, cross-claim or other legal right? .3 In light of the answers to the questions in clauses 1.1.1 and 1.1.2 of this Expert Determination Procedure: .1 what compensation, if any, is payable by one party to the other and when did it become payable? .2 applying the rate of interest specified in the Contract, what interest, if any, is payable when the Expert determines that compensation? .3 if compensation is not claimed, what otherwise is the resolution of the Issue? .2 The Expert must determine, for each Issue, any other questions identified or required by the parties, having regard to the nature of the Issue. …. 4 Role of Expert .1 The Expert: .1 acts as an Expert and not as an arbitrator; .2 must make its determination on the basis of the submissions of the parties, including documents and witness statements, and the Expert's own expertise; and .3 must issue a certificate in a form the Expert considers appropriate, stating the Expert's determination and giving reasons, within 16 weeks, or as otherwise agreed by the parties, after the date of the letter of engagement of the Expert referred to in clause 71.3 of the GC21 General Conditions of Contract.

The Expert Determination

The parties referred for expert determination disputes Lahey had raised under the Contracts, relating to four variations under the MV contract and two variations under the Bardia contract (Lahey's claims). The Department in turn raised defences, cross-claims and set-offs to the six variation claims by Lahey; eleven claims under the MV contract and ten claims under the Bardia contract (the Department's claims).
During the expert determination process, but separately to that process, Lahey served payment claims which were the subject of various adjudication applications and determinations by an adjudicator under the provisions of the SoP Act (the Adjudications). The Adjudications dealt with the six Lahey claims that had been referred as issues to the expert for determination, as well as other matters raised by the Department before the expert. Following the Adjudications and before the expert determination, the Department made a payment to Lahey in relation to the six Lahey claims the subject of referral to the expert and other variations under the Contracts that were the subject of matters raised by the Department before the expert.
The expert, Mr Donald Charrett, handed down his decision on 28 February 2020. The decision was in the form of a certificate stating the expert's determination in relation to the six Lahey claims and the 21 Department claims and giving reasons.
The expert's determination was summarised in an 8-page table in section 35 of the reasons (also repeated as part of the Executive Summary) (the Summary Table). This recorded various matters, including the amounts the expert determined that Lahey was contractually entitled to be paid for each of the six Lahey claims, and that the Department was entitled to either "set-off" (for some issues) or "repayment" (for other issues) of the amount it had paid to Lahey in excess of its entitlement, including the interest paid. The latter circumstance involving "repayment" was described elsewhere in the expert's reasons as a "restitutionary" claim.
It is common ground that the expert made two determinations, one in relation to each of the Contracts. The determinations recorded: MV contract (1) The expert determined that Lahey is entitled to payment of $3,772,997.56 by the Department in respect of the subject matter of Lahey's claims under the MV contract. (2) Given that Lahey has been paid $5,286,616.07 pursuant to the Adjudications, the Department is entitled to "set-off" or "repayment" of the amount it has paid to Lahey in excess of Lahey's entitlement. (3) The expert determined that the excess amount to which the Department is entitled to repayment by Lahey is $1,634,730.55. Bardia contract (4) The expert determined that Lahey is entitled to payment of $5,152,071.41 by the Department in respect of the subject matter of Lahey's claims under the Bardia contract. (5) Given that Lahey has been paid $7,405,506.54 pursuant to the Adjudications in relation to the Bardia contract, the Department is entitled to "set-off" or to "repayment" of the amount it has paid to Lahey in excess of Lahey's entitlement. (6) The expert determined that the excess amount to which the Department is entitled to repayment by Lahey is $2,253,435.24.
The determinations required Lahey to pay the amounts determined as payable within 15 business days. That was incorrect; the amounts were payable within 28 days, but nothing turns on this error by the expert. It is common ground that these amounts have not been paid by Lahey.

The primary judge's reasons

The primary judge noted that the parties accepted that cl 71.8.2 should be interpreted according to the principles that apply to the construction of a commercial contract: at [57]. This required that the Contracts be given a business-like interpretation: at [59].
The primary judge summarised the competing arguments of the parties at [70]-[74]. It is sufficient to reproduce the following: [70] At the hearing, the DoE undertook a similar calculation based on the MV determination which the DoE says requires Lahey to pay to it the amount of $1,634,730.55. The DoE submits that when the MV determination amount is calculated without regard to payments under the SoP Act, the amount to be compared to the Threshold as also $119,042.04, in respect of the ICT defects claim. This is because all of the other amounts subject to the MV determination were paid by the DoE pursuant to the Adjudications. The DoE did not address the calculation of the amount to be compared to the Threshold based on the Bardia determination. [71] Lahey contends that the determinations that are relevant for the purposes of cl 71.8.2 are those made by the Expert under each of the MV and Bardia Contracts as to the amounts the DoE was contractually required to pay to Lahey for the claims or works the subject of the variations in dispute. On this basis, Lahey contends that the relevant determinations are: (a) in respect of the subject matter of the MV determination, the Expert's determination that the amount of $3,772,997.56 was payable by the DoE to Lahey; and (b) in respect of the subject matter of the Bardia determination, the Expert's determination that the amount of $5,152,071.41 was payable by the DoE to Lahey. [72] Lahey contends that these are the relevant determinations as they are the only amounts the Expert determined were to be paid by one party to the other that ignore amounts paid by the DoE under the SoP Act. As each exceeds $500,000 (and the aggregate exceeds $500,000), Lahey says the Determination is not final and binding. … [74] Lahey also submits that the DoE's approach is incorrect because its calculations are based on the finally determined amounts that have regard to payments made under the SoP Act, as they include amounts that the DoE had already paid under the Adjudications and are to be repaid by way of restitution under the SoP Act. Lahey says that all the SoP Act payments made by the DoE should be ignored or "removed from the Determination" in order to calculate the amount left to be compared to the Threshold, which is the value of the underlying claims for payment made by Lahey.
The primary judge said of cl 71.8.2 that the "determination" under each of the Contracts was the total amount payable by Lahey to the Department as a result of the determination, being the amounts to be paid back to the Department by Lahey: at [87].
The primary judge rejected Lahey's submission that each of the determinations are not final and binding. The dispositive reasoning is at [88]-[91]: [88] The DoE submits, and I accept, that the words "calculated without having regard to any amount that has been paid pursuant to the [SoP Act]" in cl 71.8.2 operate on the amounts each of the MV and Bardia determinations requires one party to pay to the other. In my view, that calculation can be undertaken by deducting from the amounts required to be paid, the amounts that have been paid by the DoE pursuant to the SoP Act (because regard is not to be had to those amounts). The outcome of that calculation is then compared with the Threshold to assess whether the determinations are final and binding. [89] Undertaking those calculations leads me to conclude that the MV determination and the Bardia determination are both final and binding. [90] This is because the MV determination requires Lahey to pay to the DoE the amount of $1,634,730.55, of which $119,042.04 is the only amount that has not been paid by the DoE pursuant to the SoP Act. [91] As for the Bardia determination, while the overall determination requires Lahey to pay to the DoE a total $2,253,435.24, when that amount is calculated without regard to amounts paid by the DoE under the SoP Act, the DoE is required to pay Lahey the amount of $65,224.62 in respect of V0146 (DB2); see [35(b)] above. This is because the Bardia determination requires Lahey to repay the DoE $2,318,659.86 by way of restitution for amounts the DoE had paid under the Adjudications in excess of Lahey's contractual entitlements: see at [33],[35(a)], [35(d)], [35(e)], [35(g)]-[35(j)] above.
Further, the primary judge rejected Lahey's submission that the Department's construction gave rise to an uncommercial or absurd result, giving the following reasons at [94]; Lahey contended that that [sic] it would make no commercial sense for the very same claims advanced in this case to be justiciable if no payments had been made by the DoE under the SoP Act, but for the Determination to be final and binding in circumstances where payments had been made and to which regard should not be had for the purposes of cl 71.8.2. It was contended that this was some type of uncommercial or absurd result and a triumph of semantics. I disagree. I see nothing uncommercial about an outcome which renders the claims made by Lahey and the DoE in this case not being justiciable in circumstances where all of them had been the subject of previous Adjudication processes pursuant to which Lahey received, and since that time has had the benefit of, significant funds which it sought to retain as part of another extensive expert determination process. The key difference to the situation where the claims are justiciable (as no payments had been made) is that, in this case, the claims were, in essence, claims made by the DoE to recover money already paid to Lahey, rather than claims by Lahey to be paid compensation for variations by the DoE.

Grounds of appeal

The draft notice of appeal contains three grounds which are related. Ground 1 challenges the primary judge's construction of cl 71.8.2 of the Contracts. Ground 2 challenges the application of that construction to the facts. Ground 3 challenges the conclusion of the primary judge that each of the determinations of the expert is final and binding.

Principles

There is no dispute as to the applicable principles of construction identified by the primary judge by reference to Electricity Generation Corporation v Woodside Energy Ltd (2014) 251 CLR 640; [2014] HCA 7 at [35] and Mount Bruce Mining Pty Ltd v Wright Prospecting Pty Ltd (2015) 256 CLR 104; [2014] HCA 37 at [46]-[49].
The clause of the contract is to be construed objectively by reference to its text, context, and commercial purpose, asking what a reasonable person would have understood it to mean. This requires an examination of the language used, the surrounding circumstances known to the parties, and the commercial purposes or objects to be secured by the contract: Electricity Generation at [35]; Mount Bruce Mining at [46]-[49].
Further, unless a contrary intention is indicated, a court is entitled to approach the task of giving a commercial contract a business-like interpretation on the assumption that the parties intended to produce a commercial result. The court should construe the contract so as to avoid it making commercial nonsense or working commercial inconvenience: Electricity Generation at [35].
One further matter should be mentioned. If the language of the contract is open to two constructions, preference will be given to that which avoids consequences which appear to be capricious, unreasonable, inconvenient or unjust, "even though the construction adopted is not the most obvious, or the most grammatically accurate": Australian Broadcasting Commission v Australasian Performing Right Association Ltd (1973) 129 CLR 99 at 109 (Gibbs J); [1973] HCA 36.

Submissions

An understanding of the parties' competing arguments is assisted by reference to the tables below, which record the parties' agreed summary of each of the determinations made by the expert. It is common ground that some minor calculation errors by the expert should be ignored. SCHEDULE A Table summarising expert determination - Manly Vale Public School 1 2 3 4 Claim # Details of Claim Amount paid to Lahey pursuant to Adjudication Amount determined by Expert Amount payable to DoE pursuant to Expert Determination 1 V006 - DD&C Variation $915,659.21 $362,240.59 $553,418.62 2 V012 - Slab under Block N $322,228.71 $72,837.46 $249,391.25 3 V022C - OSD Tank (Southern Driveway) Adjustment $415,540.85 $346,615.85 $70,925.00 4 V029 - Air Conditioning - Lahey Reply $2,598,039.40 $2,125,062.32 $472,977.08 5 V068B - Northern Rd Pump Out Tank - Adjustment $225,665.71 $181,637.72 $44,027.99 6 V109 - Stormwater & Sediment Control $171,186.35 $171,186.35 $0.00 7 Deduction for Design Changes - - $0.00 8 ICT Defects - - -$119,042.04 9 Non-Compliant Tender Option - - $0.00 10 V020 - Aconex Extension $26,455.00 $26,455.00 $0.00 11 V035A - Lift Extension $120,520.44 $105,538.95 $14,981.49 12 V041B - Rainwater Tank Adjustment $161,362.49 $141,642.75 $19,719.74 13 V067 - Mobile Crane Costs for Steel Works & Other $89,765.40 $48,754.20 $41,011.20 14 V080 - Concrete Seating Around Retained Landscape $64,439.27 $37,394.04 $27,045.23 15 V086 - OSD & RWT Tanks Between Blocks K & L $175,753.24 $153,632.33 $22,190.91 Total $5,286,616.07 $3,772,997.56 $1,634,730.55

Table summarising expert determination - Bardia Public School 1 2 3 4 Claim # Details of Claim Amount paid to Lahey pursuant to Adjudication Amount determined by Expert Amount payable to DoE pursuant to Expert Determination 1 V004 - Suspension $434,027.90 $49,655.67 $384,372.23 2 V047 - Air Conditioning $1,340,542.89 $1,333,022.83 $7,520.16 3 V015 - Acceleration $2,843,888.00 $1,094,643.20 $1,749,244.80 4 V146 - Asbestos Removal Playspace CW1 Wall Stockpile $634,761.69 $699,986.31 -$65,224.62 5 V128 - Asbestos Removal Black A&B Asbestos Piles $840,320.67 $840,320.67 $0.00 6 V011 - Asbestos Soil 500t $168,648.15 $164,925.60 $3,722.55 7 V013 - Hire of Concrete Barriers $353,890.54 $331,165.75 $22,724.79 8 V051 - Existing School Sewer Diversion $36,120.22 $36,120.22 $0.00 9 V056 - Sports Field Changes $167,469.06 $164,433.06 $3,036.00 10 V062 - Structural Steel Changes $269,769.61 $157,960.20 $111,809.42 11 V073 - New fire hydrant pump room $224,036.15 $194,945.60 $29,090.55 12 V090 - Car Park Design Changes $92,031.66 $84,892.30 $7,139.36 Total $7,405,506.54 $5,152,071.41 $2,253,435.24

In oral argument, senior counsel for Lahey identified the single point in the appeal as whether the primary judge erred in applying what was characterised in submissions as the "disregard" provision in cl 71.8.2 of the Contracts.
On Lahey's preferred construction, cl 71.8.2 requires an adjustment to be made to the amount which the determination requires one party to pay to the other by disregarding any payments the builder has already received under the SoP Act. That is, cl 71.8.2 requires the calculation of an "adjusted amount" by "adding back" or "deducting" from the "determined amount" any amount paid to the builder under the SoP Act.
Lahey submitted that its construction is supported by both the text and the context. Lahey says that the objective intention of the parties is to remove from the assessment of the value of disputes, which the parties are precluded from litigating by cl 71.8.2, the existence of any payments made under the SoP Act, given that such payments are an interim or provisional payment, and are subject to the parties' rights under the construction contract.
Lahey further submitted that its construction involves no straining of the language of the Contracts and is commercially sensible. It avoided what Lahey says would be an unreasonable and capricious result if the alternative construction adopted by the primary judge is accepted. The complaint made is that the primary judge's construction allows for two entirely different results as to whether a determination is final and binding depending solely on whether a party has in fact made a payment of an adjudication award under the SoP Act for the work the subject of the claim. The submission continued that in the present case, if the Department had not made payment of the amounts awarded under the SoP Act adjudications, then the determinations would not be final and binding.
Applying its construction to the facts, Lahey says: 1. as to the MV contract, when the determined amount of $1,634,730.55 in column 4 is calculated "without having regard to any amount that has been paid pursuant to the [SoP Act]", being the column 2 amount of $5,286,616.07, cl 71.8.2 requires the Department to pay to Lahey the column 3 amount of $3,772,997.56; 2. as to the Bardia contract, when the determined amount of $2,253,435.24 in column 4 is calculated "without having regard to any amount that has been paid pursuant to the [SoP Act]", being the column 2 amount of $7,405,506.54, cl 71.8.2 requires the Department to pay to Lahey the column 3 amount of $5,152,071.41; 3. for each of the Contracts, the calculation required by cl 71.8.2 exceeded the threshold of $500,000, before litigation is permitted; hence, the determinations were not final and binding.
On the Department's preferred construction, which the primary judge accepted, cl 71.8.2 requires that "of the Determined Amounts, no regard is to be had to 'any amount that has been paid pursuant to the SoP Act'" [emphasis added]. That is, the adjustment required by cl 71.8.2 to the determined amounts in column 4 of the above tables, only deducts or adds back that part "of" the "determined amount" that has been paid pursuant to the SoP Act, and not all amounts that have been paid pursuant to the SoP Act.
Applying this construction, the Department says: 1. as to the MV contract, all of the amounts comprised in column 4, except for $119,042.04 relating to claim #8 for the ICT defects claim (being an amount payable to Lahey by the Department), answer the description of an "amount that has been paid pursuant to the [SoP Act]"; 2. as to the Bardia contract, all of the amounts comprised in column 4, except for $65,224.62 relating to claim #4 for the asbestos removal claim (being an amount payable to Lahey by the Department), answer the description of an "amount that has been paid pursuant to the [SoP Act]"; 3. it is only those amounts "of" the determined amount in column 4 of the above tables which are a SoP Act payment that cl 71.8.2 requires to be disregarded; and 4. for each of the Contracts, the calculation required by cl 71.8.2 was less than the threshold of $500,000, before litigation is permitted ($119,042.04 in the case of the MV contract and $65,224.62 in the case of the Bardia contract); hence, the determinations were final and binding.
In response to Lahey's submission that the primary judge's construction gives rise to an uncommercial or absurd result, or would be capricious, the Department adopted the primary judge's reasons at [94] (see [32] above) when submitting that the construction adopted by her Honour was not uncommercial. The Department also submitted that the result of the construction adopted by her Honour in this case: … reveals a commercial purpose, which is that it's about money changing hands, and if it is solely due to SoP Act flows of money, that there's a commercial purpose that the parties not be able to relitigate the issues.
For completeness, it should be noted that no assistance on the construction question is to be obtained from cases which have considered the earlier Edition 1 of the General Conditions: Shoalhaven City Council v Firedam Civil Engineering Pty Ltd (2011) 244 CLR 305; [2011] HCA 38; Firedam Civil Engineering Pty Ltd v Shoalhaven City Council [2010] NSWCA 59.

Reasoning

Clause 71.8 is a jurisdictional provision which precludes either party from commencing litigation in respect of the issues determined by the expert unless one of two exceptions apply.
The first exception in cl 71.8.1 can be put aside; it concerns a determination which does not involve paying a sum of money.
The second exception in cl 71.8.2 directs attention to two amounts. One is the amount which "the determination requires one party to pay to the other"; the parties referred to this amount as the "determined amount". The other is the determined amount "calculated without having regard to any amount that has been paid pursuant to the [SoP Act]". It is convenient to refer to this amount as the "adjusted amount". The exception in cl 71.8.2 to the parties' obligation to treat the determination by an expert as final and binding is engaged if the adjusted amount exceeds the threshold of $500,000 which had to be met before litigation was permitted.

Text

Starting with the text, what is required by cl 71.8.2 to be disregarded from the "determined amount" is "any amount that has been paid pursuant to the [SoP Act]". As a matter of language, the word "any" in the "disregard" provision includes all payments whatsoever made pursuant to the SoP Act, and not, as the Department submitted, only "some" or "part" of the SoP Act payments.
Thus, on its literal meaning, cl 71.8.2 requires that the determined amount, being the column 4 amount in the above tables, be calculated by disregarding the SoP Act payments, being the payments in column 2 of the tables. That requires adjusting the column 4 amount by deducting or adding back the column 2 amount. The result of that calculation is the amount in column 3 of the tables, which for each of the Contracts exceeded the threshold of $500,000.

Context

The plain meaning of cl 71.8.2 is supported by the context, given the nature of SoP Act payments. It is well-established that the SoP Act is not concerned with finally and conclusively determining the entitlements of parties to a construction contract. Payments made under the SoP Act are an interim or provisional payment, subject to the parties' rights under the construction contract. Further, the SoP Act acknowledges and preserves parties' contractual entitlements. As the joint judgment (Kiefel CJ, Bell, Gageler, Keane, Gordon JJ) observed in Southern Han Breakfast Point Pty Ltd (in liq) v Lewence Construction Pty Ltd (2016) 260 CLR 340; [2016] HCA 52 at [19]: The provisions of the Act have effect despite any provision to the contrary in any contract (s 34). Subject to that qualification, nothing in Pt 3 affects any right that a party to a construction contract may have under the contract, under Pt 2 in respect of the contract, or apart from the Act in respect of anything done or omitted to be done under the contract (s 32(1)). Part 3 also has no effect on civil proceedings arising under a construction contract, save that a court or tribunal is required to allow for any amount paid to a party under or for the purposes of Pt 3 in any order or award it makes and may make such order as it considers appropriate for the restitution of any amount so paid having regard to its decision in those proceedings (s 32(2), (3)).
In Probuild Constructions (Aust) Pty Ltd v Shade Systems Pty Ltd (2018) 264 CLR 1; [2018] HCA 4 the joint judgment (Kiefel CJ, Bell, Keane, Nettle and Gordon JJ) explained the nature and purpose of SoP Act payments at [36]-[39]: [36] First, it is to be recalled that the Security of Payment Act was enacted "to reform payment behaviour in the construction industry" by seeking to ensure that a person who undertakes to carry out construction work under a construction contract is entitled to receive, and is able to recover, progress payments promptly in relation to the carrying out of that work. In particular, it was designed to "stamp out the practice of developers and contractors delaying payment to subcontractors and suppliers". And it achieves that objective by setting up a scheme, including a "unique form of adjudication of disputes over the amount due for payment", which is, as Basten JA observed in the Court of Appeal, "coherent, expeditious and self-contained". The intended result is that "each party knows precisely where they stand at any point of time". [37] Second, it is important to appreciate the subject matter of the Security of Payment Act. The Security of Payment Act is not concerned with finally and conclusively determining the entitlements of parties to a construction contract. Section 8 confers an entitlement to a progress payment, which may be the final payment, a single or one-off payment or what is described as a "milestone payment". Part 3 of the Security of Payment Act creates a distinct procedure for enforcing that statutory entitlement, which includes the making of a payment claim, the provision of a payment schedule in response and the determination of a payment claim by an adjudicator (at the option of the claimant). [38] The statutory entitlement to a progress payment and the procedure for recovery of a progress payment are separate from, and in addition to, a contractor's entitlement under a construction contract to receive payment for completed work. The statutory entitlement is predicated upon the existence of a construction contract, but the entitlement and the means available for its enforcement stand apart from the parties' rights under that contract. Indeed, the Security of Payment Act has effect despite any contractual provision to the contrary: any purported derogation is void. Moreover, the Security of Payment Act acknowledges and preserves parties' contractual entitlements. Importantly, the Security of Payment Act provides that in any proceedings before a court or tribunal in relation to any matter arising under a contract, the court or tribunal must allow for, and may make such orders as it considers appropriate for the restitution of, any amount paid under or for the purposes of Pt 3. [39] As was described in Southern Han Breakfast Point Pty Ltd (in liq) v Lewence Construction Pty Ltd, the Security of Payment Act was the subject of substantial amendments in 2002. Introducing the Bill for the Building and Construction Industry Security of Payment Amendment Act 2002 (NSW), the responsible Minister stated: "[The Security of Payment Act] was designed to ensure prompt payment and, for that purpose, [the Security of Payment Act] set up a unique form of adjudication of disputes over the amount due for payment. Parliament intended that a progress payment, on account, should be made promptly and that any disputes over the amount finally due should be decided separately. The final determination could be by a court or by an agreed alternative dispute resolution procedure. But meanwhile the claimant's entitlement, if in dispute, would be decided on an interim basis by an adjudicator, and that interim entitlement would be paid." The Security of Payment Act does not speak of "interim" entitlements and payments, but the label aptly reflects how the statutory entitlement interacts with any underlying contractual liability. In that respect, the statutory entitlement established by the Security of Payment Act stands in marked contrast to the sort of final determination provided for in the legislative scheme considered in Hockey v Yelland, the effect of which was permanent. (Citations omitted.)
The joint judgment in Probuild concluded at [44]: Having regard to the above matters, it is right to say that the Security of Payment Act creates an entitlement that is "determined informally, summarily and quickly, and then summarily enforced without prejudice to the common law rights of both parties which can be determined in the normal manner". (Citations omitted.)

Purpose

Accepting the interim or provisional nature of payments made under the SoP Act, the objective purpose of cl 71.8.2 is readily apparent. An arbitrary threshold of $500,000 has been chosen by the parties for what might be described as minor claims, which following an expert determination, are subject to the preclusion of litigation. However, the parties have also chosen to remove from the assessment of whether they are precluded from litigating disputes following an expert determination the existence of any payments made under the SoP Act. That is, the parties have agreed that the value of their disputes for the purposes of the jurisdictional provision in cl 71.8.2 is to be ascertained by reference to the value of their claims unaffected by any payments made under the SoP Act, given that the parties' contractual rights under the contract are unaffected by those payments.

The primary judge's construction should be rejected

There are at least three difficulties with the construction adopted by the primary judge.
First, the language of the disregard provision in cl 71.8.2 is expressed in wide terms, referring to "any" SoP Act payments, not merely part "of" the SoP Act payments made to the builder.
Second, the primary judge's construction of the disregard provision involves a partial adjustment to the "determined amount", which is not justified by the language of cl 71.8.2.
The partial adjustment arises in this way: the determined amount is the "result" of the expert taking into account all of the SoP Act payments made to Lahey by deducting the column 2 amount (the SoP Act payments) from the column 3 amount (Lahey's entitlement under the contract) to produce the column 4 amount. However, the construction adopted by the primary judge involves deducting only "part" of the SoP Act payments from the determined amount in column 4. That is not what the disregard provision requires. As Lahey correctly submitted, the only way not to take into account the SoP Act payments as cl 71.8.2 requires is to deduct or add back the SoP Act payments in column 2 from the determined amount in column 4 to produce the column 3 amount.
Third, contrary to the primary judge's reasoning at [94] rejecting Lahey's submission that the construction advanced by the Department gave rise to an uncommercial or absurd result, it is not to the point that pursuant to the adjudication process under the SoP Act "Lahey received, and since that time has had the benefit of, significant funds which it sought to retain as part of another extensive expert determination process". Nor is it to the point that, as the primary judge stated at [29]: The key difference to the situation where the claims are justiciable (as no payments had been made) is that, in this case, the claims were, in essence, claims made by the DoE to recover money already paid to Lahey, rather than claims by Lahey to be paid compensation for variations by the DoE.
These observations of the primary judge did not have sufficient regard to the interim or provisional nature of the payments made under the SoP Act, which are subject to the parties' rights under the construction contract: Probuild at [38]. Nor did these observations take into account that, insofar as the claims made by the Department before the expert included restitution of money already paid to Lahey pursuant to adjudications under the SoP Act, those SoP Act payments were the very thing that cl 71.8.2 required to be disregarded when assessing whether the threshold of $500,000 had been achieved, before litigation was permitted.
Moreover, the distinction drawn by the primary judge at [94] between the situation where claims are justiciable (as no SoP Act payments had been made) and the present case where her Honour found the claims not to be justiciable (as the Department sought to recover the SoP Act payments as part of the expert determination procedure), ignored that the SoP Act is intended to be beneficial legislation that operates in a "rough and ready" way to preserve the cash flow to a builder notwithstanding that the builder might ultimately be required to refund the money received and yet have the inability to repay: Chase Oyster Bar Pty Ltd v Hamo Industries Pty Ltd (2010) 78 NSWLR 393; [2010] NSWCA 190 at [207]-[208] (McDougall J), cited with approval in Saville v Hallmarc Constructions Pty Ltd (2015) 47 VR 177; [2015] VSCA 318 at [51] (Warren CJ and Tate JA, Kaye JA agreeing). See also: Southern Han at [4]; Probuild at [36], [39]; Amflo Constructions Pty Ltd v Jefferies [2003] NSWSC 856; (2004) 20 BCL 452 at [25] (Campbell J).
Lahey correctly submitted that the construction adopted by the primary judge has the perverse incentive for the builder not to resort to making progress claims under the SoP Act for fear that the builder would lose the possible right to litigate disputes about important matters in terms of monetary significance. The Department's response, that the parties intended by cl 71.8.2 that "where money is changing hands purely because of flows of moneys coming back under the SoP Act, … they cannot relitigate those matters", is unattractive for three reasons.
First, it ignores the plain language of cl 71.8.2. Second, it ignores the beneficial effect of the SoP Act as explained at [63] above. Third, it has the potential consequence of two different outcomes depending on whether the builder has invoked the SoP Act. That result would be unreasonable and capricious. The Department's submissions seeking to justify the primary judge's construction as being commercially reasonable should be rejected.
One further matter should be mentioned. The Department says that Lahey's identification of the "determination" for the purposes of cl 71.8.2 is inconsistent with the terms of the expert determination procedure provided in Sch 5, cl 1. There is nothing in this point. The submission was based on a misunderstanding of Lahey's written submissions (par 15) as having asserted that the "determined amount" referred to in cl 71.8.2 is the amount produced after the first step by the expert in Sch 5, cl 1 of assessing Lahey's (notional) entitlement under the Contracts; that is, the column 2 amount in the above tables. Lahey correctly accepted that the "determined amount" was the amount in column 4 of the above tables. Lahey's reference in its written and oral argument to the "determination" in this matter was a reference to the adjusted amount "for the purposes of cl 71.8.2", that is, after the disregard provision had been taken into account. Nothing in the procedure to be followed by the expert under Sch 5 supports the construction adopted by the primary judge.

Summary

In summary, I have concluded that on the proper construction of cl 71.8.2, the provision requires an adjustment to the "determined amount" which is to be calculated by deducting or adding back the amounts which answer the description "any amount that has been paid pursuant to the SoP Act", not merely amounts paid pursuant to the SoP Act which are part "of the determined amounts", as the Department submitted and the primary judge accepted.
Applying the correct construction of cl 71.8.2, the calculation required by disregarding the amount of the SoP Act payments is to deduct or add back from the "determined amount" in column 4 of the above tables, the SoP Act payments in column 2, with the consequence that for the purpose of assessing whether the threshold of $500,000 had been achieved, cl 71.8.2 requires payment by one party (Lahey) to the other (the Department) of the amount in column 3, which for each of the Contracts exceeds the threshold of $500,000.
Accordingly, Lahey was not precluded from litigating the disputes the subject of the issues determined by the expert under each of the Contracts. It follows that the primary judge erred in summarily dismissing the proceedings.

Conclusion and Orders

The appeal has succeeded and there is no reason why costs should not follow the event: Uniform Civil Procedure Rules 2005 (NSW), r 42.1.
I propose the following orders: 1. Grant leave to appeal. 2. Direct the applicant to file a notice of appeal in the form of the draft contained in Tab 2 of the White Folder within 7 days. 3. Appeal allowed. 4. Set aside the orders made by Henry J on 28 August 2020 and in lieu, order: 1. The defendant's notice of motion filed 9 June 2020 be dismissed. 2. The defendant to pay the plaintiff's costs of the motion. 1. Remit the matter to the Technology and Construction List of the Equity Division for directions for the further conduct and hearing of the proceedings. 2. Respondent to pay the appellant's costs of the appeal.

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: 26 April 2021

Building and Construction Industry Security of Payments Act 1999(NSW)

Building and Construction Industry Security of Payment Amendment Act 2002(NSW)

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