Corrs High Vis: Episode 19 – Construction Law Update - August 2017

Jaclyn Masters: Commentator

Michael Earwaker: Corrs Chambers Westgarth – Construction Partner, Sydney

Andrew McCormack: Corrs Chambers Westgarth – Construction Partner, Brisbane

Jennifer Barrett: Corrs Chambers Westgarth – Construction, Special Counsel, Brisbane

Wayne Jocic: Melbourne University Senior Lecturer and Co-Director of Studies in Construction Law

Jaclyn: Hello and welcome to High Vis the Corrs Chambers Westgarth Construction Podcast. My name is Jaclyn Masters and I am a Senior Associate in the Construction team here at Corrs. Today we are going to be looking at some of the leading case developments around Australia and if you would like further information about any of these they can be found in the print edition of the August 2017 Construction Law Update which is available on the Corrs website. To discuss the cases today I am joined by a Sydney Partner Michael Earwaker, Brisbane Partner Andrew McCormack, Melbourne Consultant Wayne Jocic and Brisbane based Special Counsel Jennifer Barrett. Before we jump into our coverage of the cases today it is also worth noting a development in the international construction community. The Kuala Lumpur Regional Centre For Arbitration became the first arbitration institution in the world to release a suite of standard form building contracts earlier this month. Andrew if we can start with you. The construction industry has been keenly watching the developments of two security of payment special leave applications that went before the High Court recently in Probuild and Shade Systems and Maxcon and Vidas. Both matters were granted special leave. Can you tell us a little bit more about what the High Court had to say here.

ANDREW: Well Jaclyn presently these two cases confirm, pending the High Court’s consideration of the issue, that the security of payment legislation in both New South Wales and South Australia does not permit judicial review on any basis other than jurisdictional error by the adjudicator. If we look at the two cases in Shade Systems and Probuild the New South Wales Court of Appeal, reversing the trial Judge’s first instance decision, confirmed that an error of law on the face of the record was not a ground for judicial review of an adjudicator’s decision. In Maxcon and Vidas, the full court of the Supreme Court of South Australia confirmed two things: first, that the adjudicator in that case did not make a jurisdictional error in construing the retention clause of the relevant construction contract; and second, that the adjudicator’s error was an error of law on the face of the record but this did not render the adjudicator’s decision void. Both of these cases have been appealed to the High Court and were therefore the subject of a special leave application hearing before the High Court. Because the key issue in the two cases, and indeed the eminent Counsel representing the parties in both cases, were in fact common, the special leave applications were heard together. Interestingly Counsel for the respondents in both cases, that is, the parties actually satisfied with the existing determinations of the New South Wales and South Australian Appellate Courts, submitted that the legal costs of the ligation vastly outweighed the amounts in dispute in these cases which were approximately $30,000 in Maxcon and about $200,000 in the Probuild case. On this basis it was argued special leave should be refused. Ultimately however the High Court decided otherwise and special leave to hear both matters was granted. Notwithstanding the relatively low value of the amounts in dispute, the point of law that needs to be resolved, that is, the scope to seek judicial review of an adjudicator’s determination for reasons other than a jurisdictional error on the part of the adjudicator, is an issue of such importance as to warrant the High Court’s attention and I think this is to be welcomed. It seems likely that the appeals will be heard together by the High Court when it next sits in Canberra which is in October this year. Now it has to be said that if the High Court overturns the decision of the New South Wales Court of Appeal and the South Australian Supreme Court on this point it will have significant consequences for adjudication determinations not just in New South Wales and South Australia, but also in Queensland, Victoria and Tasmania which all have very similar security of payment legislation. If that were to happen I think it would likely lead to an increase in the number of adjudication decisions being challenged through judicial review and that’s an outcome that some might say defeats the purpose of the security of payment legislation which after all is intended to provide a cheap, rapid and enforceable outcome to construction payment disputes. What does all that mean? Well I think it is fair to say that the construction industry will be waiting for the High Court’s view on this matter with a great deal of interest.

Jaclyn: Thanks Andrew. Now Michael over in the Western Australia Court of Appeal CPB and JKC Australia LNG is a decision which looked at a call on performance bonds under a construction contract. Can you give us some insight into what construction professionals need to take away from this decision?

Michael: These cases are another example of a contractor seeking relief where there has been a threatened call on its project securities. In this case the project securities were in the form of bank guarantees. The contractor was CPB Contractors and it sought relief in both the Supreme Court and the Court of Appeal in Western Australia. It was unsuccessful in both instances. The decisions of both the Supreme Court and the Court of Appeal were consistent with recent authority. That recent authority is usually, that a high bar will be set for a contractor to obtain the injunctive relief of the type sought by CPB. However there were a few particular matters to which these cases referred which were of interest. Firstly, CPB had commenced a dispute resolution process under the contract prior to bringing its claim for the injunctive relief. CPB relied on that commencement of the dispute resolution process as part of its argument that it ought to be able to secure the injunctive relief against the owner. CPB said that the dispute resolution process under the contract ought to be allowed to run its course in order for the issue to be finally resolved and the Court would not interfere with it. That argument was unsuccessful. The cases also provide an interesting analysis of what might simply be called the “no injunctive clauses”. Those clauses are ones which say that a contractor is prohibited from bringing injunctive relief. Seemingly those clauses would “cut the contractor off at the knees” before being able to bring a claim of the type that CPB did. The Supreme Court found that clause was void as an answer of jurisdiction of the Court’s authority. But the Court of Appeal did find that that clause had some work to do and deftly connected the operation of that clause with the specific wording of the provisions of the contractor that related to the use of the project securities. Finally, the Courts consider that the substance level whether or not there was a prima facie issue that had to be argued in order for the injunctive relief to be satisfied. Notwithstanding the attempt by CPB to drive this matter in to the dispute resolution provisions, neither the Court alone nor the Court of Appeal thought there was a substantive issue to be tried and that formed the basis of the denial of the injunctive relief sought by the contractor.

Jaclyn: Thanks Michael. Now Jennifer, the recent Federal Court decision in Hughie and Esposito Holdings has some important lessons for clients working in the arbitration space, particularly in light of procedural fairness and circumstances in which it may be necessary and appropriate for a Court to overturn an arbitral award. Can you step us through this decision?

Jennifer: Yes Jaclyn. Thank you for that question. Yes the case of Hughie and Esposito Holdings is a very interesting one and I can certainly commend the description of the arbitral proceedings as set out in the judgment of Justice Beech. They are set out in quite a lot of detail. The matter is complex with various different parties involved at different times. The matter arose under the UNCITRAL Arbitration Rules and the arbitrators identity is not disclosed but it is clear that the matters complained of before the Court were considered quite exceptional. Mr Justice Beech describes the exceptional circumstances of the case and I think the summary in his judgment sets those out quite well. There are various details there including pre-judgments of matters that were not actually raised before the arbitrator or were only raised somewhat by one party and not by the other. There is reference to out of scope defences and decisions made by the arbitrator that appear to be completely in contravention of prior comments from him that he would not make any decisions in that regard. And here we will note that the transcripts were put in evidence and the matters discussed were quite clear. And in this regard you might wish to look at paragraphs 90 to 96 of the judgment. For our purposes we would note that making an application for an arbitral award to be overturned in the first instance, and then secondly for the arbitrator to be disqualified; those are two very significant applications to make and ones that you would not wish to lose upon in case you are sent back to the arbitration and you are dealing with an arbitrator who has formed a certain view of the parties. That will be a tactical difficulty that every client would have to consider in this regard. For our purposes we would note that these exceptional circumstances of the case did result in the arbitral award being set aside and did result in the arbitrator being disqualified. I think the point to highlight here is the really useful restatement of the test for overturning an arbitral award and this was very clear in what is set out in the judgment as Justice Beech explained. He said, and I quote, “this involves to some extent engaging with the merits of the issues the subject of the award that was made but in my view that inevitably follows. The perspective which I am applying is not a review of the merits of the awards as such, but rather the counter factual question of whether there was a reasonable possibility that the award might have been different if the denial had not occurred.” Now that is very interesting and it was a way of explaining that although the Court has in no way got jurisdiction to redo an award that is made, where we have a case of this nature whether hearings had been conducted in such a way that defences were precluded to certain parties, a valuable opportunity was lost by those parties. And that in and of itself amounted to real unfairness and practical injustice. Now that tends in my view to confirm the arbitral process in Australia and in no way detracts from it. It’s there to show that the Courts are available in very limited circumstances and we had those circumstances here. I think it’s interesting to note as in effect a new test as to the caution that will be given by the Supervisory Court in a matter of this nature and these are set out at paragraph 5 of the judgment in three parts. The first, the contractual and therefore consensual nature of the dispute resolution mechanism chosen. Second, the need for expedition, commercial efficiency and finality in the application of that mechanism, and thirdly, in such a context any consequent short of real unfairness or real practical injustice ought not justify the setting aside of an award. So those are the matters which the Court has in mind when putting in to effect the parties’ decision usually in our experience at the contracting stage, but potentially also when the dispute itself arises. That’s where the parties decide that they will go to arbitration. If you don’t like the results you cannot of course simply go to the Court for a second alternative or appeal outcome. We only turn to the Court when essentially there has been a very serious matter which results in effectively the Court’s mopping up a difficulty that has been created. The arbitration rules that we see in practice such as the UNCITRAL Rules, the ICC Rules and the [ICACA] Rules all have provisions making it clear that the Court is not to be treated as a grounds of appeal. The question then arises as to how this case will be developed in future. I think the test set out here may not be used very often. It is unusual to see a case of this nature where the arbitration proceeded in the way that was set out and the fact that the arbitrator was also removed by virtue of the decision is also a matter of tremendous significance. That is not something that happens very often. It’s an unusual application and as I mentioned at the outset one that you would make with considerable hesitation.

Jaclyn: Thanks Jennifer. Now Wayne if we can turn to you. There had been a development in the South Australian Full Court of the Supreme Court in Stone and Chapel, which gives some interesting guidance on the assessment of damages for breach of contract. Why do clients working in the industry need to be mindful of this decision?

Wayne: Well, this is one of those cases that we should be mindful of because it’s fun and because it deals with a really important issue and that is what damages are payable for defective work that has been accepted. Now the facts are really simple. A very discerning couple, the Stones, had a ceiling, it was too short, it was on average 48 millimetres to short. They sued and they were suing for the cost of rectifying that ceiling. Very substantial works; it was going cost several hundred thousand dollars. Now the leading High Court authority suggests that they would probably have been entitled to the cost of rectifying the low ceiling unless that was not a reasonable course to adopt. But what does that mean? When are rectification damages not a reasonable course to adopt? And in this Stone and Chapel case the Full Court sets out a series of considerations. Eight considerations in one judgment. Half a dozen in another and so what we see is a great deal for parties to work with in argument about whether rectification costs should be awarded or not. Things like, whether it matters, whether the party is actually going to rectify the work, whether they can do it, whether it’s disproportionate, whether the builder is genuinely blameworthy. These are some of the factors that are considered. Now the last little issue, last interesting thing about this case is that the result was that the Stones didn’t get the cost of rectification. Instead of $330,000 they were awarded $30,000 for loss of amenity. What that means is something that the Court really doesn’t add to, simply saying that it may that it’s incapable of precision, or even substantial explanation. So that’s a really interesting case because it goes to what is a reasonable course to adopt and also how we calculate loss of amenity damages and on that we are little better informed.

JACQUELINE: Thanks for joining me today Wayne, Michael, Jennifer and Andrew. To our listeners we hope you will join us next time for the next episode of Corrs High Vis.

This podcast is for reference purposes only. It does not constitute legal advice and should not be relied upon as such and you should always obtain legal advice about your specific circumstances.

This podcast is for reference purposes only. It does not constitute legal advice and should not be relied upon as such. You should always obtain legal advice about your specific circumstances.