Zauner Construction Pty Ltd v No 2 Pitt Street Pty Ltd [2001] VSC 154

5. By building contract entered into on or about 28 September 1999 the contractor agreed with the defendant, No. 2 Pitt Street Pty Ltd ("the principal") to construct stage 1 of a project known as the Birallee Plaza Shopping Centre at 97-99 Melrose Drive, Wodonga. The building contract was in writing. It included the Australian Standards General Conditions of Contract AS 2124-1992 as modified by certain special conditions to which I shall refer.

8. Clause 51 required the principal and others to enter into a deed setting out the terms by which payments were to be made by the principal into a nominated bank account in the name of the superintendent, Construction Project Analysis Pty Ltd in trust for the contractor and the principal, to provide security for payment to the contractor under and in accordance with the building contract. According to Mr Bubke this security was required because stage 1 of the project represented part only of the work for which the contractor had tendered and because the principal was a trust company. Accordingly, the parties and the superintendent and others entered into a deed dated 27 September 1999 in compliance with cl. 51. The deed required the principal to make an initial payment into the security trust account of $750,000 and this was done. By cl. 2.2 of the deed, further payments were to be made into the security trust account by specified dates as follows:

The November and subsequent payments were not made by the due dates or at all.

14. Clause 4 of the deed deals with the consequence of a default on the part of the principal:

"4.1 If: (a) the Principal fails to perform on time and in full any of the obligations referred to in clause 2.2 above; or (b) the balance of moneys in the Account is at any time less than the value of the claims for certified payment submitted by the Contractor under the Construction Agreement which are at that time unpaid by the Principal; then the Principal and the Contractor agree that despite any other provision of the Construction Agreement or this Deed, the Contractor may at any time and without further notice: (c) suspend the whole or any part of the work under the Construction Agreement; and (d) exercise any of the other rights referred to in clause 44.9 of the Construction Agreement; as if the Principal had failed to show reasonable cause why the Contractor should not exercise a right referred to in clause 44.9 by the time specified in a Notice under clause 44.7. 4.2 The parties acknowledge that the rights conferred by clause 4.1 are continuing rights solely for the benefit of the Contractor and any failure or delay by the Contractor in exercising the rights conferred by clause 4.1 will not amount to a waiver, an estoppel or otherwise limit or reduce the rights of the Contractor pursuant to clause 4.1 above."

18. I return now to those parts of General Condition 44 which deal with default by the principal. Clause 44.7 permits the contractor in such a case to give to the principal a written notice to show cause in certain circumstances of default. The formal requirements of such a notice are set out in cl. 44.8. Clause 44.9 is in the following terms:

"44.9 Rights of the Contractor If by the time specified in a notice under Clause 44.7 the Principal fails to show reasonable cause why the Contractor should not exercise a right referred to in Clause 44.9, the Contractor may by notice in writing to the Principal suspend the whole or any part of the work under the Contract. The Contractor shall lift the suspension if the Principal remedies the breach but if within 28 days after the date of suspension under Clause 44.9, the Principal fails to remedy the breach or, if the breach is not capable of remedy, fails to make other arrangements to the reasonable satisfaction of the Contractor, the Contractor may by notice in writing to the Principal terminate the Contract. The Contractor shall be entitled to recover from the Principal any damages incurred by the Contractor by reason of the suspension."

22. It will be seen that cl. 4.1 of the deed confers on the contractor the right to suspend the work without further notice and the obligation to lift this suspension if the principal remedies the breach, that is, in this case, if it makes the payment into the security trust account. The reference to the other rights referred to in cl. 44.9 of the building contract means that the contractor might terminate the building contract if the default continues. It also gives a right to damages pursuant to the last paragraph of cl. 44.9 which I have set out above.

25. The uncontradicted evidence of Mr Zauner shows that the contractor commenced the works in or about September 1999. There were some variations and the work proceeded until 10 December 1999. By this time, according to the contractor's progress claim no.5, the value of the work performed was in excess of $1M against a total contract value of the works of $6.3M. The superintendent's value of the work at that time was a little under $1M. On any view, there had been substantial work then completed. Details of the contractor's claims and the responses to them appear from the following table:

# These are the dates verified by Mr Zauner. The superintendent's letters enclosing the certificates in response assert that the claims were received later and on dates which would have the consequence that only certificates 2, 3, 5, 6, 7, and 15 were issued after the date stipulated in the building contract. There is, however, no evidence that the superintendent is correct in these assertions and I have not had regard to them.

30. On 28 November 1999 the principal failed to lodge the sum of $1M into the security trust account and this breach of cl.2.2 of the deed has not been remedied. As a consequence, the contractor, exercising its rights under cl. 4.1 of the deed, suspended the work on 10 December 1999. This suspension has remained in place and still remains in place. The surprising position is, then, that the work has been interrupted for some 17 months but still the building contract remains on foot. It appears from the progress claims and the certificates that the contractor continued to lodge monthly claims after 10 December 1999 and these were processed by the superintendent until March 2000. By that time, the certified value of the work executed was $1,175,774. In and after claim 9, and possibly before this, the contractor had in its claims included claims for extension of time of the date for completion and for prolongation costs at the rate of $2,000 per day. It may be that these claims for prolongation costs were included in the claims under the heading "provisional sums". No certificates were issued in response to claims 8 - 13. That issued in response to claim 14 was for $Nil. The accompanying details show that the superintendent included in certificate 9 $92,000 for prolongation costs acknowledging that no extension of time had then been approved. The amount of certificate 10 was $264,200. This was calculated on the basis that the total value of the work then performed was $1,470,518. This was made up of $1,082,031 for construction work, $372,000 for prolongation costs and $16,487 on account of variations then under review. The prolongation costs are said to have been calculated at the rate of $2,000 per day pursuant to General Condition 36 as amended by Special Condition 14. Thereafter, monthly claims continued to be lodged and certificates issued and time extensions allowed, at least until March 2001.

33. The payments made in response to these certificates are set out in the table above. It appears that payments pursuant to certificates 1 - 6 were made by the superintendent itself, drawing upon the security trust account until it was exhausted. The amount paid to this date was $1,022,197 as required by these first six certificates. After this date, a further $49,269 has been paid under certificates 7 and 8, a total of $1,071,466.

36. General Condition 42, as modified by Special Condition 20, contains procedures for the submission to the superintendent of progress claims for payment, for the issue by the superintendent of payment certificates and for payment to the contractor by the principal. The clause is lengthy and in familiar terms. I shall not set it out. No issue was raised as to the form of or the issuing of the payment certificates which were issued. This is, therefore, not a case such as CMR Builders (Vic) Pty Ltd v Rosebud Hotel Pty Ltd[1]. What is put on behalf of the principal is that the contractor ought not to have made claims and the superintendent ought not to have certified as each did.

39. The argument depends upon the legal consequences of a suspension under cl. 4.1 of the deed as opposed to a suspension under cl. 44.9 of the building contract. It was put that these are two separate agreements and that a suspension under the deed has legal consequences which differ from those attendant upon a suspension under the building contract. A suspension under the deed may entitle the contractor to common law damages but not to delay or disruption costs at the stipulated daily rate pursuant to General Condition 36.

42. It appears from the evidence that the contractor has claimed, and has been allowed by the superintendent, extensions of time under cl. 35.5 and, pursuant to cl. 36, extra costs for each day of extra time at the daily rate specified of $2,000 in the bill of quantities. This application does not require me to consider the validity of the time extensions granted by the superintendent. Clause 36, as amended by Special Condition 14, is in the following terms:

"Where the Contractor has been granted an Extension of Time under Clause 35.5, for an event specified in Appendix A in respect of which payment of extra costs has been granted, the Principal shall pay to the Contractor the daily amount specified for that separable portion as stated in monetary provisions section of the bills of quantities. Nothing in Clause 36 shall - (a) oblige the Principal to pay extra costs for delay or disruption which have already been included in the value of a variation or any other payment under the Contract; or (b) limit the Principal's liability for damages for breach of contract. The Contractor will not be entitled to recover any monetary compensation from the Principal because of or relating to any delay in reaching Practical Completion unless all of the following conditions have been satisfied, namely: (i) the delay was caused by an event of the type described in Annexure Part A; (ii) the Contractor has claimed an extension of time in respect of the delay in strict accordance with the provisions of Clause 35.5; (iii) an extension of time has been granted under Clause 35.5 in respect of delay; (iv) no monetary compensation in respect of the delay has been included in the value of any variation carried out by the Contractor and no such compensation is payable to the Contractor under any other provision of the Contract. The Contractor acknowledges that the amount calculated is a genuine pre-estimate of the Contractor's likely costs, loss and damage resulting from a delay in reaching Practical Completion caused by an event of the type described in Annexure Part A and will be the Contractor's sole remedy against the Principal for monetary compensation for that delay and will be in full satisfaction of all claims, demands, actions, proceedings, or suits (including claims for damages) which the Contractor may have or make against the Principal arising out of or concerning that delay."

46. The events referred to in part (i) of the second paragraph of cl. 36 are -

"(iv) variations directed under Clause 40; ... (x) any breach of the Contract by the Principal."

50. It was submitted that any breach which has been committed by the principal is a breach, not of the building contract, but of the deed. Accordingly, the only entitlement of the contractor is to monetary compensation by reason of the suspension is to actual proved damages in accordance with the last paragraph of cl. 44.9. This submission depends upon the fact that the deed is a separate agreement and that a non-payment under its provisions is not a breach of cl. 51, a point which was not argued before me.

53. Accepting for the purposes of this application that the principal's analysis is at least arguably correct, it does not to my mind mean that summary judgment for the certified and uncertified sums should be denied. The scheme of cl. 42.1 is that payment should be made in accordance with the superintendent's certificate. Provided a valid certificate is issued, it matters not that the certificate is in error. It may be corrected by a further certificate issued pursuant to cl. 42.2 or by a re-evaluation of the work in a subsequent payment certificate or, perhaps, by a determination pursuant to General Condition 47, as amended by Special Condition 21. An overpayment made pursuant to a certificate may be restored pursuant to cl. 47.3. I reject the submission put on behalf of the principal that it is not obliged to pay where the uncertified claim or the sum certified for payment is based on a misapprehension or a misapplication of the contract.

56. The contractor is entitled to submit claims for payment including claims for "amounts then due to the Contractor arising out of or in connection with the Contract". These amounts include sums which might be due under cl. 44.9 as well as sums under cl. 36. The superintendent is entitled and required to form an opinion as to the amount of the payment which is to be made by the principal to the contractor and to include this in a payment certificate issued within 14 days of receipt of the claim pursuant to cl. 42.1. This clause makes clear that certified sums are to be paid and that such payments are to be on account only without prejudice to the entitlement of the principal to dispute the certificate under cl. 47 as amended by Special Condition 21. Indeed, the superintendent is entitled under cl. 42.1 to issue a certificate notwithstanding that no claim has been made.

59. On behalf of the contractor it was argued that it follows from this, and from the default provisions of the fourth paragraph of cl. 42.1, that where the superintendent fails to issue a certificate or where the certificate is issued late, the principal must pay the amount of the claim within the prescribed time. Where no certificate issued, this follows from the terms of the clause. Where the certificate is issued late, it is ineffective so that the same consequence flows. This has been the construction of clauses such as the present cl. 42.1 by the Queensland Court of Appeal [2]; it is consistent with the decision of Rolfe J in New South Wales[3]. If I may respectfully say so, I agree with these analyses and will follow them.

62. There is, however, a complication where, following the failure of the superintendent to issue a certificate timeously or at all, a valid certificate is subsequently issued. In the Daysea case[4] a final certificate was issued after an invalid payment certificate. Having concluded that the contractor was entitled to payment of the sum claimed where the payment certificate was invalid because it was late, the Court of Appeal nevertheless refused to give judgment in that sum for, if paid, it would have to be repaid in accordance with the valid final certificate. It follows, equally, that the obligation to pay which arises from a later valid payment certificate will supersede any entitlement for payment of the sum claimed where no valid certificate has issued.

65. No certificate was issued in response to claims 8, 9, 10, 11, 12 and 13. In each case the principal was by cl. 42.1 obliged to pay the claim within 28 days of receipt of the claim by the superintendent. The claims are cumulative so that the amount payable in respect of these claims is $2,147,212 plus any prolongation costs claims which are not included in this sum. But a $Nil certificate was issued within time in response to the contractor's claim 14. This certificate supersedes the obligation to pay against the prior uncertified claims. I put to one side the principal's obligation to pay interest on those claims pursuant to clause 42.9.

68. In response to claims 15, 16, 17 and 18 the certificates were issued late. Applying the principle in the Daysea case, the principal's obligation in the case of a late certificate, too, is to pay the amount claimed. These claims were also cumulative so that the total payable is $2,322,012, again putting to one side interest,

71. Certificate 14 which was issued in response to claim 19 is valid. The sum of $26,620 certified is made up as follows:

Again, this determination of the value of work performed supersedes the contractor's valuation of the work included in its claim 18 and in claims 15, 16 and 17 which preceded it. No argument was presented for any entitlement under the uncertified claim 20.

76. The valuation of the work in claim 18 is $3,390,477 which sum includes $2,120,338 for basic work plus $510,000 for provisional sums plus $43,062 for variations plus $517,077 for "profit and attendance unpaid portion of contract" and $200,000 for unspecified "other costs". In claim 19 the valuation of the work is $3,430,478. This is the same as that in claim 18 except for an extra $40,000 for provisional sums. The superintendent in response to claim 19 allowed only $1,082,031 for what I have called basic work, $512,000 for prolongation costs, $16,487 for variations and rejected the four remaining items totalling $1,700,862. The total entitlement of the contractor under this certificate 14 is, therefore, $378,000, representing the certified value of work, namely, $1,610,518 less $161,052 retention less $1,071,466 previously paid. There is in my mind some uncertainty as to these precise sums and, further whether some additional sum is to be added for GST. I shall hear counsel as to these matters.

79. In argument counsel for the principal submitted that the proofs of the contractor were not sufficient for it to have summary judgment. They pointed out that there was no proof of the entitlement of the contractor to the $2,000 per day claimed, no evidence of how the prolongation costs were calculated or arrived at and no evidence of the grant of time extensions as required by cl. 35.5. There is no substance in this submission because the claim of the contractor does not depend upon these proofs. It is sufficient that claims pursuant to cl. 42.1 have been made and not responded to or, in the case of the last claim, that a valid certificate has issued.

82. I mention also that in its defence and counterclaim the principal raised a number of other matters. These were not relied upon in opposition to this application and I say nothing further about them.

85. I propose, therefore, that there be judgment for the sum calculated in the manner indicated in paragraph [22] above. I will also hear counsel as to interest.

[2] Daysea Pty Ltd v Watpac Aust Pty Ltd [2001] QCA 49.

[3] Algons Engineering Pty Ltd v Abigroup Contractors Pty Ltd (1997) 14 BCL 215.

[4] [2001] QCA 49 at [31].