On what is hopefully the last lap in completing the manuscript For Extra-Contractual Recoveries For Construction And Engineering Work, I am largely sticking to areas which have been considered by the courts. There are many of these. And they show that contractors often have routes to recovery which are not apparent from the express wording of the contract. But there are some routes which seem to be open, which has not been considered by the courts at all. Perhaps because nobody has ever tried them?
One of them concerns security of payment under the East Coast model. Is there any reason why the contractor should not seek to enforce its right to a progress payment by way of litigation or arbitration, i.e. outside the procedures established by the legislation? For the purpose of canvassing the point here, I refer to the sections in the South Australian Building and Construction Industry Security of Payment Act 2009, although the same point is available under other East Coast State regimes.
There are a number of reasons why a claim to a progress payment under section 8 of the Act[1] might be more attractive than a claim for interim payment pursuant to the terms of the contract. It is well established that the statutory right to a progress payment is parallel to and separate from the contractual right. A feature of the statutory right to a progress payment is, was the amount of the progress payment is prima facie calculated in accordance with the terms of the contract,[2] that it is not restricted by contractual mechanisms. Thus, whilst a contractual right might be limited by what has been certified, the statutory right is not so tethered. See for example Transgrid v Siemens Ltd [2004] NSWCA 395; (2004) 61 NSWLR 521 at [35], John Holland Pty Ltd v Roads and Traffic Authority of NSW [2007] NSWCA 140 at [37] and [38], Plaza West Pty Limited v Simon’s Earthworks (NSW) Pty Limited [2008] NSWCA 279 at [54]. At least arguably, such contractual mechanisms also include notice provisions, such that a particular claim might, if the contractual notice has not been provided, be barred as a contractual claim for interim payment, but permissible as a statutory claim to a progress payment under section 8 of the Act. Put another way, the amount of the statutory progress payment is to be calculated according to the underlying terms of the contract, and not according to the way that any contractual mechanisms have been administered.So, you might ask, if the statutory right to a progress payment might be more extensive that the parallel contractual right to an interim payment, why would the contractor or subcontractor simply not rely on his right to go to adjudication, or otherwise use the procedures available under the Act? The answer to that might well be that all of the rights go to adjudication and the other procedures available under Part 3 of the Act hinge on service of a payment claim[3], and the payment claim must be served within six months after the construction work was last carried out, or less.[4] If that period has already passed, the Part 3 right to go to adjudication has been lost.
So, in the circumstances, can the contractor or subcontractor issue proceedings in court, or go to arbitration, seeking to enforce his Part 2 right to a progress payment?
Although untested, the argument for the enforcement of the Part 2 statutory right to payment, independent of the Part 3 enforcement procedure, might run as follows:
- The essential structure of the legislation lies in Part 2 and Part 3;
- Part 2 creates a statutory right for a contractor to recover progress payments, this statutory right being parallel to and in addition the contractual right of the contractor under the terms of the contract;
- Part 3 sets up a statutory scheme whereby this statutory right to progress payments may be enforced either by means of adjudication and/or by court process where the respondent has failed to provide a payment schedule and/or by reason of the commercial pressure inherent in the right of suspension;
- These essential parts of the legislation are sandwiched between Part 1, which deals with definitions and so forth, and Part 4, which deals with miscellaneous matters such as the prohibition on contracting out.
- There is nothing in Part 2 of the Act which states expressly that the right to a progress payment under Part 2 may be enforced only by the means set out in Part 3. On the contrary, section 32(1)(b) of the Act specifically provides that none of the procedural routes in Part 3 affect any right that a party to a construction contract has to a statutory progress payment under Part 2.[5] That appears to be a clear indication that the opportunities for enforcement under Part 3 are not exclusive, such that a contractor may enforce his right to a statutory Part 2 progress payment by other means.
- If the Part 2 right to a progress payment is to be enforced by litigation or arbitration, then the usual time limitation periods – six years for contracts underhand – are the only time constraint.
Perhaps surprisingly, there appear to be no cases in which a party has sought to enforce its Part 2 right to a progress claim, per se, by way of litigation or arbitration.
Oh, and there is this as well. Section 33 of the Act not only provides that the Act prevails over any provision to the contrary in any contract (subsection 1) but also that any provision of an agreement that remotely crosses the Act (I paraphrase here) is void.[6] Not just unenforceable. Void. That is strong stuff, and makes it very difficult for a paymaster to counter the above analysis by anything contained in the contract.
Why has nobody been down this route?
PS
I have been asked what I say about this topic in my forthcoming book. I am not dealing with this decision, because it comes after my cut-off date. It is thus, as per my present draft:
Cross Claims for Defects
If the work done by the contractor is defective, the owner is ordinarily entitled to damages, and if the contractor makes a claim – whether pursuant to the contract or on some extra contractual basis – for payment for the work, then the owner is ordinarily entitled to cross claim, setting off her entitlement to damages for defects against the contractor’s claim for payment. Typically, the contract contains some form of defects liability provision, and because there is usually an implication here in favour of the contractor, it is useful to say something of the position where the owner cross claims for the cost of rectifying defects. The necessary analysis is in three parts, the first two applying where there is a defects liability provision, and the third applying in any event.[1]
The usual implication is that where the contractor is expressly required by the contract to remedy defects, the contractor is also entitled to remedy those defects.[2] Depending on the wording of the contract, the defects in question might be all defects which manifest themselves during the relevant period, or just those defects which are notified to the contractor.
The first stage of the analysis is to consider whether the defects liability provisions operate as an exclusive code, such that if the owner does not comply with her implied obligation to give the contractor the opportunity to remedy defects, she nevertheless retains her common law right to damages.
In England, the answer to this question is generally “no”, on the basis that clear express words are required to exclude common law right to damages, and there are no such clear express words in the usual clauses.[3]
In Australia, the answer to this question is generally “yes”.[4]
If the answer is “yes”, then position seems to be that there is no room for a “wider common law right” for the owner to recover damages for the defects at all.[5] She gets zero.
The second stage of the analysis is to consider the position if there is a defects liability provision in the contract, if (following the English approach) it is not to be treated as a complete code excluding the owner’s right to claim damages. In these circumstances, a failure by the owner to give the contractor his right to remedy is a breach of contract, which sounds in damages in favour of the contractor. The damage here is measured by the loss suffered by the contractor, namely the opportunity to carry out the rectification work for less than his liability for the cost of rectification work carried out by a fresh rectification contractor. The net effect of all of this is that the measure of damages payable or allowable by the contractor for the defects is not what it has cost the owner to rectify, but what it would have cost the contractor to rectify.[6] Typically, the cost of rectification to the contractor is less than the cost incurred by the owner with a rectification contractor, and in some cases – in particular where the contractor can get a subcontractor to rectify the work without cost the contractor – is either nothing or trivial.
The third stage of the analysis is to consider whether the owner has failed to mitigate her loss by unreasonably refusing a contractor’s offer to rectify. This issue arises even in cases where there is no defects liability provision in the contract. It is well settled law that mitigation issues are concerned with the loss suffered by the claimant or counterclaimant, not any financial ramifications on the guilty party. And so the logical result should probably be that the consequence of a failure to mitigate is that the owner recovers nothing in respect of the defects that the contractor was ready, willing and able to rectify without charge.[7] However, it is typically assumed without any very logical analysis that the effect of a failure to mitigate is the same as in the second stage of the analysis, namely to reduce the damage recoverable to what the cost of rectification to the contractor would have been, and there are some dicta to that effect. For example in Copley v Lawn[8] Longmore LJ said
[25] … both sides are anxious to have an answer to the question whether, if the claimants did fail to take reasonable steps to mitigate their loss, they can recover nothing or can recover, at least, the cost which the defendants’ insurers would have had to pay to hire a replacement car themselves.
[26] In principle it cannot be correct that a claimant who rejects a defendant’s reasonable offer is entitled to nothing. The claimant has still suffered a loss.
And in CJD Equipment Pty Limited v A&C Constructions Pty Limited & Ors[9] Handley AJA said [10]
92 Damages for the builder’s breach of contract must therefore be assessed on the basis that the proprietor “has taken the hypothetical action and been endowed with its hypothetical benefits.”
93 Glass JA did not indicate whether the hypothetical benefits should be calculated on a gross or net basis. In other words must the hypothetical cost of the reasonable steps in mitigation be allowed when calculating the hypothetical benefits?
94 In my judgment the plaintiff must be allowed the cost of the reasonable hypothetical steps when calculating the hypothetical benefits. [11]
The position is not entirely clear, either in England or Australia. The moral might be that a contractor who is faced with a cross claim alleging defects in circumstances where he has not been given the opportunity to remedy might be well advised to plead:
- if there is a defects liability provision, an implied term of entitlement to rectify; and
- a breach of that implied term, and the damage suffered as a result of that breach, being the difference between actual rectification costs and what it would have cost the contractor to rectify. Depending on the circumstances, a further breach might not only be the refusal to allow remedial work, but also a failure to notify defects that did in fact appear during the defects liability period; and
- a failure on the part of the owner to mitigate.[12]
[1] Arguably, there might be a fourth – estoppel, on the basis that the owner might be estoppel from claiming damages at common law if she has failed to follow a contractual regime for the rectification of defects. But this notion seems to have received little or no judicial attention,
[2] In England, see eg Pearce and High v Baxter (CA) [1999] 1 BLR 101 at 104. In Australia, see eg Bitannia Pty Ltd v Parkline Constructions Pty Ltd [2009] NSWSC 1302, (2010) 26 BCL 335.
[3] H.W. Nevill (Sunblest) Limited v. William Press and Son Limited (1981) 20 BLR 78; William Tomkinson and Sons Ltd v The Parochial Church Council of St Michael 1990 C.L.J. 319, Pearce and High v Baxter.
[4] Turner Corporation Ltd v Austotel Pty Ltd (1994) 13 BCL 378.
[5] Turner v Austotel; Bitannia Pty Ltd v Parkline Constructions Pty Ltd (2010) 26 BCL 335. But note that Brooking suggests that the result is that the damages are pegged back to what the cost of remedial work would have been to the contractor.
[6] Pearce and High v Baxter.
[7] That was the result in Woodlands Oak v Conwell [2011] EWCA Civ 254; see page 1387 below for extracts. But note that even if nothing is recoverable in respect of the cost of rectification, there may be other recoverable loss, such as that arising from interruption of business.
[8] [2009] EWCA Civ 580; [2010] 1 All ER (Comm) 890 CA at pp 898, 900 [25]-[26], [29].
[9] [2011] NSWCA 188.
[10] Having referred to the judgment of Glass JA in Munce v Vinidex Tube Makers Pty Ltd [1974] 2 NSWLR 235, 239.
[11] Bailey suggests at Volume II page 1332 fn 346 that where a subcontractor would have carried out the rectification work without charge to the contractor, then the cost to the subcontractor should be the measure of damages.
[12] A further possible plea might also include the alternative of estoppel; see above.
My note on Woodlands is:
This case considered the question of mitigation. The owners had failed to mitigate their loss by allowing the contractor the opportunity to remedy the work. At first instance, the Recorder awarded the owners nothing by way of damages for defects in question, and that award was upheld in this appeal.
The Recorder’s logic was that the owners were not entitled to recover any more than it would have cost the contractor to rectify the defects[1], which in this case was nothing, because the contractor’s subcontractors would have done the remedial work without cost to the contractors. But note paragraph 6 of Lord Justice May’s judgment: “more importantly” it would have been at no cost to the owners. Those two words suggest that what matters is what would have been the cost of remedial work to the owner, not what would have been the cost to the contractor.
See the discussion at page 205 above.
[1] At [23].
[1] 8—Rights to progress payments
On and from each reference date under a construction contract, a person—
(a) who has undertaken to carry out construction work under the contract; or
(b) who has undertaken to supply related goods and services under the contract,
is entitled to a progress payment.
[2] 9—Amount of progress payment
The amount of a progress payment to which a person is entitled in respect of a construction contract is to be—
(a) the amount calculated in accordance with the terms of the contract; or
(b) if the contract makes no express provision with respect to the matter—the amount calculated on the basis of the value of construction work carried out or undertaken to be carried out by the person (or of related goods and services supplied or undertaken to be supplied by the person) under the contract.
[3] 13—Payment claims
(1) A person referred to in section 8 who is or who claims to be entitled to a progress payment (the “claimant”) may serve a payment claim on the person who, under the contract concerned, is or may be liable to make the payment.
[4] 13(4) A payment claim may be served only within—
(a) the period determined by or in accordance with the terms of the construction contract; or
(b) the period of 6 months after the construction work to which the claim relates was last carried out (or the related goods and services to which the claim relates were last supplied),
whichever is the later.
[5] 32—Effect of Part on civil proceedings
(1) Subject to section 33, nothing in this Part affects any right that a party to a construction contract—
(a) may have under the contract; or
(b) may have under Part 2 in respect of the contract; or
(c) may have apart from this Act in respect of anything done or omitted to be done under the contract.
[6] 33—No contracting out
(1) The provisions of this Act have effect despite any provision to the contrary in any contract.
(2) A provision of an agreement, whether in writing or not—
(a) under which the operation of this Act is, or is purported to be, excluded, modified or restricted, or that has the effect of excluding, modifying or restricting the operation of this Act; or
(b) that may reasonably be construed as an attempt to deter a person from taking action under this Act,
is void.