Duffy Kennedy Pty Ltd v Galileo Miranda Nominee Pty Ltd - [2020] NSWCA 25

Court of Appeal

Supreme Court

New South Wales

Summary available
Amendment notes

Medium Neutral Citation: Duffy Kennedy Pty Ltd v Galileo Miranda Nominee Pty Ltd [2020] NSWCA 25
Hearing dates: 30 October 2019
Decision date: 25 February 2020
Before: White JA at [1];
Brereton JA at [182];
Barrett AJA at [183]
Decision:
Appeal dismissed with costs.

Catchwords:
BUILDING AND CONSTRUCTION – construction contracts – Building and Construction Industry Security of Payment Act 1999 (NSW) – whether right to suspend work validly exercised – whether unpaid interest on late payment of “scheduled amount” forms part of the scheduled amount – the definition of “scheduled amount” does not include interest payable under s 11 on the unpaid amount of a progress payment unless that amount is included in a “scheduled amount”
CONTRACT – Breach of Contract – whether ‘show cause notice’ was validly issued in circumstances where the power to issue the notice was conferred on the principal’s representative – where principal was involved in the principal’s representative’s decision to issue the notice – notice validly issued as principal’s representative gave adequate and proper consideration to issuing the notice and it would be inconsistent with the principal’s right to see that its representative acts properly if it could not be involved in the decision
CONTRACT – Breach of Contract – whether ‘take out notice’ was validly issued where its validity was contingent on the principal’s representative being satisfied that the default that was the subject of the ‘show cause notice’ had not been remedied or the contractor had otherwise failed to show cause – not shown that the principal’s representative failed to give adequate and proper consideration to the issues – not shown that the principal’s representative did not possess the relevant satisfaction
EVIDENCE — Privileges — Without prejudice privilege – whether information obtained during the course of ‘without prejudice’ meetings can be used for purposes other than settlement – ‘without prejudice’ privilege is not based upon an implied agreement that if the negotiations do not result in an agreement for settlement of the dispute, the parties will make no use of what has been disclosed by the other party in the negotiations

Legislation Cited:
Building and Construction Industry Security of Payment Act 1999 (NSW), ss 4, 11, 14, 15, 16, 22, 23, 24, 25, 27
Environmental Planning and Assessment Act 1979 (NSW), s 6.30
Security of Payment Amendment Act 2002 (NSW)

Cases Cited:
Calderbank v Calderbank [1976] Fam 93
Cutts v Heads [1984] CH 290
Field v Commissioner for Railways for NSW (1957) 99 CLR 285
Galileo Miranda Nominee Pty Ltd v Duffy Kennedy Pty Ltd [2019] NSWSC 1157
McCann v Switzerland Insurance Australia Ltd (2000) 203 CLR 579; [2000] HCA 65
Muriniti; Newell v Lawcover Insurance Pty Ltd (No 2) [2018] NSWCA 311
Pihiga Pty Ltd v Roche [2011] FCA 240; (2011) 278 ALR 209
Service Station Association Ltd v Berg Bennett & Associates Pty Ltd (1993) 45 FCR 84
Taylor v The Owners – Strata Plan No 11564 (2014) 253 CLR 531
Unilever plc v The Proctor & Gamble Co [2001] 1 All ER 783
Walker v Wilshire (1889) 23 QBD 335
Wentworth Securities Ltd v Jones [1980] AC 74
FPM Constructions v Council of the City of Blue Mountains [2005] NSWCA 340

Category: Principal judgment
Parties: Duffy Kennedy Pty Ltd (Appellant)
Galileo Miranda Nominee Pty Ltd (Respondent)
Representation:
Counsel:
F Hicks SC with S Ahmed and F Anwar (Appellant)
S G Finch SC with D R Sibtain (Respondent
Solicitors:
Madison Marcus (Appellant)
Mills Oakley (Respondent)

File Number(s): 2019/280811
Decision under appeal

Court or tribunal:

Supreme Court of New South Wales

Jurisdiction:

Equity Division

Citation:

[2019] NSWSC 1157

Date of Decision:

6 September 2019

Before:

Parker J

File Number(s):

2019/136937

HEADNOTE

[This headnote is not to be read as part of the decision]

The appellant challenged a decision of a judge of the Equity Division upholding the respondent’s summons seeking orders that the appellant provide certain items and documents that were required to achieve ‘Practical Completion” in accordance with the parties’ contract.

On 18 April 2017 the parties entered into a contract for the appellant to design and construct two residential buildings, car park, pool and other facilities as part of a development at Miranda known as the Palisade. The Contract Price was a lump sum amount of $65,758,576 exclusive of GST. The respondent in accordance with the contract appointed a project manager, Resource Co-ordination Partnership Pty Ltd (RCP), which was described as the “Principal’s Representative”.

On 19 March 2019 a sum of $293,984.42 became due to the appellant and payable by the respondent in accordance with the contract and the payment schedule. That sum was not paid on that day. The primary judge found that the respondent initiated an electronic payment of the amount due without interest on 22 March, which was a Friday. Payment did not reach the appellant until the following Monday, 25 March. Interest claimed by the appellant in the sum of $177.20 payable under s 11 of the Building and Construction Industry Security of Payment Act 1999 (NSW) (“Security of Payment Act”) remained outstanding.

On 25 March 2019 the appellant issued two notices, one under the Security of Payment Act and the other under the contract, notifying the respondent of its intention to exercise its right to suspend works as a result of the default in payment. After the effluxion of two business days after service of the notice the appellant suspended works on 28 March 2019 in accordance with the Security of Payment Act.

Construction of works was never recommenced by the appellant, which resulted in RCP, in association with the respondent, issuing a ‘show cause notice’ on 20 March 2019. Despite ‘without prejudice’ meetings between the parties aimed at resolving the dispute the respondent issued a ‘take out notice’ on 29 April 2019 removing the remaining works from the hands of the appellant. At this stage the respondent commenced the proceedings before the primary judge seeking the orders referred to above. The respondent did not return the appellant’s security after issuing the ‘take out notice’.

The issues on the appeal were:

Was the appellant entitled to continue to suspend works under the Security of Payment Act until payment of the outstanding interest.
Was the ‘show cause notice’ valid due to the appellant’s breaches of contract
Was the ‘show cause notice’ valid where the respondent was involved in RCP’s decision to issue the notices in circumstances where the power was conferred on RCP. Did RCP give adequate or proper consideration to the factual circumstances prior to issuing the ‘show cause notice’.
Did RCP give adequate or proper consideration to the appellant’s response to the show cause notice and the factual circumstances prior to the respondent issuing the ‘take out notice’.
Was RCP precluded from having regard to information obtained during a ‘without prejudice’ meeting which did not result in settlement of the dispute.
Was the appellant entitled to the return of it security under clause 18.2 of the contract once the ‘take out notice’ was issued.

The Court of Appeal (White and Brereton JJA, Barrett AJA), dismissing the appeal, held:

Per White JA (Brereton JA and Barrett AJA agreeing at [182] and [183] respectively)

As to issue (i)

The right to suspend works arises were there has been a failure to pay a “scheduled amount”. The definition of “scheduled amount” does not include interest payable under s 11 on the unpaid amount of a progress payment unless that amount is included in a “scheduled amount”: [53], [63], [68], [69].

Building and Construction Industry Security for Payment Act 1999 (NSW), applied. Taylor v The Owners – Strata Plan No 11564 (2014) 253 CLR 531; Wentworth Securities Ltd v Jones [1980] AC 74, referred to.

As to issue (ii)

Due to the resolution of issue (i) in favour of the respondent the appellant was in breach by wrongly suspending its construction of works: [106], [107].

No error was shown in the primary judge’s conclusion that the appellant was also in breach throughout the relevant period due to the failure of the appellant to achieve Practical Completion under the contract: [109], [117], [122], [126], [127], [132], [133], [139], [140].

As to issue (iii)

The involvement of the respondent in issuing the ‘show cause notice’ did not invalidate the notice as RCP was satisfied that the notice should be issued and was satisfied with the grounds for the giving of the notice as stated in it: [79], [80]. It would be inconsistent with the respondent’s rights under the contract and its right to see that its representative acts properly if it could not be involved in RCP’s decision: [97].

RCP did not need to exercise its judgment independently of the Principal where RCP was genuinely satisfied with the notice as drafted by the respondent: [91].

As to issue (iv)

RCP did give adequate and proper consideration to issuing the ‘take out notice’ as the evidence that RCP’s officer reviewed and discussed the appellant’s response to the ‘show cause notice’ was not successfully challenged: [157], [158].

There was no prejudgement or lack of consideration by RCP of the appellant’s response to the show cause notice or the factual circumstances in reaching the required level of satisfaction for the respondent to issue the ‘take out notice’: [159], [162], [163].

As to issue (v)

The ‘without prejudice’ privilege is not based upon an implied agreement that if the negotiations do not result in an agreement for settlement of the dispute, the parties will make no use of what has been disclosed by the other party in the negotiations: [167], [172], [173], [175], [176]

Pihiga Pty Ltd v Roche [2011] FCA 240; (2011) 278 ALR 209; Unilever plc v The Proctor & Gamble Co [2001] 1 All ER 783; Cutts v Heads [1984] CH 290, referred to.

As to issue (vi)

This argument was dealt with in detail by the primary judge and no error was shown as to the primary judge’s disposition of the argument in favour of the respondent: [179], [180].

Judgment

WHITE JA: This is an appeal from orders of the Equity Division (Parker J) in relation to a dispute concerning a design and construction contract of two residential tower buildings (Galileo Miranda Nominee Pty Ltd v Duffy Kennedy Pty Ltd [2019] NSWSC 1157). The appellant, Duffy Kennedy Pty Ltd (“DK”) was the Contractor. The respondent, Galileo Miranda Nominee Pty Ltd (“Galileo”) was the Principal.
On 18 April 2017 the parties entered into a contract for DK to design and construct two residential buildings, car park, pool and other facilities as part of a development at Miranda known as the Palisade. The Contract Price was a lump sum amount of $65,758,576 exclusive of GST.
Practical completion was due on 18 February 2019.
On 26 February 2019 DK issued payment claim 26 claiming payment due of $1,010,161.72.
On 12 March 2019 Galileo’s Principal Representative (Resource Co-ordination Partnership Pty Ltd (“RCP”)) issued a payment certificate for progress claim 26 for $293,984.42 and a payment schedule assessing that as the amount due. (These figures are exclusive of GST.)
The contract provided that the Principal was to pay the Contractor the amount certified for payment in the Payment Certificate within 15 business days of the issue of the Payment Certificate (Clause 19.6(1) and Item 31). It is common ground that the amount of $293,984.42 plus GST was payable by Galileo to DK on 19 March 2019. That sum was not paid on that day. The primary judge found that Galileo initiated an electronic payment of the amount due ($323,382.86) on 22 March, which was a Friday. Payment did not reach DK until the following Monday, 25 March (Judgment [29]).
On Monday, 25 March 2019 at 4:43pm DK gave two notices to Galileo. One notice was given under s 16(2)(b) of the Building and Construction Industry Security of Payment Act 1999 (NSW) (“the Security of Payment Act”). That notice stated:

This is a notice given under section 16(2)(b) of the Act.
On 26 February 2019, the Contractor served Payment Claim 26. On 12 March 2019, the Principal served a Payment Schedule scheduling a payment for Payment Claim 26 for the sum of $293,984.42.
The due date for payment was 19 March 2019.
In breach of the Contract, Galileo has not made full payment as required under the Contract and the Act.
The Contractor gives notice that it intends to suspend carrying out construction work under the construction contract.
This notice made [sic] under s. 16(2)(b) of the Act.”
1. DK also issued a notice under clause 23 of the Contract. That clause gave it the right to suspend works if the Principal defaulted in making any payment to the Contractor under the Contract and that default continued for more than 14 days after the Principal received written notice from the Contractor that it intended to exercise a right under that clause. DK did not rely on the notice under clause 23 of the Contract.
2. Neither notice stated that the default alleged was in failing to pay interest.
3. Clause 19.8 and item 6 of the schedule to the contract provided for interest to be payable at the rate of 10 per cent per annum from the date after payment was due until the date the amount was paid.
4. Section 11(2) of the Security of Payment Act gave DK a statutory right to interest on the unpaid amount of a progress payment that had become due and payable.
5. Section 16 (which is considered in more detail below) provided that where the Principal failed to pay the scheduled amount on or before the due date for the progress payment to which the payment claim related (viz. 19 March 2019), the claimant (DK) could (amongst other things) “serve notice on the respondent of the claimant’s intention to suspend carrying out construction work ... under the construction contract.”
6. Section 27 relevantly provides:
A claimant may suspend the carrying out of construction work (or the supply of related goods and services) under a construction contract if at least 2 business days have passed since the claimant has caused notice of intention to do so to be given to the respondent under section 15, 16 or 24.
The right conferred by subsection (1) exists until the end of the period of 3 business days immediately following the date on which the claimant receives payment for the amount that is payable by the respondent under section 15(1), 16(1) or 23(2).”
1. On 28 March 2019 DK gave notice to Galileo that it was immediately suspending work. The notice was purportedly given under s 23(1) of the Security of Payment Act. This was an evident mistake. Nothing turns on the mistake.
2. The primary judge found that DK was entitled to suspend the carrying out of construction work on the day of 28 March (that being the next day after the expiry of two business days after service of the notice of intention to suspend work) (Judgment [59])). The primary judge found that that right expired at the end of 28 March, that being the end of three business days after DK received payment of the “scheduled amount”.
3. DK contended that it had a statutory right to continue to suspend work until interest on the scheduled amount was paid. It did not articulate that contention until 12 April 2019 in its response to a “show cause” notice referred to below. It then claimed an entitlement to interest of $177.20. That amount was paid on 15 April 2019.
4. Clause 24.1 of the contract provides:

“24.1 Default by Contractor

Without limiting any other right or remedy of the Principal, if the Contractor is in breach of its obligations under the Contract Including:

without reasonable cause, suspending otherwise than in the manner provided by clause 23, the carrying out of the Works before Practical Completion;
falling [sic] to proceed with the Works with due diligence or in a competent manner;
refusing to comply with a written direction from the Principal's Representative;
refusing or persistently neglecting to comply With any written notice from the Principal's Representative given at any time requiring the Contractor to remove defective work or improper materials or goods incorporated in the Works;
failing to provide any security required by the Contract;
failing to provide evidence that it has effected and maintained all insurances in accordance with the Contract; or
providing false documentary evidence of payment of its subcontractors,

or is otherwise in breach of the Contract, the Principal's Representative may issue to the Contractor a written notice specifying the event of default, having regard [to] the nature of the default, requiring the Contractor to:

show cause why the Principal should not terminate the Contract or take the remaining work out of the hands of the Contractor; or
remedy the default.
1. On 29 March 2019 DK was served with a notice purportedly given under clause 24.1 requiring it to show reasonable cause why Galileo should not exercise a right referred to in clause 24.1(8) to terminate the contract or take work out of the hands of the contractor. The notice was signed by a Mr Martoo on behalf of RCP and a Ms Elizabeth Jumikis on behalf of Galileo. The notice was on Galileo’s letterhead. The notice alleged that DK had breached the contract in a number of respects.
2. The respects in which Galileo sought to maintain the validity of the notice at trial were that DK had wrongly and without reasonable cause suspended the carrying out of works, and had failed to proceed with the works with due diligence or in a competent manner, in breach of warranties in the contract. In respect of the latter contention, the notice asserted that DK had failed to achieve Practical Completion by not having provided the Principal Certifying Authority (McKenzie Group Consulting (NSW) Pty Ltd) (“McKenzie Group” or “the PCA”) with items required to be completed in order to obtain the occupation certificate required for Practical Completion.
3. Practical Completion was defined (clause 1.1(44)). Practical Completion was not achieved merely by the Works being complete and fit for their Intended Purpose except for Minor Defects. Practical Completion also required the provision to the Principal’s Representative of documents specified in item 17 of schedule A. These included a Final Certificate of Occupation under the Environmental Planning and Assessment Act 1979 (NSW). The show cause notice identified tasks which were required to be completed to the PCA’s satisfaction in order for the Occupation Certificate to be issued and consequently Practical Completion to be achieved. The notice asserted that DK was required to complete those tasks.
4. On 26 March 2019 RCP had given a “Principal’s Representative Direction” (“PRD”) No. 56 requiring the contractor to submit a “completed certification list and schedule for installed fire-stopped penetrations of control joints in a form described in figures B1 and B2 to AS4072.” RCP said that those forms clearly required the Contractor to provide an itemised penetration schedule. McKenzie Group had insisted on the provision of such a schedule as a condition for issuing an Occupation Certificate.
5. The notice to show cause of 29 March also required DK to comply with what were said to be legislative requirements in respect of “balustrade compliance in four apartments”. The notice stated that DK had been aware of this particular failure since 9 October 2018 when it had been notified by the PCA and had continued to fail to remedy the non-compliance.
6. DK was directed to provide “a list of all the things required to achieve Practical Completion and the date upon which it expects to achieve Practical Completion.”
7. On 12 April 2019 DK provided a response to the Notice to Show Cause. It did not challenge the fact that the Notice had been issued on the letterhead of Galileo and signed for Galileo as well as RCP. In its response DK identified for the first time that it relied upon non-payment of interest of $177.20 payable in respect of the late payment of the scheduled amount specified in RCP’s payment schedule of 12 March 2019. DK asserted that the unpaid interest formed part of the scheduled amount. On this basis it claimed that it had validly suspended the works.
8. DK denied that it had not proceeded with the works with due diligence or in a competent manner to bring the works to completion by the date of Practical Completion. It claimed that it was entitled to an extension of time for the date for Practical Completion.
9. On the hearing of the appeal Mr Hicks SC, who appeared with Mr Ahmed and Mr Anwar for DK, accepted that DK was required to comply with the Principal’s Representative’s Direction under clause 7.1(4). That clause provided that if the Principal’s Representative gave a Direction, the contractor was required to comply with the direction either within the stated time, or, if no time were stated, promptly. Mr Hicks submitted that DK had complied with its contractual obligation to provide information about fire penetration locations, but accepted that DK could not refuse the direction of 26 March 2019. He submitted in substance that the direction changed the contractual position, but submitted that DK did not refuse to provide the document and was not in breach as at the date of the show cause notice because DK had not refused to provide the information sought and had not had time to do it.
10. In its response of 12 April 2019, DK did not acknowledge that it would provide a fire penetration schedule or raise the height of the balustrades. Instead, it said it intended to prepare a letter to be sent by the Principal to the PCA which would ask the PCA to explain why it had changed its opinion in respect of the balustrades and would ask the PCA why it considered it appropriate or necessary to “go behind” any of the certificates given, particularly having regard to s 6.30 of the Environmental Planning and Assessment Act. It is not clear how this response was relevant.
11. DK stated that it had analysed the work required to be done to achieve Practical Completion and set out those works in schedule 2 to its response. In its schedule 2 it did not acknowledge that it was required to provide the penetration schedules sought by McKenzie Group or to raise the balustrades. In substance it asserted that it had completed all works required of it.
12. Clause 24.2 provides:

“24.2 Rights of the Principal

...

(a) the Contractor fails to show cause or remedy the default to the satisfaction of the Principal's Representative within 10 Business Days after receipt of the notice under clause 24.1; or

(b) the Contractor is subject to an Insolvency Event,

the Principal may immediately suspend all further payments to the Contractor under the Contract and, without prejudice to any other right or remedy the Principal might have, by further written notice given to the Contractor:

(d) take the remaining work out of the hands of the Contractor,

in which case no further payment will become due to the Contractor under the Contract.

In the circumstances set out in 24.2(1 )(c) or 24.2(1 )(d) the Contractor

must:

(a) provide to the Principal's Representative copies of all the Design Documents (as at the date of termination) and other documents, information, materials and the like produced by the

Contractor for the Works;

(b) as soon as possible and in a safe manner remove from the Works all its Temporary Works and Construction Plant which the Principal's Representative has notified the Contractor in writing is not required to remain on the Site for completion of the Works by others;

(d) delivery to the Site any plant and materials intended for the Works which are not yet incorporated; and

(e) if required by the Principal's Representative, assign or novate to the Principal the benefit of any agreement or warranty entered into by the Contractor with any subcontractor.”

On 29 April 2019 Galileo gave a “take out notice” to DK. The notice was also signed by Mr Mark Dibben of RCP. The notice stated that the Contractor had failed to show reasonable cause by the date and time stipulated in the Show Cause Notice. It stated that pursuant to cl 24.2(1)(d) the Principal “... hereby takes out of the contractor’s hands the whole of the work under the Contract remaining to be completed.”
On 1 May 2019 DK, through its solicitors, gave notice that it considered Galileo’s take out notice of 29 April 2019 to be a repudiation of the contract. DK stated that it accepted the repudiation and elected to terminate the contract.
On 2 May 2019 McKenzie Group issued an interim occupation certificate excluding four apartments on level 7. In a covering letter to DK, McKenzie Group stated:

“Further certificates will be needed for the Balustrade works in apartments AA704, AA706, BB701 and BB703 and completion of the penetrations register.”

Also on 2 May 2019 Galileo filed a summons in the Technology and Construction List. It sought various orders to give effect to the take out notice. It also sought orders that DK immediately provide it with a completed penetration schedule as required by the PCA and in accordance with details at annexure A to its notice of 29 April 2019, and an order that DK provide to it a copy of all contracts with subcontractors.
On 10 May 2019 DK filed a cross-summons. It sought the following relief as well as costs:

A declaration that the Notice to Show Cause dated 29 March 2019 issued by the Cross Defendant to the Cross Claimant was invalid, void or of no effect.
A declaration that the Take Out Notice dated 29 April 2019 issued by the Cross Defendant to the Cross Claimant was invalid, void or of no effect.
A declaration that the Cross Defendant repudiated the contract between the Cross Claimant and the Cross Defendant.
A declaration that the contract between the Cross Claimant and the Cross Defendant was validly terminated by the Cross Claimant on I May 2019.
An order that the Cross Defendant forthwith return the two (2) undertakings provided by Swiss Re International SE dated 15 August 2017 in favour of the Cross Defendant and each in the sum of $1,643,964.40.
An order that the proceedings be referred to a referee under Part 20, Division 3, of the Uniform Civil Procedure Rules 2005 (NSW) for enquiry and report as to the Cross Claimant's loss, damage and damages arising from the repudiation of the contract by the Cross Defendant and the termination of the contract.”
1. The primary judge recorded that the proceedings were initially brought on an urgent basis, but that Galileo accepted that DK had left the site. Some claims for relief associated with that had fallen away and another claim in the summons had been resolved. The primary judge recorded that shortly before the hearing an interim occupation certificate was issued for the four remaining units on level 7. The primary judge then recorded that as a result of those developments, the only order sought by Galileo was the order that DK complete the penetration schedule and an order that it provide Galileo with copies of its subcontracts. His Honour noted that to establish its entitlement to that relief Galileo needed to show that the take out notice was valid. DK’s claim for relief in its cross-claim depended upon its showing that the take out notice was invalid. It was common ground that the take out notice could not validly rely on an alleged breach of contract by DK unless DK were in breach at the time the show cause notice was issued (Judgment [20]).
2. The primary judge rejected DK’s submission that it had a statutory entitlement to maintain its suspension of works on 29 March (and subsequently up to 18 April) by reason of Galileo’s failure to pay interest (Judgment [43]-[59]).
3. DK argued before the primary judge that even if it did not have a statutory right to suspend work for non-payment of interest payable as a result of the late payment of the scheduled amount, its suspension was not “without reasonable cause” (Clause 24.1(1)). The primary judge rejected that argument. He noted that DK had not specifically identified the failure to pay interest in its correspondence with Galileo up to 29 March as a ground for suspending the works (Judgment [61]). His Honour said that the amount of interest was miniscule in the scheme of things and the suspension of work was a completely disproportionate response to the failure to pay interest (Judgment [68]).
4. The primary judge found that when the show cause notice was given DK was also in breach of contract by not having provided the penetration schedule required by McKenzie Group. The breach was twofold. First, provision of the schedule was required in order to procure an occupation certificate (Judgment [128], [138]-[143]). Secondly, the penetration schedule was required by terms of the contract which picked up the requirements of Australian Standard AS4072.1 (Judgment [144]-[146]).
5. The primary judge also held that DK was in breach of contract by not complying with McKenzie Group’s requirement to increase the height of the balustrades (Judgment [152]-[153]).
6. The primary judge rejected DK’s submission that the show cause notice was invalid because it was not “issued” by the Principal’s Representative (Judgment [215] and [216]). The primary judge also rejected DK’s submission that the Principal’s Representative had not given adequate or proper consideration as to whether the notice should be issued. His Honour held that the issue of a show cause notice under clause 24.1 did not depend on the exercise of any judgment by the Principal’s Representative and there was no implication that the Principal’s Representative, in issuing the notice, was required to act in good faith, or honestly, or reasonably (Judgment [221] and [225]). The primary judge also held that, in any event, the relevant officers of RCP did consider the provisions of the contract. They concluded that DK was in breach in the respects identified in the draft notice, and this conclusion was not only reasonably open to them, but was correct. The primary judge concluded there was no lack of honesty, good faith or reasonableness (Judgment [226]).
7. The take out notice was given pursuant to clause 24.2 of the contract, which is quoted at [29] above.
8. The primary judge assumed that clause 24.2(1) imposed an obligation on RCP to act in good faith and reasonably in forming a state of dissatisfaction with DK’s show-cause response (Judgment [238]). The primary judge concluded that there was no lack of reasonableness or good faith in RCP’s declining to be satisfied that DK had shown cause (Judgment [248]). The primary judge rejected DK’s argument that RCP improperly took into account what was said by a Mr Pratt of DK in a “dispute meeting” between representatives of RCP and DK which was said to have been held on a without prejudice basis. The primary judge held that the meeting was conducted on a without prejudice basis, but that did not preclude RCP from relying upon what was said in the meeting in forming a view as to its satisfaction or lack of satisfaction with DK’s response to the show cause notice (Judgment [250]-[253]).
9. The primary judge also held that in any event, nothing that was said at the meeting by Mr Pratt added anything that RCP did not already know and what was said involved no change to DK’s position (Judgment [254]). The primary judge rejected DK’s attack on the validity of the take out notice.
10. Finally, the primary judge rejected DK’s claim that it was entitled to the return of security. His Honour held that the security was required for due performance of the contract as obligations under the contract (clause 18.2), and that included liabilities that could arise after the take out notice, including liability to pay damages, as well as accrued liabilities (Judgment [267]).
11. For the reasons which follow, I agree with each of the primary judge’s conclusions and generally with his reasons. The appeal should be dismissed with costs.

Grounds 1 and 2: no statutory right to suspension of work after 28 March 2019

Grounds 1 and 2 of the notice of appeal were:

“1 The primary judge erred in concluding that the Appellant had no right to suspend or maintain suspension of the works under the Building & Construction Industry Security of Payment Act 1999 (NSW).

The primary judge erred in concluding that the Appellant's suspension of the works under the contract was without reasonable cause under the terms of clause 24 of the contract and in respect of the issue of a Show Cause Notice (also called a default notice in the judgment) by the Principal's Representative.”
1. As noted above (at [16]), DK submitted that it had a statutory right to continue to suspend work after 28 March 2019 because Galileo had not paid interest on the scheduled amount of $293,984.42 for the period from 19 March 2019 to the date of payment (25 March).
2. The primary judge rejected this contention.
3. Sections 15 and 16 of the Security of Payment Act are contained in Div 1 of Pt 3. Part 3 is headed “Procedure for recovering progress payments”. Division 1 is headed “Payment claims and payment schedules”.
4. Sections 17 and 24 are contained in Div 2 of Pt 3. Division 2 is headed “Adjudication of disputes”.
5. Section 27 is in Div 3 of Pt 3. Division 3 is headed “Claimant’s right to suspend construction work”.
6. Sections 13 and 14 (also in Div 1 of Pt 3) provide for the making of progress claims by persons who, under a construction contract, have undertaken to carry out construction work (or to supply related goods and services) and who are or claim to be entitled to progress payments. In response to service of a payment claim the respondent may reply to the claim by providing a payment schedule to the claimant (s 14(1)). Section 14(2) provides:

“(2) A payment schedule—

(a) must identify the payment claim to which it relates, and

(b) must indicate the amount of the payment (if any) that the respondent proposes to make (the scheduled amount).”

The definition of “scheduled amount” in s 14(2) is consistent with the definition of that expression in s 4. Section 4 provides that “scheduled amount” means “the amount of a progress payment that is proposed to be made under a payment schedule, as referred to in s 14”.
Section 15 deals with the case where the respondent fails to provide a payment schedule within the time allowed by s 14. It relevantly provides:

“15 Consequences of not paying claimant where no payment schedule

This section applies if the respondent—

(a) becomes liable to pay the claimed amount to the claimant under section 14(4) as a consequence of having failed to provide a payment schedule to the claimant within the time allowed by that section, and

(b) fails to pay the whole or any part of the claimed amount on or before the due date for the progress payment to which the payment claim relates.

In those circumstances, the claimant—

(a) may—

recover the unpaid portion of the claimed amount from the respondent, as a debt due to the claimant, in any court of competent jurisdiction, or
make an adjudication application under section 17(1)(b) in relation to the payment claim, and

(b) may serve notice on the respondent of the claimant’s intention to suspend carrying out construction work (or to suspend supplying related goods and services) under the construction contract.

...

If the claimant commences proceedings under subsection (2)(a)(i) to recover the unpaid portion of the claimed amount from the respondent as a debt—

(a) judgment in favour of the claimant is not to be given unless the court is satisfied of the existence of the circumstances referred to in subsection (1), and

(b) the respondent is not, in those proceedings, entitled—

to bring any cross-claim against the claimant, or
to raise any defence in relation to matters arising under the construction contract.”
1. “Claimed amount” is defined in s 4 as follows:

“claimed amount means an amount of a progress payment claimed to be due for construction work carried out, or for related goods and services supplied, as referred to in section 13.”

Section 16, upon which DK relies, relevantly provides:

“16 Consequences of not paying claimant in accordance with payment schedule

This section applies if—

(a) a claimant serves a payment claim on a respondent, and

(b) the respondent provides a payment schedule to the claimant—

within the time required by the relevant construction contract, or
within 10 business days after the payment claim is served,

whichever time expires earlier, and

(d) the respondent fails to pay the whole or any part of the scheduled amount to the claimant on or before the due date for the progress payment to which the payment claim relates.

(2) In those circumstances, the claimant—

(a) may—

recover the unpaid portion of the scheduled amount from the respondent, as a debt due to the claimant, in any court of competent jurisdiction, or
make an adjudication application under section 17(1)(a)(ii) in relation to the payment claim, and

(b) may serve notice on the respondent of the claimant’s intention to suspend carrying out construction work (or to suspend supplying related goods and services) under the construction contract.

...

If the claimant commences proceedings under subsection (2)(a)(i) to recover the unpaid portion of the scheduled amount from the respondent as a debt—

(a) judgment in favour of the claimant is not to be given unless the court is satisfied of the existence of the circumstances referred to in subsection (1), and

(b) the respondent is not, in those proceedings, entitled—

to bring any cross-claim against the claimant, or
to raise any defence in relation to matters arising under the construction contract.”
1. If a claimant elects to make an adjudication application in relation to the payment claim pursuant to s 16(2)(a)(ii) the adjudicator is to determine the amount of the progress payment to be paid by the respondent to the claimant (the “adjudicated amount”), the date on which such amount became payable and the rate of interest payable on such amount (s 22(1)).
2. If an adjudicator determines that a respondent is required to pay an adjudicated amount, the respondent must pay that amount within five business days unless the adjudicator determines a later date for payment (s 23).
3. Section 24 relevantly provides:

“24 Consequences of not paying claimant adjudicated amount

If the respondent fails to pay the whole or any part of the adjudicated amount to the claimant in accordance with section 23, the claimant may—

(a) request the authorised nominating authority to whom the adjudication application was made to provide an adjudication certificate under this section, and

(b) serve notice on the respondent of the claimant’s intention to suspend carrying out construction work (or to suspend supplying related goods and services) under the construction contract.

...

An adjudication certificate must state that it is made under this Act and specify the following matters—

(a) the name of the claimant,

(b) the name of the respondent who is liable to pay the adjudicated amount,

(d) the date on which payment of the adjudicated amount was due to be paid to the claimant.

If any amount of interest that is due and payable on the adjudicated amount is not paid by the respondent, the claimant may request the authorised nominating authority to specify the amount of interest payable in the adjudication certificate. If it is specified in the adjudication certificate, any such amount is to be added to (and becomes part of) the adjudicated amount.”
1. The adjudication certificate can be filed as a judgment debt (s 25).
2. Section 11 relevantly provides:

“11 Due date for payment

Subject to this section and any other law, a progress payment to be made under a construction contract is payable in accordance with the applicable terms of the contract.

(1A) A progress payment to be made by a principal to a head contractor under a construction contract becomes due and payable on—

(a) the date occurring 15 business days after a payment claim is made under Part 3 in relation to the payment, except to the extent paragraph (b) applies, or

(b) an earlier date as provided in accordance with the terms of the contract.

...

Interest is payable on the unpaid amount of a progress payment that has become due and payable at the rate—

(a) prescribed under section 101 of the Civil Procedure Act 2005, or

(b) specified under the construction contract,

whichever is the greater.

If a progress payment becomes due and payable, the claimant is entitled to exercise a lien in respect of the unpaid amount over any unfixed plant or materials supplied by the claimant for use in connection with the carrying out of construction work for the respondent.”
1. None of ss 15(1), 16(1) or 23(2) provides for the payment of interest on an amount that is payable by the respondent under any of those provisions.
2. It is clear from the definition of “scheduled amount” that the amount does not include interest payable under s 11 on the unpaid amount of a progress payment unless that amount is included in a scheduled amount. Interest under s 11(2) is payable not on a scheduled amount as such, but on a progress payment that is due and payable. A contractor can include in its payment claim a claim for interest on amounts of progress payments to which it claims to be entitled and which have not been paid or have not been paid in full. However, interest payable because of the late payment of the scheduled amount is not itself part of the scheduled amount. That follows from the definition of scheduled amount. It is also consistent with the heading and structure of Pt 3.
3. Part 3 deals with the procedure for recovering progress payments, not with the recovery of all amounts that might be payable under the Act. It is open to a claimant to make an adjudication application in relation to an unpaid portion of a claimed amount where the respondent has failed to provide a payment schedule within the time allowed by s 14, or where a respondent fails to pay the whole or part of a scheduled amount on or before the due date for the progress payment to which the payment claim relates (s 16(1)(d)). If a claimant proceeds by way of making an adjudication application, the adjudicator’s determination must specify the rate of interest payable on an adjudicated amount (s 22(1)). The nominating authority can be asked to specify the amount of such interest that is to be included in an adjudication certificate to be registered as a judgment debt (s 24(4)). These provisions are inconsistent with such interest being part of the scheduled amount. They are consistent with the definition of “scheduled amount” in ss 4 and 14(2)(b) as being the amount identified by the respondent in its payment schedule as the amount it proposes to pay.
4. If interest payable on the late payment of a scheduled amount were itself to be taken as part of the scheduled amount for the purposes of s 16(1)(d), then by parity of reasoning it would have to be part of the “unpaid portion of the scheduled amount” within the meaning of s 16(2)(a)(i) that was recoverable as a debt due to the claimant in a court of competent jurisdiction. In such proceedings the respondent would not be entitled to raise any defence “in relation to matters arising under the construction contract” (s 16(4)(b)(ii)). That would be so even if the claimant claimed interest from the date the scheduled amount became payable at a rate different from the rate of interest payable under s 11(2), for example 20 per cent rather than 10 per cent as specified under the construction contract in issue in the present case.
5. DK argued that this consequence would not follow. It argued that it would be open to the respondent to challenge the amount of interest claimed in such proceedings if the interest was not payable as provided for by s 11(2). But if interest were claimed at a rate said to be specified under the construction contract, it would not be possible for the respondent to raise a defence to the claim by reason of s 16(4)(b)(ii). This is a further indication that interest that is payable as a result of the late payment of a scheduled amount is not itself part of the scheduled amount.
6. The current provisions were introduced by the Security of Payment Amendment Act 2002 (NSW). DK relied upon the Minister’s Second Reading Speech and the Explanatory Memorandum. The Minister in his Second Reading Speech stated that “It is proposed to allow the claimant up to three business days to resume work after the claimant has been paid all moneys due under the Act.” The Explanatory Note stated that “Schedule 1 [41] provides that the right of a claimant to suspend work under a construction contract exists up until three business days after the date the claimant receives payment for the amount that is payable by the respondent under the Act.”
7. In fact, the Act does not so provide. Section 27(2) provides that the right to suspend construction work exists until three business days after the claimant receives payment for the amount payable by the respondent under s 15(1) (the “claimed amount” where the respondent failed to provide a payment schedule), s 16(1) (the “scheduled amount”), or s 23(2) (“the adjudicated amount”). It does not provide that the contractor is entitled to suspend works until those amounts and interest payable by reason of the late payment are paid.
8. It is not possible by adopting a purposive construction of the Act to reconstruct the text of the Act so to provide (Taylor v The Owners – Strata Plan No 11564 (2014) 253 CLR 531 at [37]-[39]; Wentworth Securities Ltd v Jones [1980] AC 74 at 105-106).
9. The primary judge reached the same conclusion for substantially the same reasons: He said:

Counsel for Galileo was however right in pointing out that the right to obtain judgment under s 16(2)(a)(i) is a right to obtain judgment for ‘the unpaid portion of the scheduled amount’. And although s 16(1) does not use the words ‘amount that is payable’, it refers in sub-paragraph (d) to the failure by the respondent ‘to pay the whole or any part of the scheduled amount’. In my view it is quite clear that the reference in s 27(2) to ‘the amount that is payable under s 16(1)’ is a reference to the ‘scheduled amount’.
As we have seen, the term ‘scheduled amount’ is a defined term and means the amount identified in the payment schedule as the amount of the payment ‘that the respondent proposes to make’. At the time the scheduled amount is specified in the payment schedule, the time for payment has not arrived. The amount is one which the respondent ‘proposes to make’. The Act should not be construed on the assumption that the respondent intends, at the point when the schedule is issued, to make a late payment. The natural reading is that the amount refers to the amount specified in the payment schedule only.
Furthermore, while analogous operation of the rights of suspension and the right to obtain a judgment counts for something, it is not the only contextual consideration. In practice, identifying the amount of interest due under s 11 may not be straightforward. The facts of this case illustrate that.
Nor is it just a question of counting the correct number of days. Section 11(1) refers to the rate prescribed in the contract and there may be cases where that gives rise to a dispute as to what the contract says. On DK’s argument, the validity of a suspension (and consequential action under the contract) might depend on a dispute about the quantum of interest, where the answer would not be known until court proceedings had run their course. That would hardly be a workable interpretation to place on the Act. Above all, the parties need to know where they stand at the time that rights of suspension are invoked or are under consideration.
The need to quantify interest in a final way is implicitly recognised in the Act itself. As well as suspending works, or moving to obtain judgment, an unpaid claimant has the option of obtaining an adjudicator's determination (s 16(2)(a)(ii)). This results in a specified amount due defined as the ‘adjudicated amount’ (s 22(1)) which must be paid by the due date (s 23(2)). If that amount is not paid, the authority to whom the adjudication application was made can provide an adjudication certificate which can then be filed as a judgment (ss 24 and 25). It is specifically provided in s 24(2) that if interest is due and payable on the adjudicated amount, the authority can be asked to specify the amount of interest payable in the certificate. If so specified, the interest is added to and ‘becomes part of' the adjudicated amount. The Act thus provides a mechanism whereby outstanding interest can be certified so that there is no possible debate about the amount.
Section 27(2) provides that a right of suspension exists if there is a failure to pay in full the amounts payable under ss 15(1), 16(1) or 23(2). If the adjudication procedure has been followed and a certificate specifying interest has been issued, the adjudicated amount under s 23(2), which must be paid in full if the suspension is to cease, may include interest. But there is no equivalent mechanism for determining the interest under s 16(1) (or s 15(1)) and including it in the amount payable. I think this tells against creating such a mechanism by implication.
Failure to pay the interest may be frustrating for a claimant but it would be an over-statement to suggest that the claimant has no remedy. The contract may, of course, oblige the respondent to pay interest on the outstanding payment claims. If so, the interest can be included in the next payment claim under the contract. Even if this approach is not available, the claimant has the option of seeking judgment or an adjudication certificate.
In my view, the better conclusion is that, for the purposes of s 27(2), the ‘amount that is payable’ under s 16(1) is the amount specified in the payment schedule and does not include interest under s 11. It follows that DK was not entitled to continue the suspension of works after 28 March.”
1. I agree.
2. DK argued before the primary judge that even if its construction of the Security of Payment Act were wrong it did not suspend work without reasonable cause within the meaning of cl 24.1, because it acted in good faith and on a bona fide (and reasonable) construction of the Act. As noted at [37] above the primary judge rejected this submission (Judgment [60]-[68]). It was not pressed on appeal.

Ground 3a.: Galileo’s involvement in issuing the show cause notice

Ground 3a. of the Notice of Appeal was as follows:

The primary judge erred in:

a. the proper construction of clause 24.1 of the contract and the involvement of the Respondent in the exercise of the powers and functions expressly reserved for the Principal’s Representative.”

As noted above at [18] the Show Cause Notice of 29 March 2019 was issued on Galileo’s letterhead. It was prepared by Galileo’s lawyers. It was sent to DK on 29 March 2019 at 2.04pm by Ms Jumikis, who was Galileo’s internal lawyer. It was signed by Mr Martoo on behalf of RCP and by Ms Jumikis on behalf of Galileo.
Clause 24.1 is quoted at [17] above.
The issue raised by ground 3(a) of the notice of appeal is whether the show cause notice of 29 March 2019 was issued by the Principal’s Representative within the meaning of clause 24.1. DK submitted that it was not because of Galileo’s involvement in the preparation, signing and sending of the notice. In her affidavit of 1 May 2019 Ms Jumikis deposed that on 29 March 2019 Galileo served on DK the notice to show cause. She deposed that Galileo issued the notice to show cause because DK had wrongfully and without reasonable cause suspended the carrying out of the work under the contract and had failed to proceed with the works with due diligence or in a competent manner and was in breach of warranties under certain clauses.
DK submitted that RCP (the Principal’s Representative) made little or no independent assessment of the assertions in the notice to show cause, and simply countersigned the document at the request of Galileo. It submitted that under clause 24.1 the Principal’s Representative was required to exercise its own discretion as to whether or not a notice to show cause should be issued and that RCP failed to do that.
As to DK’s argument that the show cause notice was not “issued” by RCP, the primary judge said (at Judgment [216]):

“As to the first argument, it is true that RCP was obviously unwilling to have the notice go out on its own letterhead. The precise reason for this does not clearly appear in the evidence, but I do not think it matters. In ordinary parlance, to "issue" a document means to release, or authorise release, of it. By signing the notice, RCP took responsibility for its content. The fact that it was not on RCP's letterhead does not, in my opinion, affect this. RCP was prepared for the document to be sent to DK in the form in which it was sent as a statement made (albeit it jointly) by RCP. In my view RCP issued the document in the relevant sense. I reject this argument.”

As to the submission that RCP had not given adequate or proper consideration to whether the notice should be issued, the primary judge said:

the parties were agreed that clause 24.1 should be read literally and that the power to issue the notice under that clause arose if the Contract were in breach. It was not enough that the Principal or the Principal’s Representative might be satisfied in good faith that the contractor was in substantial breach (cp FPM Constructions v Council of the City of Blue Mountains [2005] NSWCA 340 at [164]) (Judgment [219]-[220]);

clause 24.1 did not impose any express limitation on the power to issue the notice by reference to the judgment or satisfaction of the Principal’s Representative (Judgment [218]);

because the parties were agreed that the power to issue the notice depended upon whether the contractor was or was not in breach rather than upon the Principal’ or the Principal’s Representative’s belief or judgment that it was in breach, the issue of the notice did not depend on the exercise of any judgment by the Principal’s Representative (Judgment [221]);

because the issue of the show cause notice did not immediately affect the contractor’s rights but was a pre-condition to a debate about whether the Principal should be entitled to terminate the Contract or take the work out of the contractor’s hands, the court should not be too ready to treat alleged deficiencies in the default notice as invalidating the procedure (Judgment [221]-[222]). The important requirement is that the notice identified a breach, which the notice did (Judgment [223]);

DK responded to the substance to the allegations made in the notice. It did not take any point that the notice was issued on Galileo’s letterhead and signed by Galileo as well as RCP. However, no issue of waiver was raised by Galileo (Judgment [224]);

No obligation should be implied into clause 24.1 which would require the Principal’s Representative in issuing the notice to act in good faith or honestly or reasonably; but in any event, and importantly, the primary judge concluded (at Judgment [226]):

In my view, the fact that the default notice was drafted by Galileo's lawyers, MO [Mills Oakley], does not matter. The important point is that the relevant officers of RCP did consider the provisions of the contract and concluded that DK was in breach in the respects identified in the draft notice. It was not suggested to Mr Dibben or to Mr Hughes in cross-examination that they did not actually believe that DK was in breach. The view that DK's suspension of performance and its failure to comply with McKenzie's requirements constituted a breach of contract was reasonably open; indeed, on my findings it was correct. In my view there was no lack of honesty, good faith or reasonableness.”
1. The primary judge was correct in holding that RCP was satisfied that the notice should be issued and was satisfied with the grounds for the giving of the notice as stated in it.
2. A draft of the show cause notice was prepared by Galileo’s external lawyers, Mills Oakley. They sent a draft version of the notice to Ms Jumikis of Galileo at 3.14pm on 28 March 2019. This was forwarded by Ms Jumikis to Messrs Hughes and Dibben of RCP. Ms Jumikis asked that RCP review the draft notice as a matter of urgency and advise Galileo if they had any issues with it.
3. Twenty minutes later Mr Hughes forwarded that email to Mr Martoo, a director of RCP, stating:

“Please see attached draft show cause letter from Galileo’s lawyers for your review. I have attached the Directions reference within the letter FYI.

Happy to catch up over the phone if you’d like to run through in more detail. I’ll call to discuss.”

Mr Martoo responded at 5:06 PM in an email addressed to Messrs Hughes and Dibben. That email was in the following terms:

“As discussed it is essential that RCP now collates electronic copies of all documents referenced in the draft letter such that we can verify the accuracy of the statement being made including dates, amounts, contract clauses etc. If these documents can be copied into a new folder specific to this correspondence for our reference.

Mark,

Can you please review and check each of these reference documents against the draft letter and verify back to me that the information stated in the draft letter is in fact accurate.

The above process is not looking necessarily to verify the legal interpretation of the contract (although happy to receive any observation if you feel there may be errors) however, more particularly to verify the accuracy of reference data as quoted in the letter”

An hour later Mr Dibben sent an email to Mr Martoo and Mr Hughes (all of RCP) attaching a hyperlink to the draft show cause notice and attaching his comments on the document. Mr Dibben’s comments on the draft notice were extensive. Against critical assertions, such as that “the contractor has failed to achieve Practical Completion by the Date for Practical Completion.” He stated, “this is correct”.
On the morning of 29 March 2019 Ms Jumikis’ emailed Mills Oakley with a copy of the draft notice incorporating RCP’s comments and suggestions. They were incorporated in a redraft of the notice.
The draft of the notice as originally prepared by Mills Oakley provided for the document to be sent on RCP’s letterhead. Ms Jumikis sent a further email advising that the notice would be sent on Galileo’s letterhead as “RCP would need to get external legal advice in order to put it on their letterhead.”
Mr Dibben replied with further comments and suggestions as to the notice and said that RCP was happy to countersign the notice on Galileo’s letterhead.
At 12.26pm on 29 March Mr Martoo forwarded the show cause notice signed by him for RCP stating that RCP had signed the letters as the Principal’s Representative. He noted that “the correspondence has been prepared by Galileo ... on the basis of their own legal advice.”
The notice to show cause was served at 2.04pm on 29 March 2019.
The primary judge said:

But the parties in the present case agreed that the requirement in cI 24.1 that the Contractor be in breach should be read literally. They also agreed that if the Contractor is not actually in breach when the default notice is issued, no take-out or termination action taken by the Principal is valid. This means that the potentially "better construction" referred to by Basten JA is not available.
For this reason, the issue of a default notice under cI 24.1 does not itself depend on the exercise of any judgment by the Principal's Representative. Furthermore, the issue of such a notice does not itself have any effect on the Contractor's rights. It is at most a precondition to a debate about whether the Principal should be entitled to terminate the contract or take the work out of the Contractor's hands.”
1. It does not follow that because the parties agreed that whether clause 24.1 was triggered depended upon whether the contractor was actually in breach and not upon whether the Principal’s Representative believed that it was in breach, that the decision whether to issue the show cause notice (called by the primary judge a “default notice”) could not involve the exercise of a discretion as prima facie indicated by the use of the word “may”. As I understood it, Galileo was prepared to concede such a construction. But it submitted that that did not mean that RCP had to exercise its judgment independently of the Principal. I agree. RCP was of the view that DK was in breach. It agreed with the final version of the show cause letter after making amendments to the earlier draft. It agreed that the notice should be issued by signing the notice and agreeing to its being sent. It issued the notice as the primary judge correctly found.
2. DK submitted that RCP had a dual role, acting as the agent of Galileo in certain functions and as an independent assessor in other functions. It submitted that because the power to issue the notice under clause 24.1 was vested in the Principal’s Representative and not in the Principal, its role in issuing the notice was as an independent assessor and not as an agent of Galileo. Otherwise the power to issue the notice to show cause would have been given to the Principal and not to the Principal’s Representative. It reasoned that it followed that Galileo should not have been involved in RCP’s exercise of the power under clause 24.1.
3. I do not agree. As the primary judge observed, the issue of a notice to show cause did not immediately affect the contractor’s rights, but allowed it to show cause why the Principal should not terminate the contract or take the work out of its hands or, depending on the nature of the breach, to remedy the default. Under clause 24.2 the right of the Principal to terminate the Contract or to take the remaining work out of the hands of the Contractor only arose if the Contractor failed to show cause or remedy the default to the satisfaction of the Principal’s Representative (clause 24.2(1)).
4. Clause 7.1(1) provided:

“7.1 Appointment of Principal’s Representative

The Principal must ensure that at all times there is a Principal’s Representative and that the Principal’s Representative acts in accordance with the Contract.”
1. Because the Principal was required to ensure that the Principal’s Representative acted in accordance with the Contract, there was necessarily a degree of supervision by the Principal of the work of the Principal’s Representative. That would not preclude the Principal’s Representative from exercising an independent function if that were provided for by the Contract.
2. However, there is nothing in clause 24.1 and 24.2 to indicate that the Principal’s Representative cannot have regard to the views of the Principal in deciding whether to issue a notice to show cause under clause 24.1.
3. Clause 24.1 states that the clause does not limit any right of the Principal. One of the Principal’s rights is to see that the Principal’s Representative acts properly to protect the Principal’s interest in the due performance of the Contract. It would be inconsistent with that right if the Principal could have no involvement in the Principal’s Representative’s decision whether or not to issue the notice under clause 24.1.
4. Galileo submitted that it was clear that the Principal should have an involvement in the decision to issue a notice under clause 24.1 because the notice had to do one, or perhaps more than one, of three things as specified in clause 24.1(8) and (9): that is, either show cause why the Principal should not terminate the contract, or show cause why the Principal should not take the remaining work out of the hands of the Contractor, or remedy the default.
5. I do not accept the latter aspect of this submission. The better construction of clause 24.1 is that depending upon the nature of the default, the notice should require the Contractor either to show cause under subclause (8) or remedy the default under subclause (9) (if the default is capable of remedy). I do not accept that the notice must specify only one of the courses that may be open to the Contractor in the event of a default that gives rise to the issue of the notice.
6. Nonetheless, the fact that it is ultimately for the Principal to decide under clause 24.2 as to what action might be taken under that clause (if clause 24.2(1)(a) is engaged) shows that it would be an unbusinesslike construction to say that the Principal could have no involvement in the exercise of the Principal’s Representative’s discretion to issue a notice under clause 24.1 (McCann v Switzerland Insurance Australia Ltd (2000) 203 CLR 579 at 589 [22]; [2000] HCA 65; Muriniti; Newell v Lawcover Insurance Pty Ltd (No 2) [2018] NSWCA 311 at [41], [51]).
7. DK challenged the primary judge’s finding at [226] (quoted at [79]) above that it was not suggested to Mr Dibben or to Mr Hughes in cross-examination that they did not actually believe that DK was in breach. DK submitted that this was an irrelevant finding because there was no finding that anyone with appropriate authority formed the view that DK was in breach. DK submitted that it was only Mr Martoo who had that authority and he was not called.
8. However, it is clear that Messrs Dibben and Hughes formed the view that DK was in breach. There is no reason that Mr Martoo was not entitled to rely on their views in deciding to sign the notice. In any event, their views could be attributed to RCP. Mr Dibben was not a director of RCP at the date of the notice. He was appointed a director on 1 April 2019, a bare three days after the notice was issued. He deposed to his understanding that DK was in substantial breach of the Contract in the respects identified in the notice. When the notice was issued he was the New South Wales manager of RCP and had been in that position since 1 December 2013.
9. Contrary to DK’s submission, the evidence clearly establishes that RCP through its relevant officers had formed the view that DK was in breach of contract and that a notice under clause 24.1 should be issued.

Ground 3(b): validity of the Show Cause Notice

Ground 3(b) of the notice of appeal stated that the primary judge erred in concluding that the show cause notice was valid.
The show cause notice alleged a number of breaches by DK. Three were relied upon and upheld at trial. They were:

wrongful suspension of the works;

failure to provide a “penetration schedule” to the satisfaction of the PCA; and

failure to undertake balustrade works required by the PCA for four apartments on level 7 of the Development.

For the reasons above, DK fails in its challenge to the primary judge’s finding that it had wrongly suspended its construction of works.
It follows that clause 24.2 was enlivened irrespective of DK’s other challenges.
In respect of failure to achieve Practical Completion by 18 February 2019 the show cause notice stated:

“Failure to achieve Practical Completion

As a precondition to Practical Completion, the Contractor is obligated to obtain an Occupation Certificate (clause 1.1(44) and Schedule A, Item 17). It is evident from the 'Occupation Certificate Proforma Package' prepared by McKenzie Group Consulting (NSW) Pty Ltd (dated 25 March 2019), that the Contractor is yet to complete a number of items that are required to be completed in order to obtain the Occupation, Certificate and achieve Practical Completion.

The Principal confirms its understanding of the items outstanding which, in order to obtain the Occupation Certificate and achieve Practical Completion, the Contractor must do or complete. These items are identified in the Principal's Representative Direction numbers 56, 57 and 58, which we enclose for your ease of reference.

...

... The tasks required by the Principal Certifying Authority in order for the Occupation Certificate to be issued, and consequently, Practical Completion to be achieved, fall within the Contractor's scope of the work under the Contract. The Contractor has failed to comply with Legislative Requirements in respect of the balustrade compliance in 4 apartments. The Contractor has been aware of this particular failure to comply with Legislative Requirements since on or about 9 October 2018, when notified by the Principal Certifying Authority, and continues to fail to remedy the non-compliance.”

As noted at [38] and [39] above the primary judge found that when the show cause notice was given DK was in breach in both respects, that is, in not providing the penetration schedule required by McKenzie Group (the PCA) and not complying with McKenzie Group’s requirement to increase the height of the balustrades.
In its written submissions, DK contended that the primary judge did not identify the relevant obligations DK was found to have breached in refusing to provide a penetration schedule. That criticism is wrong. The primary judge did identify the relevant contractual terms.
Clause 9.1(1) required the Contractor to “... carry out and complete, or cause to be carried out and completed, all of the work required so as to design, construct and complete the Works in a proper and workmanlike manner and bring the Works to Practical Completion on or before the Date for Practical Completion”. Clause 9.1(7)(c) provided that the Contractor was required to design and construct the Works so that the Works when completed, would comply with “all of the requirements of the Contract, including the Principal’s Project Requirements and all Variations”.
“Works” meant the completed works to be handed over to the Principal in accordance with the Contract. “Principal Project Requirements” was defined as follows:

“Principal’s Project Requirements or PPR means the documents included in Schedule J which describe the requirements for the Works.”

The effect of these terms was that the Works to be constructed by DK were to comply with the Principal’s Project Requirements. Those Requirements included:

“It is the Contractor’s responsibility to manage the PCA to procure and obtain the ... Occupation Certificates” (Clause 4.19)

and

“With the exception of those responsibilities of the Principal within the Contract, the Contractor will be responsible to procure and obtain ... the Occupation Certificate for the Works.” (Clause 4.33)

Clause 11.1(3) of the Contract provided:

“Complying with Legislative Requirements

...

The Contractor must also comply with all relevant Australian Standards, to the extent that they are not inconsistent with the requirements of the Contract and Legislative Requirements.”
1. To achieve Practical Completion DK was required, amongst other things, to provide to the Principal’s Representative documents in item 17 (clause 1.1(44)(f)).
2. The documents in item 17 included:

“...

Two copies of all necessary authorities, certificates and approvals for each relevant part of the works required for the lawful occupation and use of the Works for its Intended Purpose or as required by the terms of the Contract issued by all Authorities including the Final Certificate of Occupation under the Environment Planning and Assessment Act 1979 (NSW).

...

Other documents and information which, in the reasonable opinion of the Principal’s Representative, are required for the use, operation, servicing and/or maintenance of the Works.”
1. Clause 4.47(h) of the Principal’s Project Requirements required DK to provide “... all certificates and other information required by the Private Certifying Authority (PCA)”.
2. Clause 4.06 of the Principal’s Project Requirements required that DK deliver the Works in accordance with the “Architectural documents”. Clause 1.7 of Part 0182 of the Architectural documents contained a requirement that the Contractor should “Submit evidence of conformance with the recommendations of AS 4072.1 Appendix B” and:

“Submit a completed certification list and schedule for installed fire-stop penetrations and control joints.

- List Form: To AS 4072.1 Figure B1.

- Schedule form: To AS 4072.1 Figure B2”

Australian Standard 4072.1 (“AS4072.1”) contains in Appendix B a series of recommendations relating to record-keeping and documentation of fire penetration points. AS4072.1 is divided into two parts; mandatory provisions and recommendations.
The relevant part of Appendix B to AS4072.1 reads:

“B1 GENERAL

For fire-resistant service penetrations and control joints documentation, evidence of compliance with this Standard should be provided as set out in this Appendix.

When the installation of a fire-resistant sealing system has been completed, the installer should provide written evidence to the building owner or building owner's representative that –

(a) each such system (service penetration or control joint) is identical with a tested specimen. or, where there are variations from this tested specimen, these variations are in accordance with Clause 4.1 of this Standard; and

(b) each such system has been correctly installed in accordance with the manufacturer's installation instructions.

B2 DOCUMENTARY EVIDENCE

The evidence referred to in Paragraph B1 should be in the form of a numbered certificate, form, statement or the like from the installer of the system or systems, certifying –

(a) that an inspection of each type of system or systems has been carried out by the installer; and

(b) whether or not the installation is in accordance with Items (a) and (b) of Paragraph B1.

B3 STATEMENT OF COMPLIANCE AND SCHEDULE

Included on or attached to the certificate, form or statement of compliance should be a record of each installation giving the following information:

(a) Project name and address.

(b) Name, address and contact phone number of installing company or party.

(d) Description of service or control joint.

(e) Identification of the position of the installations, for example –

marked up drawings;
sketches; and
photographs.

(f) Description of the system used or a schedule of systems.

(g) Description of product or system used to maintain the FRL of the building element of each installation.

NOTE: Each installation should be numbered for ease of identification on the drawing.

(h) The FRL of the installation.

A unique number that references each installation.”
1. Figure B1 in Appendix B is a recommended form of providing the above list.
2. Although Appendix B to AS 4072.1 contains recommendations rather than mandatory provisions, DK was required by clause 1.7 of the Architectural schedule to submit evidence in accordance with the list form in Figure B1 and the schedule form in Figure B2 to AS 4072.1. The recommended format for listing penetrations control joints was set out in Figure B1 of AS 4072.1 as follows:

Floor or wall desig-nation

Installation Ref. No.

Wall (W) Floor (F) Ceiling (C)

FRL: Structural adequacy/ integrity/ insulation min./ min./min.

Service description Service size (diameter)*x No. of or Group opening (mm x mm)

Manufacturer product and system number

Report Ref:

G

A12

W

-/60/60

500 x 200 mm opening with 100 mm diameter. Copper pipe plus assorted power cables

ABC mortar - System 651

R25

RPC’s direction PRD No 56 referred to in the show cause notice quoted at [17] stated:

“Further to the ongoing advice from the Principal Certifying Authority (PCA), the Contractor is directed to comply with the following instruction noted by the PCA as required to satisfy BCA compliance condition #12:

‘Provide a full penetration schedule nominating systems and locations and provide test reports for all systems used’.

In accordance with clause 4.19(a) and 4.33 of the Principal’s Project Requirements (PPR), ‘it is the Contractor’s responsibility to manage the PCA to procure and obtain all approvals and the Occupation Certificate.’

The Contractor is also required to comply with the Fire Stopping section of the Architectural specification (Section 0182, 1.7 Submissions), which note the following requirements as issued to the Contractor as part of tender documentation:

‘Submit a completed certification list and schedule for installed fire-stopped penetrations and control joints.

- List form: To AS 4072.1 Figure B1.

- Schedule form: To AS 4072.1 Figure B2’

The above-mentioned list and schedule forms of AS4072.1 are attached for reference, and clearly require the Contractor to maintain an itemised penetration schedule in addition to referencing systems used.

The Contractor is directed to commence with resolving the compliance issue immediately, and to manage the PCA to procure and obtain all approvals and the Occupation Certificate in accordance with its Contractual obligations.”

The Direction then set out the relevant terms of the architectural requirement part 0182 “fire-stopping” and figures B1 and B2 of Appendix B to AS 4072.1.
The primary judge held that DK was required to provide the penetration schedule called for by McKenzie Group both because a penetration schedule was called for by the terms of the contract (Judgment [144]) and because McKenzie Group reasonably required the provision of such a schedule as a condition of providing an occupation certificate and DK was required to provide that schedule in order to satisfy McKenzie Group’s requirements. There was no error in this reasoning.
The primary judge said:

Counsel for DK pointed out that the absence of a penetration schedule had not prevented the issue of the interim occupation certificate. It may be accepted, as Mr Pearce conceded in cross-examination, that he considered the building was safe to occupy without a penetration schedule. But this goes nowhere. The purpose of the penetration schedule is for record-keeping not safety as such. It was clearly reasonable to require the schedule to be provided after occupation began, so long as it was provided eventually.
Counsel for DK pointed out that the requirements in Figure B1 were illustrative. Counsel submitted that it was excessive to require DK to provide extensive details, including photographs, of scores of installations which had already been done.
This submission attributed a rigidity of approach to McKenzie which it did not in fact exhibit. While it is true that completion of the full spreadsheet provided by McKenzie on 12 March would have required over 50,000 entries, McKenzie subsequently indicated that the spreadsheet was only a guide and a lesser amount of information could be provided. McKenzie's ‘more simplified template’ of 14 March did not insist upon the provision of hyperlinked photographs for every installation. In fact, the form of schedule specified in the take-out notice, and which McKenzie agreed to accept, was less extensive still.
DK could have negotiated with McKenzie following 12 March with a view to limiting any excessive and unnecessary provision of information. DK chose not to do so, and instead refused as a matter of principle to provide a penetration schedule. In my view this was a clear failure by DK to execute the works in accordance with its obligations under the contract.
1. I agree.
2. As events transpired, an interim occupation certificate was issued by McKenzie Group without a penetration schedule. DK submitted that it was not in breach because, if an interim certificate could issue, then a penetration schedule was not required.
3. This is not correct. Independently of its obligation to do everything necessary to procure an occupation certificate, DK was required to provide a penetration schedule to comply with the requirements of AS 4072.1 and the recommendations in Appendix B to that standard. Further, it was required to procure not merely an interim occupation certificate, but a final certificate.
4. The primary judge correctly concluded that DK was in breach of its obligation to provide a fire penetration schedule.
5. In issuing the interim occupation certificate on 2 May 2019, McKenzie Group stated:

“Further Occupation Certificates

The enclosed certificate has only been issued for a stage of work being whole excluding apartments AA704, AA706, BB701 and BB703

Further certificates will be needed for the Balustrade works in apartments AA704, AA706, BB701 and BB703 and completion of the penetrations register.”

As to the balustrades, the primary judge said:

“151 As to the balustrades, McKenzie's position was that the top of the hob was the ‘surface beneath’ for the purposes of the application of BCA cI D2.16. As the top of the hob was at 280 millimetres, the top of the balustrade needed to be raised to 1,280 millimetres to maintain the one thousand millimetre distance. In arguing that this was wrong, counsel for DK focused on the definition of the climbing exclusion zone in Table D2.16(a). Counsel observed that the climbing exclusion zone only starts at 150 millimetres above floor level. Thus the top of the barrier (at 1,000 millimetres above the floor) only needs to be 850 millimetres above the lowest point of the climbing exclusion zone. This meant, according to the argument, that all which was necessary was to have the top of the balustrade 850 millimetres above the top of the hob. As the top of the hob was at 280 millimetres, the specification of the top of the balustrade at 1130 millimetres in December 2017 had been the correct approach. Counsel submitted that, on McKenzie’s approach, if there was a climbable object the top of which was at 150 millimetres (in accordance with the climbing exclusion zone requirement) the top of the barrier would need to be 1,150 millimetres rather than the 1,000 millimetres specified. That could not be correct.

In my view this argument has some force. But in the end I do not think that the position taken by McKenzie was manifestly erroneous or unreasonable. The requirements of BCA cl D2.16 in the circumstances was somewhat ambiguous. Even if McKenzie was obliged to act reasonably, in my view it did not fail to do so.
Counsel for DK submitted that to increase the height of the balustrades was a variation, and that DK was not entitled to undertake this work without a formal variation being issued by the Principal's representative. But even if this is correct, the fact is that DK was refusing to undertake the work. Had DK genuinely been concerned about the need to have a variation, it could readily have approached RCP for this purpose. That would be an incident of its obligation to proceed with the works with reasonable diligence. DK's position was clear. It did not want to raise the height of the balustrades and was taking the position that it did not have to do so. In my view this was a breach of contract.”
1. So far as the primary judge’s reasons went, I agree with them.
2. The level 7 balustrades were railing barriers that were constructed on top of the outer edge of the balcony. It was not in dispute that the floor of the balcony on level 7 was more than 4 metres above the surface beneath it.
3. The dispute about the balconies centred on a horizontal concrete hob below the balustrades on their balcony side. The top horizontal surface of the hob was 280 millimetres above the surface of the balcony. The PCA’s position in July 2018 was that the balustrade’s height had to be raised to 1280 millimetres above the surface of the balcony so as to maintain a height of 1 metre, measured from the horizontal surface of the hob.
4. The requirements of cl D2.16 of the Building Code of Australia were extracted by the primary judge. (The Building Code was not provided with the appeal papers). As recorded by the primary judge that clause provides:

“D2.16 Barriers to prevent falls

(a) A continuous barrier must be provided along the side of-

...

a floor, corridor, hallway, balcony, deck, verandah, access bridge or the like; and

...

If the trafficable surface is 1 m or more above the surface beneath

The primary judge also recorded:

Table D2.16(a) relevantly provides that the minimum barrier height is one metre. Heights are measured ‘vertically from the surface beneath’.
The table also provided under the heading ‘Barrier Climbability’ that:
Any horizontal or near horizontal elements between 150mm and 760mm above the floor must not facilitate climbing.
The design for the level 7 balustrades consisted of a railing barrier on top of the outer lip of the balcony. On the balcony side, below the barrier, was a horizontal concrete hob. The top of the hob was 280 millimetres above the surface of the balcony.
In December 2017, McKenzie issued construction certificate 3, which required the top of the balustrade to be 1,130mm above the surface of the balcony. This meant that the top of the balustrade was 850 millimetres above the top of the hob.”
1. The primary judge recorded that architects retained by DK stated that they did not consider the hob to be a climbable object for the purposes of BCA D2.16. Considering the picture of the balustrade contained in the primary judge’s judgment, this would be a surprise to parents of small children. It is clear from the parts of clause D2.16 contained in the primary judge’s reasons that a barrier height measurement is to be taken from the “surface beneath”. The “surface beneath” the top of the railing barrier as originally constructed was not one metre above the top of the hob which was a surface (and a climbable surface) beneath the top of the railing barrier. But whether or not the hob was a climbable surface, the “surface beneath” the top of the barrier was to be measured from the horizontal surface of the concrete hob which was the surface immediately beneath that barrier.
2. I do not share the primary judge’s caution in accepting Galileo’s argument as to whether DK was in breach in relation to the construction of the balustrades. Otherwise I agree with his Honour’s reasons on this issue.
3. Accordingly, I agree with the primary judge that each of the three breaches relied upon in the show cause notice was established.

Ground 4: validity of the take out notice

Ground 4 of the notice of appeal was as follows:

“4 The primary judge erred in:

a. the proper construction of clause 24.2 of the contract and the involvement of the Respondent in the exercise of the powers and functions expressly reserved for the Principal's Representative;

b. proceeding on the basis that the Principal’s Representative had:

i. considered the Appellant’s Response to Show Cause Notice; and

ii. determined that the Appellant had failed to show cause to its satisfaction,

without making any findings of fact or addressing the detailed submissions as to the evidence upon this issue;

c. proceeding on the basis that the Appellant’s representative had made certain statements at a ‘without prejudice’ meeting without making any findings of fact or addressing the detailed submissions as to the evidence upon this issue;

d. concluding that the Principal’s Representative was entitled to consider statements allegedly made at a ‘without prejudice’ meeting when determining that the Appellant had failed to ‘show cause’ to its satisfaction under clause 24.2 of the contract; and

e. concluding that the consequent exercise of power by the Respondent under clause 24.2 of the contract was valid.”

DK provided a response to the show cause notice on 12 April 2019. In relation to the first alleged breach in the show cause notice (wrongly suspending the works) DK stated that it was entitled to suspend works because interest on the late payment of the scheduled amount had not been paid. As noted above, this was the first time that DK identified this basis for its continuing to suspend works after 28 March 2019.
In relation to the asserted breach that DK had failed to proceed with the works with due diligence, DK said that alleged deficiency in works were the subject of directions given by the Principal’s Representative on 26 March 2019, being only three days before the issue of the show cause notice. It said there had not been (nor was there at the time of giving the notice) a reasonable time for the contractor to comply with those directions.
DK also said that it was entitled to a number of extensions of time which had been claimed but wrongly refused.
DK stated that it had done all work required by it to obtain Practical Completion. It stated that it had completed all work required by item 17 of schedule A and foreshadowed preparing a letter to be sent by Galileo to the PCA which would request the PCA to explain why it considered it appropriate or necessary to “go behind” any of the certificates that had been provided and why it had “changed its opinion” in respect of the balustrades and would request that the PCA revise and update the “occupation certificate pro forma package” to reflect any updated view of its position.
The primary judge’s conclusions in relation to this ground are set out at [42] and [43] above.
The primary judge found that DK’s response to the default notice consisted of a series of arguments to the effect that it was not in breach and that a fair reading of the response was that “DK was taking the position that it was not in breach and that was that” (Judgment [246] and [247]). That finding was not challenged.
Under clause 24.2(1) Galileo’s right to either terminate the contract or take the remaining work out of DK’s hands only arose if DK failed to show cause or failed to remedy the default “to the satisfaction of the Principal’s Representative”.
The primary judge proceeded on the basis that in forming the judgment required by clause 24.2(1) RPC was required to act in good faith and reasonably (applying Service Station Association Ltd v Berg Bennett & Associates Pty Ltd (1993) 45 FCR 84 at 94 (Gummow J); Judgment [234]-[238]).
DK alleged that RCP did not make its own judgment as to whether or not it should be satisfied with RCP’s response, but followed the dictates of Galileo; that if it did form its own judgment, it pre-judged the issue before the show cause response was received; and if it did form its own judgment, it did so on the basis of statements made by Mr Pratt of DK at a meeting or meetings held in April 2019 to the effect that DK did not intend to provide the penetration schedules required by McKenzie Group or to raise the height of the balustrades, or would only do so if that work were accepted as variations to the contract. DK submitted that because the meeting at which those sentiments were expressed was held on a without prejudice basis, it was not open to RPC to have regard to them in forming its opinion as to whether it was satisfied or dissatisfied with DK’s response to the show cause notice.
The primary judge found that the relevant officers of RCP did consider the provisions of the contract and concluded that DK was in breach in the respects identified in the notice to show cause (Judgment [226]). His Honour accepted the evidence of Ms Jumikis of Galileo and Mr Dibben of RCP in which they denied that there had been a pre-judgment of the show cause response (Judgment [240]).
The primary judge concluded that there was “... no lack of reasonableness or good faith in RCP declining to be satisfied that DK had shown cause on this point (being the default involving the suspension of works)” (Judgment [248]). His Honour found that the fact that RCP’s view was informed by statements made by Mr Pratt at a meeting held on a without prejudice basis was irrelevant when it came to considering the validity of action taken in reliance or partial reliance on what was said at that meeting for contractual purposes (Judgment [251]). His Honour said that in any event, what Mr Pratt said at the meeting did not add anything to that which RCP already knew because even before the issue of the notice to show cause DK’s position was that it was aware of McKenzie Group’s requirements but disagreed with them and did not intend to comply with them (Judgment [254]).
The assertion in ground 4(b) of the notice of appeal that the primary judge did not make necessary findings of fact or address evidence or submissions on this topic is without foundation.
DK submitted that there was no finding that the Principal’s Representative gave consideration to DK’s response. I understand that this submission was premised on DK’s further submission that only Mr Martoo was the relevant decision-maker for RCP. Otherwise it is incomprehensible. DK challenged the primary judge’s finding (at Judgment [226]) that relevant officers of RCP did consider the provisions of the contract and concluded that DK was in breach in the respects identified in the default notice; i.e. the show cause notice.
DK submitted that the primary judge had found that the relevant person for the Principal’s Representative to determine whether to allow Galileo to act under clause 24.2 of the contract was Mr Martoo. The primary judge made no such finding. Rather, he found that Mr Martoo was the signatory of the show cause letter. He did not find that Mr Martoo was the relevant person in RCP to consider DK’s response to the show cause notice. Mr Dibben was a director of RCP by the time the response was received. The fact that Mr Martoo did not receive the response was neither here nor there. Mr Dibben was the mind of RCP for the purpose of forming a judgment as to whether RCP was satisfied or dissatisfied with DK’s response.
At trial DK submitted that Mr Dibben made no real or genuine attempt to consider its response to the show cause notice. DK issued subpoenas to RCP and Mr Dibben seeking production of documents recording RCP’s review of DK’s response to the show cause notice. The subpoenas were presumably wider. It was an agreed position before the primary judge that although a large amount of material had been produced by RCP and Mr Dibben in answer to subpoenas, there was “... no written communication or record in respect of any review of the response to the show cause notice.”
However, Mr Dibben gave evidence that he, in consultation with his colleagues at RCP, did consider the response to the show cause notice and that:

he, in consultation with his colleagues, considered that DK was maintaining its claim that it was entitled to suspend works and did not propose to terminate the suspension in circumstances where the advice RCP had received from Galileo was that DK was not entitled to suspend works;

he, in consultation with his colleagues at RCP, considered whether DK had been granted all the extensions of time to which it claimed to be entitled. He deposed that with the exception of two Notices of Delay that were yet to be finalised all other relevant Notices of Delay had been assessed and issued and that DK was not at that date entitled to further extensions of time beyond those that had been approved;

he, in consultation with his colleagues, considered that if the works were to be taken out of DK’s hands how much sooner the outstanding work (namely, the penetration schedule and the balustrade works) would be completed. He deposed that DK was denying its responsibility to complete the penetration schedule or the balustrade works and RCP (and Galileo) considered that DK was not willing to complete the works and it would therefore be more time efficient for Galileo to take the work out of DK’s hands and demand the documentation required in order to obtain the occupation certificate and to complete the balustrade works itself;

it was evident that DK was generally unwilling to comply with RCP’s and Galileo’s reasonable directions in respect of the works; and

DK’s response to the show cause letter and its actions did not show any evidence of attempts by DK to lift its performance on site or otherwise.

DK submitted before the primary judge that his affidavit was plainly crafted by Galileo’s lawyers. DK challenged Mr Dibben’s credibility and veracity. That challenge was unsuccessful. The primary judge found both that the relevant officers of RCP believed that DK was in breach in respect of the breaches asserted in the notice to show cause (Judgment [226]) and that RCP considered DK’s response to the show cause notice and did not act unreasonably or not in good faith in declining to be satisfied that DK had shown cause (Judgment [248]). DK did not show that the primary judge misused his advantage in making those findings.
At trial DK submitted that the decision to take the work out of its hands was made by Galileo before the receipt of DK’s response to the show cause notice. It relied on an email dated 11 April 2019 (that is, the day before the response to the show cause notice was due) that was sent by Mr Paul Marshall of Galileo to Mr Dibben and Mr Stephen Hughes of RCP. The sending of that email had been preceded by meetings between Galileo, RCP and DK. Mr Marshall wrote:

“Mark & Stephen,

Further to our discussion this afternoon, unfortunately we no longer have any confidence that a sensible resolution can be reached with DK. We therefore need to consider the next available course of action which will be to enforce step in rights pursuant to the show cause notice issued. These rights will be triggered following a period of ‘reasonable consideration’ of their anticipated response which we expect to receive by COB tomorrow (deadline under the contract). It will depend somewhat on the substance of the DK response however based on the expected reply, Mills Oakley believe the weekend plus 2 days allows sufficient time for ‘reasonable consideration’ so step in rights will likely trigger around Tuesday next week. This will not be a termination of the contract – rather we will be taking control of works to achieve PC & OC and the contractor remains on the hook for LD’s and other obligations. We will have the right to access contractor securities to undertake this work.”

Mr Marshall then outlined action that would be required from RCP in order “... to hit the ground running come Tuesday/Wednesday next week.” This included RCP’s giving advice as to an appropriate builder to complete outstanding works and ascertain availability to take over, to deal with subcontractors, and to put together a list of consultants required to complete the penetration schedule and to contact the certifier to confirm its endorsement of the proposed lifting of the balustrades to achieve compliance to obtain certainty that the proposed design would be approved by the certifier.
The primary judge found:

... The decision makers at RCP were well aware that the take-out notice was based on advice from MO [Mills Oakley], which presumably included advice on whether the position taken by DK in its show-cause response was valid. There is no evidence that the RCP decision makers considered this issue by obtaining advice themselves, but I do not think it is necessary to do so. RCP had no reason to second guess MO’s opinion in that regard and RCP, not having legal expertise, is unlikely to have been unable to contribute anything to the process had it sought some more detailed advice. In my view, there was no lack of reasonableness or good faith in RCP declining to be satisfied that DK had shown cause on this point.”
1. The fact that Galileo and inferentially RCP assumed before DK’s response was received that steps would need to be taken to issue a take-out notice does not mean that RCP did not give genuine consideration to the response.
2. Contrary to Mr Marshall’s apprehension that Galileo and RCP would need to “hit the ground running”, the take-out notice was not issued until 29 April 2019. In the meantime, a meeting was held on a without prejudice basis between DK, RCP and Galileo. Mr Dibben said that the first dispute meeting took place after the “notice of dispute” (i.e. the notice to show cause) and before the response to that notice. He also said that there was a second notice of dispute meeting with DK onsite after 12 April 2019 where DK still said that they were not going to provide the penetration schedule the way the PCA wanted it and they still said that the balustrade complied and they were not going to rectify it. This evidence was not objected to. It was elicited in cross-examination. DK did not ask for the answer to be struck out.
3. There was a dispute about what position DK had taken on the meeting of 16 April, but that is not relevant for present purposes. DK submitted that it was not open to RCP to rely on anything said at a without prejudice meeting in deciding whether it was satisfied or not satisfied with DK’s response to the show cause notice.
4. The primary judge dealt with this submission as follows:

“250 Counsel's argument attacked the use of allegedly without prejudice communications, not as evidence in curial proceedings, but as part of the procedure laid down by cI 24.2. Although reference was made to provisions of the Evidence Act 1995 (NSW), s 131, that provision applies only in curial proceedings: s 4. It does not apply to a non-curial procedure such as that under cI 24.2. Counsel's argument must therefore be that for RCP to rely upon something said in a without prejudice meeting in some way fell foul of the common law rules concerning privilege over without prejudice communications.

But in my view the fact that the meeting was conducted on a without prejudice basis is irrelevant when it comes to considering the validity of action taken in reliance, or partial reliance, on what was said at that meeting for contractual purposes. Legal professional privilege has been recognised as being more than a rule of evidence: it is a substantive legal right: Baker v Campbell (1983) 153 CLR 52. But although without prejudice privilege has been recognised for a long time in the common law but is now enshrined in the Evidence Act, it has not been recognised as a substantive legal right in the same sense. The rule that without prejudice communications are privileged is simply a rule of evidence. It applies only in curial proceedings to prevent the admission of evidence, and even in such proceedings, it only applies when objection is made. In my view it had no application to RCP when RCP was considering the question raised by cl 24.2.”
1. I agree.
2. The authorities cited by DK did not support its submission that Mr Dibben was not entitled to take account of what was said at a without prejudice meeting between representatives of Galileo, DK and RCP. In Cutts v Heads [1984] CH 290 Oliver and Fox LJJ held that a letter containing an offer of compromise expressed to be without prejudice except as to costs (at (299)) was admissible on the question of costs (not following Walker v Wilshire (1889) 23 QBD 335). The privilege rested in part upon public policy and in part upon an express or implied agreement that without prejudice negotiations should be protected from disclosure (at 306). Public policy was in favour of allowing a Calderbank letter to be available to be used on questions of costs once liability had been determined. The change in the practice of courts and the profession following the decision in Calderbank v Calderbank [1976] Fam 93 meant that the conventional import of the words “without prejudice” had been modified where the offer was made without prejudice save as to costs, so as to protect negotiations from disclosure only whilst liability was still in issue and not on the question of costs (at 310, 316).
3. Cutts v Heads provides no support for DK’s submission.
4. DK also cited Unilever plc v The Proctor & Gamble Co [2001] 1 All ER 783. There, the Court of Appeal of England and Wales dismissed an appeal from an order striking out an action commenced by Unilever plc against Proctor & Gamble Co as an abuse of process. Unilever had sought a declaration that it had not infringed Proctor & Gamble’s European patent. Its entitlement to commence that proceeding depended upon its establishing that Proctor & Gamble had threatened to commence proceedings in the United Kingdom against Unilever for infringement of the patent. It was common ground that the threat had been made, and only made, in a without prejudice meeting that was held to seek to negotiate a resolution of proceedings that had been commenced in the European Patent Office by Proctor & Gamble against an indirect subsidiary of Unilever (at 786).
5. Parts of the reasons for judgment of Robert Walker LJ (as his Lordship then was) and Simon Brown LJ, if read without context, provide some support for DK’s position that a party to a without prejudice meeting cannot be allowed to use to its advantage anything said by the other party if the statement is not within a recognised exception to the privilege. Robert Walker LJ said (at 796-797):

“... [T]he without prejudice rule is founded partly in public policy and partly in the agreement of the parties. ... [T]he protection of admissions against interest is the most important practical effect of the rule. But to dissect out identifiable admissions and withhold protection from the rest of without prejudice communications (except for a special reason) would not only create huge practical difficulties but would be contrary to the underlying objective of giving protection to the parties (in the words of Lord Griffiths in Rush & Tompkins at p.1300)

‘to speak freely about all issues in the litigation both factual and legal when seeking compromise and, for the purpose of establishing a basis of compromise, admitting certain facts.’

Parties cannot speak freely at a without prejudice meeting if they must constantly monitor every sentence, with lawyers or patent agents sitting at their shoulders as minders.

Lord Griffiths in Rush & Tompkins noted (at p.1300), and more recent decisions illustrate, that even in situations to which the without prejudice rule undoubtedly applies, the veil imposed by public policy may have to be pulled aside, even so as to disclose admissions, in cases where the protection afforded by the rule has been unequivocally abused.

With those principles in mind I come back to the facts of this case, bearing in mind (as Mr Hobbs enjoined the court to do) that this is an appeal in a strike-out and that the facts pleaded in Unilever's statement of claim (‘a threat to take proceedings in the United Kingdom in respect of such alleged infringement’) must be assumed, for strike-out purposes, to be true.

...

... It was a high-level meeting between highly-skilled professionals representing the interests of multinational groups which are household names. The meeting was in the judge's words held ‘in the context of ongoing discussions with a view to settling a number of issues between the two organisations’ ... It was an occasion for both sides to speak freely. There is nothing (beyond the bare and unembroidered pleading of a threat) to suggest that Procter & Gamble's representatives at the meeting acted in any way that was oppressive, or dishonest, or dishonourable.

In my judgment the judge was right to conclude that it would be an abuse of process for Unilever to be allowed to plead anything that was said at the meeting either as a threat or as a claim of right. The circumstances were such that each side was entitled to expect to be able to speak freely, and their agreement to the meeting being arranged evinces that common intention. I would if necessary base my conclusion on the parties' agreement to extend the normal ambit of the rule based on public policy. But I do not think it is necessary to go that far. The Frankfurt meeting was undoubtedly an occasion covered by the normal rule based on public policy, and the pleading of the threat (or claim of right) has not been shown to come within any recognised exception.”

Simon Brown LJ said (at 800):

“I assume, as for strike out purposes I must, that in the course of the without prejudice negotiations here the respondents committed what Mr Hobbs calls ‘a statutory tort’ under s.70. I nevertheless unhesitatingly conclude that they did not thereby unequivocally abuse the protection afforded by the without prejudice rule.”

These passages do not go so far as DK’s submissions require them to go. In any event, when read in context of Robert Walker LJ’s discussion of the authorities in relation to without prejudice communications, that uniformly refer to without prejudice privilege as a rule governing the admissibility of evidence, no wider conclusion should be drawn from Unilever plc v Proctor & Gamble Co than that it is an abuse of process to commence proceedings relying wholly on evidence that is inadmissible (Pihiga Pty Ltd v Roche [2011] FCA 240; (2011) 278 ALR 209 at [71]).
That would be consistent with the classic statement of the nature of the without prejudice privilege of Dixon CJ, Webb, Kitto and Taylor JJ in Field v Commissioner for Railways for NSW (1957) 99 CLR 285 (at 291):

“The law relating to communications without prejudice is of course familiar. As a matter of policy the law has long excluded from evidence admissions by words or conduct made by parties in the course of negotiations to settle litigation. The purpose is to enable parties engaged in an attempt to compromise litigation to communicate with one another freely and without the embarrassment which the liability of their communications to be put in evidence subsequently might impose upon them. The law relieves them of this embarrassment so that their negotiations to avoid litigation or to settle it may go on unhampered. This form of privilege, however, is directed against the admission in evidence of express or implied admissions. It covers admissions by words or conduct. For example, neither party can use the readiness of the other to negotiate as an implied admission. It is not concerned with objective facts which may be ascertained during the course of negotiations. These may be proved by direct evidence.” (Emphasis added.)

It is unnecessary to consider how far later authorities might have extended the privilege beyond the making of admissions as part of an offer of settlement (Pihiga Pty Ltd v Roche at [81] and cases cited).
DK’s submission is neither supported by authority nor consistent with principle. The principles upon which the privilege exists are the requirements of public policy or the implied agreement arising from the fact that negotiations are conducted on a without prejudice basis that the parties will keep their communications confidential. It has never been suggested so far as I am aware that the privilege is based upon an implied agreement that if the negotiations do not result in an agreement for settlement of the dispute, the parties will make no use of what has been disclosed by the other party in the negotiations.
Such an implication would be inconsistent with the policy that supports the privilege which is to encourage the negotiated settlement of disputes. Take the case of unsuccessful negotiations to compromise a claim where prior to the commencement of those negotiations the defendant considers the plaintiff’s claim to be weak. As a result of the negotiations the defendant apprehends that the plaintiff’s claim is stronger than initially thought. After negotiations fail to reach a compromise the defendant makes a formal offer of compromise in accordance with the rules. Had the negotiations not taken place the defendant would either have made no offer of compromise or would have made an offer in a substantially lower sum than that offered. The offer of compromise is not accepted. The plaintiff obtains judgment for less than the offer of compromise. Could the plaintiff be heard to say that the usual costs consequence should not follow because the defendant took into account and used for his advantage what he learned about the strength of the plaintiff’s case during the without prejudice negotiations by making a higher offer than he would otherwise have made? I think not.
In any event, the primary judge found that what Mr Pratt said at the meeting did not add anything to that which RCP already knew. It follows that RCP’s position was not materially altered by reason of Mr Dibben taking into account what Mr Pratt said at the without prejudice meeting in forming his opinion that he was not satisfied with DK’s response to the show cause notice.
For these reasons ground 4 should also be dismissed.

Ground 5: release of security

As noted above at [44], the primary judge found that DK was not entitled to release of security it provided after Galileo took the work out of its hands. By ground 5 of the notice of appeal DK challenges that finding.
The primary judge dealt with DK’s submissions in detail at Judgment [262]-[268]. I agree with the primary judge’s disposition of this argument for the reasons he gave.

Conclusion

For these reasons I propose that the appeal be dismissed with costs.
BRERETON JA: I agree with White JA.
BARRETT AJA: I agree with White JA.

**********

Amendments

09 September 2020 - Minor typographical errors corrected.

Decision last updated: 09 September 2020

Medium Neutral Citation:	Duffy Kennedy Pty Ltd v Galileo Miranda Nominee Pty Ltd [2020] NSWCA 25
Hearing dates:	30 October 2019
Decision date:	25 February 2020
Before:	White JA at [1]; Brereton JA at [182]; Barrett AJA at [183]
Decision:	Appeal dismissed with costs.
Catchwords:	BUILDING AND CONSTRUCTION – construction contracts – Building and Construction Industry Security of Payment Act 1999 (NSW) – whether right to suspend work validly exercised – whether unpaid interest on late payment of “scheduled amount” forms part of the scheduled amount – the definition of “scheduled amount” does not include interest payable under s 11 on the unpaid amount of a progress payment unless that amount is included in a “scheduled amount” CONTRACT – Breach of Contract – whether ‘show cause notice’ was validly issued in circumstances where the power to issue the notice was conferred on the principal’s representative – where principal was involved in the principal’s representative’s decision to issue the notice – notice validly issued as principal’s representative gave adequate and proper consideration to issuing the notice and it would be inconsistent with the principal’s right to see that its representative acts properly if it could not be involved in the decision CONTRACT – Breach of Contract – whether ‘take out notice’ was validly issued where its validity was contingent on the principal’s representative being satisfied that the default that was the subject of the ‘show cause notice’ had not been remedied or the contractor had otherwise failed to show cause – not shown that the principal’s representative failed to give adequate and proper consideration to the issues – not shown that the principal’s representative did not possess the relevant satisfaction EVIDENCE — Privileges — Without prejudice privilege – whether information obtained during the course of ‘without prejudice’ meetings can be used for purposes other than settlement – ‘without prejudice’ privilege is not based upon an implied agreement that if the negotiations do not result in an agreement for settlement of the dispute, the parties will make no use of what has been disclosed by the other party in the negotiations
Legislation Cited:	Building and Construction Industry Security of Payment Act 1999 (NSW), ss 4, 11, 14, 15, 16, 22, 23, 24, 25, 27 Environmental Planning and Assessment Act 1979 (NSW), s 6.30 Security of Payment Amendment Act 2002 (NSW)
Cases Cited:	Calderbank v Calderbank [1976] Fam 93 Cutts v Heads [1984] CH 290 Field v Commissioner for Railways for NSW (1957) 99 CLR 285 Galileo Miranda Nominee Pty Ltd v Duffy Kennedy Pty Ltd [2019] NSWSC 1157 McCann v Switzerland Insurance Australia Ltd (2000) 203 CLR 579; [2000] HCA 65 Muriniti; Newell v Lawcover Insurance Pty Ltd (No 2) [2018] NSWCA 311 Pihiga Pty Ltd v Roche [2011] FCA 240; (2011) 278 ALR 209 Service Station Association Ltd v Berg Bennett & Associates Pty Ltd (1993) 45 FCR 84 Taylor v The Owners – Strata Plan No 11564 (2014) 253 CLR 531 Unilever plc v The Proctor & Gamble Co [2001] 1 All ER 783 Walker v Wilshire (1889) 23 QBD 335 Wentworth Securities Ltd v Jones [1980] AC 74 FPM Constructions v Council of the City of Blue Mountains [2005] NSWCA 340
Category:	Principal judgment
Parties:	Duffy Kennedy Pty Ltd (Appellant) Galileo Miranda Nominee Pty Ltd (Respondent)
Representation:	Counsel: F Hicks SC with S Ahmed and F Anwar (Appellant) S G Finch SC with D R Sibtain (Respondent Solicitors: Madison Marcus (Appellant) Mills Oakley (Respondent)
File Number(s):	2019/280811
Decision under appeal	Court or tribunal: Supreme Court of New South Wales Jurisdiction: Equity Division Citation: [2019] NSWSC 1157 Date of Decision: 6 September 2019 Before: Parker J File Number(s): 2019/136937

Floor or wall desig-nation	Installation Ref. No.	Wall (W) Floor (F) Ceiling (C)	FRL: Structural adequacy/ integrity/ insulation min./ min./min.	Service description Service size (diameter)*x No. of or Group opening (mm x mm)	Manufacturer product and system number	Report Ref:
G	A12	W	-/60/60	500 x 200 mm opening with 100 mm diameter. Copper pipe plus assorted power cables	ABC mortar - System 651	R25