ViaSat Inc v Hansen Yuncken Pty Ltd

Supreme Court of NSW|2024-12-02|Before: Rees J

td (Defendant) Representation: Counsel: M Green SC / B Ilkovski (Plaintiff) M Elliott SC / D Hand (Defendant)

JUDGMENT

HER HONOUR: The plaintiff, Viasat Incorporated, is the head contractor and the defendant, Hansen Yuncken Pty Ltd, is a subcontractor in respect of works performed for the Department of Defence. The subcontractor, essentially, constructed a building and building management system (BMS) as part of the establishment of a satellite station near Wagga Wagga. The parties fell into dispute as to whether the subcontractor had satisfied the requirements for "Final Acceptance" under the subcontract in May 2020, or whether the head contractor was entitled to liquidated damages of $1.62 million for failure to satisfy those requirements until December 2020. The parties participated in an arbitration. The subcontractor won. The head contractor now seeks leave to appeal from the arbitral award under s 34A of the Commercial Arbitration Act 2010 (NSW).

Leave to appeal

The occasions on which the Court may grant leave to appeal from an arbitral award are narrowly circumscribed. As the learned authors of Russell on Arbitration (24th ed, 2015, Thomson Reuters) observe, "few appeals … actually get over the leave requirement, which has been designed to catch all but the most meritorious appeals. … the provision is [generally] accepted as a necessary compromise between the desire to entrench arbitral authority on the one hand, and the desire on the other to continue the development of the body of English commercial law, with the link between the courts and tribunals remaining in place": at [8-132]-[8-133].
Section 34A(1) of the Commercial Arbitration Act provides: 34A Appeals against awards (1) An appeal lies to the Court on a question of law arising out of an award if: (a) the parties agree … that an appeal may be made under this section, and (b) the Court grants leave.
That is, s 34A provides an 'opt-in' regime for judicial review of awards: Jacobs Group (Australia) Pty Ltd v Commonwealth [2020] VSC 127 at [10], [13]. While the former Commercial Arbitration Act 1984 (NSW) contemplated that parties to an arbitration agreement may exclude the right of appeal on a question of law, the current Act contemplates no right of appeal on a question of law as the default position unless the parties agree otherwise: ASC AWD Shipbuilder Pty Ltd v Ottoway Engineering Pty Ltd (2017) 129 SASR 122; [2017] SASCFC 150 at [78] per Nicholson J (Kourakis CJ and Stanley J agreeing). It is entirely within the parties' remit to agree upon the extent to which the arbitrator's decision on legal questions is binding or subject to review by this Court. The Act respects the parties' choice.
The first element of s 34A(1)(a) is satisfied here: cl 12.1.5, subcontract. As to whether the Court ought grant leave, s 34A(3) provides: (3) The Court must not grant leave unless it is satisfied: (a) that the determination of the question will substantially affect the rights of one or more of the parties, and (b) that the question is one which the arbitral tribunal was asked to determine, and (c) that, on the basis of the findings of fact in the award: (i) the decision of the tribunal on the question is obviously wrong, or (ii) the question is one of general public importance and the decision of the tribunal is at least open to serious doubt, and (d) that, despite the agreement of the parties to resolve the matter by arbitration, it is just and proper in all the circumstances for the Court to determine the question.
The fact that each of the requirements in s 34A(3) must be satisfied before leave to appeal is granted is noteworthy.
As the drafters of the equivalent English legislation explained, these criteria are intended to encapsulate the reasoning in Pioneer Shipping Ltd v BTP Tioxide Ltd (The Nema) [1982] AC 724, where the House of Lords construed the precursor legislation "in a way that very much limited the right of appeal": Departmental Advisory Committee on Arbitration Law Report on the Arbitration Bill and Supplementary Report on the Arbitration Act 1996 (DAC Report) (February 1996) at [286]-[287]. The philosophy in The Nema was summarised by Lord Mustill and S Boyd QC, Commercial Arbitration (2nd ed, 1989, Butterworths) at 604: "… even in those cases where Parliament has preserved the jurisdiction to entertain appeals, it is no longer axiomatic that courts should be alert to protect parties against decisions made contrary to that system of law which they have expressly or impliedly selected as applicable to their disputes. … Instead, the Court will proceed on the assumption that the parties to an arbitration agreement are content to take the risk that the arbitrator will make mistakes of law, just as they have always been understood as willing to take the risk that [the arbitrator] will make mistakes of fact. There is now a presumption in favour of the chosen tribunal, not the chosen law."
Here, the parties agreed that the requirements of s 34A(3)(b) were satisfied. The focus of the application for leave was on the requirements of sub-ss 34A(3)(a), (c)(ii) and (d). As this application illustrates, where leave to appeal is sought in respect of multiple questions, whether the requirements of s 34A(3) are met in respect in respect of each "question" should be considered, as the requirements may be satisfied in respect of some questions but not others.

Question substantially affects rights of parties

Whereas the former Commercial Arbitration Act 1984 (NSW) required that determination of the question of law "could" substantially affect the rights of the parties, s 34A(3)(a) of the current Commercial Arbitration Act requires that determination of the question of law "will" substantially affect such rights. As Judge Coulson QC observed of this requirement in Walsall Metropolitan Borough Council v Beechdale Community Housing Association Ltd [2005] EWHC 2715 (TCC) at [15]: "Too often, this is 'taken as read' … it is not good enough simply for a party to assert that the alleged issue in question must affect their rights because it goes to an aspect of the dispute in the arbitration. The party asserting that its rights are adversely affected needs to demonstrate the various options open to the arbitrator and how and why the particular point which the arbitrator has erroneously decided has a substantial effect on the rights of the claiming party. As Lord Phillips expressed it in The Northern Pioneer [2003] 1 Ll. Rep 212, the claimant must show that the issue has a substantial impact on the rights of the parties at issue in the arbitration."
The requirement in the former Commercial Arbitration Act was considered in Yesodei Hatorah College Inc v Trustees of the Elwood Talmaud Torah Congregation (2011) 38 VR 394, where Croft J summarised the principles at [18] (citations omitted): "… the question whether the rights of a party 'could be' substantially affected is a question of fact. The consideration of this requirement by the court should not be narrowly confined and, in particular, is not confined to cases in which the nature of the effect is monetary. In circumstances where the arbitrator is required to construe the provision of a contract, it may readily be seen that this is a question of law capable of substantially affecting the rights and obligations of the parties to the contract [or] if the question of law involves the existence or otherwise of a contract …"
Similarly, the earlier requirement was considered in Cole v Gebauer Nominees Pty Ltd [2012] WASC 9, where Allanson J observed at [31]: "… Questions of law, however important, should not go forward for decision if, as between the immediate parties, the matter is largely academic: Ipswich Borough Council v Fisons PLC [1990] 1 Ch 709 at 721. Relevant factors include the amount in issue, and the relationship between the costs of the appeal and the significance of the question of law to be determined: Cargill International SA v Peabody Australia Mining Ltd [2010] NSWSC 887 [139]."
These observations remain apposite under the Commercial Arbitration Act 2010, to which the more onerous requirements of the current legislation should be added: "The Court must not grant leave unless it is satisfied … that the determination of the question will substantially affect the rights of one or more of the parties".

Question of general public importance and open to serious doubt

Section 34A(3)(c)(ii) requires the Court to be satisfied that the question of law is of "general public importance" and the tribunal's decision is "at least open to serious doubt". The requirement that tribunal's decision must be "at least open to serious doubt" is a less onerous test than "obviously wrong": DAC Report at [288]. In CMA CGM SA v Beteiligungs-Kommanditgesellschaft MS "Northern Pioneer" Schiffahrt-gesellschaft mbH & Co (Northern Pioneer) [2003] 1 WLR 1015; [2002] EWCA Civ 1878, Lord Phillips explained that, when paired with the criterion of "general public importance", this requirement is "calculated to place a particularly severe restraint on the role of the Commercial and higher courts in resolving issues of commercial law of general public importance", for example, to questions involving standard clauses widely used and where "changing circumstances can raise issues of general public importance in relation to such clauses that are not covered by judicial decision": Northern Pioneer at [61].
The criterion of "general public importance" directs attention not to the interests of the parties but to the public interest in clarifying questions of law which will have a general application: Ottoway Engineering Pty Ltd v ASC AWD Shipbuilder [2017] SASC 69 at [122] (Blue J). Questions of law which are obviously important to the arbitrating parties may not meet this description, but may be commercially unique to the parties and their particular circumstances, for example, whether one party relied on a misleading representation made by the other: Golden Mile Milling Pty Ltd v Novus Capital Ltd [2022] WASC 364 at [106] (Martin J).

"just and proper in all the circumstances for the Court to determine the question"

Section 34A(3)(d) requires the Court to be satisfied that, despite the parties' agreement to submit to arbitration, it is "just and proper in all the circumstances for the Court to determine the question". The DAC Report explained the reason for this requirement at [290]: "… we think it desirable that this factor should be specifically addressed by the Court when it is considering an application. It seems to us to be the basis on which the House of Lords acted as it did in The Nema … The Court should be satisfied that justice dictates that there should be an appeal and in considering what justice requires, the fact that the parties have agreed to arbitrate rather than litigate is an important and powerful factor."
The learned authors of Commercial Arbitration (2001 Companion Volume to the Second Edition, Butterworths) considered that this required the applicant to establish a further reason for intervention. At 357-358: "This requirement is plainly not satisfied simply be demonstrating that the other requirements of [the section] are satisfied, for otherwise [the subsection] would be unnecessary. Some further reason for intervention must be present: the court is likely to refuse leave to appeal if there are circumstances which indicate that the parties wished speed and finality to prevail even if the tribunal decided a question of law in a way which was obviously wrong or at least open to serious doubt."
I do not consider that s 34A(3)(d) requires the applicant to establish a further reason for leave to be granted beyond those revealed by the preceding sub-sections. Rather, s 34A(3)(d) requires the Court to specifically turn its mind to whether, notwithstanding the Court's satisfaction that the preceding criteria have been established, leave to appeal ought be granted, including potentially by reason of other features of the dispute, the arbitration or the application. As the learned authors of Russell on Arbitration put it, the fourth condition for permission to appeal gives the Court "a final "sweep-up" discretion, which it can use to refuse leave if the other three conditions are met. … Once the Court has wrestled with and overcome the 'obviously wrong' or 'serious doubt' test … then satisfaction of this condition is likely to follow as a matter of course": at [8-158].
This approach was taken by Akenhead J in Braes of Doune Wind Farm (Scotland) Ltd v Alfred McAlpine Business Services Ltd [2008] 1 Lloyd's Rep 608; [2008] EWHC 426 (TCC), who observed obiter at [31]: "… Although this is a separate criterion, it can not necessarily be considered in isolation from the other criteria. I accept that the fact that the arbitrator was here a highly experienced and well known construction law QC is a relevant factor to take into account … (see Keydon Estates Ltd v Western Power Distribution (South Wales) Ltd [2004] EWHC 996 (Ch)). It seems to me that this sub-section is an overall 'catch-all' provision, albeit an important one. However, it could properly be said that, if all the other criteria were established, it would often, but not invariably, be unjust for an obviously wrong decision on an important question of law not to be put right by the Court. That could be thought to be even more so if the chosen highly respected arbitrator has simply had a major intellectual aberration."
Similarly, in Inghams Enterprises Pty Ltd v Southern Cross Farms Australia Pty Ltd (2022) 398 ALR 562, the parties approached this requirement on the basis that whether it would be just and proper to determine the questions posed would stand or fall with the Court's conclusion on the other criteria for leave. Doyle JA noted obiter that if all of the other criteria for a grant of leave had been made out, "then it may well have been just and proper" for the Court to grant leave: at [183] (Livesey and Bleby JJA agreeing).
Finally, I note that in the United Kingdom applications for leave to appeal are determined on the papers unless it appears to the court that a hearing is required: s 69(5), Arbitration Act 1996 (UK). Whilst the same process is not mandated in New South Wales, the procedure is not dissimilar in that the application for leave must set out in detail how the statutory requirements are said to be satisfied: r 47.3(3), Uniform Civil Procedure Rules 2005 (NSW). It also follows from this analysis that, in the hearing of an application for leave to appeal under s 34A of the Commercial Arbitration Act 2010, the applicant should squarely focus on whether the requirements for leave are satisfied, rather than proceed directly to argue the appeal. Also obviously enough, in determining whether these requirements are satisfied, the Court need not resolve how the questions would fare on appeal if leave were granted.

The subcontract

It is necessary to say something about the negotiation of the subcontract and its provisions. The subcontract was for the construction of a building, as part of a larger project being undertaken for the Department of Defence.
When drafting contracts, defence officers are typically required to use procurement contracting template suites, of which two are relevant for present purposes: 1. The Australian Standard for Contracting Suite of Contracting Templates (ASDEFCON) is designed for the procurement of "materiel", being goods and services for a military purpose such as ships, aircraft, vehicles, weapons and their supporting systems and services. ASDEFCON-based contracts were also widely used by other Commonwealth departments and agencies, including the Department of Home Affairs (and Australian Border Force), the Australian Federal Police and Australian intelligence agencies. 2. The Defence Facilities Suite of Contract Templates (Facilities Contract) is used for infrastructure/building works and associated support services.
These templates are widely used, where the Department of Defence is by far the largest procurer of goods and services in the Commonwealth Government, accounting for some 52% of procurement contracts by value. (The second highest procuring department accounts for only 6%.) According to the expert witnesses called by the parties, Colin Thorne (for the head contractor) and Darren Naumann (for the subcontractor), the meaning and effect of the general conditions in both template suites are well-settled in the industry.
Perhaps curiously, although this subcontract concerned the construction of a building, the subcontract was based on the ASDEFCON template but with two clauses added from the Facilities Contract. The subcontractor's project director, Gregory Spencer, said this was the first time in his experience that the draft contract prepared by the head contractor was based on the "ASDEFCON (Strategic Materiel)" draft standard conditions rather than the Facilities Contract. The subcontract was negotiated over about seven months. Mr Spencer said that most of the amendments were made at his request, in an attempt to align the subcontract as much as possible with the terms of a Facilities Contract. I will return to the extent to which the relevant clauses in the subcontract are widely used in the defence industry and, thus, the extent to which the proper construction of these clauses is a question "of general public importance", at [67].
In November 2018, the parties entered into the subcontract. The parties' objectives were set out in cl 1.2.2, including to ensure that the subcontractor delivered the Supplies on time, on budget and to the required specifications: cl 1.2.2(a). Further, the parties intended to support the achievement of these objectives through cost efficiency, transparency, and open, honest and timely communication: cl 1.2.2(k). The parties agreed to perform their obligations having regard to these objectives: cl 1.2.3.
Clause cl 6, "DELIVERY, ACCEPTANCE AND OWNERSHIP", obliged the subcontractor to deliver Supplies in accordance with the subcontract, including the Milestone Schedule and the statement of works (SOW): cl 6.1.1. The subcontractor was obliged to meet the Milestones, including the entry and exit criteria for each Milestone, failing which, the head contractor may exercise its rights to claim liquidated damages: cl 6.1.2-6.1.3.
Clause 6 traversed postponements in the delivery of the Supplies, progress certification and Acceptance of conforming Supplies at specified delivery points: cl 6.7.1. The penultimate Milestone for the project was "Facilities Practical Completion". The Entry Criteria required the subcontractor to submit draft Operation and Maintenance Manuals (or OMMs) and draft As-Constructed Drawings/Documents package for assessment by the head contractor. The Exit Criteria included delivery of the reviewed draft Operation and Maintenance Manuals and reviewed draft As-Constructed Drawings as prescribed in Attachment O. Attachment O contained detailed description of what was required in respect of the manuals and drawings. As to the manuals, the subcontractor was required "as a condition precedent to SGS-E Facilities Practical Completion to compile operation and maintenance manuals and provide one copy of the draft manuals in respect of each aspect of the Facilities to the head contractor for approval. In addition, the subcontractor was obliged to provide "As-Constructed" drawings or documents in accordance with a compendious list of requirements.
The final Milestone was Facilities Completion on 1 May 2020. If the subcontractor did not achieve Final Acceptance within 30 days of the Milestone Date for Facilities Completion, then the head contractor was entitled to liquidated damages at the rate of $10,000 per working day: cl 7.11.
The Entry Criteria for the Final Milestone included: ● Final Operation and Maintenance Manuals for assessment by Viasat ● Final As-Constructed Drawings/Documents package for assessment by Viasat
The Exit Criteria included: (amendments from the initial draft subcontract are marked-up) ● Delivery of endorsed Operation and Maintenance Manuals (approved by Viasat (acting reasonably)) as prescribed in Attachment O ● Delivery of endorsed As-Constructed Drawings (approved by Viasat (acting reasonably)) as prescribed in Attachment O
Attachment O did not contain any further or separate requirements for Final Acceptance in respect of "As-Constructed" Drawings. As for Operation and Maintenance Manuals, cl 1.2 of Attachment O provided: "1.2 The Subcontractor must, as a condition precedent to SGS-E Facilities Completion: (a) resubmit the Draft Operation and Maintenance Manuals and the Draft Amended Operation and Maintenance Manuals to Viasat, as necessary; and (b) once approved by Viasat, submit three (3) hard and one (1) soft copies of the final, approved versions of the Draft Operation and Maintenance Manuals and the Draft Amended Operation and Maintenance Manuals (Final Operation and Maintenance Manuals) to Viasat."
Clause 6.8 dealt with Final Acceptance and provided: (substantive amendments from the initial draft subcontract are underlined) "6.8.1 The Subcontractor shall, when seeking Final Acceptance: (a) complete and present a signed Final Acceptance Certificate certifying that the Subcontractor has fulfilled its obligations under this Subcontract, except to the extent that the Subcontractor's obligations expressly, or by implication, survive the Final Acceptance Milestone, including the obligations in clause 12.5; and (b) provide any other supporting evidence reasonably required by Viasat Representative, including confirmation of successful completion of any Final Acceptance testing required by this Subcontract. 6.8.2 The Viasat Representative shall, within 15 Working Days of the Subcontractor seeking Final Acceptance: (a) endorse the Final Acceptance Certificate if the following requirements are met: (i) the Subcontractor has achieved all previous Milestones and Acceptance of all Supplies in accordance with clause 6.7, in which case, the date identified by and no earlier than the date transmitted by, the Subcontractor in the Final Acceptance Certificate as being the date of Final Acceptance will be the date of Final Acceptance; and (ii) the Subcontractor demonstrates to the reasonable satisfaction of the … Viasat Representative, that the Supplies function and integrate as required by the Subcontract and that the Subcontractor has fulfilled its obligations in accordance with this Subcontract, except to the extent that the Subcontractor's obligations expressly, or by implication, survive the Final Acceptance Milestone, including the obligations in clause 12.5; or (b) notify the Subcontractor that it has failed to achieve the requirements of Final Acceptance detailed in clause 6.8.2a, in which case the Viasat Representative shall advise the Subcontractor in writing of the reasons for the failure."
If a notice of failure to achieve the requirements of Final Acceptance was given, the subcontractor was obliged, within seven days of receipt of that advice, to provide "full written details to the Viasat Representative of its proposed remedy": cl 6.8.3. In such a case, the head contractor was then required under cl 6.8.4, within 21 days, to either: 1. instruct the subcontractor in writing to complete any course of action proposed by it within a specified time; or 2. issue a notice of rejection of the proposal and require that the subcontractor submit an alternative proposal within 10 days of that notice.
Embedded within cl 6.8.1(a) and 6.8.2(a)(ii) was reference to cl 12.5, which provided,: "12.5 Survivorship 12.5.1 Any term of this Subcontract which expressly or by implication from its nature is intended to survive the termination or expiration of this Subcontract and any rights arising on termination or expiration shall survive, including … any warranties … given under this Subcontract."
As to warranties, the subcontractor gave a 12 months' warranty for Defects in materials and workmanship in the Supplies, starting from Acceptance of the Supplies. Clause 9.2.1 provided: "The Subcontractor warrants that the materials and workmanship in the Supplies (including the Facilities and Building Works) conform with, and that the Supplies meet the requirements of this Subcontract. The Subcontractor shall remedy by repair, replacement or modification, Defects in materials and workmanship in the Supplies notified to the Subcontractor by the Viasat Representative during the period of 12 months starting from Acceptance of the Supplies (for the purposes of clause 9.2 called the 'warranty period')."
Defect was defined as a fault, deficiency or absence of an item of the Supplies, where the fault may be in design or deviation of a dimension, finish or other functional characteristic from specified requirements or from recognised standards of engineering practice. Supplies was defined as goods and services supplied under the subcontract, including Technical Data and all designs required in connection with the building works. Technical Data included information reduced to a material form in relation to the Supplies, including manuals, designs and drawings.

The works

On 6 November 2018, the subcontractor started work. By November 2019, the subcontractor was approaching practical completion. In November and December 2019, the subcontractor provided "As-Constructed" drawings. In January 2020, the head contractor began to provide comments on these drawings. In February 2020, the subcontractor submitted Operation and Maintenance Manuals. Matters which the head contractor wished the subcontractor to address were identified in a document called a "punchlist", which was issued by the head contractor and updated from time to time. On 25 February 2020, a punchlist was created for the Operation and Maintenance Manuals.
On 26 February 2020, the subcontractor achieved the Facilities Practical Completion Milestone. Two days later, the subcontractor demobilised from the site. Further revisions of the "As-Constructed" drawings continued to pass between the subcontractor and head contractor.
The Final Milestone was required to be achieved by 1 May 2020. On 15 May 2020, an updated punchlist was issued for the Operation and Maintenance Manuals. On 20 May 2020, the subcontractor issued a Final Acceptance Request. On 21 May 2020 and 3 June 2020, the punchlist for the Operation and Maintenance Manuals was updated again.
By 10 June 2020, 15 Working Days had passed since the Final Acceptance Request. But the head contractor did not respond by either endorsing the Final Acceptance Certificate or notifying the subcontractor that it had failed to achieve the requirements of Final Acceptance: cl 6.8.2(a) or (b). Also on 10 June 2020, the subcontractor proposed to amend the subcontract such that the warranty period commenced on 26 February 2020, being the date of Acceptance of Facilities Practical Completion. The head contractor agreed to this amendment on 23 June 2020.
From 22 to 26 June 2020, a Physical Configuration Audit took place, as required by the SOW. Following this, the head contractor issued further comments on the "As-Constructed" drawings. In July 2020, the subcontractor's project manager pressed suppliers to respond to these further comments, "And yes I know they have commented previously" but "Please note these requirements form part of the entry and exit criteria of Final Acceptance". The head contractor emphasised this 'admission against interest' before the arbitrator and on this application. It is not clear why. Post-contractual conduct is not admissible on the question of what a contract means: Brambles Holdings Limited v Bathurst City Council (2001) 53 NSWLR 153; [2001] NSWCA 61 at [25]-[26].
Further revisions of the "As-Constructed" drawings passed back and forth and were progressively finalised for different services from August 2020 to the last drawings for Fire and Electrical on 16 December 2020. On 18 December 2020, the head contractor endorsed the Final Acceptance Certificate. On 28 January 2021, the head contractor certified liquidated damages in the sum of $1.62 million.

The arbitration

In June 2021, the subcontractor served a statement of claim, seeking a declaration that it had achieved Final Acceptance on 20 May 2020 and that the head contractor was not entitled to liquidated damages. Alternatively, the subcontractor sought a declaration that the head contractor's breaches of the subcontract rendered the liquidated damages clause inoperable. In July 2021, the head contractor served a cross-claim, seeking $1.62 million in liquidated damages. From December 2021 to March 2023, the parties put on their evidence. The arbitration was held over six days in August 2023.
On 28 March 2024, the arbitrator issued a final award. The arbitrator concluded that the subcontract had implied terms inter alia requiring each party to cooperate to enable the other party to have the benefit of the contract and to act in good faith: at [127], [134]. The arbitrator then devoted some 26 pages to endeavouring to ascertain precisely what the head contractor contended had to be done by the subcontractor, but had not in fact been done, before issuing the Final Acceptance Certificate.
Picking up the story again at page 60 of the arbitral award, attention turned to the Final Acceptance Milestone requirements for Operation and Maintenance Manuals, including the terms of Attachment O. The arbitrator accepted the subcontractor's submission that the items on the punchlist that remained 'open' as at 3 June 2020 were minor, if not trivial, "and were certainly not matters that would justify the refusal of Final Acceptance here": at [246].
While the subcontractor submitted that it could readily attend to these matters under the warranty period, the head contractor submitted to the arbitrator that the focus should be on the entry and exit criteria for the Final Acceptance Milestone. The arbitrator did not accept the head contractor's analysis of the cross-over between the warranty period and the relevant Milestones. Where the warranty period commenced on Practical Completion, "to the extent that there existed minor defects and omissions in the works at the time Final Acceptance was sought … Hansen Yuncken was entitled to remedy those things during the unexpired portion … of the warranty period": at [248]. The arbitrator also accepted the subcontractor's submission that the head contractor should have notified any problems with the Operation and Maintenance Manuals when responding to the Final Acceptance Certificate under cl 6.8.2: at [251]. The arbitrator concluded at paragraph [252]: (emphasis in original) "It cannot be the proper construction of the Subcontract to conclude that any error or omission in the OMMs disqualifies Hansen Yuncken from the award of Final Acceptance. That is particularly so where, as here, the parties provided for a warranty period for the express purpose of permitting Hansen Yuncken an opportunity to rectify, for the benefit of Viasat, defects and omissions in the works the subject of the earlier grant of 'Practical Completion'. This is not a case where, for example, there was a failure to provide a particular OMM, such that it could be said that Hansen Yuncken had wholly failed to fulfil a component of the condition precedent. I am not satisfied that any "failures" in the OMMs were of sufficient magnitude to preclude Final Acceptance."
The arbitrator took the same approach in respect of the Final Acceptance Milestone requirements for "As-Constructed" drawings when reviewing the requirements of Attachment O. The arbitrator considered that the suggestion that errors and omissions in the drawings disqualified the subcontractor from Final Acceptance was inconsistent with the Milestone for Practical Completion having been met. The omissions or defects in the drawings, referred to in correspondence, were minor and capable of rectification during the warranty period or a remedy proposal under cl 6.8: at [265].
The arbitrator then turned to whether the head contractor had complied with its obligations under cl 6.8 and concluded that it had not. The arbitrator considered at [335]-[336]: "335 Notably, the obligation to do one of those two things [in cl 6.8.2] is not conditioned upon Viasat Representative being satisfied that the FA [Final Acceptance] Certificate has been property presented, or presented timeously. Indeed, subclause 6.8.2b expressly provides for what should occur in the circumstance that, for whatever reason, the Viasat Representative is of the opinion that Hansen Yuncken has failed to achieve the requirements of Final Acceptance specified in the immediately preceding subclause. 336 To conclude that the FA Certificate is "premature" or "grossly premature" is, in reality, to hold the belief that the requirements for Final Acceptance have not been met. So understood, nothing about [the head contractor's representative] Ms Armstrong's conclusion that the presentation of the FA Certificate was "premature" should be taken to have relieved her from her obligation under subclause 6.8.2, or to in some way deprive Hansen Yuncken's presentation of the FA Certificate of the effect contemplated by clause 6.8.1. …"
Whilst the arbitrator was satisfied that the conditions for Final Acceptance had been met at the time that the Final Acceptance Certificate was presented, if he was wrong about that then he did not accept that satisfaction of the conditions was a "condition precedent" to the presentation of a Final Acceptance Certificate. At [338]-[339]: "338 … Such a construction would, with respect, be entirely uncommercial, leading to the absurd result that where the employing party regarded [a Final Acceptance] Certificate as 'premature' because certain criteria were not met, it could simply ignore such applications when received, tell the builder nothing, and leave the builder in the dark as to the efficacy of the application. Moreover, such a construction would render subclause 6.8.2b redundant. 339 The parties plainly contemplated that minds might reasonably differ, and that they may have different views, as to whether the entry and exit criteria were met, and established a regime for exposing those different views, and having them resolved. That regime, which is found in more or less similar form in most building contracts, required, in the circumstances that obtained here, the furnishing by a Viasat Representative of her reasons for concluding that Hansen Yuncken had failed to achieve the requirements of Final Acceptance. That was a contractual requirement - it was more than a mere 'nicety', as Ms Armstrong described it. Her silence was not a proper response."
The arbitrator concluded that, even if the Final Acceptance Certificate was perceived to be premature, the head contractor was not relieved of its obligation under cl 6.8.2 to respond in one of the two ways specified, including to state as much in writing within 15 Working Days: at [340]. As such, the head contractor's failure to respond to the Final Acceptance Certificate within 15 Working Days, or at all, was a breach of the express terms of cl 6.8.2, the cooperation obligation in clause 1.2.3 and the implied terms of inter alia cooperation and good faith. The head contractor's silence was "antithetical to the fostering of 'transparency and open, honest and timely communication'. To remain silent, while, apparently, harbouring reasons for not endorsing the [Final Acceptance] Certificate is, with respect, to be anything but transparent": at [344]. To defer sending correspondence in response to the certificate for some seven months was inconsistent with the duty to cooperate and the implied obligation of good faith: at [344].
The arbitrator accepted the subcontractor's submissions in respect of the "prevention" principle. The absence of any response from the head contractor to the Final Acceptance Certificate deprived the subcontractor of the benefit of its express contractual right under cl 6.8.3 to provide a proposed remedy and thereafter, under cl 6.8.4, to receive from the head contractor an instruction to undertake the proposed remedy or a direction to submit an alternative proposal: at [361]. At [362]: "As is orthodox in construction contracts, the Subcontract contemplated that [a Final Acceptance] Certificate regarded by the Viasat Representative as wrongly claiming completion would trigger a further regime under which the works would meet the entry and exit criteria for the Final Milestone. Here, that regime was thwarted by the Viasat Representative's inaction, in breach of Viasat's obligations under the Subcontract."
The arbitrator dismissed as "sophistry" the head contractor's submission that this was really a "loss of opportunity" argument: at [363]. The arbitrator rejected the head contractor's submission that it was necessary for the subcontractor to establish a counterfactual, being that it would have completed its obligations under the subcontract earlier if the head contractor had responded to the Final Acceptance Certificate. The arbitrator stated, "No authority for the proposition that the counterfactual need be made good where acts of prevention have been established [was] cited … None of the authorities on Viasat's list of Authorities supports that proposition and nor am I aware of any such authority": at [366]. Further, at [367]: "… the proposition ignores the essence of the prevention principle viz that a party cannot insist on the performance of a contractual obligation by the other if it itself is the cause of the other's non-performance. The principle operates to prevent a party from taking advantage of its own default … In any event, if I am wrong about that, it is well open to infer, not least from the fact that Hansen Yuncken brought the works to a state that the Viasat Representative regarded as justifying the issue of Final Acceptance … that the timely provision by her of the 'reasons for failure' would have seen Hansen Yuncken remedy the works. It is not necessary for me to embark on the hypothetical exercise of determining by when that might have occurred."
The arbitrator rejected the head contractor's argument that the subcontractor's case on prevention failed for want of evidence going to a counterfactual: at [369]. In the result, the arbitrator declared that the subcontractor achieved Final Acceptance on 20 May 2020 and the head contractor was not entitled to liquidated damages.
On 12 May 2024, the head contractor commenced these proceedings, being within the 3 months required by the Commercial Arbitration Act: s 34A(6).

Questions of law

The first question was whether the arbitrator wrongly construed the Exit Criteria for the Final Milestone of the subcontract as it related to Operation and Maintenance Manuals and As Constructed Drawings where: 1. the Final Milestone was required to be achieved by 20 May 2020 but the head contractor had not then approved the Operation and Maintenance Manuals or As Constructed Drawings for the purposes of the Exit Criteria; and 2. the arbitrator determined that the subcontractor was not legally disqualified from the award of Final Acceptance on 20 May 2020 as it could remedy any defects and omissions in the Operation and Maintenance Manuals and As Constructed Drawings during the warranty period.
The second question was whether, on the proper construction of cl 6.8.2(b) of the subcontract, the head contractor was required to give notice to the subcontractor that it had not achieved the relevant Exit Criteria for the Final Milestone.
The third question was whether the arbitrator failed to properly consider whether the subcontractor was prevented by the head contractor from achieving the Final Milestone.

Should leave to appeal be granted

Whether leave should be granted was dealt with by the parties on a composite basis in respect of the three questions of law.

Question substantially affects rights of parties

As to the requirements of s 34A(3)(b) - "determination of the question will substantially affect the rights of one or more of the parties" - the head contractor submitted that its rights were substantially affected, where $1.62 million is a lot of money.
The subcontractor submitted that determination of the questions posed by the head contractor would not substantially affect the parties' rights, as the head contractor lost no matter what. Given other findings made by the arbitrator which are not challenged, the head contractor was not entitled to liquidated damages in any event. The arbitrator concluded that there were implied terms of the subcontract that any notice issued by the head contractor under cl 6.8.2 was required to provide the subcontractor with sufficient details to enable it to issue a Remedy Proposal in accordance with cl 6.8.3. There was an implied term that the parties would take all steps reasonably necessary to enable the other party to perform its obligations under the contract. There was an implied obligation that the head contractor would do all things necessary on its part to enable the subcontractor to have the benefit of the subcontract, including by providing timely responses to any application for Final Acceptance. There was an implied term of good faith. The head contractor breached these implied terms and cl 1.2.3 by its failure to properly consider the application for Final Acceptance dated 20 May 2020 and respond. This prevented the subcontractor from performing its contract. As a consequence, the head contractor was not entitled to liquidated damages as these breaches rendered cl 7.11 inoperable and caused time under the contract to be set "at large". The head contractor was entitled to general law damages only.
The head contractor rejoined that, if it was right about the construction of the subcontract, then the findings of breach of implied terms could not stand as there was no obligation for the head contractor to do anything. Further, implied obligations to cooperate and the like must cede to direct entitlements under the contract.
For the purposes of this requirement for leave, I think the three questions are inter-related and may be conveniently considered together. In short, the head contractor contends that the arbitrator should have construed the subcontract as requiring that the head contractor had approved the Operation and Maintenance Manuals and As-Constructed Drawings before the subcontractor was entitled to issue a Final Acceptance Certificate such that, if the subcontractor issued a Final Acceptance Certificate before the approved Operation and Maintenance Manuals and As-Constructed Drawings had been delivered by the head contractor, then the certificate had no contractual effect. This was so notwithstanding the 'carve-out' in cl 6.8.1(a): that the subcontractor certified that they had fulfilled their obligations "except to the extent that the Subcontractor's obligations expressly, or by implication survive the Final Acceptance Milestone, including the obligations in clause 12.5", which included a warranty for Defects in materials and workmanship in the Supplies. This was also so notwithstanding the head contractor's obligation under cl 6.8.2 to respond to the subcontractor's application for Final Acceptance in one of the two ways there set out. It was said to follow that the head contractor was not precluded from relying on the liquidated damages clause by its failure to respond by either method specified in cl 6.8.2.
I accept that the proper construction of the subcontract "could" substantially affect the head contractor's rights, where the amount of liquidated damages claimed, but rejected by the arbitrator, is material. The question is whether construction of the subcontract "will" substantially affect those rights, given the other findings made by the arbitrator, which are not challenged.
If the head contractor's proposed construction of the subcontract is accepted, then the implied terms found by the arbitrator to form part of the contract will give way to express terms of the contract, as so construed: Sanders v Snell (1998) 196 CLR 329. Express terms pose more of an obstacle to the proffered construction, in particular, the obligation imposed on the head contractor by cl 6.8.2 that it "shall within 15 Working Days of the Subcontractor seeking Final Acceptance" respond in one of two ways. But I accept that, if the head contractor's arguments as to how the clauses in the subcontract operate together are endorsed by the Court, then determination of this question "will substantially" affect the rights of the parties. This requirement is satisfied.

Question of general public importance and open to serious doubt

As to the requirements of s34A(3)(c)(ii) - "the question is one of general public importance and the decision of the tribunal is at least open to serious doubt" -the head contractor submitted that the contractual provisions the subject of the appeal were frequently used in procuring works and supplies for the Department of Defence. The proper construction of these clauses was said to raise a question of general public importance, relying on the evidence of Mr Thorne. The fact that more than one set of precedents had been used to form this contract did not gainsay the importance of the Court considering the meaning of its terms in relation to standard form clauses. Mr Spencer's evidence demonstrated that the departures from the standard form did not materially change the clauses now challenged. There was said to be serious doubt as to the conclusions of the arbitrator in relation to the construction of the subcontract and its application to the facts as found.
The subcontractor submitted that this was a bespoke contract, which was unusual and not-to-be-repeated, relying on the evidence of Mr Naumann. The use of an ASDECFON precedent for the purposes of a building contract was both unusual, and unique to the circumstances of this project. The contract was the subject of extensive negotiations and was heavily amended. Given the evidence of Mr Naumann, the Court would conclude that there is no public interest in the questions raised on this appeal, and the answers to those questions will not have a general application beyond the confines of the unique terms of this subcontract. As to the question of whether or not the decision was at least open to serious doubt, it was submitted that the arbitrator correctly applied well-established principles of contract interpretation in reaching his determination.
I consider that the parties' evidence and submissions on the templates used in defence contracts were relevant to the first and second questions of law only. I have earlier set out Mr Spencer's evidence on the unusual features of the subcontract: see [24]-[24]. Mr Spencer described the amendments made to the critical clause, cl 6.8, in the course of negotiations. The amendments included the addition of "Exit Criteria" which do not appear in the ASDEFCON (Strategic Materiel) draft standard conditions.
Mr Thorne explained that variations to cl 6, including cl 6.8 (Final Acceptance), are resisted by defence procurement authorities as cl 6 is a 'core' clause which defence officials are required to include, with tailoring "kept to a minimum" and to "only be deleted or changed if specialist legal or contracting advice has been obtained". Clause 6.8 of the subcontract incorporated minor tailoring, likely reflecting the fact that the procurer was the head contractor rather than the Commonwealth of Australia, and customising required response timelines. Mr Thorne said the use of milestones in the subcontract was consistent with ASDEFCON and its widespread use by the Department of Defence and the defence industry, as was the use of exit and entry criteria for each milestone, including document deliverables. Mr Thorne agreed, however, that milestones with entry and exit criteria were not typically used in contracts for construction work. Most milestones in the subcontract were consistent with those used in the Facilities Contract rather than ASDEFCON milestones.
Mr Naumann said the subcontract was not typical of contracts used by the Department of Defence, where most construction work was contracted using a Facilities Contract. The Department of Defence 'Contract Template Selection and Tailoring Guide' required that the Facilities Contract "must be used for construction procurements". Mr Naumann said construction works being undertaken by building contractors working under subcontract arrangements to a materiel contractor were "very much the exception to the rule". Taking elements of both contract forms and combining them into a single hybrid contract was not typical in his experience and "patently not consistent with the mandatory use of the Defence Facilities Suite as described by a Defence Policy."
Mr Naumann said that amendments to the Facilities Contract templates were limited to the addition of special conditions. Where performance requirements were associated with the achievement of milestones in the Facilities Suite of contracts, they were articulated as conditions precedent. The use of milestones with entry and exit criteria was not typical in contracts for the performance of construction work on defence property. Mr Naumann said that the amendments made to the ASDEFCON template to produce the subcontract were particular to this project, reflected a unique agreement negotiated by the parties and did not follow the Department of Defence's own guidelines. If Defence were to follow its own policies, the subcontract ought not be used in any other procurements. He also did not consider the volume and value of goods and services that might be procured by the subcontract to be significant and described the value of the works undertaken in this project to be miniscule in comparison with the defence budget overall.
Mr Thorne agreed that his experience was in the acquisition and maintenance of military equipment, whilst Mr Naumann's expertise was in the construction of buildings and facilities on defence property. He deferred to Mr Naumann's expertise on matters concerning the construction of facilities on defence properties. Mr Thorne agreed that it was unusual to combine two template suites. While other contracts had amalgamated template suites in this manner, it was unlikely that this particular subcontract would be repeated.
The two clauses from the Facilities Contract which were added to the ASDEFCON template, when drafting the subcontract, are not relevant to the questions of law sought to be raised on appeal. The questions of law concern cl 6 from the ASDEFCON template. I have marked-up the amendments to the Exit Criteria and cl 6.8 during negotiations at [30] and [32]. The amendments were, in short, to add an obligation on the head contractor to act reasonably, including when approving the manuals and drawings.
Beyond the addition or deletion of particular words, however, is the fact that a contract generally used for the acquisition of military vehicles and weapons was used for the construction of a building. Rather than utilising conditions precedent for the achievement of performance requirements, entry and exit criteria were used instead. This was not typical. Where Mr Thorne deferred to Mr Naumann's expertise, so will I. The subcontract was unusual and unique to this particular job. In these circumstances, the proper construction of this particular contract by a Court will not give guidance on the construction of defence contracts more broadly, but to a contract what was unique to these parties: Golden Mile Milling v Novus Capital at [106]. The applicant has failed to establish this criteria.
If I am wrong about this, then nor am I satisfied that the decision of the tribunal is open to serious doubt. The parties made detailed submissions in support of the construction of the subcontract for which each contended, broadly repeating submissions made to the arbitrator. It is not necessary to repeat those submissions here, nor to address those submissions as if leave has been granted. Suffice to say that the arbitrator's construction of the contractual regime, including the 'carve-out' in cl 6.8.1(a) - the subcontractor certified that they had fulfilled their obligations "except to the extent that the Subcontractor's obligations expressly, or by implication survive the Final Acceptance Milestone, including the obligations in clause 12.5 - and the obligations on the head contractor under cl 6.8.2 was, with respect, straightforward, available and sensible.
Also suffice to say that the head contractor's proposed construction of the subcontract is arguable but faces some challenges and has a distinctly uncommercial flavour. For example, on the head contractor's construction, until the subcontractor is entitled to have the Final Acceptance Certificate accepted, the head contractor need not respond to the certificate. The bulk of cl 6.8 would be otiose. In short, this is not one of those cases where the Court would be tempted to grant leave in order to resolve an issue of commercial law of general public importance: Northern Pioneer at [61].
The third question of law does not concern the templates used for defence contracts but general law principles. The "prevention principle" is that "a party cannot insist on the performance of a contractual obligation by the other party if it itself is the cause of the other party's non- performance", where the principle may be regarded as a particular manifestation of the duty to cooperate implied by law in all contract: Spiers Earthworks Pty Ltd v Landtec Projects Corp Pty Ltd (No 2) (2012) 287 ALR 360; [2012] WASCA 53 at [47] per McLure P (with whom Newnes JA agreed); cited with approval in Probuild Constructions (Aust) Pty Ltd v DDI Group Pty Ltd (2017) 95 NSWLR 82; [2017] NSWCA 151 at [114] (McColl JA; Beazley ACJ and Macfarlan JA agreeing).
The learned authors of Hudson's Building and Engineering Contracts (14th ed) note that "In the absence of an applicable extension of time clause, acts of prevention by the [head contractor], whether authorised by or breaches of the contract, will set time at large and invalidate any liquidated clause. Variations whether authorised under the contract or subsequently agreed, will be regarded as acts of prevention (or waiver) for this purpose. Where the act of prevention … goes to part of the delay but not to the whole, the entire liquidated damages clause will still be invalidated, unless an applicable extension of time clause exists which enables a new completion date to be set": at [6-033].
A more fulsome explanation was given by in Peak Construction (Liverpool) Ltd v McKinney Foundations Ltd (1970) 69 LGR 1 by Salmond LJ (Edmund Davies and Phillimore LJJ agreeing) at 11: (citations omitted) "A clause giving the employer liquidated damages at so much a week or month which elapses between the date fixed for completion and the actual date of completion is usually coupled … with an extension of time clause. The liquidated damages clause contemplates a failure to complete on time due to the fault of the contractor. It is inserted by the employer for his own protection; for it enables him to recover a fixed sum as compensation for delay instead of facing the difficulty and expense of proving the actual damage which the delay may have caused him. If the failure to complete on time is due to the fault of both the employer and the contractor, in my view, the clause does not bite. I cannot see how, in the ordinary course, the employer can insist on compliance with a condition if it is partly his own fault that it cannot be fulfilled. I consider that unless the contract expresses a contrary intention, the employer, in the circumstances postulated, is left to his ordinary remedy; that is to say, to recover such damages as he can prove flow from the contractors' breach. No doubt if the extension of time clause provided for a postponement of the completion date on account of delay caused by some breach or fault on the part of the employer, the position would be different. This would mean that the parties had intended that the employer could recover liquidated damages notwithstanding that he was partly to blame for the failure to achieve the completion date. In such a case the architect would extend the date for completion, and the contractor would then be liable to pay liquidated damages for delay as from the extended completion date.
It is not clear to me how the arbitrator's treatment of this issue is said to give rise to a question of general public importance, beyond the fact that the question arose in the context of a defence contract. This requirement is not satisfied for the third question. Nor am I satisfied that the arbitrator's decision is open to serious doubt. Whilst the head contractor's submission to the arbitrator on causation and 'loss of opportunity' may have been arguable, it remained the case on this application that no authority was cited in support of these propositions. The arbitrator's application of established legal principles was unremarkable.
Having failed to satisfy the Court as to this requirement in respect of any of the three questions, no leave can be granted.

"just and proper in all the circumstances for the Court to determine the question"

As to the requirements of s34A(3)(d) - "it is just and proper in all the circumstances for the Court to determine the question" - the head contractor submitted that a combination of the earlier factors supported a grant of leave in the circumstances of this arbitration. It is not necessary to consider this criteria, where the preceding requirements of the statute have not been satisfied.

Orders

For these reasons, I make the following orders: 1. Dismiss the Summons filed on 12 May 2024. 2. Order the plaintiff to pay the defendant's costs of the proceedings.

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: 11 December 2024

Commercial Arbitration Act 1984(NSW)

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Judgment (17 paragraphs)

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