Construction Law Update
A CPD Seminar for the Law Society of
20th June 2007
Robert Fenwick Elliott[1]
1. This update deals with several loosely connected areas in construction law that have been the subject of noteworthy development over the past few months, namely quantum meruit, contractual mechanism breakdown, adjudication and delay analysis.
Quantum Meruit – Some Recent Developments
2. There are a few of recent cases on quantum meruit[2], but it might be worth reviewing some – by now - well established principles:-
3. The old "implied contract theory" is now well and truly dead. This presupposed that where one person undertakes work for and at the request of another, the law will import a contractual promise to pay. In its place, the restitutionary principle has become firmly established: if there is no enforceable contractual obligation, the law will in appropriate circumstances apply a quantum meruit in circumstances where it would be unjust for the recipient of the work or materials to retain their benefit without paying for them.
The Relationship between quantum meruit and contract
4. It is plainly the function of the law of quantum meruit to plug a gap where no contractual relationship exists. But the law will sometimes allow a quantum meruit notwithstanding the existence of a contract. It has been said that the limits of the incursion are clear, thus for example this passage from the Federal Court decision in GEC Marconi Systems Pty Limited v BHP Information Technology Pty Limited [3]
655 Turning now to restitutionary claims, it is equally well accepted law, to use the language of Mason P in Trimis v Mina [1999] NSWCA 140 at [54] which I respectfully adopt, that:
"The starting point is a fundamental one in relation to restitutionary claims, especially claims for work done or goods supplied. No action can be brought for restitution while an inconsistent contractual promise subsists between the parties in relation to the subject matter of the claim. This is not a remnant of the now discarded implied contract theory of restitution. The proposition is not based on the inability to imply a contract, but on the fact that the benefit provided by the plaintiff to the defendant was rendered in the performance of a valid legal duty. Restitution respects the sanctity of the transaction, and the subsisting contractual regime chosen by the parties as the framework for settling disputes. This ensures that the law does not countenance two conflicting sets of legal obligations subsisting concurrently. As Deane J explained in the context of the quantum meruit claim in Pavey & Matthews (at 256), if there is a valid and enforceable agreement governing the claimant's right to payment, there is "neither occasion or legal justification for the law to superimpose or impute an obligation or promise to pay a reasonable remuneration". See also Update Construction at 275n; Ansett Transport Industries (Operations) Pty Ltd v Alenia Aeritalia & Selenia Spa (1991) 105 FLR 169; Brenner v First Artists Management Pty Ltd [1993] 2 VR 221. This principle is applicable to other restitutionary claims (see, eg Foran v Wight (1989) 168 CLR 385 at 413, 432; Baltic Shipping Co v Dillon (The Mikhail Lermontov) (1993) 176 CLR 344 at 355-6, 385)."
5. In Russell Edwards Design Services v Baring [2007] NSWSC 140 the matter was put this way:
The obligation to make restitution will not arise where there is a subsisting enforceable contract between the parties for the performance of the services in question.
but the case law shows that the extent to which quantum meruit may be allowed notwithstanding the existence of a contract remains somewhat fluid. There are a number of situations in which a builder might want to look for a quantum meruit recovery:
· Where his contractual recovery is constrained by statutory requirements as to contractual form and/or licensing, and
· Where his contractual recovery is constrained by onerous contractual terms, and
· Where a contractual chain has broken down, and
· Where the contract has been terminated.
Recovery in Quantum Meruit Notwithstanding Legislative Controls
6. There are a number of legislative controls on building work. Nevertheless, work is often done contrary to such controls: In such circumstances, is the builder entitled to be paid?
The Contract is not in writing, as required
7. Some of the legislation requires that building contracts must be in writing. Generally speaking, if work is done without a written contract, the courts have allowed quantum meruit recovery.
8. The leading case is Pavey & Mathews v Paul[4], decided by reference to s.45 of the Builders Licensing Act 1971 (NSW), which provides:
A contract (in this section referred to as a 'building contract') under which the holder of a licence undertakes to carry out, by himself or by others, any building work or to vary any building work or the manner of carrying out any building work, specified in a building contract is not enforceable against the other party to the contract unless the contract is in writing signed by each of the parties or his agent in that behalf and sufficiently describes the building work the subject of the contract.
9. The High Court found that, whilst the section prohibited enforcement of the contract, yet a quantum meruit claim is not an enforcement of the contract, but rather is a restitutionary remedy that is independent of the contract. Thus, the builder was allowed his quantum meruit recovery. Plainly, the effect of the decision was to largely
circumvent the intention of the legislation[5].
10.
In
The Builder is not licensed, as required
11.
Some of the legislation requires that the builder be
licensed. Thus in
A
person required by this Act to be licensed as a building work contractor is not
entitled to any fee, other consideration or compensation under or in relation
to a contract with another on whose behalf the person performed work as a
building work contractor unless—
(a) the person was authorised to perform the
work under a licence; or
(b) a court hearing proceedings for recovery of
the fee, other consideration or compensation is satisfied that the person's
failure to be so authorised resulted from inadvertence only.
12. In DG Australia Pty Ltd v Alexander[6] and again in Stankovic v Aufderheid[7] it was held that an unlicensed contractor may recover in quantum meruit notwithstanding section 6(2).
Recovery of a Quantum Meruit Notwithstanding onerous contract conditions –
The Road to John Holland v Miami
13. Here, as in other areas, the courts seek to strike a balance – often unstable - between upholding the bargain of the parties and preventing unfairness.
14. Consider a hypothetic clause at the end of a variation provision in a contract as follows:
Provided always that no additional work shall be considered for payment under this contract unless authorised in writing by the Queen of Hearts in triplicate.
15. If the owner orders additional work, but without any authorisation by the Queen of Hearts in triplicate, it may readily be asserted by the builder that the effect of this provision is that, the contract not governing his entitlement to payment for that work, he is entitled to a quantum meruit. In other words, if the contract washes its hands, so to speak, of a payment entitlement, it leaves the stage open for quantum meruit to take over. Consider a hypothetical rider at the other end of the scale:
Provided always that if any variation of the contract works which adds to its content is carried out without having been authorised in writing by the Queen of Hearts in triplicate, then the amount payable for that variation is 5 cents.
16. In this case, it would be hard for the builder to deny that the contract covers the issue of payment for such work.
17. There have been some cases in which this issue has been ventilated.
18. In Liebe v Molloy (1906) 4 CLR 347 the High Court was called upon to consider a building contract, which stipulated that no extra works beyond those included in it, should be allowed or paid for "without an order in writing from the employer and architect". The court allowed a quantum meruit for work required and done without such an order (in those days, characterised as implied contractual obligation to pay); Griffith CJ said at p.353:-
"The law on the subject may be very briefly stated. There was a written contract between the parties, and these items cannot be brought within its terms in face of the express stipulation that `no extra shall be paid for unless ordered by an order in writing by the architect endorsed by the employer;' but that stipulation does not exclude altogether the implied doctrine of law that, when one man does work for another at his request, an implied obligation arises to pay the fair value of it. The question therefore is whether, notwithstanding the absence of written orders, the contractor is entitled to recover these sums, or in other words, whether under the circumstances of the case an implied contract to pay for them is to be inferred. That is inference of fact to be drawn by the tribunal which is called upon to determine the matter, that is, the umpire."
19. In Gigliotti Constructions Pty Ltd v Jalili[8], the court applied Liebe v Molloy in declining to overturn an arbitrator's allowance of a quantum meruit.
20. In Built Interiors Pty Ltd v Three Dinosaurs Pty Ltd[9], the New South Wales Court of Appeal refused to allow a builder to recovery for additional work on a quantum meruit basis, and cited with approval the following passage from the judgment of the trial Judge:
Moreover, as it seems to me, the law does not permit recovery on a quantum meruit, or unjust enrichment, basis where there is, between the parties, as there was in this case, an existing and enforceable contract, which covers the situation. In my opinion, the amount claimed in respect of unapproved variations relates to works performed within the scope of the contract in order to complete that which was contracted for. In so far as the claims, in truth, constituted 'variations' as defined, then the contract provided for the authorisation of such variations, for the valuation of the work done, and for the resolution of disputes. That being so, there is no room for the application of principles of quantum meruit or unjust enrichment (Pavey and Mathews Pty Ltd v Paul 162 CLR 221 and Update Constructions Pty Ltd v Rozelle Child Care Centre Ltd (1990) 20 NSWLR 251, especially Priestley JA at 275).
21.
But it appears from John
Holland v
W Cook Builders v Lumbers[11]
22. In January 2007 the Full Court of the Supreme Court of South Australia handed down a decision in relation to payment for building work performed in the absence of a building contract: W Cook Builders Pty Ltd (In liq) v Lumbers & Ors (30 January 2007).
23. The land owners, Matthew Lumbers and Warwick Lumbers, agreed with W Cook & Sons Pty Ltd to build a house of unusual and complex design. W Cook & Sons was specifically selected by Warwick Lumbers due to its reputation and competence, and the business relationship between Lumbers and a senior executive of the Cook group of companies. No written contract was signed. Without telling the Lumbers, W Cook & Sons arranged to have the work performed by a subsidiary company, W Cook Builders Pty Ltd ("the Builder") for internal administrative reasons. The Builder did not hold a building licence. Both the Builder and W Cook & Sons shared common staff and a common bank account. The arrangements with the Lumbers were informal due to the high degree of trust Warwick Lumbers placed in W Cook & Sons and its management; when the Builder required payment its senior executive would make a verbal request and the funds were transferred by Lumbers. No written invoices were issued.
24. The Lumbers made total payments of about $420,000. After the Builder went into liquidation, the liquidator found that the Lumbers had not been asked by the Builder to pay the full cost of the house; an amount of $261,715 remained unpaid. The Builder, through the liquidator, sued the Lumbers for the balance of the construction costs. At the trial, Warwick Lumbers said he would never have approved the assignment of the building contract from his selected builder, W Cook & Sons, to the Builder as he had selected W Cook & Son because of their longstanding reputation.
Quantum meruit claim
25. A quantum meruit claim is a claim to be paid fair value for the work undertaken where no contractual right to payment exists. As there was no contract between the Lumbers and the Builder, the Builder argued that it should be paid for its work on a quantum meruit basis. The Builder said that it would be unconscionable for the Lumbers to receive and retain the benefit of having a home built without paying for it. The Builder said that the Lumbers had been unjustly enriched at the Builder's expense and the Builder was, therefore, entitled to recover in quantum meruit for the goods and services that were supplied at the Builder's expense.
The impact of the Builder being unlicensed
26. The Lumbers said that the Builder was not entitled to any payment at all for the works because section 39 of the Builders Licensing Act 1986 (SA) precludes the entitlement of an unlicensed person to any payment for building work unless the person's failure to be licensed resulted from inadvertence.
27. There was evidence that the failure to hold a licence was not inadvertent. The Supreme Court held that section 39 of the Builders Licensing Act only disallows a claim to a contractual sum on the part of an unlicensed builder. That is, an unlicensed builder cannot sue for any contract sum. However, it does not preclude a claim by a builder on a quantum meruit basis for work that has been completed in the absence of a contract.
Court's views on Quantum Meruit
28. The Court made some observations about quantum meruit and unjust enrichment claims:
29. Quantum meruit and unjust enrichment claims may only be brought by a builder where, for whatever reason, there is no valid contract in place – where there is a contract in place, it is the terms of the contract which will govern what monies the builder is entitled to and a quantum meruit claim will not be permitted.
30. The Court said that there are 3 key elements to be proved before an unjust enrichment claim can succeed in relation to a construction contract: -
- the home owner must receive a benefit. Historically, it has been said that the benefit must be requested by the owner, or at least that the owner acquiesced in the works being performed in circumstances where a reasonable person would have realised that the builder expected to be paid. In this instance, Lumbers said that he had not asked the Builder to do the work and would not have accepted the house if it had known that the Builder was performing the work. Lumbers had asked W Cook & Sons to do the work. The Court said this was not an obstacle to a quantum meruit claim where an owner receives an "incontrovertible" benefit; that is, a benefit that no reasonable person could deny. The Court said that the Lumbers had received such a benefit by having the house built by the Builder;
- the benefit must be received at the builder's expense;
- it must be shown that it would be unjust if the builder were not remunerated – that is, the builder must establish that it would be unconscionable for the owner to retain the benefit.
The Court's Findings
31. The Court held that the Lumbers were obliged to make payment to the Builder on the principles of quantum meruit and unjust enrichment. The Builder incurred actual expenses from which the Lumbers benefited. The services provided were with the knowledge of the Lumbers and they benefited at the expense of the Builder. The Lumbers agreed to the work being carried out and by moving in to the house accepted the benefit. The Lumbers knew that the services were not being provided gratuitously.
32. The fact that Warwick Lumbers said he would not have accepted the benefit if he had known it was to be the Builder doing the work was found by the Court to be irrelevant. There was no suggestion that there was any difference in the quality of the construction of the house as a consequence of it having been built by the Builder rather than by W Cook & Sons. The failure on the part of the Builder to have the necessary insurance did not have any adverse effect on the Lumbers.
Comment
33. The cases have hitherto focussed on the issue of whether there is a subsisting enforceable contractual obligation between the parties. There are good policy reasons for this "no-go" area to extend up and down the contractual chain – otherwise the fundamental basis of contracting and subcontracting – not to mention the insolvency scheme – is in danger of being offended. What, for example, of the claim of a subcontractor against a principal in circumstances where the head contractor has become insolvent? Or where the claim of the head contractor for the subcontracted work has been barred by a notice provision, or lack of certification, or settlement? It might perhaps be conscionable for the principal not to pay viz a viz the head contractor in such circumstances, but is he to be subjected to cries of unconscionability by each of the subcontractors and suppliers?
34. It is understood that an application for special leave to appeal will be heard in or around August. This is a case which has turned on its own special facts, but the appellate court will perhaps want to consider whether this case, if not reversed, might have the unintended side effect of opening the floodgates to quantum meruit claims by sub-contractors against principals.
Skinner v Harnas[12]
35. This is a decision of Mr Justice Gray of 3rd April.
36. The case arose out of the MBA's "Domestic Building Plain English Contract: House". Clause 8.6 dealt with the cost of variations as follows:-
"If a price is not agreed for the extra work is started, the Builder may proceed with the extra work requested or required and the price of the extra work shall be the actual cost to the Builder, together with a percentage as stated in Item D1 of the Schedule and GST".
The relevant item in the Schedule was filled in "Not applicable".
37. When the matter when to arbitration, the Builder did not put forward in the evidence as to the actual cost of variations, but instead came up with expert evidence as to the reasonable cost of the variations.
38. The Owners argued that, unless the Builder could prove the actual cost of the variations, he was entitled to be paid nothing for the variations. The arbitrator found that the Builder was entitled to be paid a quantum meruit for the variations.
39. That looked like a pretty clear error of law. The question of how much the Builder was entitled to be paid for the variations was a matter governed by the Contract, and so there really should have been no scope for any finding based on quantum meruit. The Owners sought leave to appeal from the arbitrator's decision under Section 38 of the Commercial Arbitration Act 1986, which relevantly provides:-
(1) Without
prejudice to the right of appeal conferred by subsection (2), the Court shall
not have jurisdiction to set aside or remit an award on the ground of error of
fact or law on the face of the award.
(2) Subject to subsection (4), an appeal shall
lie to the Supreme Court on any question of law arising out of an award.
(3) On the
determination of an appeal under subsection (2) the Supreme Court may, by
order--
(a) confirm,
vary or set aside the award;
or
(b) remit
the award, together with the Supreme Court's opinion on the question of law
which was the subject of the appeal, to the arbitrator or umpire for
reconsideration or, where a new arbitrator or umpire has been appointed, to
that arbitrator or umpire for consideration,
and where the award is remitted under paragraph (b)
the arbitrator or umpire shall, unless the order otherwise directs, make the
award within three months after the date of the order.
(4) An
appeal under subsection (2) may be brought by any of the parties to an
arbitration agreement--
(a) with the
consent of all the other parties to the arbitration agreement;
or
(b) subject
to section 40, with the leave of the Supreme Court.
(5) The
Supreme Court shall not grant leave under subsection (4) (b) unless it
considers that--
(a) having
regard to all the circumstances, the determination of the question of law
concerned could substantially affect the rights of one or more parties to the
arbitration agreement;
and
(b) there
is--
(i) a
manifest error of law on the face of the award;
or
(ii) strong
evidence that the arbitrator or umpire made an error of law and that the
determination of the question may add, or may be likely to add, substantially
to the certainty of commercial law.
40. The effect of this Section is, of course, that it is not sufficient to show that there is a manifest error of law, and Gray, J plainly had this in mind in quoting from the observation in Leighton Contractors Pty Ltd v South Australian Superannuation Fund Investment Trust.
As Debelle J observed in Leighton Contractors Pty Ltd v South Australian Superannuation Fund Investment Trust:
The
application for leave must satisfy both pars (a) and (b) of s 38(5). The
fact that (a) is included serves to emphasise that the court will not hear
appeals, even on a question of law, unless they are of substantial importance
to the parties. Thus, a party might be able to point to an obvious flaw
in the reasoning of the arbitrator but that flaw might not affect the ultimate
conclusion. Section 38(5)(a) requires the applicant to satisfy the court
that the rights of the parties could be substantially affected by the
error. If it appears that the flaw could not substantially affect the
ultimate conclusion, leave should not be granted.
41. What the arbitrator should have done was, not to award the quantum meruit, but to allow the Claimant to rely on the expert evidence as evidence of actual cost.
42. Take a simple example, a builder builds a wall by way of variation. He is entitled to the actual cost, but has failed to keep any records. On the balance of probabilities, does this mean that there was no actual cost involved in building the wall? Or course not. The best evidence is of course for the builder to keep decent records as to what his actual cost is. But as a second best alternative, there is no reason why he cannot use expert evidence to the effect that:-
"Such a wall costs $1,000 to build".
43. The decision of the Court in refusing appeal was obviously right, and good common sense. The alternative, of allowing the appeal in order that the Court could then, under Section 38(3)(b) remit the matter to the arbitrator in order that he could award precisely the same amount under the Contract instead of in quantum meruit, would have increased costs, but not substantially affected the rights of any of the parties. Unhappily, the terms in which the decision was framed might cause some difficulty. The Judge said:-
20
The applicants’ submission should be rejected. It was the intent of the contract that the
respondent could undertake variations without prior agreement with the applicants
on the price of those variations, and that in such cases the respondent would
be paid his actual cost. If he could not
produce evidence to prove his actual cost, nothing in the contract precluded
the arbitrator from relying on expert evidence to determine the reasonable cost
of the works as undertaken. It accorded
with the intention of the contract that the builder be paid the cost for
variations undertaken.
21
The reference to “actual cost” in the contract should, in any event, be
moderated to mean reasonable cost. The
respondent could not recover for unnecessary or extremely inefficient labour,
even if it did comprise his “actual cost”.
Given that clause 8 of the contract should be taken to refer to the
reasonable cost of the respondent. No
injustice was occasioned by the arbitrator acting on expert evidence as to the
reasonable cost of the variations.
Conclusion
22
This application raises no point of principle – it calls for the
interpretation of a particular contract.
The arbitrator has made findings that the respondent undertook
additional work to the benefit of the applicants. If the respondent were not to be paid for
these variations, the applicants would receive a windfall. Moreover, no hardship will be suffered as a
result of the arbitral award standing.
Nothing precluded the arbitrator from relying upon expert evidence to
determine estimates of the actual cost of the variations.
44. The problem lies in Paragraph 21 of the judgment. On a proper analysis, if a contract provides for "actual cost" then neither a Court nor an arbitrator can transmute that provision into "reasonable cost". Certainly, there is likely to be an implied term in all cost or cost plus arrangement that a contractor is precluded from recovering his actual cost to the extent that such cost is wastefully or extravagantly incurred. But to return to the earlier example: it may be that the reasonable cost of erecting a wall is $1,000. If the actual cost to the Builder is only $500 (because the local Scout troop wanted their "build a wall" badges) then the Builder should only be entitled to his $500.
Time at Large and Contractual Mechanism Breakdown
Background
45. The "time at large" principle has been firmly established in the common law for a long time; the doctrine of breakdown in contractual mechanism is somewhat more recent[13].
46.
The leading authority on the point is now the Court of
Appeal decision in Peak Construction (
A
clause giving the employer liquidated damages at so much a week or month which
elapses between the date fixed for completion and the actual date of completion
is usually coupled, as in the present case, with an extension of time clause.
The liquidated damages clause contemplates a failure to complete on time due to
the fault of the contractor .... If the failure to complete on time is due to
the fault of both the employer and the contractor, in my view, the clause does
not bite. I cannot see how, in the ordinary course, the employer can insist on
compliance with a condition if it is partly his own fault that it cannot be
fulfilled: Wells v Army & Navy
Co-operative Society Ltd;
47. The effect of this rather curious rule is that contractors have on many occasions appeared to be arguing against themselves that a particular delaying event has not entitled them to an extension of time. The motivation here is that a contractor will often be better served, not by a short extension of time for a particular event, but by something which shatters the whole of the contractual scheme, including the completion date and the liquidated damages.
48. The treatment of this topic in Dorter and Sharkey[14] is somewhat anomalous, but running a discussion of the time at large principle into a discussion of the entirely different issue of the "gross method v net method" issue (see below).
Gaymark – The High Water Mark of Time at Large
49. In Australia, the time at large principle was applied in its most extreme form in Gaymark Investments Pty Limited v Walter Construction Group Limited [1999] NTSC 143; (2005) 21 Construction Law Journal 71. In that case, the Arbitrator made the following findings:
(1) That the contractor was delayed in completing the work, including a delay of 77 days by causes for which the employer was responsible, but the contractor's application for an extension of time was barred because of its failure strictly to comply with the notification requirements for the extension of time clause.
(2) That the 77 days' delay constituted acts of prevention by the employer with the result that there was no date for practical completion and the contractor was then obliged to complete the work within a reasonable time (which the Arbitrator found that it in fact did) with the consequence being that Gaymark was prevented from recovering liquidated damages for delay.
50. The Supreme Court of the Northern Territory of Australia refused leave to appeal and upheld the Arbitrator's award. Bailey J said this at paragraphs 69-71 of his judgment:
"69. 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 Constructions' delay costs because of that company's failure to comply with the notice provisions of SC19). The effect of re-drafting GC35 of the contract (to delete GC35.4 and substitute SC19) has been to remove the power of the superintendent to grant of allow extensions of time. SC19 makes provision for an extension of time for delays for which Gaymark directly or indirectly is responsible but the right to such an extension is dependent on strict compliance with SC19 (and in particular the notice provisions of SC19.1). In the absence of such strict compliance (and where Concrete Constructions has been actually delayed by an act, omission or breach for which Gaymark is responsible) there is no provision for an extension of time because GC35.4 which contains a provision which would allow for this (and is expressly referred to in GC35.2 and GC35.5) has been deleted.
70. In Peak Construction (
'The liquidated damages and extension of time clauses and printed forms contract must be construed strictly contra preferentum. If the employer wishes to recover liquidated damages for failure by the contractors to complete on time in spite of the fact that some of the delay is due to the employer's own fault or breach of contract, then the extension of time clause should provide, expressly or by necessary inference, for an extension on account of such a fault or breach on the part of the employer'.
71. In the circumstances of the present case, I consider that this principle presents a formidable barrier to Gaymark's claim for liquidated damages based on delays of its own making. I agree with the arbitrator that the contract between the parties fails to provide for a situation where Gaymark caused actual delays to Concrete Construction's achieving practical completion by the due date coupled with a failure by Concrete Constructions to comply with the notice provisions of SC19.1. In such circumstances, I do not consider that there was any 'manifest error of law on the face of the award' or any 'strong evidence' of any error of law in the arbitrator holding that the 'prevention principle' barred Gaymark's claim to liquidated damages."
51.
There was a sideswipe at the Gaymark decision in Beckhaus v Brewarrina No 2
[2004] NSWSC 1160, in which the Court of Appeal in
[36] A later
case being Gaymark Investments Pty Ltd v Walter
Construction Group Ltd (1999) 16 BCL 449 suggests
that there is still some room for the application of the prevention principle.
The reasoning in that case is subject to extensive criticism in the literature
by the current editor of
52.
But Beckhaus falls short of declaring that Gaymark was wrongly decided[15]: on its facts it is
limited to the rather curious mechanism in AS 2124, whereby the whole raison d'etre of the notice provisions
seems to be undone by the combination of clause 23 and the penultimate limb of
clause 35.5[16].
A full frontal judicial attack on Gaymark has now been made, but before turning to that, it is necessary to review the related issue of breakdown of contractual machinery.
Breakdown of Contractual Mechanism
53. It is well established[17] that, in certain cases, where a machinery established by a contractual mechanism, has broken down, either because of the failure of one party to operate it or for other reasons, then the court will substitute its own mechanism to establishing the contractor's entitlements:
a) In Sudbrook Trading v. Eggleton [1983] 1 A.C. 444, HL the lessee of a property was given an option to purchase it at a price "as may be agreed upon 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 lessor refused to nominate a valuer. The House of Lords construed the option clause as an agreement to sell the property at a fair and reasonable price, and the provision for ascertaining that price to be a subsidiary, non-essential part of the contract. The machinery for the assessment of that price had broken down, and there was no reason why the Court should not substitute other machinery. Their Lordships ordered an inquiry into the fair value[18].
b)
In Booker Industries Pty Ltd v Wilson Parking (Qld) Pty Ltd (1982) 149 CLR 600, at
616 the High Court 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.
c) In
Finnegan v
I am
driven to the conclusion that it is only when what I perhaps may call the
architect procedure has broken down that the court is empowered to open up and
review the architect's certificates or opinions and substitute its own
machinery.
d) In
Northern Regional Health Authority v.
Derek Crouch Construction Co. Ltd. and Another [1984] 2 W.L.R. 676 (
"The
position might well be different if the machinery in clause 35 had broken down
and was incapable of operating. In such a case the agreement of the parties on
a matter of machinery (as opposed to substantive obligation) having been
frustrated, the court could and would substitute different machinery."
This case has been overtaken on the point of whether certificates can be reviewed by the court, but this point remains good law.
e) Croudace
Limited v.
f) In Merton v Leach, per Vinelott J
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.
g) In
John Barker Construction Limited v
"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."…It seems to me that this is
a case in which the contractual machinery established by the parties has become
frustrated or, put in other words, has broken down to such an extent that it
would not now be practicable or just for the matter to be remitted to the
architect for re-determination; and that in those circumstances the Court must
determine on the present evidence what was a fair and reasonable extension of
time.
h)
In Jezer Construction Group P/L and Ors v
Lilischkies [2004] QSC 270, 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.
i)
In Bernhard's
Rugby Landscapes v
138. A
breakdown of the contractual machinery occurs when without material default or
interference by a party to the contract, the machinery is not followed by the
person appointed to administer and operate it and, as a result, its purpose is
not achieved, and is either no longer capable of being achieved or is not
likely to be achieved. It can for most practical purposes be equated to
interference by a contracting party in the process whereby the other is
deprived of a right or benefit, eg the failure of an employer to re-appoint an
administrator or certifier on the resignation of the previously appointed
person, or where that person fails or is unwilling to do his duty and the
employer will not take steps to rectify the position: see Panamena.
Non-compliance with the machinery by the administrator is not in itself
sufficient: the effect must be that either or both of the parties to the
contract do not in consequence of the breakdown truly know their position or
cannot or are unlikely to know it. Either is then free to have its position
established by the appropriate means available: litigation or arbitration
(preceded, if the contract so requires, by recourse to adjudication or the
like). If the true position is or can be established by other contractual means
then the breakdown is likely to be immaterial even where the result of the
breakdown is that one party does not obtain the contractual right or benefit
which would or might otherwise have been established by the machinery, eg the
issue of a certificate, provided that the true position can be restored by the
operation of other contractual machinery.
In Rhodia Chirex v Laker Vent (2004) Const LJ Vol 20 No 3 the Court of Appeal endorsed the Bernhard Rugby Landscapes principles:
And, in
my view, for the reasons I have given in relation to the first claim, that is
how the judge should have dealt with it, not as a matter of final
certification. If I am right about that, whether Rhodia is in breach of its
obligation under cl.43.8 to provide the project manager with information in
good time and issues as to the validity of Mr McKinlay's final termination
certification and/or as to what should be put in its place, in relation to
Rhodia's cross-claims not the subject of reference to the expert, may yet be
capable of determination in fresh proceedings. These could possibly be by way
of arbitration pursuant to cl.46 (since only disputes referred to an expert for
resolution are barred by cl.45.7 from resolution by arbitration under cl.46) or
by the court on the Bernhard Rugby Landscapes basis that the contractual
machinery has broken down.
- In Green & Ors v Wilden Pty Ltd & Ors[19], Haskuck J said:
[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.
- Saloma Pty Ltd v Big Country Developments Pty Ltd [2006] NSWSC 652
The authorities in cases such as Hall v Busst (1960) 104 CLR 206 which go back
to the judgment of Sir William Grant in Milnes v Gery (1807) 14 Ves Jun 400 ; 33 ER 574, indicate that when
one gets a situation such as the present, equity uses its powers to supply the machinery that has broken down.
Multiplex v Honeywell
54.
The above represents a fairly complete but one sided
review of the cases in which contractual machinery breakdown has been
established. It is hard to avoid the
conclusion that the development of the law in this area has been driven, at
least to some extent, by the fact that contractors engaging construction
specialist lawyers have outgunned the general practitioners more usually
engaged by principals. Be that as it
may, the principle has been somewhat reined in by the latest judgment in the
litigation concerning Wembley Stadium in
55. Multiplex entered into a subcontract with Honeywell for various electronic systems for £13.4M, and claimed that Honeywell was responsible for considerable delay. There were a number of adjudications, and in the third adjudication, the Adjudicator held that time had been set at large under the subcontract. Multiplex disagreed and commenced proceedings seeking a declaration that time had not been set at large.
56.
Multiplex succeeded in the High Court in
"Whatever may be the law of the Northern
Territory of Australia, I have considerable doubt that Gaymark represents the
law of
57.
Neither, one is bound to take it, it is very likely to
represent the law of any other state of
58. The case is important as marking a new determination by the courts to shore up the effectiveness of extension of time provisions in construction contracts, and to limit the extent to allow these contractual mechanisms to be shattered by time at large or contract mechanism arguments.
59. Jackson J summarised the principles thus:
“(i) Actions by the employer which are perfectly
legitimate under a construction contract may still be characterised as
prevention, if those actions cause delay beyond the contractual completion
date.
(ii) Acts of prevention by an employer do not set time
at large, if the contract provides for extension of time in respect of those
events.
(iii) In so far as the extension of time clause is ambiguous, it should be construed in favour of the contractor.
The third proposition must be treated with care. It
seems to me that, in so far as an extension of time clause is ambiguous, the
court should lean in favour of a construction which permits the contractor to
recover appropriate extensions of time in respect of events causing delay. This
approach also accords with the principle of construction set out by Lewison in
"The Interpretation of Contracts" (3rd edition, 2004). That principle
reads as follows:
"Where
two constructions of an instrument are equally plausible, upon one of which the
instrument is valid and upon the other of which it is invalid, the court should
lean towards that construction which validates the instrument."
Adjudication
Interstate and International News
60. In summary, news from interstate and abroad is as follows:
|
Date of Legislation/effective date |
Jurisdiction |
Legislation |
|
|
1996/1998 |
|
||
|
1996/1998 |
" |
|
|
|
1996/1999 |
" |
|
|
|
|
Building and Construction Industry Security of Payment Act 1999 |
Amended 2002. |
|
|
2002 |
Building and Construction Industry Security of Payment Act 2002 |
Major amendments earlier this year |
|
|
2002 |
|
||
|
2004 |
Building and Construction Industry Payments Act 2004
|
|
|
|
2004/2005 |
|
||
|
2004/2005 |
Modelled on the WA system |
||
|
2004 |
Building and Construction Industry Security of Payment Act 2004 |
Based on NSW model |
|
|
2007? |
|
|
To be based on NZ model (?) |
|
? |
|
|
Still at consultation stage |
|
|
|
|
|
61.
In
62. Note that (so far at any rate) the current review of the Building Work Contractors Act 1995 has not focused on the adjudication issue, and in any event is not likely to lead to any legislative changes until around the end of next year[21].
The Contractual Adjudication Group scheme
The CAG scheme is a meld of the
Eastern seaboard system, and the system that operated in the rest of the world
(
- Parties can choose their adjudicator, or get a nomination
- 3 weeks for a decision
- Objective is to put the cash where a court would put it; no "default" provisions
- Short hearings allowed, with representation (following DRB/mini-trial model)
- "Pay now, argue later" enforceability
See Appendix B to this paper.
The Xenophon Bill
63. Independent Nick Xenophon has had a Bill prepared by Parliamentary Counsel; see Appendix A to this paper. In the first instance, this is based on the NSW system, but this is likely to change, as features of the other models are taken into account. In reality, the Xenophon Bill is more likely to act as a prompt than a model.
64.
Is adjudication inevitable in
Delay Analysis
The Society of Construction Law Protocol
65. The Society of Construction Law Delay and Disruption Protocol was published in 2002. It states its own aims as follows:
“A. The object of the Protocol is to provide useful guidance on some of the common issues that arise on construction contracts, where one party wishes to recover from the other an extension of time and/or compensation for the additional time spent and the resources used to complete the project. The purpose of the Protocol is to provide a means by which the parties can resolve these matters and avoid unnecessary disputes.”
66. A key feature of the protocol is its preference for delay claims to be resolved on a rolling basis – as the project proceeds – rather than at the end. This introduces some interesting and difficult causation issues, since it is not possible at the time of the delay to say as fact what delays in fact delayed completion – a subjective element is necessarily introduced. See below for a more detailed discussion of this issue.
67. The full text of the protocol is at www.eotprotocol.com. The glossary appears in the Appendix below.
Critical Path Analysis
68.
Courts
and arbitrators now
accept that projects are planned by CPM[23]
techniques:
“In the context of a substantial
building work it is inconceivable in the modern day and age that technological
resources could not be utilised”[24]
69.
And
they are open to the concept that the use of such techniques is acceptable and
appropriate in the retrospective analysis of delay.
70.
On
the whole, they do not like Total Time Claims[25]
any more than they like Total Cost Claims[26]:
“In my opinion, the Court should approach a total cost claim with a great deal of caution, even distrust. I would not, however, elevate this suspicion to the level of concluding that such a claim should be treated as prima facie bad…”[27]
Activities
71. An activity manifests itself as a record in a database[28]. It typically contains many fields: both user entered and machine calculated.
72. Examples of fields include:
|
User entered • Description • Duration • Calendar |
Machine calculated • Earliest start date • Latest start date • Earliest finish date • Latest finish date • Float |
73. The number of activities, or records, varies hugely. After about 3000, the data starts to get somewhat unwieldy.
Relationships
74. Relationships are stored in a different table[29]. Fields typically include:
- The identity of the predecessor
- The identity of the successor
- The type of link
- The lag
75. For a project with 3000 activities, there might be about 5000 or 6000 relationships.
76. Each relationship is saying something like:
"It is necessary for the predecessor to have (finished) before it is possible to (start) the successor"
77. Contract programmers end up getting to be very familiar with their relationships, and start doing things with them that go beyond the logically sound – an example perhaps of familiarity breeding contempt; see below.
Finish-Start Relationship
78. Zero lag
"It is necessary for the predecessor to have finished before it is possible to start the successor"
79. 1 day lag
"It is necessary for the predecessor to have finished, and then for a further period of (x days) to elapse, before it is possible to start the successor"
Start-Start relationship
80. These usually have lags attached:
"It is necessary for the predecessor to have started, and then for a further period of (x days) to elapse, before it is possible to start the successor"
Finish-Finish relationship
81. Again, these are typically used with lags:
"It is necessary for the predecessor to have finished, and then for a further period of (x days) to elapse, before it is possible to finish the successor"
Rarely used relationships
82.
This logic (SF-3) says that activity 2 cannot finish until 3 days before activity 1 starts.
83. These unusual logic links are typically used, if at all, as drawing tools, and are not usually useful in delay analysis.
Methods of Analysis
84. The SCL Protocol table of analysis types is as follows:
|
Type of analysis |
As-planned programme without network |
Networked as-planned programme |
Updated as-planned networked programme |
As-built records |
|
As-planned v as-built |
X |
or X |
and X |
or X |
|
Impacted as-planned |
|
X |
|
|
|
Collapsed as-built |
|
|
|
X |
|
Time impact analysis |
|
X |
or X |
and X |
Gross Method v Net Method
85. One of the most common methodology traps concerns the use of gross method or net method of impact analysis.
Gross method
86. This is also known, in its most extreme form, as the “colour of the front door argument”
- Due to his own delays, contractor is 6 months late
- At last, when nearly finished, he strikes the scaffolding
- Architect stands back at looks at his building for the first time. He orders the contractor to repaint the front door a darker shade of blue, which takes a day
- Contractor seeks 6 months’ extension of time
87.
Amalgamated Building Contractors Ltd v
“Take
a simple case where the contractors, near the end of the work, have overrun the
contract time for six months without legitimate excuse. They cannot get an extension for that
period. Now suppose that the works are
still uncompleted and a strike occurs and lasts a month. The contractors can get an extension of time
for that month. The architect can clearly
issue a certificate which will operate retrospectively. He extends the time by one month from the
original completion date, and the extended time will obviously be a date which
is already past.”
88.
Balfour
Beatty v Chestermount
“Accordingly, I conclude on the Second
Question that it would be wrong in principle to apply the ‘gross’ method, and
that the ‘net’ method represents the correct approach.”[30]
Net method
89. 7.4 Take the example in the context of a Gantt chart:
90. Change colour of front door bears a logical relationship to preceding activities.
Gross method
91. Using the gross method, the activity "Change colour of front door" is constrained to start “no earlier than” or “must start on” date of instruction.
Or is sometimes just put as a point of argument.
Ways to avoid gross method
92. There are two keys ways to avoid gross method:
- Watershed analysis
- Avoid fixed constraints
Recent Cases
93. There have been a number of recent cases which illustrate the current approach of the courts to delay claims:
94.
This is
not exactly a recent case, but
sets the scene for Great Eastern Hotel in that it shows that the
essential flaw in the as-planned impacted method can be fatal:
“8. In particular, Leighton
alleged that Stelux caused critical delay by releasing tender information for
MVAC and electrical sub-contract works late.
The Arbitrator found that the information was indeed provided later than
it should have been according to the original programme. But she held that such lateness could not
have delayed the completion of works.
9. The information was required
for the award of the superstructure MVAC and electrical sub-contracts. On the date when it originally ought to have
been provided, Leighton was still involved in substructure works. Even by the time that the information had
been provided and the MVAC and electrical subcontracts awarded, Leighton was
only just ready to start (and had not yet commenced) construction of the
basement slab.
10. It accordingly seems to me
that the Arbitrator reasonably concluded that the late information could not
have caused actual delay.”
Great Eastern Hotel v John Laing[32]
95. This is an English decision arising out of the refurbishment of an old hotel[33]. It was a case brought against a construction manager for failure to bring the project in on programme – as such it was necessary for the claimant to prove a culpable failure to manage. The construction manager used an as-planned impact analysis to try to show that the delays were caused by the design team's delays. The principal used a watershed analysis, using time impact analysis in the first windows, was as such was able to show the criticality or otherwise of all delays. The court found for the principal:
“184. I reject Mr Celetka's[34] evidence that the late design information either
caused or contributed to the critical delay in the Project… furthermore, the
impacted as planned analysis delay takes no account of the actual events which
occurred on the Project and gives rise to an hypothetical answer when the
timing of design release is compared against the original construction
programme. Thus it would take no account of the fact that the design team would
have been aware of significant construction delays to the original master
programme, and would have been able to prioritise design and construction to
fit this. Furthermore, Mr Celetka in his report compares the timing of the
actual design releases against an original programme which was superseded by later
versions of the procurement programme on which Laing showed later dates for the
provision of the information required.”
“Mr
Kane v Sopov[36]
96.
This
is a 2005 decision of the Supreme Court of Victoria.
·
Superintendent
had granted 11 days
·
Contractor
sought another 139 days
·
Court
considered 18 claims, and awarded another 56 days
·
Judgment
over 1000 paragraphs long
·
Judge
said: “Robust approach to detail”
·
Would not have happened a while ago.
97.
The
court said:
“677 The
question then arises as to whether or not the extension of time claims were
made out. So far as the expert evidence of Lynas is concerned, in my view, for
reasons I state at the end of this judgment, it was admissible and presented in
an appropriate form constituting expert evidence. It was not evidence of the
fact of the delay but evidence, quite properly, as to the nature of the delay
and whether it was fair and reasonable in all the circumstances in a technical
and complex context.
680 Inevitably, extension of time claims involve
the immersion of the court in the minutiae of the building site. In the present
case, as already observed, a total of 18 extension of time claims were made.
However, within each EOT there were extensive sub-claims relating to a variety
of issues. Ultimately, it is appropriate in a case of this nature for a court to
adopt a robust view based upon the evidence before it, somewhat akin to the
approach taken in building cases by the application of the Scott Schedule. I
have, therefore, carefully considered the evidence with respect to each of the
EOTs in this case.
681 When a
proceeding comes before the superior court of the State, it is desirable and in
the interests of justice that such a robust approach be taken notwithstanding
the extent of time taken up at trial and the expanse of documents preoccupied
with the EOTs. Hence, each claim is looked at individually and the evidence
analysed, albeit in a concise and brief manner, requirements as set out by the
Court of Appeal in Fletcher Construction Australia Ltd v Lines MacFarlane
& Marshall Pty Ltd (No. 2)”
620 Collins Street
98. This is a decision of the Supreme Court of Victoria. A principal unsuccessfully challenged an arbitrator's award in favour of a contractor, including an award that the contractor was entitled to an extension of time. A number of points emerge from it.
a) The arbitrator noted that the claimant's methodology generally satisfied the guidelines within the SCL Protocol. The court found no fault with the arbitrator's approach there[38];
b) The starting point for the analysis does not necessarily have to be the construction programme contemplated by the contract
[63] In
summary the plaintiff contended that Abigroup must prove a prospective
construction program as contemplated by the contract, as a precondition to
valid EOT claims. The Arbitrator rejected the contractual basis of this argument.
He further addressed the evidence expressly on the basis that its adequacy in
justifying a retrospective delay analysis was ultimately critical issue.
[64] I am not
satisfied that his reasoning demonstrates misconduct;
c) An unsuccessful challenge was made on the basis that the arbitrator made his award on the basis of the claimant's analysis, rather than site diary entries or other diary entries, letters, memoranda etc to the effect that the works were being critically delayed. The court found that the arbitrator had properly evaluated the analysis
[81] I do not
accept that this reasoning evidences misconduct. In my view it deals with the
facts in issue in a logical and relatively detailed way
