Intercon Engineering Pty Ltd v Lend Lease Project Management and Construction (Australia) Pty Ltd; Christopher John Wright v Lend Lease Project Management and Construction (Australia) Pty Ltd

[2014] NSWSC 441

Supreme Court

New South Wales

Medium Neutral Citation:	Intercon Engineering Pty Ltd v Lend Lease Project Management & Construction (Australia) Pty Ltd; Christopher John Wright v Lend Lease Project Management & Construction (Australia) Pty Ltd [2014] NSWSC 441
Hearing dates:	8 April 2014
Decision date:	16 April 2014
Jurisdiction:	Equity Division
Before:	Ball J
Decision:	Both proceedings be dismissed.
Catchwords:	CONTRACT - construction - whether subcontract incorporated terms of head contract - uncertainty
Cases Cited:	Austra Tanks Pty Ltd v Running [1982] 2 NSWLR 840 Electricity Generation Corporation t/as Verve Energy v Woodside Energy Ltd [2014] HCA 7
Category:	Principal judgment
Parties:	Intercon Engineering Pty Ltd ACN 084 882 815 (Plaintiff 2013/347434) Christopher John Wright and Cathy Maree Wright (Plaintiff 2013/347418) Lend Lease Project Management & Construction (Australia) Pty Ltd (ABN 97 000 098 162) (Defendants)
Representation:	Counsel: H F Woods (Plaintiffs) S Robertson with R E Raffell (Defendants) Solicitors: Michael Flaherty (Plaintiffs) Dibbs Barker (Defendants)
File Number(s):	2013/347434 and 2013/347418
Publication restriction:	None

Judgment

Introduction

1. In July 2007, the defendant in each of the 2 proceedings with which this judgment is concerned, now known as Lend Lease Building Pty Ltd (Lend Lease), entered into a head contract (the Head Contract) with the Commonwealth of Australia, represented by the Department of Defence, for the design, construction, commissioning and qualification of a facility referred to as the "Mulwala Redevelopment Project" (the Project).

1. In April 2009, the plaintiffs in matter 2013/347418 (Mr and Mrs Wright) entered into 3 subcontracts with Lend Lease to perform certain work in connection with the Project. In August 2009, the plaintiff in matter 2013/347434 (Intercon) entered into a subcontract with Lend Lease also to perform certain work in connection with the Project.

1. The issue in both proceedings is whether Lend Lease is obliged to release the balance of the retention amounts it continues to hold under each subcontract.

Factual background

1. Each of the subcontracts is in substantially the same terms. Clause 10.8.1.1(1) of each subcontract entitles Lend Lease to retain from any amount payable under the subcontract an amount determined at the rate, and up to the limit, specified in the appendix to the subcontract. Clause 10.9 of each subcontract provides that, in lieu of the retention referred to in cl 10.8.1.1(1), the subcontractor may provide 2 unconditional banker's undertakings of equal value for a total amount that is equal to the limit of the amount Lend Lease is entitled to retain. Clause 10.10.1 of each subcontract provides:

Upon the later of Substantial Completion and receipt by [Lend Lease] of a written request from the Subcontractor for release of either a banker's undertaking or money retained and subject to Clause 6.9.3, [Lend Lease] must release to the Subcontractor either one banker's undertaking or one half of the money retained under Clause 10.8.1.1(1) as applicable. Upon the later of the making good of defects and other matters not in accordance with the Subcontract, the expiration of the Defects Liability Periods (or Second Defects Liability Periods if applicable) and receipt by [Lend Lease] of a written request from the Subcontractor for release of either a banker's undertaking or money retained [Lend Lease] must release to the Subcontractor either the remaining banker's undertaking or the balance of the money retained.

1. The terms "Defects Liability Periods" and "Second Defects Liability Periods" are defined in cls 9.7.1, 9.7.2 and 9.7.3 of the subcontracts in the following terms:

9.7.1 The Defects Liability Period for the Works and each Stage will commence on the Date of Substantial Completion.

9.7.2 Each of the Defect Liability Periods will expire at the end of the period stated in the Appendix.

9.7.3 A Second Defects Liability Period for the period stated in the Appendix will apply to a defect or other matter not in accordance with the Subcontract notified to the Subcontractor by [Lend Lease] during a Defects Liability Period. The Second Defects Liability Period will commence on the date [Lend Lease] notifies the Subcontractor that the defect or other matter has been made good to the satisfaction of [Lend Lease].

1. The "Works" were the works to be performed under each subcontract. The work under each subcontract was not divided into stages.

1. In relation to cl 9.7.2, the relevant item in the Appendix to each subcontract provides:

Defects Liability Periods will expire 24 months after the Date of Final Acceptance (as defined under the Head Contract).

In relation to cl 9.7.3, the relevant item in the Appendix to each subcontract provides:

Second Defects Liability Period is 36 months after the Date of Final Acceptance.

1. Nothing in this case turns on the Second Defects Liability Period. Presumably, however, the reference in the Appendix to "the Date of Final Acceptance" in respect of that item is also meant to be a reference to that expression as defined in the Head Contract. There is no definition of "Date of Final Acceptance" in any of the subcontracts.

1. "Head Contract" is defined in cl 1.1 of each subcontract to mean the Head Contract. The expression "Date of Final Acceptance" is defined under that contract to mean:

The date of Final Acceptance of the Works or a Stage set out in a Certificate of Final Acceptance, being the date by which the Works or a Stage achieved Final Acceptance and all other preconditions to Final Acceptance are satisfied.

It is agreed between the parties that Final Acceptance of the Works under the Head Contract has not yet been achieved.

1. It appears that Mr and Mrs Wright provided Lend Lease with 6 bank guarantees in accordance with cl 10.9 of each of their subcontracts. Three of those have been released in accordance with the first limb of cl 10.10.1, following Substantial Completion of the work the subject of the subcontracts and receipt of a written request from Mr and Mrs Wright. Lend Lease continues to holds 3 bank guarantees provided by Mr and Mrs Wright for $46,205.65, $107,914.17 and $46,810.27.

1. There was a dispute between Lend Lease and Intercon in relation to the work performed under Intercon's subcontract. On or about 2 September 2010, Intercon and Lend Lease entered into a Deed of Release to resolve that dispute. Clause 2 of that deed sets out certain payments to be made by Lend Lease to Intercon. Clause 2(ii) relevantly provides:

... For the avoidance of doubt the retention monies held by [Lend Lease] comprises two bank guarantees each valued at $172,833.50 as well as cash retention of $45,583. Further, for the avoidance of doubt, the monies paid by [Lend Lease] in accordance with clause 2(i) of this Release includes one half of the retention monies retained by [Lend Lease] under the Subcontract and the Agreement and the release of the remaining retention monies referred to in this clause 2(ii) (i.e. $391,250 exclusive of GST) will occur upon the latter [sic] of the making good of all defects and other matters not in accordance with the Subcontract and the Agreement, the expiration of the Defects Liability period (or Second Defects Liability Period if applicable) and receipt by [Lend Lease] of a written request from Intercon for release of the balance of the money retained; ...

It was common ground between Lend Lease and Intercon that the effect of this clause was to preserve Lend Lease's right to retain half the retention amount in accordance with cl 10.10.1 of the subcontract and that that amount consists of 2 bank guarantees each of $172,833.50 and $45,583 in cash.

1. Mr and Mrs Wright and Intercon have demanded return of the guarantees and cash still held by Lend Lease. It is agreed between the parties that those demands were made more than 2 years after Substantial Completion of the works (as defined in each subcontract).

1. It is clear from the definition of "Date of Final Acceptance" in the Head Contract that that contract contemplates the possibility that work under it will be divided into stages and that it is possible for Final Acceptance to occur in respect of each stage.

1. At the time the Head Contract was entered into, the works were divided into 2 stages. One was described in schedule 1 to the contract as "Stage 1 PSTC". The other was described as "Stage 2 rest of the works". It appears that since then the works under the Head Contract have been divided into additional stages. However, it is not clear what those stages are. The Head Contract has been varied by deed by the Commonwealth and Lend Lease on a number of occasions. It is apparent from Deed Number 4 dated 20 December 2013 that the works have been divided into additional stages described as "PPSF" and "CBF Building" and that the date for Final Acceptance of those stages is 15 February 2015. Apart from that, there was no evidence concerning the stages the work has been divided into, nor any evidence concerning which, if any, of those stages have been the subject of Final Acceptance. The absence of that evidence was raised by the court with the parties, but no party sought to lead additional evidence concerning that matter or sought an adjournment in order to do so.

1. It is agreed between the parties that there is no outstanding notice served by Lend Lease in respect of any defects or other matters not in accordance with the respective subcontracts.

1. It is also agreed that Mr and Mrs Wright and Intercon did not see the terms of the Head Contract at the time they entered into their respective subcontracts.

Consideration

1. It is not easy to understand the plaintiffs' argument. They contend that the subcontracts do not incorporate the meaning of the phrase "Date of Final Acceptance" from the Head Contract to identify what is meant by that expression as it appears in the Appendix to each subcontract. Alternatively, they submit that, if the subcontracts do, cl 9.7.2 of the Subcontracts is void for uncertainty, with the result that, provided a request is made, the guarantees and retention amount must be returned or paid no later than 24 months after the date of Substantial Completion under each subcontract, which it is agreed has occurred.

1. Both contentions, however, depend on a misconception of how the subcontracts define the expression "Defects Liability Period". According to the plaintiffs, what was intended by cl 9.7.2 and the Appendix of each subcontract was to incorporate by reference the expression "Date of Final Acceptance" as that expression is used in the Head Contract. They then seek to demonstrate that that could not have been the parties' intention because the expression is meaningless without the incorporation of other terms defined in the Head Contract on which the meaning of the expression depends. On the other hand, those defined terms make no sense if they are incorporated into the subcontracts.

1. However, cl 9.7.2 and the Appendix of each subcontract do not seek to incorporate by reference terms from the Head Contract. Rather, their effect is to fix the date for the expiry of the Defects Liability Period by reference to a date determined in accordance with the Head Contract. What cl 9.7.2 and the Appendix require the parties to do is to ascertain the Date of Final Acceptance under the Head Contract. That date becomes the date by reference to which the Defects Liability Period under the subcontracts is to be calculated. Once that is appreciated, the uncertainty identified by the plaintiffs does not arise.

1. It is not unusual for parties to fix the time by when a right accrues, or some other event occurs, under a contract by reference to an external event. It is common, for example, for loan contracts to contain cross-default provisions. Clause 9.7.2 and the Appendix of each subcontract operates no differently from provisions of that type. They simply provide for the identification of the Defects Liability Period under the subcontracts by reference to the Date of Final Acceptance under the Head Contract, just as cross default provisions in loan contracts provide for default under one contract by reference to default under another. There is no question in that case of incorporating the terms of one contract into another and the various authorities referred to by the plaintiffs that deal with that question have no application.

1. The commercial purpose behind defining the Defects Liability Period under the subcontracts by reference to the Date of Final Acceptance under the Head Contract is clear. Under cl 13 of the Head Contract, the Defects Liability Period under that contract expires 24 months after the last Date of Final Acceptance. Lend Lease plainly did not want to be in a position where it had to release guarantees or retention amounts under its subcontracts before the Defects Liability Period under the Head Contract had expired. It did not want to be faced with a claim under the Head Contract to rectify defects during the Defects Liability Period of that contract in respect of work done by a subcontractor in circumstances where it had already released the retention amount and guarantees it held from that subcontractor. The parties chose to deal with that possibility by tying the Defects Liability Period under the subcontracts to the Date of Final Acceptance under the Head Contract.

1. As used in the subcontracts, the expression "Date of Final Acceptance" is ambiguous. It may mean the date of Final Acceptance of the whole works under the Head Contract or it may mean the date of Final Acceptance of the stage or those stages to which the work performed under the relevant subcontract relates. However, that ambiguity does not make cl 9.7.2 of the subcontracts uncertain. It simply means that the ambiguity must be resolved by the normal processes of construction of the relevant clause. As Wootten J explained in Austra Tanks Pty Ltd v Running [1982] 2 NSWLR 840 at 843 in the context of discussing various ways in which uncertainty in contracts can arise:

Thirdly, the parties may have dealt with a matter, and the words may have meaning: the problem is that they have more than one meaning. Unless the agreement was vitiated by mistake, the courts will decide which is the most reasonable meaning to attach to the words in all the circumstances.

1. The parties did not lead any evidence of surrounding circumstances that might have shed light on the meaning of the expression "Date of Final Acceptance" as used in the subcontracts. In the absence of any evidence of that type, the answer would normally be determined by having regard to the terms of the relevant agreements and the objective intention of the parties that is to be inferred from the contracts themselves and the commercial purpose of the relevant clauses: see Electricity Generation Corporation t/as Verve Energy v Woodside Energy Ltd [2014] HCA 7 at [35].

1. Lend Lease submitted that it was not necessary to resolve the ambiguity in the meaning of "Date of Final Acceptance" in the present cases. That is because the plaintiffs' pleaded case was that the relevant provisions of the subcontracts were void for uncertainty, not that they were ambiguous.

1. There is much to be said for the proposition that all issues between the parties concerning when the retention amounts should be released should be resolved in the current proceedings. However, I have concluded that it would not be appropriate to attempt to do so in this case.

1. The resolution of the ambiguity in the meaning of "Date of Final Acceptance" cannot affect the outcome. There was no evidence before the court from which it could be concluded that the subcontracts in question related to particular stages of the Head Contract or that the Date of Final Acceptance under the Head Contract had occurred in respect of those stages and, if so, when. The plaintiffs bore the onus of proof on those issues, since they bore the onus of proving that the conditions specified in cl 10.10.1 for the release of the guarantees or retention amounts had been satisfied. Consequently, even if the court accepted that the expression "Date of Final Acceptance" was a reference to the Date of Final Acceptance of the stage or stages to which the work the subject of the subcontract related, the plaintiffs would still fail because they have failed to prove that the work they did related to a stage or stages in respect of which the Date of Final Acceptance occurred more than 2 years ago.

1. Moreover, the resolution of the question of ambiguity involves issues concerning the interpretation of the Head Contract which were not fully addressed by the parties.

1. One matter that is relevant to the resolution of the ambiguity is the commercial purpose behind the clause. As I have said, the commercial purpose of the retention of cash or guarantees during the Defects Liability Period was to protect Lend Lease in the event that it faced claims by the Commonwealth arising from defects in the work carried out by the subcontractors during the Defects Liability Period under the Head Contract. If the operation of the Defects Liability Period under the Head Contract is tied to the completion of particular stages, it makes commercial sense to tie the operation of the Defects Liability Periods under the subcontracts to the same stages.

1. However, the Head Contract itself is not clear on whether there is one Defects Liability Period or a Defects Liability Period in relation to each stage of the Works under that contract. Clause 13.1(a) provides:

The Defects Liability Period shall commence on the last Date of Final Acceptance and, subject to any extension in accordance with this clause 13, shall expire 24 Months after the last Date of Final Acceptance.

Clause 13.2 provides:

Subject to clauses 13.2(a) and (b), the Contract must correct all Defects.

If, prior to the expiration of the Defects Liability Period for the Works or a relevant Stage ... the Contract Administrator discovers or believes there is a Defect, the Contract Administrator may give [Lend Lease] an instruction specifying the Defect and ..."

The clause then goes on to say, among other things, that the Contract Administrator may give Lend Lease instructions to rectify the Defect or carry out a Variation (as defined) to overcome the Defect. Clause 13.1(a) suggests that there is only one Defects Liability Period. On the other hand, cl 13.2 suggests that there is one in respect of each Stage (as defined).

1. Not only did the parties not address the interpretation of the Head Contract in their submissions, but resolution of that question in the context of the current proceedings would cause difficulties for Lend Lease. If those issues were resolved in a way that was unfavourable to Lend Lease, it would have no right of appeal because it has been successful in the proceedings in any event. However, resolution of those issues may have consequences for Lend Lease in the future if it turns out that the work performed under the subcontracts relates to stages of the work under the Head Contract that have already reached Final Acceptance. At that time, Lend Lease might be bound by any decision in these proceedings that resolved the ambiguity.

1. Consequently, if the resolution of the ambiguity has any practical effect, it is a question that must await another day.

Orders

1. Both proceedings are dismissed. I will hear the parties in relation to costs.

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Decision last updated: 16 April 2014