EXTRA-CONTRACTUAL RECOVERIES: 12 HIDDEN OPPORTUNITIES AND RISKS – The Paper

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Here is my paper delivered at the Society Of Construction Law Conference a couple of weeks ago:

 

SoCLA National Conference 2022

“Getting Risk Right”

 

Hobart

5 – 7 May 2022

 

EXTRA-CONTRACTUAL RECOVERIES:

12 HIDDEN OPPORTUNITIES AND RISKS

 

Robert Fenwick Elliott[1]

 

Introduction

  1. As bespoke contracts have become lengthier, and more heavily laden with Queen of Hearts clauses[2] and “I Delay, You Pay”[3] arrangements, it has increasingly been the case that the contractual entitlement of contractors and subcontractors to commercially reasonable payment for their work is shut out by express contractual provision. They may read the contract once, twice, or 20 times, and find no express contractual route to payment. In those circumstances, it is necessary to turn to extra-contractual routes to recovery; that is to say routes to recovery that are not to be found in the express words of the contract.
  2. These routes have become all the more important. They are not much taught in law schools, and are frequently overlooked by claimants to whom they may be available.  As such, they can represent hidden opportunities for claimants.  They can also constitute hidden risks for employing parties – both owners and contractors who engage subcontractors –  that may not become apparent until a legal case against them has been advanced in legal proceedings.
  3. Understandably, a good deal of what is said and written about construction law centres on construction contracts. This paper focuses on one aspect of construction law: what rights are available to a party which executes construction or engineering work to get paid? And understandably, people typically start looking at the express wording of the contract. And those who are to pay for the work typically assume that their liability to pay is limited to what the contract says.
  4. There are two particular problems with this approach. Firstly, there are numerous alternative routes to payment for work other than the express wording of the contract.  This paper is intended to illuminate the overall landscape of extra-contractual recovery by looking at a dozen particular paths.[4] Some of them are very well established. Others are more speculative.
  5. The author has not made a precise count, but guesses that in about half of the recoveries in which he has been involved as a lawyer have involved[5] some element of extra-contractual recovery, often pleaded in the alternative to the contractual right.
  6. As one looks at these alternative routes, one sees a second problem. Very often, parties do not do what they have contracted to do. Conceptually, this is easily understood where the contractor does not build what he has contracted to build, and thus becomes liable for the cost of rectification, either under the contract or by way of damages. More complex is what happens when the owner, and/or the owner’ s agents, do not do what they are required to do by the contract. A number of the alternative routes to payment are concerned with the legal consequences of such failures.
  7. Clearly, these alternative routes to payment represent opportunities for contractors and risks for owners. They are not as well recognised as they might be, and it is in that sense that they might be characterised as hidden. For the parties who have undertaken work for which they have not been paid, notwithstanding their legitimate commercial expectation, the takeaway from this paper will be that it is worthwhile going through these alternative routes in order to see whether any of them are available. If you are advising an owner, the takeaway is not to be too myopic about the contract: the risks might well lie elsewhere.

I – The Quantum Meruit Alternative – Two Types of Quantum Meruit

  1. Over the years many recoveries for construction and engineering work have been made, not pursuant to a contract, but by way of quantum meruit. If one person asks another person to do some work, and that other person does that work, a right to payment will generally arise in quantum meruit. It used to be thought that that right should be categorised as a matter of quasi-contract, but since the decision of the High Court in Pavey and Matthews v Paul in 1987[6], it has been treated both in Australia and around the common law world as arising under the law of restitution, as a matter of unjust enrichment.
  2. It is often assumed that the restitutionary claim for unjust enrichment is the only specie of quantum meruit these days, but it is clear from the decision of the UK Supreme Court in 2013 in Benedetti v Sawaris[7] that this is not so.  Some quantum meruit claims are not restitutionary at all, but arise pursuant to the law of contract.[8]
  3. The example given in Benedetti of a contractual quantum meruit is where a person consults a private doctor or a lawyer such that there is a contract but no agreement is made as to remuneration.[9] The law will ordinarily imply a term for reasonable remuneration. In the construction context, the more common circumstance is that the parties reach a partial agreement about payment for the work. They might, for example, agree an amount for payment for the original contract work, without agreeing anything about what should be paid for additional work. At least two possibilities arise here:
    • the contract might have no application to that additional work, in which case the contractor is likely to be entitled to a restitutionary quantum meruit. That is the case where, in the language of Leibe v Molloy[10], the work is “outside the contract”;
    • the contract might require the contractor to perform that additional work but without any express provision as to what should be paid for it, in which case the contractor is likely to be entitled to a contractual quantum meruit.
  1. Does it matter? Clearly, it does, because as noted by Lord Reid in Benedetti, the claims are “of a fundamentally different character”.[11] For a restitutionary quantum meruit, the focus is on the enrichment obtained by the recipient of the work. That might include, for example, windfall profits as in Costain v Zanen[12]. Potentially complex issues arise as to market value, subjective devaluation and subjective revaluation.[13] For a contractual quantum meruit, on the other hand, the focus is on the cost to the provider of the service, usually plus a reasonable margin. Sometimes, a restitutionary quantum meruit will be more favourable, and sometimes a contractual quantum meruit, and so it is worth giving some careful thought as to which route should be pursued.[14]

Which is it?

  1. There are a variety of circumstances in which a quantum meruit may arise. It is suggested that the relevant type of quantum meruit available is likely to be:

 

Work done without any contract at all Restitutionary
Work done “outside the contract”[15] Restitutionary
Contract with no agreement at all as to price[16] Contractual
Work done pursuant to a contract in respect of which there is no agreement as to the price for this work[17] Contractual
Contract but with statutory prohibition on contractual recovery[18] Restitutionary
Contract repudiated by owner (quantum meruit now severely limited by Mann v Paterson)[19] Assumed restitutionary. But probably better regarded as contractual

 

 

II – Damages for Misleading or Deceptive Conduct

  1. Damages for misleading or deceptive conduct under what is now section 18[20] of the Australian Consumer Law[21] represent a substantial but largely unexplored opportunity for recovery in the construction law arena. The series of decisions in the Abigroup v Sydney Catchment Authority litigation[22] illustrates how a contractor may be able to recover damages for misleading or deceptive conduct for the cost of dealing with unexpected ground conditions, notwithstanding the non-reliance provisions in the contract.
  2. The facts of that case can be fairly simply summarised. Abigroup contracted to construct a slipway for some $85 million. The contract repeatedly provided that the tender information was liable to be incomplete, and should not be relied on, but tucked away at clause DS-59.2.14(c) of the detailed specifications and under clause 2.10.2 of the Concept Design Report was a statement that no plans existed of an embankment or outlet pipe. In fact, there was a cross section drawn in 1951, filed away and forgotten, which did in fact contain this information. Nobody knew about this drawing at the time the work was let. If Abigroup had known about the cross-section, it would have been forewarned about a considerable quantity of work that it failed to predict when it tendered.
  3. The litigation was long and complex:
    • Initially, the case was referred to a referee, who found that Abigroup failed in its claims;
    • Nicholas J adopted the referee’s report;
    • the Court of Appeal found that both the referee and the first instance court had failed to correctly interpret the representation relied on, and remitted the case for rehearing;
    • on rehearing, McDougall J found for Abigroup on liability, but found that Abigroup had not established any recoverable loss;
    • the Court of Appeal allowed an appeal on the loss issue, and remitted the case to him;
    • McDougall J decided, on the basis of the Court of Appeal’s guidelines, that Abigroup was entitled to recover its entire loss;
    • the High Court then refused special leave to appeal.
  1. There are a number of interesting features about the outcome here:
    • the contractual allocation of risk, in terms of unknowns, was entirely disregarded;
    • it was irrelevant that the misrepresentation was entirely innocent;
    • the basis on which damages were awarded was essentially as if the representation were a contractual warranty, and not on the usual basis that the parties are put back in the position that they would have been in but for the misrepresentation.
  1. The decisions have been referred to a number of times on particular points, but it is remarkably rare for the outcome to be applied wholesale.
  2. In a “no transaction” case, the mechanism by which this provides a route to recovery is simple: the contractor says that but for the misleading conduct, he would not have done the work at all, such that he is entitled to be paid the whole of the actual cost of the work to him[23] giving credit, of course, for such payment as he has received.

 

III – Misleading by Programme Claims outwith the Reach of Time Bar

  1. The Abigroup case concerned misleading conduct in relation to ground conditions, a matter of particular importance in civil engineering cases. For subcontractors executing building work, a matter of more importance is typically that of programme. Subcontractors price on the basis that they will be able to start their work on a given date and carry it out over a given period or periods. A subcontractor, for example, might be provided with the head contract programme which it turns out, in the event, to have been hopelessly misleading, such that the subcontractor is delayed in starting the work and/or then has to do his work over a much longer period of time and hence at much greater cost.
  2. Such a programme, if provided part way through the head contract work, is likely to be a mix of statements as to what work has already been performed, and when, and statements as to the timing of future work. If, for example, a head contractor provides a tendering cladding subcontractor with a programme which misrepresents that the ground work has proceeded on time – when in fact it has been severely delayed over parts of the site – that is likely to be not only a misrepresentation of fact as to the state of the work at that time but also a misrepresentation as to the future inasmuch as the groundwork delays will inevitably flow through to the superstructure.
  3. Section 4 of the ACL, which deals with misleading representations with respect to future matters, provides that misrepresentations are to be treated as misleading either if they are actually misleading, or if they have been made without reasonable grounds. Subsection (1) provides as follows:

(1)  If:

(a)  a person makes a representation with respect to any future matter (including the doing of, or the refusing to do, any act); and

(b)  the person does not have reasonable grounds for making the representation;

the representation is taken, for the purposes of this Schedule, to be misleading.

  1. Curiously, the representation is taken to be made without reasonable grounds, and hence misleading, unless evidence is adduced on the matter[24], but this provision does not of itself reverse the burden of proof[25] in the sense that it places an evidential but not a persuasive burden on the person who made the relevant representation to adduce evidence there were reasonable grounds for making the representation. And if the representation is in fact misleading, it is not taken outside the reach of section 18 merely because there were reasonable grounds for it.[26]
  2. In principle, it seems that there is a right to recovery here for misleading or deceptive conduct provided the case is properly pleaded[27] and provided that the claimant can show the necessary reliance.[28]
  3. For the purpose of such a case, exclusion clauses will be of no effect. Further the claim will not ordinarily be caught by time bar provisions in the contract.[29]

 

IV – Damages as an Alternative to Contractual Claims

  1. Contracts rarely provide by their express terms that, if one party is in breach of contract, the other party is entitled to compensation. They do not need to; the right to damages for breach of contract arises simply as a matter of the law of contract.[30] In some circumstances, the right to damages for breach of a term of the contract (which might be express or implied) might look very similar to a right to payment under the contract.
  2. For example, a contract may contain provisions for certification of sums for payment, such that there may be an implied if not express provision that the owner will ensure that the certification is fair and reasonable.[31] If the effect of the contract is that certification is a condition precedent to the right to payment under the contract, and if there is not proper fair and reasonable certification,  then the contractor may well be entitled to damages  for want of certification that equate, dollar for dollar, with the amount that should have been certified for payment.[32]
  3. More common, in practice, is the case where the breach of contract in question is a failure by the owner (or more often a head contractor) to provide the required access to the work face to the head contractor (or more often, the subcontractor). Such an obligation is sometimes by way of express term, sometimes by way of implied term, and sometimes by combination of the two. Sometimes, the contract (or subcontract) provides a route for recovery under the contract in such circumstances, and sometimes it does not. In the second case, the right to damages is likely to be the only available route to recovery. In the first case, the right to damages is likely to represent a parallel route to recovery.
  4. This parallel route – a claim for damages for breach of a term as to access – may be outside the reach of a notice or time bar provision which would have caught a similar claim made pursuant to the terms of the contract. Such was the case in Decor v Cox(No 2)[33]. Besanko J found that the giving of notice was a condition precedent to the right to an extension of time, and hence extra costs under the contract. He also found, however, that the words did not set up a condition precedent to a parallel right to damages for breach of contract. He said:

75           There are three stages in the procedure under clauses 35.5 and 36. The first is the notice claiming an extension of time, the second is the granting of an extension of time, and the third is a claim for such extra costs as are necessarily incurred.

76           Assuming for the moment that the main contractor acts in breach of contract, and that that breach causes delay or disruption and consequent loss and damage to the subcontractor, it seems to me that it cannot be said as a general proposition that the subcontractor may only claim pursuant to clauses 35.5 and 36, and may not make a claim for general damages for breach of contract… Again, I refer to the fact that clause 36 states that nothing in the clause limits the main contractor’s liability for damages for breach of contract.

77           Having regard to those conclusions, I cannot think that compliance with the first stage is a necessary precondition to a claim for general damages for breach of contract causing delay or disruption. I recognise that it is in the interests of both the contractor and the subcontractor to know of delays as soon as they occur, so that they can organise their work and the work of others on site. That, no doubt, would be conducive to what Cox called “good contract administration”. However, clauses 35.5 and 36 do not expressly preclude a claim for damages otherwise than pursuant to those clauses, and I think that clause 35.5 would have been be framed quite differently – and perhaps in similar terms to clause 46 – if the intention of the parties was that a notice claiming an extension of time for substantial completion was a necessary precondition to a claim for damages for delay or disruption caused by a contractor’s breach of contract.

78           In my opinion, Decor’s delay claim and its additional hours claim do not fail by reason of the fact that it did not comply with the procedure in clauses 35.5 and 36.

  1. A similar position may arise where the breach of contract is a breach of an obligation to value or certify work; depending on the wording of the contract, such a claim might be outside the reach of any notice or time bar provisions in the contract. This is particularly so since breach of Braganza[34] or good faith obligations may be difficult to contract out of.

 

V – Breakdown of Contractual Machinery

  1. The doctrine of breakdown of contractual machinery is of some particular importance in construction and engineering cases, and has become more so as the trend for lengthy bespoke contracts has led to more complex contractual machinery, all the more prone to breakdown.
  2. Historically, the doctrine appears to have derived from concepts of impossibility; in a surprisingly modern-sounding passage in the 1779 decision in Hotham v East India Company[35], Ashhurst J. said:

It is unnecessary to say whether the clause relative to the certificate be a condition precedent or not; for granting it to be a condition precedent, yet the plaintiffs having taken all proper steps to obtain the certificate, and it being rendered impossible to be performed by the neglect and default of the company’s agents, which the jury have found to be the case, it is equal to performance. If it were necessary to cite any case for this, which is evident from common sense, it was so held in Rolle’s Abridgment, 445, and many other books.

  1. The doctrine particularly developed in the context of land law, where arrangements for the fixing of rental by an expert were sometimes derailed by a failure to appoint the expert. Thus in Booker Industries Pty Ltd v Wilson Parking (Qld) Pty Ltd[36], Brennan J said:

If the contractual machinery for fixing the rental were to fail, the rental would be fixed by the court…Such a lease would be valid, for if the machinery for fixing the rent should fail, the court’s machinery will be available to fix it: certum est quod certum reddi potest.

  1. The same position obtained if an entity named to make an assessment has ceased to exist. In Jezer Construction Group P/L and Ors v Lilischkies[37], such an entity was the Queensland Building Tribunal. Wilson J said:

The mechanism for assessment has failed in that the QBT has ceased to exist. I respectfully adopt the approach of Lord Fraser in Sudbrook at 484, and conclude that there is no distinction in principle between a case where the mechanism for assessment of the costs and outlays fails because of the non co-operation of one of the parties and the present case where it has failed because of a legislative act in abolishing the body which was to perform the assessment. Accordingly the Court should substitute a mechanism for the assessment of the costs and outlays.

  1. In applying this doctrine in Green & Ors v Wilden Pty Ltd & Ors[38], Hasluck J in the Supreme Court of Western Australia adopted the English authority of Sudbrook:

[924] In Sudbrook Trading Estate Ltd v Eggleton [1983] 1 AC 444 lessees were granted an option to purchase the reversion in fee simple of the subject premises at such a price (not being less than a prescribed figure) as may be agreed by two valuers, one to be nominated by the lessor and the other by the lessee and in default of such agreement by an umpire appointed by the valuers. The Court of Appeal applied well-established principles in holding that this amounted to an agreement to agree, and since the Court could neither compel a party to appoint a valuer nor order specific performance of an incomplete agreement, the Court could not intervene.

[925] An appeal to the House of Lords was allowed upon the basis that, on its true construction, the agreement was for sale at a fair and reasonable price by the application of objective standards, and that as the price was to be ascertained by machinery which, on the true construction of the agreement was a non-essential part of the contract, the Court would, if the machinery broke down for any reason, substitute its own machinery, to ascertain a fair and reasonable price. Accordingly, since the options had been validly exercised, the contracts constituted by their exercise should be specifically performed, and an enquiry as to the fair valuation of the reversion should be held and conveyances made to the lessees, if necessary, by the Court.

[926] I note in passing that this conclusion flowed from the fact that one party was resisting the appointment of a valuer, with the result that, to that extent, the operation of machinery which depended upon both parties nominating a valuer could be said to have broken down.

  1. England led the way in extending the doctrine to include cases, not only where the third party was not appointed or ceased to exist, but to cases where there was a failure by the third party to act as required. In London Borough of Merton v Leach[39], Vinelott J explained the circumstances in which a certifying architect under the JCT63 form of contract should ascertain direct loss or expenses globally attributable to more than one head of claim. He concluded that explanation as follows:

To this extent the law supplements the contractual machinery which no longer works in the way in which it was intended to work so as to ensure that the contractor is not unfairly deprived of the benefit which the parties clearly intended he should have.

  1. The “extent” referred to here appears to be this: that if the architect did not do what he should have done by way of ascertainment, then and to that extent the court may intervene and substitute the ascertainment that should have been made. The doctrine of breakdown of contractual machinery is thus used to establish what is in effect something akin to a right of appeal from certifiers’ decisions.
  2. In J F Finnegan v Sheffield[40], a case heard in September 1988, a breakdown was found to arise out of the fact that the provisions of JCTclause 30(5)(a) of the contract – which required the completion of the final measurement and valuation and hence certification within 6 months of practical completion – had still not happened 2 years after that. Judge Stabb concluded:

The final measurement and valuation as required by the contract should, therefore, have been completed by 26 September 1986. So far as I know, this was never done and, in this respect, the architect procedure would appear to have broken down.

  1. John Barker Construction Limited v London Portman Hotel Limited[41] is a case which goes further, since there the architect had purported to exercise the very certification role in question – that of certifying extensions of time. But the court nevertheless found that there was a breakdown, because the architect did not approach his certification task in a proper way. The court said:

All in all, I am satisfied that the plaintiffs have established that, although there was no bad faith or excess of jurisdiction on the part of the architect, his determination of the extension of time due to the plaintiffs was not a fair determination, nor was it based on a proper application of the provisions of the contract, and it was accordingly invalid.

  1. A similar approach was adopted in the Australian case of Walton Construction v Illawarra Hotel[42], where McDougall J found that the court could look at the product of the Superintendent’s labours, to see if she had arrived at reasonable extensions of time and valuation of variations, and if not, to substitute its own determinations.
  2. It would be a mistake to make too exact a comparison between the approach of the courts to these breakdown of contractual machinery cases, and the approach taken in cases of judicial review or challenges to decisions of experts and adjudicators. But there is a certain commonality of approach. If the parties have agreed (or in the case of judicial review cases, the law has imposed) a particular regime whereby the rights of the parties are to be determined in a particular way, then prima facie the courts will not interfere, and will let that regime take its course. Mere error is not sufficient. But once it be shown that the process has “come off the rails”, either because there is no one doing what is required at all, or because whoever was doing what was required was doing it in a way that cannot be regarded as a proper implementation of the mechanism at all, then the courts typically feel justified in stepping in.

 

VI – Gaymark Lives

  1. The decision in Gaymark Investments v Walter Construction Group[43] – that time may be set at large when extension of time provisions have been rendered inapplicable by a contractor’s failure to give requisite notice – is often regarded as an outlier, notwithstanding that it has never been overruled in Australia. But a recent paper by Tony Marshall[44] presents a detailed analysis suggesting that it was correctly decided.
  2. The route adopted by both the arbitrator and the court in Gaymark was to find that time was at large in circumstances in which it was the owner who caused delay, but the contractor had failed to give the notices which were conditions precedent to a right to extension of time under the contract. It was a head contract case, but the principle appears to be the same as in the subcontract context. Bailey J plainly had the merits in mind, saying:
  3. Acceptance of Gaymark’s submissions would result in an entirely unmeritorious award of liquidated damages for delays of its own making (and this in addition to the avoidance of Concrete Construction’s delay costs because of that company’s failure to comply with the notice provisions of SC 19).
  4. The Gaymark decision has come in for some sustained criticism, in particular from the late Ian Duncan Wallace, and in Hudson.[45] It is by no means obvious, however, that the decision was a mere outlier. Bailey J carefully considered both of the Turner cases that had considered this issue – Turner v Austotel[46] and Turner v Co-ordinated Industries[47]. In both of those cases, it was found that time had not been set at large. But Bailey J extracted the ratio in terms of the focus in the second of these cases on the residual power: the reason the prevention principle did not operate was because of the clause – clause 35.4 – providing for extension of time notwithstanding the absence of strictly compliant notice clauses. As established by Peninsula Balmain v Abigroup[48], the effect of such a clause is that the superintendent (or whoever else is responsible for administering the extension of time) is obliged to act honestly and impartially in deciding whether to use that reserve power.
  5. To precis, what Bailey J was saying in Gaymark, paraphrasing and adding in the Peninsula Balmain point, was this (putting it for the moment in a subcontractual context): that

If a head contractor actually prevents a subcontractor from achieving the subcontract date for completion, and the subcontractor has not given the required notices, then time is at large, unless there is a reserve clause which empowers and requires the necessary extension of time notwithstanding the absence of notices.

  1. Attempts to dislodge the Gaymark decision as binding Australian law have so far been unsuccessful. In Spiers Earthworks Pty Ltd v Landtec Projects Corp Pty Ltd (No 2)[49] McLure P found that she did not need to determine any conflict between the Turner cases and Gaymark.  Similarly, in Probuild Constructions (Aust) Pty Ltd v DDI Group Pty Ltd[50] the New South Wales Court of Appeal noted that neither party had asked it to resolve the “conflict” between the Turner decisions and Gaymark (if any[51]) and it did not seek to do so.
  2. Further, if the contractor’s failure to give the required notice results from the owner’s breach – rendering compliance impossible – the case for time being set at large is much stronger. That was the result in Alstom v Yokogawa (No 7).[52]

 

VII – Non-Payment setting Time at Large

  1. Decisions from Hong Kong are not binding in Australia, but nevertheless they have some persuasive value, and accordingly the decision in CCECC v Might Foundate[53]is of some interest. An arbitrator[54] had found as a fact that the claimant had been delayed by the respondent’s lack of payment, and as a matter of law that time had thereby been set at large such that the claimant was not liable to pay liquidated damages, was thus entitled to recover payment for work done without deduction.[55] The award was challenged in the courts,  but the challenge failed, Burrell J saying that the arbitrator could not be faulted for his finding.[56]  The court added, by way of comment :
  2. In our case, there were admitted late payments running into millions of dollars. Sub-contractors depend very heavily on these interim payments. The arbitrator cannot be faulted for making a finding, in this particular set of facts, which recognized the fact that, very often, in Hong Kong a sub-contractor’s lot is not a happy one.

 

VIII – Braganza Requirements in Certification

  1. It is not uncommon, in construction or engineering contracts, for one party, or an employee or agent or someone else engaged by that party, to be required to exercise a discretion in relation to various matters, including matters going to payment. There have been a number of commercial cases which show that a party with a contractual right to exercise a discretionary powermay be subject to an implied obligation to exercise that power rationally. This line of authority stems from this passage in The Product Star[57], sometimes known as the “default rule”[58]:

Where A and B contract with each other to confer a discretion on A, that does not render B subject to A’s uninhibited whim. In my judgment, the authorities show that not only must the discretion be exercised honestly and in good faith, but, having regard to the provisions of the contract by which it is conferred, it must not be exercised arbitrarily, capriciously or unreasonably. That entails a proper consideration of the matter after making any necessary inquiries. To these principles, little is added by the concept of fairness: it does no more than describe the result achieved by their application.

  1. In 2014, the Supreme Court endorsed the rule in British Telecommunications Plc v Telefónica O2 UK Ltd:[59]

As a general rule, the scope of a contractual discretion will depend on the nature of the discretion and the construction of the language conferring it. But it is well established that in the absence of very clear language to the contrary, a contractual discretion must be exercised in good faith and not arbitrarily or capriciously: Abu Dhabi National Tanker Company Ltd v Product Star Shipping Ltd (No 2) [1993] 1 Lloyd’s Rep 397, 404 (Leggatt LJ); Gan Insurance Company Ltd v Tai Ping Insurance Company Ltd (No 2) [2001] 2 All ER (Comm) 299, para 67 (Mance LJ); Paragon Finance Plc v Nash [2002] 1 WLR 685, paras 39-41 (Dyson LJ).

  1. In Braganza v BP Shipping[60], albeit substituting the concept of rationality for that of reasonableness, Lady Hale took the same line: she found that there was an implied term that the decision making process had to be:
    • lawful,
    • rational,
    • in good faith,
    • consistent with its contractual purpose.[61]
  1. She included both parts of the Wednesbury test[62] namely
    • have the decision makers taken into account matters which they ought not to take into account, or conversely, have refused to take into account or neglected to take into account matters which they ought to take into account? And then
    • have they nevertheless come to a conclusion so unreasonable that no reasonable decision maker could ever have come to it?
  1. In doing so, she endorsed the observation of Lord Sumption in Hayes v Willougby[63] that the concept of rationality has in recent years come to play an increasingly significant role in a contractual context, such that the contractual implied term is drawing closer and closer to the principles applicable in judicial review.[64] Her analysis was endorsed by all the other members of the Supreme Court.
  2. The Product Star case concerned a term in a charterparty; the vessel should not be required to proceed to any port which the master or owners in their discretion considered dangerous. Both the Commercial Court and the Court of Appeal held that a refusal to proceed to the port of Ruwais[65] on account of supposed war risks was a breach of contract.  In Horkulak v Cantor[66], the principle was applied to a provision in a contract of employment for a discretionary bonus.  In Socimer v Standard Bank[67], the principle was applied to a contract for the sale of assets between banks which entrusted the task of valuation to one party.  In JML Direct v Freesat[68] a contract gave the defendant satellite television service provider the discretion to decide what logical channel numbers should be allocated to the plaintiff’s shopping channels; again that discretion was found to be subject to The Product Star
  3. Prima facie, it is hard to see that the provisions in these cases are distinguishable from those commonly found in construction contracts, whereby the owner or her agent is given contractual powers, not only to value the contractor’s work, but also to decide a host of other matters, such as the contractor’s entitlement to extension of time, whether to accept the contractor’s programme, whether to allow subcontracting, to determine which of conflicting contractual provisions is to prevail, and many others. Sometimes, the clauses use the word “discretion” and sometimes they do not: nothing seems to turn on this distinction[69].
  4. More recently, the Braganza principle was treated as “well founded in authority” for the purpose of constraining an owner’s powers under a PFI contract for the design, construction and maintenance of a mechanical biological waste treatment plant in Essex County Council v UBB Waste[70], indicating that the principle has now migrated into the construction law space. Accordingly, there is now direct authority for the proposition that where an owner under a construction contract has a discretion about some matter (such as whether to grant an extension of time notwithstanding the lack of a requisite notice) then public law principles apply, and the exercise or non-exercise of the discretion may be challenged on Wednesbury
  5. As it happens, Essex v UBB went further, not least because of the lengthy 25 year maintenance term. Pepperall J found that the contract was a “relational contract”[71] and as such was prepared to imply a term of good faith.
  6. The Product Star doctrine is not fully settled, and is still evolving. In an appropriate case, it may well have a place in a construction context, enabling a contractor to recover damages representing the cost of work he would not otherwise get paid for: it is suggested that fertile ground would be a case where:
    • The contract confers a power on the owner or her agent that affects whether or not the contractor is entitled to payment for a particular part or aspect of his work;
    • The owner or her agent exercises, or refuses to exercise, that power in a way that is grossly unreasonable;
    • The effect of such exercise or refusal to exercise makes a commercial nonsense; or
    • There is no express contractual mechanism whereby that nonsense may be effectively remedied.
  1. In Australia, the courts have neither clearly adopted nor rejected The Product Star line; rather, they have tended to make their analysis along good faithgrounds (there being less resistance in Australia than in England to a generalised doctrine of good faith in commercial dealings).  In Thiess v Placer[72] the court considered a clause – clause 6.5.1 – which conferred a contractual power to terminate a mining contract:

“[Placer] may, at its option, at any time and for any reason it may deem advisable, cancel and terminate the Contract, in which event [Thiess] shall be entitled to receive compensation as follows:”

The court declined to apply The Product Star principle:

It is true that in the present case, Placer had a discretion whether or not it would terminate the contract. But cl 6.5.1 provided it with an absolute and uncontrolled discretion which it was entitled to exercise for any reason it might deem advisable. That is a contractual right which relieved Placer from any obligation to have regard to Thiess’ interest.

In my view, the distinction between Product Star (supra) and this case serves only to emphasise the strength of Placer’s position.

  1. Conversely, in The Australian Rail, Tram and Bus Industry Union of Employees, West Australian Branch v Public Transport Authority of Western Australia[73] the principle was accepted without question:

Reference was also made by the Union in its submissions, to the implied obligation of good faith, and the obligation on an employer to not exercise its managerial discretion arbitrarily, capriciously, unreasonably or for a collateral purpose: Horkulak v Cantor Fitzgerald International [2004] EWCA Civ 1287; Abu Dhabi National Tanker Co. v Product Star Shipping Ltd. (The “Product Star”) (No. 2) [1993] 1 Lloyd’s Rep 397; Foggo v O’Sullivan Partners (Advisory) Pty Ltd (2011) 206 IR 87. As to the latter proposition, there can be no question that in a case where discretion is to be exercised, it should not be arbitrary or capricious. How the exercise of the discretion is to be regarded in this context will also depend on the terms of the relevant contract, and all of the circumstances of the case.

  1. It is submitted that in Australia it is at least arguable, in the construction and engineering context, that where a contract allows an owner, or someone being paid by the owner, to exercise a discretionary power, then that power must be exercised in accordance with the Braganza

 

IX – Relief from Forfeiture

  1. The decision of the Supreme Court of the UK in Cavendish v El Makdessi, ParkingEye Ltd v Beavis[74] shows that the penalty rule is merely the first stage in a two-stage test of the enforceability of liquidated damages clauses, the second being relief from forfeiture.
  2. Two appeals were heard at once, and it is the second one which is of particular interest here. It concerned a notice in a car park in the following terms:

ParkingEye car park management

2 hour max stay

Customer only car park

4 hour maximum stay for Fitness Centre Members

Failure to comply with the following will result in a Parking Charge of:

£85

  1. This stipulation, contractual in nature, was in the nature of a liquidated damages provision; the motorist was obliged to leave the car park within 2 hours of arrival, and compensation for breach of that obligation was liquidated – albeit at a flat £85 rather than so much per minute or hour of lateness in departing.
  2. The dispute in the Supreme Court concerned whether or not this was a penalty. Neither party argued its case in terms of whether or not the provision was in the nature of a forfeiture clause, so as to enliven the doctrine of relief from forfeiture. Nevertheless, each of the judgments address this question, and their approach (which would seem to be entirely applicable to the treatment of a liquidated damages clause in a construction contract) indicated that there is a two-stage test. The court first considers the question of whether the clause is a penalty clause, and if not, then goes on to consider the question of whether there should be relief from forfeiture. The second stage of this test is quite different from the first. It considers, not whether the provision protected any legitimate commercial interests judged as at the date the contract was entered into, but instead the outcome: would the enforcement of the provision, as matters have turned out, be unconscionable.
  3. Lords Newberger and Sumption (Lord Carnwath agreeing) said:
    1. What is less clear is whether a provision is capable of being both a penalty clause and a forfeiture clause. It is inappropriate to consider that issue in any detail in this judgment, as we have heard very little argument on forfeiture – unsurprisingly because in neither appeal has it been alleged that any provision in issue is a forfeiture from which relief could be granted. But it is right to mention the possibility that, in some circumstances, a provision could, at least potentially, be a penalty clause as well as a forfeiture clause. We see the force of the arguments to that effect advanced by Lord Mance and Lord Hodge in their judgments.
  4. Lord Mance said:

The relationship between the penalty doctrine and relief against forfeiture

160     Jobson v Johnson proceeds on the basis that a case may raise for consideration both the penalty doctrine and the power of the court to relieve against forfeiture. In my opinion, that is both logical and correct in principle under the current law. A penalty clause imposes a sanction for breach which is extravagant to the point where the court will in no circumstances enforce it according to its terms. The power to relieve against forfeiture relates to clauses which do not have that character, but which nonetheless operate on breach to deprive a party of an interest in a manner which would not be penal. That it would not be penal is evident from the fact that the court will only grant relief on the basis that the breach is rectified by performance. “[I]n the ordinary course”, as the Privy Council said in Cukurova Finance International Ltd v Alfa Telecom Turkey Ltd [2013] UKPC 20, [2015] 2 WLR 875, para 13, “relief in equity will only be granted on the basis of conditions requiring performance, albeit late, of the contract in accordance with its terms as to principal, interest and costs: see eg per Lord Parker of Waddington in Kreglinger v New Patagonia Meat and Cold Storage Co Ltd [1914] AC 25, at pp 49-50 and per Lord Wilberforce in Shiloh Spinners Ltd v Harding [1973] AC 691, at pp 722C and 723H”. The two doctrines, both originating in equity, therefore operate at different points and with different effects. Consideration whether a clause is penal occurs necessarily as a preliminary to considering whether it should be enforced, or whether relief should be granted against forfeiture.

    1. This same inter-relationship between the penalty doctrine and relief against forfeiture was also assumed in BICC plc v Burndy Corpn [1985] Ch 232, where Dillon LJ, with whom Ackner LJ agreed, considered first whether the clause was a penalty, before moving to the issue of relief against forfeiture. The clause was a provision in an agreement dissolving a joint relationship, whereby certain joint patent rights would continue to be held by BICC, with Burndy paying its share of the costs of their maintenance and processing by BICC, and with a clause providing that, if either party failed to fulfil its obligations in that regard, the party not in default could require an assignment of the guilty party’s interests in the joint rights…
  2. Lord Hodge said:

…

227         There is no reason in principle why a contractual provision, which involves forfeiture of sums otherwise due, should not be subjected to the rule against penalties, if the forfeiture is wholly disproportionate either to the loss suffered by the innocent party or to another justifiable commercial interest which that party has sought to protect by the clause.  If the forfeiture is not so exorbitant and therefore is enforceable under the rule against penalties, the court can then consider whether under English law it should grant equitable relief from forfeiture, looking at the position of the parties after the breach and the circumstances in which the contract was broken.

…

258         The rule may also be criticised because it can be circumvented by careful drafting. Indeed one of Cavendish’s arguments was that clause 5.1 could have been removed from the scope of the rule if it had been worded so as to make the payment of the instalments conditional upon performance of the clause 11 obligations. This is a consequence of the rule applying only in the context of breach of contract. But where it is clear that the parties have so circumvented the rule and that the substance of the contractual arrangement is the imposition of punishment for breach of contract, the concept of a disguised penalty may enable a court to intervene: see Interfoto Picture Library Ltd v Stiletto Visual Programmes Ltd [1989] QB 433, Bingham LJ at pp 445-446 and, more directly, the American Law Institute’s “Restatement of the Law, Second, Contracts” section 356 on liquidated damages and penalties, in which the commentary suggests that the court’s focus on the substance of the contractual term would enable it in an appropriate case to identify disguised penalties.

  1. Lord Clarke said:

291…As to the relationship between penalties and forfeiture, my present inclination is to agree with Lord Hodge (in para 227) and with Lord Mance (in paras 160 and 161) that in an appropriate case the court should ask first whether, as a matter of construction, the clause is a penalty and, if it answers that question in the negative, it should ask (where relevant) whether relief against forfeiture should be granted in equity having regard to the position of each of the parties after the breach.

  1. Lord Toulson said:
    1. On the inter-relationship between the law relating to penalties and forfeiture clauses, I agree specifically with paras 160-161 of Lord Mance’s judgment and paras 227-230 of Lord Mance’s judgment. Ms Smith argued in her written case and orally that if relief were to be granted at all to Mr El Makedessi it should be pursuant to the relief against forfeiture, because clauses such as 5.1 were properly to be regarded as forfeiture clauses and the penalty doctrine was therefore not capable of being applied. I would reject that argument for the reasons given by Lord Mance and Lord Hodge. I agree with them that the proper approach is to consider first whether the clause was an exorbitant provision to have included in the contract at the time when it was made; and, if not, to consider next whether any relief should properly be granted under the equitable doctrine of relief against forfeiture in the circumstances at and after the time of the breach. As Lord Mance and Lord Hodge have noted, this approach was followed by the Court of Appeal (Ackner, Kerr and Dillon LJJ) in BICCplc v Bundy Corpn [1985] Ch 232. It is logical and just.
  2. These are all obiter dicta. But taken in the round, they represent a powerful caucus of opinion. Let us consider the position of the subcontract, where the subcontractor is obliged to complete the subcontract work by a stipulated date, and is liable for substantial liquidated damages for failure to achieve such completion. The contract also contains provisions for extension of time in the Queen of Hearts form, such that in practice it would have been difficult if not downright impossible for the subcontractor to have provided the various notices stated to be conditions precedent to any right to extension of time. Suppose that the project is delayed, such that for reasons that are nothing to do with the subcontractor, the subcontractor is prevented from starting on time, let alone from completing by the stipulated subcontract completion date. And suppose further that the head contractor has failed to keep the subcontractor informed of the head contract delays, such that it is impossible for the subcontractor to meet the stringent conditions precedent for an extension of time. In other words, the scheme of the contract is one of “I delay, you pay”. In these circumstances, the level of liquidated damages might well be, of itself, a fair reflection of the cost of delay to the head contractor; the liquidated damages clause might well survive an attack on the basis of the law of penalties. But it is hard to see that the clause would be likely to survive the second stage of attack based on relief from forfeiture, particularly if the head contractor suffered no actual loss at all by reason of this subcontractor’s failure to reach its completion date, because all of its losses had been caused by other delays.[75]
  3. Surprisingly, there appear to have been – so far – in the common law world no cases either in Australia or elsewhere in which liquidated damages liabilities have been challenged on this basis.
  4. In Australia, there has been some divergence between the English approach to liquidated damages in Cavendish and the Australian approach in Andrews v ANZ[76]. It is much less obvious that there is any divergence in relation to relief from forfeiture. The last leading case in Australia, Tanwar Enterprises v Cauchi[77], was decided by the High Court in 2003 (i.e. before the decision in Cavendish), and it remains to be seen what the Australian courts will make of the dicta referred to above. As in England, there has been some divergence of authority on whether relief from forfeiture is available only where the subject matter over which relief is sought is a proprietary right, and if so what that means.[78] Given that the question of relief from forfeiture is essentially a matter of unconscionability, the Australian courts may prefer the view that the issue has now been codified in Australia by what is now sections 20 and 21 of the Australian Consumer Law, considered next, and deal with the issue on that basis.

 

X – Relief under Section 21 of the Australian Consumer Law

  1. Section 21 may provide a parallel route to relief from forfeiture. It provides as follows:

Section 21   Unconscionable conduct in connection with goods or services

(1)  A person must not, in trade or commerce, in connection with:

(a)  the supply or possible supply of goods or services to a person (other than a listed public company); or

(b)  the acquisition or possible acquisition of goods or services from a person (other than a listed public company);

engage in conduct that is, in all the circumstances, unconscionable.

  1. It might be thought, at first blush, that there is considerable scope for overlap between this provision and section 20, which deals with unconscionable conduct within the meaning of the unwritten law.[79] However, section 20 is disapplied where there is an overlap[80], and so the following discussion focuses on section 21.
  2. Section 22 sets out a number of matters to which the court may have regard for the purposes of section 21, and for present purposes, the following are likely to be particularly relevant:

(2)  Without limiting the matters to which the court may have regard for the purpose of determining whether a person (the acquirer ) has contravened section 21 in connection with the acquisition or possible acquisition of goods or services from a person (the supplier ), the court may have regard to:

(a)  the relative strengths of the bargaining positions of the acquirer and the supplier; and

(b)  whether, as a result of conduct engaged in by the acquirer, the supplier was required to comply with conditions that were not reasonably necessary for the protection of the legitimate interests of the acquirer; and

(c)  whether the supplier was able to understand any documents relating to the acquisition or possible acquisition of the goods or services; and

 (d)  whether any undue influence or pressure was exerted on, or any unfair tactics were used against, the supplier or a person acting on behalf of the supplier by the acquirer or a person acting on behalf of the acquirer in relation to the acquisition or possible acquisition of the goods or services; and

…

(i)  the extent to which the acquirer unreasonably failed to disclose to the supplier:

(i)  any intended conduct of the acquirer that might affect the interests of the supplier; and

 (ii)  any risks to the supplier arising from the acquirer’s intended conduct (being risks that the acquirer should have foreseen would not be apparent to the supplier); and

 (j)  if there is a contract between the acquirer and the supplier for the acquisition of the goods or services:

 (i)  the extent to which the acquirer was willing to negotiate the terms and conditions of the contract with the supplier; and

 (ii)  the terms and conditions of the contract; and

 (iii)  the conduct of the acquirer and the supplier in complying with the terms and conditions of the contract; and

 (iv)  any conduct that the acquirer or the supplier engaged in, in connection with their commercial relationship, after they entered into the contract; and

…

(l)  the extent to which the acquirer and the supplier acted in good faith.

  1. In a typical “I delay, you pay” arrangement between head contractor and subcontractor, these factors suggest that unconscionable conduct within the meaning of section 21 might well be found in circumstances where a head contractor seeks to fix a subcontractor with the cost of delay which was not in fact caused by the subcontractor.[81]
  2. If the court is predisposed to find that it is unconscionable for a head contractor to recover or deduct liquidated damages in the circumstances, there is a wide range of remedies available. Section 243 provides:

243  Kinds of orders that may be made

Without limiting section 237(1), 238(1) or 239(1), the orders that a court may make under any of those sections against a person (the respondent) include all or any of the following:

(a)           an order declaring the whole or any part of a contract made between the respondent and a person (the injured person) who suffered, or is likely to suffer, the loss or damage referred to in that section, or of a collateral arrangement relating to such a contract:

(i)            to be void; and

(ii)           if the court thinks fit—to have been void ab initio or void at all times on and after such date as is specified in the order (which may be a date that is before the date on which the order is made);

(b)           an order:

(i)            varying such a contract or arrangement in such manner as is specified in the order; and

(ii)           if the court thinks fit—declaring the contract or arrangement to have had effect as so varied on and after such date as is specified in the order (which may be a date that is before the date on which the order is made);

(c)           an order refusing to enforce any or all of the provisions of such a contract or arrangement;

(d)           an order directing the respondent to refund money or return property to the injured person;

(e)           except if the order is to be made under section 239(1)—an order directing the respondent to pay the injured person the amount of the loss or damage;

…

 

XI – Void Provisions under Security of Payment Legislation

  1. The anti-avoidance provisions in the security of payment legislation may be much wider in their reach than usually assumed. By way of example, Section 34 of the NSW Act provides:

(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.

  1. There have been numerous cases in which contractual terms have been found to fall foul of this provision, including
    • John Holland Pty Limited v Roads and Traffic Authority of New South Wales[82]
    • Power Serve v Powerline’s Clearing Group[83]
    • Proactive v McKenzie Keck[84]
    • BRB Modular v AWX Constructions[85]
    • J Hutchinson v Glavcom[86]
    • A-Tech Australia v Top Pacific[87]
    • Grocon v Construction Profile[88]
  1. Subsection 1 is relatively unremarkable. Subsection 2 goes further, rendering offending terms void. The language is not restricted to the ambit of the provisions for progress payments and enforcement procedures in the Act.[89] Applying that language according to its terms, an offending contractual provision is void for all purposes, regardless of whether the parties have or have not availed themselves of the entitlements available under the Act. Such an approach puts section 34 alongside section 12, whereby pay when paid provisions are rendered of no effect for all purposes.
  2. Curiously, there seem to be no cases in which this proposition has been tested. This is especially curious in light of the 2006 article by Justice McDougall, who has decided so many construction cases in the Supreme Court of New South Wales. In  Prohibition on contracting out of the Building and Construction Industry Security of Payment Act 1999 (NSW)[90]  he wrote:

Consequences if provision avoided

The language of s 34 is clear. A provision of an agreement falling within subs (2) is void. It is not merely void “for the purposes of this Act”. It seems to me to be strongly arguable that, if a provision is avoided by operation of s 34, it is void for all purposes. In other words, notwithstanding the interim nature of adjudications and other proceedings under the Act, and notwithstanding the express preservation of rights (in relation to a final hearing) effected by s 32, it may well be that a provision avoided by the operation of s 34 could not be relied upon in any such final hearing.

Indeed, it is strongly arguable that this is so even if s 34 has not been relied upon for any purpose connected with the Act (eg in relation to an adjudication). Thus, if a principal or head contractor, in proceedings for final relief in a court or arbitral forum, were to rely by way of defence on a contractual provision of a kind caught by s 34, it may well be met by an argument that the clause in question is void by operation of s 34, notwithstanding that s 34 had not been raised or relied upon for the purposes of any progress claim or adjudication.

Very difficult and perhaps absurd consequences would arise if s 34 did not so operate. If the avoiding effect of s 34 were limited to things done under or in connection with the Act, then there could be radical inconsistencies between the interim rights established under the Act and rights established on a final hearing. Although s 32(3) recognises the possibility of, and makes allowance for the existence of, inconsistencies, I do not think that the legislature had such radical inconsistencies in mind. It is difficult to impute to the legislature the absurd intention to give an entitlement that is enforceable under the interim regime prescribed by the Act, but lost entirely in proceedings thereafter.

This analysis, if correct, suggests that parties in the position of the Minister in Minister v Contrax should think very carefully before inserting provisions that might fall foul of s 34 into their contracts, and that their legal advisers should specify clearly the possible consequences if they do so.

CONCLUSION

Regardless of the Act’s apparent attempts to preserve contractual freedoms, I suggest that s 34 is a bulwark against provisions attempting to eradicate or limit the rights established by the Act. The section, as amended, may be seen to have transformed the Act from a legislative scheme providing default mechanisms to one which establishes a strong entitlement to a prompt, interim progress payment.

It may be that s 34 also will have an impact on rights outside the Act, in that its avoiding effect may be permanent, and for all purposes.

  1. It might well be thought that many of the onerous provisions that one regularly sees in construction contracts have the effect of restricting the operation of the security of payment legislation and/or may reasonably be construed as an attempt to deter claimants from taking action under the legislation.

XII – Direct Enforcement of the Right to Progress Payment

  1. It is well recognised that, under the East Coast model of security of payment legislation, those undertaking construction or engineering work have a statutory right to progress payment, which is parasitic on but not identical to the usual contractual right to interim payment.
  2. The New South Wales, Victorian, South Australian Acts are each subdivided up into four parts, as follows

Part 1 – Preliminary

Part 2 – Rights To Progress Payments

Part 3 – Procedure For Recovering Progress Payments

Part 4 – Miscellaneous.[91]

  1. Part 2 includes the statutory right to progress payment. The terms of section 8 of the New South Wales Act, the Building and Construction Industry Security of Payment Act 1999 are as follows:

8 Right to progress payments

A person who, under a construction contract, has undertaken to carry out construction work or to supply related goods and services is entitled to receive a progress payment.

  1. Under Part 3, the principal procedure for recovering progress payments is by way of adjudication, but they may also be by way of default judgment in default of any payment schedule, and indirectly by means of the right to suspend work. It is typically assumed that these are the only ways in which a statutory progress payment may be recovered, but it is at least arguable that the right to a progress payment may be enforced directly by litigation or arbitration.
  2. Section 32 of the New South Wales Act provides as follows:

32 Effect of Part on civil proceedings

(1) Subject to section 34, 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.

  1. That section is in Part 3 of the Act. Accordingly, the section makes clear that the provisions as to adjudication etc do not affect the Part 2 rights. And of course, the key Part 2 right is the statutory right to progress payment.  And so the position appears to be as follows:
    • the statutory right to a progress payment under section 8 – considered in isolation – looks like a stand-alone right which may be enforced in the same way as any other statutory right;
    • section 32 seems to make clear that none of the provisions concerning adjudication etc limit that statutory right to a progress payment;
    • accordingly, it is open to a claimant to issue proceedings, or to commence arbitration, seeking enforcement of the statutory right to a progress payment. And there is no reason to suppose that it is necessary for a claimant to issue a payment claim under section 13 (a Part 3 procedure) before doing so. The relatively short periods of time available for the service of a  payment claim are thus of no relevance to such an action or arbitration.
  1. Is there any utility in framing the claim in such a way? There may well be, because there are a number of dicta to the effect that the statutory right to a progress claim is to be ascertained without regard to contract mechanisms which may well reduce or extinguish any underlying contractual right to payment. Thus for example in John Holland Pty Limited v Road and Traffic Authority of New South Wales[92], Hodgson JA said:

38 I note that in Transgrid v. Siemens Limited [2004] NSWCA 395, (2004) 61 NSWLR 521 at [35], I expressed the view (obiter) to the effect that “calculated in accordance with the terms of the contract” meant calculated on the criteria established by the contract, and did not mean reached according to mechanisms provided by the contract; and I adhere to that view as being more in accord with the use of the word “calculated” and with the prohibition in s.34 of the Act on contracting out of the effect of the Act. On the other view, contractual provisions denying progress payments for construction work otherwise than as certified by a superintendent or in accordance with review procedure provided by the contract could in my opinion have the effect of restricting the operation of the Act, and thus be made void by s.34.

  1. And again in Plaza West Pty Ltd v Simon’s Earthworks (NSW) Pty Ltd & Anor[93]

53           I adhere to the view … that “calculated in accordance with the terms of the contract” in s 9(a) of the Building and Construction Industry Security of Payment Act 1999 (the Act) does not engage contract mechanisms determining what is due under the contract, independently of calculations referrable to the work performed.

54           This means that contractors are not deprived of entitlement to payment under the Act because a condition precedent, such as the obtaining of a superintendent’s certificate, has not been satisfied…

  1. It is at least arguable that “contract mechanisms” here might refer not only to certification, but also to mechanisms set up by notice provisions or time bars which extinguish, or which purport to extinguish, all or part of a contractual entitlement to payment, such that the statutory entitlement to a progress payment might substantially exceed any contractual entitlement to payment even before the generous entitlements to interest to the statutory entitlement are taken into account.
  2. In some cases, a respondent might well be able to respond, at least in part, by counterclaiming for recovery of at least part of the difference between the two measures. The position as to that is uncertain, and may depend upon procedural considerations.

 

Black letter law

  1. It is right to acknowledge that some judges are attracted to a “black letter law” approach, tending to minimise or ignore those parts of the legal landscape which are not to be found within the express terms of the contract. In practice, a black letter approach in construction law is often unattractive, leading to results that are commercially unfair, unpredictable, and founded upon the fiction that weasel words buried within hundreds of pages of bespoke contract drafting truly reflect any meeting of the minds of the commercial men who have struck the bargain. It is perhaps for that reason that the application of black letter law is less prevalent in arbitration than it is in litigation.[94]

 

 Limitations of this paper

  1. This paper has not attempted exhaustively to consider each of the legal considerations which might apply to the various routes to recovery which have been identified. Rather, the purpose of this paper is to do enough to illuminate the general nature of those routes. In that sense, it is necessarily somewhat one-sided, focusing on the authorities which encourage the use of those routes rather than those authorities which discourage them. For the latter, the reader is invited initially to refer to the more thorough treatment in the author’s book Extra-Contractual Recoveries for Construction & Engineering Work, and thence to the hard yards of considering the very extensive jurisprudence on the various routes.

 

 

 

[1] International Member of Keating Chambers and member of the South Australian Bar. Thanks are due to Justice O’Sullivan of the Federal Court for his helpful suggestions, and the Hon Robert McDougall QC for permission to quote from his paper Prohibition on contracting out of the Building and Construction Industry Security of Payment Act 1999 (NSW). The views expressed in this paper are those of the author.

[2] I.e. clauses which set up procedural condition precedents to the entitlement to payment, such clauses serving no useful commercial purpose and being designed to be difficult or impossible of compliance.

[3] I.e. arrangements whereby head contractors seek to recover liquidated damages from subcontractors for delay not caused by those subcontractors.

[4] For a more complete treatment, see my book Extra-Contractual Recoveries for Construction & Engineering Work, London Publishing Partnership, 2022 https://londonpublishingpartnership.co.uk/extra-contractual-recoveries (2 volumes, 1077 pages). Some parts of this paper are drawn from that book, but necessarily, such extracts are not complete.

[5] These amount, in the aggregate, to some billions of dollars.

[6] (1987) 162 CLR 221.

[7] [2013] UKSC 50.

[8] Some commentators prefer the term “reasonable sum” for a contractual quantum meruit. But there is no doubt that such claims are often referred to as quantum meruit claims.

[9] At [9].

[10] (1906) 4 CLR 347.

[11] At [85].

[12] (1996) 85 BLR 77. In that English case, a subcontractor’s work enabled the head contractor to achieve a substantial bonus under the head contract; the subcontractor’s quantum meruit properly included the proportion of that bonus, taking the subcontractors quantum meruit well above the cost of the work to the subcontractor thereby reflecting the principle that a restitutionary quantum meruit is concerned with the enrichment obtained by the recipient of the work, not the cost of the work to the provider.

[13] As to which see e.g. Bendetti at [15], [21] and [29] respectively.

[14] See Benedetti at [85] for the impact of choice of pleading.

[15] The Liebe case. As in Costain v Zanen.

[16] As identified at Benedetti at [9].

[17] In these circumstances, there is often very live dispute as to whether anything is payable for the work in question at all. The suggestion being made here is simply that if there is an entitlement to payment, but no contractual agreement as to the amount of payment, then the entitlement is to a contractual quantum meruit, or reasonable sum, and not to a restitutionary quantum meruit.

[18] The Pavey & Matthews case.

[19] [2019] HCA 32.

[20] Section 18(1) provides as follows:

(1)  A person must not, in trade or commerce, engage in conduct that is misleading or deceptive or is likely to mislead or deceive.

That section forms part of Chapter 2, and as such falls within the scope of section 236, which provides for actions for damages:

(1)  If:

(a)  a person (the claimant) suffers loss or damage because of the conduct of another person; and

(b)  the conduct contravened a provision of Chapter 2 or 3;

the claimant may recover the amount of the loss or damage by action against that other person, or against any person involved in the contravention.

[21] To be found at Schedule 2 of the Competition and Consumer Act 2010 (Commonwealth).

[22] [2004] NSWCA 270, [2005] NSWSC 662, [2006] NSWCA 282 and [2007] NSWSC 220.

[23] Including, perhaps, opportunity cost calculated on a Hudson formula basis or similar.

[24] Subsection 2 provides:

(2)  For the purposes of applying subsection (1) in relation to a proceeding concerning a representation made with respect to a future matter by:

(a)  a party to the proceeding; or

(b)  any other person;

the party or other person is taken not to have had reasonable grounds for making the representation, unless evidence is adduced to the contrary.

[25] Subsection 3 provides:

(3)  To avoid doubt, subsection (2) does not:

(a)  have the effect that, merely because such evidence to the contrary is adduced, the person who made the representation is taken to have had reasonable grounds for making the representation; or

(b)  have the effect of placing on any person an onus of proving that the person who made the representation had reasonable grounds for making the representation.

The intention and effect of these provisions appears to be to put pressure on a defendant to give discovery and provide evidence by way of grist for the mill. Without these provisions, it might well be difficult for a subcontractor to provide any particulars as to why and in what respects the program in question was misleading.

[26] Subsection 4 provides:

(4)  Subsection (1) does not limit by implication the meaning of a reference in this Schedule to:

(a)  a misleading representation; or

(b)  a representation that is misleading in a material particular; or

(c)  conduct that is misleading or is likely or liable to mislead;

and, in particular, does not imply that a representation that a person makes with respect to any future matter is not misleading merely because the person has reasonable grounds for making the representation.

[27] In Brighton v Australia v Multiplex Constructions [2018] VSC 246, the plaintiff failed, both before the referee and trial, because it had omitted to plead that the representation relied on was a continuing representation.

[28] Reliance may not be easily shown. The court may be persuaded that the subcontractor would have signed the contract despite pretty much everything (many do).

[29] Brighton v Australia v Multiplex Constructions, ibid, applying the Henjo principle.

[30] Unless there is an exclusive remedies clause such as in Strachan & Henshaw v Stein Industrie (1997) 87 BLR 52 (CA).

[31] Especially where the certifier is, or is employed by, the paymaster.

[32] See for example for Balfour Beatty v Docklands Light Railway [1996] 78 BLR 42.

[33] [2005] SASC 483.

[34] See below.

[35] (1787) 1 TR 638 at 645.

[36] (1982) 149 CLR 600.

[37] [2004] QSC 270

[38] [2005] WASC 83

[39] (1985) 32 BLR 51.

[40] (1988) 43 BLR 124.

[41] (1996) CILL 1152

[42] [2011] NSWSWC 1188. Note however that that in that case, the contract expressly contemplated that extensions of time might be “allowed” in litigation.

[43] (1999) NTSC 143.

[44] The Prevention Principle and Making the Contractor pay for Employer Delay:  Is English Law departing from its Roots? published in the International Construction Law Review; Tony Marshall (2020) 37 International Construction Law Review 326 (part 1); (2021) 38 International Construction Law Review 88 (part 2).

[45] Ibid.

[46] [1994] 13 BCL 378.

[47] (1995) 12 BCL 33.

[48] [2002] NSWCA 211.

[49] [2012] WASCA 53; (2012) 287 ALR 360; (2012) 28 BCL 282; [2012] WASCA 53 at [57].

[50] [2017] NSWCA 151.

[51] It is to be noted that Gaymark did not challenge the correctness of the Turner cases, but rather note them, and distinguished them accordingly

[52] [2012] SASC 49 at [1431].

[53] [2001] HKCFI 714.

[54] The experienced and respected Colin Wall.

[55] The award included this:

  1. In the light of the above, I FIND as a FACT that the Claimant was delayed by the Respondent’s lack of payment.
  2. The Claimant says that an act of prevention by the Respondent sets time at large and that the Respondent is not entitled to deduct liquidated damages and it now has a reasonable period in which to finish the Works. I agree with this contention and I therefore HOLD as a matter of LAW that time was set at large and the Claimant is not liable to pay liquidated damages.

[56] Paragraph 45 of the judgment.

[57] Abu Dhabi National Tanker Co v Product Star Shipping Ltd (The “Product Star”) [1993] 1 Lloyd’s LR 397 at page 404 per Leggatt LJ, Balcombe and Mann LJJ agreeing.

[58] See Constraints on the Exercise of Contractual Powers; Justice Stephen Kos (2011) 42 VUWLR 17.

[59] [2014] UKSC 42 at [37] per Lord Sumption, Lords Neuberger, Mance, Toulson and Hodge agreeing.

[60] [2015] UKSC 17.

[61] At [30].

[62] Associated Provincial Pictures Houses Ltd v Wednesbury Corporation [1948] 1 KB 223, per Lord Greene MR at 233-234.

[63] [2013] UKSC 17.

[64] At [28].

[65] Ruwais is a refinery town 240 km west of Abu Dhabi.

[66] [2005] ICR 402.

[67] [2008] 1 Lloyd’s Rep. 558.

[68] [2010] EWCA Civ 34.

[69] See JML Direct, ibid at [14].

[70] [2020] EWHC 1581 (TCC).

[71] A relational contract is one which, whilst not fiduciary, yet nevertheless involves trust and confidence; see Sheikh Al Nehayan v. Kent [2018] EWHC 333 (Comm), at [167] and Bates v. Post Office (No. 3) [2019] EWHC 606 (QB)] at [725] summarised in Essex v UBB at [104] et seq. For an Australian formulation (“a contract that involves not merely an exchange, but also a relationship, between the contracting parties”) see GEC Marconi v BHP Information Technology [2003] FCA 50 at [224].

[72] [1999] WASC 1046.

[73] [2014] WAIRComm 91at [14].

[74] [2015] UKSC 67.

[75] Especially in those cases where the head contractor seeks to recover liquidated damages from two or more subcontractors for a period of delay that none of them were responsible for.

[76] [2012] HCA 30.

[77] [2003] HCA 57.

[78] See Mineralogy Pty Ltd v Sino Iron Pty Ltd [No 6] [2015] FCA 825 at [981] and [982].

[79] Section 20(1) provides:

Section 20   Unconscionable conduct within the meaning of the unwritten law

(1)  A person must not, in trade or commerce, engage in conduct that is unconscionable, within the meaning of the unwritten law from time to time.

[80] Section 20(2) provides:

(2)  This section does not apply to conduct that is prohibited by section 21.

 

[81] Different approaches may be taken by different judges. Some may say that a subcontractor who has agreed to such an arrangement – particularly if with the benefit of legal advice – should be fixed with it. Other judges may say that it was never truly part of the bargain that the subcontractor should, in effect, insure the head contractor against the risk of the head contractor’s own delays.

[82] [2007] NSWCA 140.

[83] [2011] NSWSC 1180.

[84] [2013] NSWSC 1500 at [38].

[85] [2015] QSC 218.

[86] [2016] NSWSC 126.

[87] [2019] NSWSC 404.

[88] [2020] NSWSC 409.

[89] This is in contrast to section 200 of the Queensland Act, the Building Industry Fairness (Security of Payment) Act 2017, which does appear to be limited in its reach to the operation of that Act.

[90] (2006) 22 BCL 246; [2006] NSWJSchol 6.

[91] Under the New South Wales and Victorian legislation, there is also now a Part 3a – Investigation And Enforcement Powers, which is immaterial for the present discussion.

 

 

[92] [2007] NSWCA 19 at [38].

[93] [2008] NSWCA 279.

[94] It is also noticeable that generalist courts – those that do not specialise in construction law – tend to be more attracted to black letter law arguments than specialist courts which have more realistic understanding of the reality of the construction process.

One thought on “EXTRA-CONTRACTUAL RECOVERIES: 12 HIDDEN OPPORTUNITIES AND RISKS – The Paper”

  1. Thank you Robert. I particularly like and agree with your comment on Mann v Patterson that the quantum meruit is better regarded as contractual rather than restitutionary and your support for Gaymark. You probably know that the arbitrator who made the original and correct decision was Justice McDougall’s father. He was a good arbitrator. Phil Davenport

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