Leighton Contractors Pty Ltd v East Gippsland Catchment Management Authority [2000] VSC 26

5. A very large number of affidavits have been filed on the application but the essential point is one which may be shortly stated. It is whether the Authority may resist a claim for a progress payment by raising in defence the cost of rectification for Leighton's defective work. The point is one of construction of the agreement between the parties, and it is to this that I now turn.

8. The agreement was entered into following the submission in November 1998 of a collaborative tender for the provision of project management consulting services for the Authority's flood response program. The tenderers were I.D. & A. Pty Ltd, Fisher Stewart Pty Ltd and Leighton. In the statement of claim it is alleged that the tender is incorporated in the agreement. This may be correct and both parties treated at least parts of the tender as contract documents. I am content to proceed on this basis.

11. The agreement itself is in writing. It is made between two parties only, the Authority and Leighton, who is described in it as "the Consultant". Notwithstanding that Leighton is the only contracting party, the document appears to have been drawn in a standard form so as to be appropriate for a separate agreement or agreements with the other collaborative tenderers. The services which Leighton agreed to provide are defined in cl. 8.11 as meaning:

"... those professional services to be performed by the FRP [flood response program] Construction Manager specifically described in Part 2 of Annexure 'A'."

Annexure A sets out the services to be provided, presumably by all of the consultants. Part 1 sets out the services to be provided by the other consultant or consultants as project manager for the flood response program. Part 2 sets out services which are generally called construction management services. It seems that the services to be provided by Leighton to the Authority pursuant to the agreement are those of the construction manager as detailed in Part 2.

16. The contractual structure for the performance of the flood response program work appears to be this. The project manager is responsible for program development, design, program scheduling and implementation and reporting. The construction manager is responsible for the letting of contracts for the performance of the work, the implementation of the work and reporting. The actual performance of the construction work is entrusted to various contractors under direct contracts with the Authority.

19. The contractual arrangements for the payment of the construction manager are found in Part 3 and Annexure C to the agreement. There are two components of the payment, the Fee and Reimbursable Expenses. In essence, the quantum of the fee component is arrived at by the application of the schedule of rates set out in Attachment 3 to the number of hours worked.[1] The other component, representing reimbursable expenses incurred, is to be calculated in accordance with Annexure C.[2] Clause 3.4.1 prevents the consultant from being paid for time spent changing or revising "drawings, specifications and other documents (or any of them) attributable to any error, inadequacy or deficiency in the drawings, specification and other document or Service prepared or provided by the Consultant".

22. The contractual provisions with respect to payment to Leighton of the two components of its remuneration are the following:

In consideration of the promise by the Consultant to perform the Services the Authority promises to pay to the Consultant the Fee and the Reimbursable Expenses in accordance with Annexure 'C' at the times and in the manner set out in this Agreement.

At or about the end of each payment period specified in Item 7 of the Schedule the Consultant will give to the Authority an account for the Services performed, and for reimbursable expenses incurred, during the period. Subject to any limitations contained in Annexure C, the Authority shall pay the full amount owing in respect of each account within 30 days of issue of the account.

The Authority has the right of set off in respect to any moneys which become due by the Consultant to the Authority at any time.

The Authority agrees that in addition to all other rights and remedies of the Consultant if the Authority fails to pay all moneys as and when due, the Consultant shall be entitled to recover interest at the rate specified in Item 8 of the Schedule on all moneys which are not so paid. If no rate is stated in the Schedule, it shall be at the current rate payable by the Consultant for overdraft on its current account.

If the Authority disputes the whole or any portion of the amount claimed in an account submitted by the Consultant, the Authority shall pay to the Consultant that amount which it does not dispute. At the same time the Authority shall notify the Consultant in writing of the reasons for disputing the amount in the account remaining outstanding.

If the parties are unable to reach agreement within 7 days of the Authority's notice, the dispute may be determined in accordance with Part 6 of this Agreement. If it is resolved that some or all of the amount in dispute ought properly to have been paid at the time it was first claimed, then the Authority shall pay the amount finally resolved.

At no time shall the Authority be obliged to make any payments into any trust account in respect to any disputed amount."

38. The flood response program work is not yet complete. Leighton has submitted monthly progress claims and most of them have been paid. Claims 6, 7 and 9 for work done in June 1999, July 1999 and September 1999 which were payable on 31 July 1999, 3 September 1999 and 4 November 1999 respectively, have not been paid in full. The amount short paid is $351,142. The material shows that this sum has been withheld, not because of any disagreement regarding the hours worked or the reimbursable expenses incurred or a dispute regarding the manner of calculation of the claims. What is said by Rex Bewick Candy, the operations manager of the Authority in his affidavit sworn 15 December 1999, is that by July 1999 it appeared to the Authority that the construction work at seventeen sites did not comply with the designs approved by the Authority. This allegation is confirmed by the affidavit of Trevor Andrew Dando of Sinclair Knight Merz sworn on 15 December 1999. Whether these allegations be challenged by Leighton, it is clear enough that this is a genuine dispute and that there is at least a triable issue as the quality of the construction work. I proceed therefore on the basis that the work was defective as alleged and, further, that the cost of rectification is of the order of $400,000 to $450,000, that is, in excess of the sums withheld.

41. Leighton did not itself carry out this defective work; it was only the construction manager. It was submitted on behalf of the Authority that, as such, it was required under the agreement to supervise the work of the direct contractors and to sign their work off as being in accordance with the approved design. The evidence certainly shows that on each of the seventeen sites Leighton's staff supervised and directed the work of the plant operators and that, with respect to six of them, its regional site manager confirmed in writing that the work complied with the design. Mr Candy, in his second affidavit sworn on 14 January 2000, also said that the Authority paid the direct contractors against their invoices which had been previously submitted for payment by Leighton's manager. In two cases, Leighton's operations manager, Christian Fosterling, was appointed superintendent under the AS 2124-1992 based contract entered into between the Authority and the contractor for the performance of the work. Again, for the purposes of this application, I am satisfied that there is a triable issue that Leighton performed its supervisory functions inadequately and that this amounts to a breach of the agreement or a breach of its duty of care owed to the Authority. It should be noted, however, that even if these matters be proved at trial, this may not, depending upon how the litigation is structured, result in a judgment for the Authority against Leighton for the total amount of this cost of rectification.[3]

44. The Authority, in these circumstances, contends that it is entitled pursuant to cl. 3.8 which I have set out at [7] above to withhold the cost of rectification of the defective work as a disputed amount; to set off this cost pursuant to cl. 3.6 and to abate the sum otherwise payable to Leighton on the principle in Mondel v Steel.[4] Leighton, in response, contends that it was entitled to be paid in full except to the extent that a deduction was expressly permitted in the agreement.

47. It is convenient that I underline at the outset a number of significant features of the agreement.

(1) Leighton was engaged to provide consultancy and supervisory services; it is not to produce a physical thing or a structure. This is a significant feature because the sum withheld is calculated by reference to the cost of rectifying the work of the direct contractors, a fact which may bear upon the entitlement of the Authority to abate the amount payable for the provision of the services.[5]

(2) The payments to which Leighton is entitled are to be calculated, not by reference to the product of its work, but by reference to the time and expenditure which it incurred.

(3) There is no independent certifier of Leighton's progress claims. Depending on one's point of view, this means that the Authority was at the mercy of Leighton or that Leighton was at the mercy of the Authority.[6]

(4) There is no retention or other security to be given by Leighton to protect the interests of the Authority in the case that it may have a claim in the future.

(5) As is common in building contracts, progress claims and payments are provisional only. Clause 3.2 expressly acknowledges that payment does not constitute a waiver of any right of action of the Authority against Leighton. The presence of such a clause has been thought to suggest that a deduction should not be made from a progress certificate issued under standard form contract AS2545-1993.[7]

(6) The agreement makes provision in cl. 3.4.2 for the Authority to recover the "extra costs" incurred by reason of any error or deficiency in the services provided by Leighton.

(7) The agreement obliges Leighton to indemnify the Authority against any liability to an employee of Leighton, against any liability for loss or damage to property or personal injury caused by any action or omission or default of Leighton.[8]

(6) The Authority may terminate or suspend the services to be provided by Leighton for any reason[9] or for default.[10] There is no equivalent right in Leighton to suspend work or to terminate the contract for the default of the Authority. It would seem, therefore, that, in the case of the non-payment of a claim, Leighton must nonetheless continue working unless the non-payment amounts to a repudiation and the contract is terminated by it as a result.

(7) Part 6 provides for dispute resolution by an expert, if the parties agree, or by arbitration. Either process contains relatively short time frames. The identity of the expert must be agreed within seven days and that of the arbitrator within one month. It would seem, therefore, that this dispute resolution process is not intended to await the completion of the work

(8) The agreement is expressed in relatively simple and informal terms. It does not follow any of the standard forms in use in the construction industry. It does not deal with a number of matters which are customarily contained in agreements of this type. This said, it does not bear the hallmarks of an agreement prepared by non-lawyers or by persons unskilled in the ways of the industry. Nevertheless, I will not give undue significance to omissions.

(9) I will not construe this contract contra proferentem against the Authority who, I am told, was responsible for its drafting. The parties may be taken to have negotiated the contract at arms length.

(10) There is no express term in the agreement as to the finality of claims or limiting the right of set off or excluding the substantive or procedural rights of the authority to raise a claim such as the present.

62. I am mindful of the fact that the power to order summary judgment is to be cautiously exercised; conflicts of fact should be left for trial, as should difficult and substantial questions of law which may require full argument.

65. There was no issue as to the entitlement of Leighton to the sum claimed, but for the cross-claim. The only question which I am to determine is whether the Authority is entitled to raise as a defence to a claim for non-payment of a progress claim under the agreement its claim for the costs of rectifying defective work. I mention this again because much of the argument and many of the cases to which I was referred concern a different question, whether the Authority is obliged to pay the progress claim without the deduction for this cost. If the answer to this latter question is in the affirmative, the Authority may, even so, be entitled to defend where its cross-claim permits this under the substantive law or the practice of the court.

68. I therefore approach the present case in two stages. Does the contract permit the Authority to make a deduction from progress claims for its cross-claim and, if not may the Authority, nevertheless, resist Leighton's claim in court on the basis of the cross-claim? Unless the agreement contains a clear statement of a contrary intention, the normal rights of defence and set off are available to the defendant before the court.[11] These include the right to set off an unliquidated claim against a liquidated demand.[12]

71. I turn now to consider the three bases offered by the Authority in support of its right to defend.

74. The first basis is that the claim of Leighton is now a disputed claim within the meaning of cl. 3.8 and that the Authority is obliged to pay only the undisputed portion. Counsel for Leighton submitted, first, that a claim is disputed only where the dispute is as to the amount of the claim, that is as to its calculation, the hours claimed, the rates charged or the like. This submission derives considerable support from the terminology of cl. 3.8. What may be disputed is not the amount owing[13], nor the amount due[14], nor the amount payable; it is the amount claimed. Any component of the amount claimed may be the subject of dispute. This would probably include a contention by the Authority that part of the fee is not chargeable by reason of cl. 3.4.1. Clause 3.8 then provides that the Authority shall pay the amount not in dispute. It will be recalled that in cl. 3.6 the obligation of the Authority is to pay the amount owing. Consistency between these two obligations to pay suggests that the amount of the claim after deducting disputed amounts within the meaning of cl. 3.8 should be the same as the amount owing referred to in cl.3.6.

77. This creates an immediate difficulty because the Authority is given a right of set off in the last sentence of cl. 3.6. It may be supposed that the set off would not be included as a credit in Leighton's progress claim. Is it then to be treated as a dispute for which reasons must be given under cl. 3.8? I think not, for it is not a dispute as to the amount claimed. If there is to be a dispute it will be as to the amount deducted as a set off. This disconformity between cl. 3.6 and cl. 3.8 should, to my mind, be resolved by construing "the full amount owing" in cl. 3.6 as meaning the amount of the undisputed claim less any money which may be set off under the last sentence of cl. 3.6.

80. This construction, that a "disputed amount" in cl. 3.8 is restricted to a dispute arising out of the claim in the way that I have mentioned, is consistent with the evident and laudable intention of the drafter that there should be, as far as possible, certainty in determining the amount of payments. This is confirmed by the limited right of set off to which I shall return and the provision that the Authority is not obliged to make payments into a trust account in respect of disputed amounts.[15] It is consistent with the unusual feature of this contract that Leighton is providing consultancy services only and that it is paid, not by reference to the value of its work or by reference to a lump sum, but by reference to time spent and expenses incurred.

83. I conclude that, as a matter of construction, a cross-claim for damages of the kind here made by the Authority cannot be used as a basis for disputing a claim for progress payment by Leighton pursuant to cl. 3.8.

86. Then, it was put by Leighton that the Authority did not raise the present cross-claim in any notice in writing as is required by cl. 3.8 and, in any event did not do so until after the 30 day payment period had expired. Any such difficulty disappears following my conclusion that the cross-claim here cannot be deducted pursuant to cl. 3.8. I add further that the contract does not make the giving of notice a pre-condition to the right to dispute the claim or part of it. While it is true that payment is required to be made within the 30 day period, cl. 3.7 contemplates that payments may be late. The disputed claims clause, cl. 3.8, and the dispute resolution clauses in Part 6 all contemplate that the parties should act promptly but there is no adverse consequence of any failure to do so.

89. The Authority's second basis for the right to deduct is as a set off under cl. 3.6. On behalf of Leighton it was said that the present claim cannot be a set off under cl. 3.6 because this permits the Authority to set off only "any moneys which become due by the Consultant to the Authority at any time". The Authority's claim in the present case against the construction manager may be described as being unquantified and disputed. The present assessment of the cost of rectification cannot be at the time that payment was to be made, nor at the present time, "money which has become due".[16] The Authority may set off only cross-claims which have been resolved and quantified. This is consistent with the limitations upon the Authority's right to dispute claims under cl. 3.8 to which I have referred. This means that, when a progress claim is submitted to the Authority for payment, the parties on delivery of the payment including a notice of reasons for dispute will be in no doubt as to the reason for or validity of any further deduction. It means, too, that the only dispute which the response of the Authority may provoke is that contemplated by cl. 3.8. In short, I conclude that the amount of this cross-claim is not deductable as a set off under cl. 3.6.

92. It follows, therefore, that there is not in the agreement any provision which entitles the Authority to deduct the sum in excess of $350,000 as it did. The question then arises whether, by way of defence in the proceeding, the Authority may raise the cross-claim. That it may do so by counterclaim cannot be doubted and, in such a case, on an application for summary judgment Leighton would be entitled to judgment, perhaps with a stay of execution pending disposition of the counterclaim. The Authority, however, says that it is entitled to defend the claim by raising an equitable set off or by raising the cross-claim as a defence under R. 13.14. Again, it cannot be doubted that a litigant may do so and, in this way, may resist summary judgment. Nor could it be seriously contended that, in this case, the affidavits do not show a factual basis for these defences. The claim and the cross-claim arise out of the same agreement and are sufficiently related to entitle the Authority to raise an equitable set off.

95. It is therefore necessary to consider whether these rights of an ordinary litigant have been removed or deferred by agreement between Leighton and the Authority.[17] At this point I repeat that the agreement contains no such express term. Counsel for Leighton pressed upon me an argument which was essentially based on the existence of certain limited rights of deduction in the agreement. There are two answers to this argument. First, we are here not concerned with the right to withhold payment of a progress claim, but with the different question, whether the defendant to an action on the claim has lost the right to raise certain defences. The second is that the argument depends upon an inference starting from the fact that certain deductions are permitted and leading to the conclusion that no others are permitted - expressio unius est exclusio alterius. It is clear from the judgments in Gilbert-Ash (Northern) Ltd v Modern Engineering Bristol Ltd that the removal of the right to defend requires something more explicit than an inference of this kind.[18]

98. I conclude therefore that the Authority may defend by setting off its unliquidated cross-claim in diminution or extinction of Leighton's claim against it.

101. The third basis is that of abatement of the price in accordance with the principle in Mondel v Steel to which I have referred. While it is clear that a proprietor may abate the price for defective work in a contract for work and labour done,[19] I have not been referred to a case where it has been applied to a services contract of this kind. It is not necessary for me to reach any conclusion on this question nor as to whether the amount here cross-claimed represents the diminution of the value of those services to the Authority. I express no views upon these matters.

104. I conclude, therefore, that Leighton has failed to satisfy me that the Authority is not entitled to raise its cross-claim against the claim of Leighton for the progress claims withheld. The application for summary judgment will be dismissed.

[3] See Building Act 1993, s.131

[4] [1841] EngR 61; (1841) 8 M&W 858; 151 ER 1288

[5] See Hermcrest plc v G Percy Trentham Ltd (1991) 53 BLR 104

[6] See Acsim (Southern) Ltd v Danish Contracting and Development Co Ltd (1989) 47 BLR 59 at 72-3, per Ralph Gibson LJ.

[7] Algons Engineering Pty Ltd v Abigroup Contractors Pty Ltd (1997) 14 BCL 215 at 227, per Rolfe J

[11] Gilbert-Ash (Northern) Ltd v Modern Engineering Bristol Ltd [1974] AC 689 at 717-8, per Lord Diplock; at 722-3, per Lord Salmon; LU Simon Builders Pty Ltd v H.D. Fowles [1992] VicRp 60; [1992] 2 VR 189 at 191, per Smith J; Melbourne Glass Pty Ltd v Coby Constructions Pty Ltd (1997) 14 BCL 409 at 414-5, per Gillard J.

[16] See Merritt Cairns Constructions Pty Ltd v Wulguru Heights Pty Ltd [1995] QCA 273; [1995] 2 QdR 521.

[17] Algons Engineering Pty Ltd v Abigroup Contractors Pty Ltd (1997) 14 BCL 215 at 230, per Rolfe J.

[18] [1974] AC 689 at 717-9, per Lord Diplock; at 772-3, per Lord Salmon, and the cases referred to in footnote 11 above.

[19] Riverside Motors Pty Ltd v Abrahams [1945] VicLawRp 5; [1945] VLR 45 at 53-4, per O'Bryan, Martin JJ.