MacMahon Contractors Pty Ltd & Anor v Power and Water Authority

[1996] QSC 8

IN THE SUPREME COURT

OF QUEENSLAND  No. 1805 of 1995

Brisbane

[MacMahon Contractors Pty Ltd & Anor v. Power and Water Authority]

BETWEEN:

MACMAHON CONTRACTORS PTY LTD and
  ADVANCED PIPELINE TECHNOLOGY PTY LTD
  Plaintiffs

AND:

POWER AND WATER AUTHORITY
  Defendant

REASONS FOR JUDGMENT -  MOYNIHAN J.

Judgment delivered:                 20/02/1996

CATCHWORDS:                 Summary judgment - construction contract - progress certificates arguable - whether principal had a right of set off or abatement

Counsel:  A. Goldberg Q.C. and J. Bond for the Plaintiff

H. Fraser Q.C. for the Defendant

Solicitors:  Clayton Utz for the Plaintiff
  Minter Ellison for the Defendant

Hearing date:  26/10/1995
IN THE SUPREME COURT

OF QUEENSLAND  

Brisbane  No. 1805 of 1995

BETWEEN:
  MACMAHON CONTRACTORS PTY LTD and
  ADVANCED PIPELINE TECHNOLOGY PTY LTD
  Plaintiffs

AND:
  POWER AND WATER AUTHORITY
  Defendant

REASONS FOR JUDGMENT - MOYNIHAN J.

Judgment delivered 20 February 1996

The plaintiffs seek summary judgment for the balance of the amount certified but unpaid on progress certificates issued pursuant to a contract for the construction of a gas pipeline from Daily Waters to the MacArthur River in the Northern Territory.  It was not seriously in contention that $2,493,431 was certified but not paid on progress certificates.  The defendant contended it was not obliged to pay that sum because of a right of set off or abatement.
           The application proceeded on the basis that the plaintiffs were prepared to assume, for the purpose of the application, that the defendant could raise a triable issue that it had rights to damages against them arising out of the contract.  The amounts and other aspects of the defendant's claims are appropriately sworn to and these matters can be taken as appropriately established for the purpose of the application.  The outcome of the application therefore turns essentially on the construction of certain provisions of the contract.  Before turning to those provisions it is necessary to say something about the contract and its performance.
           Although the facts are rather more expansive than the account which follows it is, I think, sufficient for the purpose of disposing of this application.
           The contract was entered into on or about 10 May 1994.  It included standard form general conditions in the form N.P.W.C. (edition 3) together with special conditions of contract and other documentation which is not of concern for present purposes.
           On 17 September 1994 that part of the pipeline which had then been constructed was pressure tested and the joints failed.  Other considerations aside this gave rise to a deed of variation of 27 October 1994.  The deed of variation reflected that the parties were in agreement that it was critical that the pipeline be completed as soon as possible in circumstances where the cause of the failure had not then been ascertained.  There was to be a change in the construction method from what is described in the material as the "new method" to the "conventional method".  Broadly speaking the new method had involved the use of an interference fit pipe jointing method (it enjoyed the name Zap-Lok) and ploughing in the pipeline.  The conventional method on the other hand involved stringing the pipe, welding the joints, and then burying it in a previously excavated trench.        The defendant claims to be able to deduct from certified amounts money reflecting its claims against the plaintiffs for damages founded on various bases.  Each of the separate amounts attributable to particular claims overtops the amount which the plaintiffs seek to recover by way of summary judgment.
           The bases giving rise to the defendant's claim for set off or abatement relate to allegations of defective workmanship, consequent delay and to allegations of misrepresentation on the part of the plaintiffs of the cost of completion of the pipeline in reliance upon which the defendant entered into the deed of variation.
           The contractual provisions as to certification and payment is to be found in cl.42 of the G.C. 42.8 of which was added by the special conditions of contract.
           General condition 42 relevantly provides:-

"42.     CERTIFICATES AND PAYMENTS

42.1    Progress Certification and Progress Payments

Unless otherwise provided in the contract, the contractor shall submit to the superintendent a detailed statement, in a form satisfactory to the superintendent, every month showing the contract value of the work carried out in performance of the contract and incorporated in the works.  Within twenty-one days after the receipt by the superintendent of such a statement or, if the contractor fails to submit any such statement, at such time as the superintendent thinks fit, the superintendent shall determine the value of the work so carried out and incorporated and issue a progress certificate.

Payment of moneys due under a progress certificate shall be made by the principal within fourteen days after the issue of that progress certificate.  The amount of the progress payment will be the total gross value shown in the progress certificate less—

(a)any retention moneys as provided in the Annexure hereto; and

(b)any progress payments already made in respect of work covered by that progress certificate; and

(c)any other amount that the principal may be entitled to deduct from the moneys due under that progress certificate.

The payment of moneys under a progress certificate shall not be taken as evidence against or as an admission by the principal that any work or item of work specified in any progress certificate has been constructed or executed or of the value thereof or of any work having been constructed or executed in accordance with the contract, but shall be taken to be payment on account only.

.   .   .   .   .   .   .   .   .

42.5Effect of Certificate   

The issue of a progress certificate or a certificate of practical completion issued pursuant to this clause shall not constitute approval of any work or other matter in respect of which it is issued nor shall it be taken as an admission of the due performance of the contract or any part thereof or of the accuracy of any claim or demand made by the contractor or of additional or varied work having been ordered by the superintendent, nor shall any such certificate negate or prejudice any of the rights, powers and remedies of the principal or the superintendent.

The issue of the final certificate issued pursuant to sub-clause 42.7 shall constitute conclusive evidence that all work under the contract has been finally and satisfactorily executed by the contractor except in so far as it is proved in any proceedings in a court of competent jurisdiction or in an arbitration under the provisions of clause 45 that the said final certificate is, in any particular, erroneous by reason of—

(a)fraud, dishonesty or deliberate concealment, on the part of the contractor or any of his sub-contractors or of any of the employees or agents of the contractor or of any of his sub-contractors, relating to the works or any part thereof or to any matter dealt with in the said final certificate; or

(b)any defect, including any omission, in the works or any part thereof which reasonable inspection at that time of the issue of the said final certificate would not have disclosed; or

(c)any accidental or erroneous inclusion or exclusion of any work, materials, goods or figure in any computation, or any arithmetical error in any computation

.   .   .   .   .   .   .   .   .

42.8Principal's Rights to Withhold Progress Payments

Not withstanding other provisions of Clause 42 the Principal reserves the right to withhold some or all of any progress payment due to the Contractor in the event that the Contractor has failed, or is failing, to perform any of his obligations under the Contract.  The amount to be withheld shall be an amount determined by the Superintendent which is sufficient to cover any costs which could be incurred by the Principal as a result of he Contractor's aforementioned failure.

Any monies so withheld shall be released to the Contractor within thirty (30) days of the Contractor correcting the failure which caused the monies to be withheld".

It seems to me that before the deed of variation came into effect cl.42.1 operated so that a progress certificate was a warranty for payment less reductions authorised by sub-cl.(c) notably the right to withhold provided for by cl.42.8.
           There are other provisions of the contract bearing on the defendants entitlement to deduct or withhold money.  Thus G.C. 46 provides:-

"46.     RIGHT OF PRINCIPAL TO RECOVER MONEYS

Without limiting the Principal's rights under any other provision in the Contract, any debt due from the Contractor to the Principal under or by virtue of any provision of the Contract may be deducted by the Principal from any moneys which may be or thereafter become payable to the Contractor by the Principal, including any retention moneys then held by the Principal, and, if such moneys are insufficient for this purpose, then from the Contractor's security under the Contract.  Nothing in this clause shall affect the right of the Principal to recover from the Contractor the whole of the debt or any balance that remains owing after deduction."

General Condition 45 deals with the withholding of money when disputes are the subject of arbitration:

"Moneys that are or become due and payable by the Principal in respect of work carried out under the Contract shall not be withheld because of arbitration proceedings but the Principal may, at his discretion, and pending the award of the arbitrator withhold payment of moneys in respect of any matter that is the subject of arbitration proceedings."

These and other provisions of the contract do not seem to be direct application.
           The provisions of the deed of variation which are directly relevant are cll.3.3, 4 & 8.  These relevantly provide:-

3.3 The Works for the purpose of this Deed and the Contract do not include rectification of the defective joints in the Completed Works.

4.THE PRINCIPAL SHALL NOT SET OFF OR COUNTERCLAIM

4.1Notwithstanding clause 8.2 herein, the principal shall not set off or counterclaim against monies due to the contractor pursuant to the contract (as amended by this deed) any sum on account of any alleged claim which the principal may otherwise have arising out of or in any way connected with the failure of the interference joints.  Nothing in this clause affects the principal's right to make such a claim otherwise than by set off or by counterclaim."

8.EXISTING CLAIMS AND RIGHTS

8.1The contractor hereby withdraws and abandons the existing claims any other claims (other than a claim for the contract sum) which it may have for events occurring prior to the date hereof.

8.2Nothing in this deed abrogates, modifies or affects any right, cause of action or claim which the principal may now or hereafter have to or against the contractor arising out of:-

(a)the contract as amended by this deed; and/or

(b)the circumstances surrounding the entry into the contract; and/or

(c)the performance of the works, including:

(i)any and all defects in the works (including the completed works) including the failure of the interference joints;

(ii)any representation made by the contractor in relation to the new method as an alterative method of construction;

(iii)any acceptance by the superintendent and the principal of any proposal by the contractor in relation to the use of the new method as an alternative method of construction;

(iv)any and all defaults and delays by the contractor in the performance of its obligations pursuant to the contract; or

(d)the additional costs of constructing the pipeline and consequential losses caused or incurred as a result of the failure of the joints and/or the entry by the parties into this deed."

Clause 6.3 of the deed varies what I will call the machinery provision of cl.42.1 to reflect the varied arrangements and concludes that "in all other respects, cl.42 of the contract will continue with full force and effect".
           The deed of variation preserves the defendants rights against the plaintiffs arising out of the contract, defects, delays and additional costs as a result of entry into the deed.(cl.8).  The right of set-off in G.C. 42.8 is expressly preserved by cl.6.3 of the deed, which after referring to cl.42.1, continues cl.42 "with full force and effect".  Clause 4.1 which provided one specific exception to the right, namely- "any sum on account of any alleged claim ...arising out of or in any way connected with the failure of the interference joints" seems to support this.
The progress certificates giving rise to this application are progress certificates in respect of work performed on the cost plus basis provided for by the deed of variation.
           I have mentioned the broad nature of the defendants claims, that the basis of the claims had, relevantly been sworn to and the plaintiff's concession for the purposes of the application.
           What I earlier referred to as the defective workmanship claims relate to "uncontrolled plastic defamation" with the result that the pipeline failed to attain the specified degree of straightness.  On 15 June 1995 the contract construction superintendents purported to determine pursuant to cl.42.8 the cost of the supply and installation and replacement pipe "physically deformed by the contractor and other costs".  All else aside "the failure" has not been corrected in terms of cl.42.8 (last sentence).
           The other component of the defective workmanship aspect of the defendant's claim relates to the allegation of damage to the plastic coating of the pipeline and like the deformation aspect relates to the pipe laid before 17 September 1994.
           General Condition 42.8 is widely expressed to authorise the withholding of money for the plaintiffs breach of its contractual obligations.  The items of plastic deformation, the determination of 15 June 1995, coating damage and delay are, on the material arguably within it.  It seems to me arguable that the effect of the deed of variation is that the defendant's right of set off is preserved subject to the specific exception of "any sum on account of any alleged claim . . . arising out of or in any way connected with the failure of the interface joints".  There is, having regard to the material, at least a triable issue that the claims for coating damage delay, and (perhaps less strongly deformation) do not arise out of, and have no connection with the failure of the interference joints.  On this basis G.C. 42.8 entitles the defendant to set the consequent amounts against the certified amounts.
           It will be recalled that the defendant alleges that it was induced to enter into the deed of variation by misrepresentation of the plaintiffs as to the future costs of the work pursuant to the deed.  The defendant's claim for the loss suffered as a result of that contravention of the Trade Practices Act 1974 (Commonwealth) or alternatively for relief under s.87 of the Act which could have the effect of extinguishing the defendants obligations under the certificates sued on.
           The defendant also relies on the principal that when a person for whom work is done is sued by the contractor for the contract price, the claim may be met by showing how much less the subject matter of the action is worth not by way of set off but by a way of abatement.  The principal is authoritively stated in Mondel v. Steel (1841) 8 M. and W. 858 (151 E.R. 1288) and is commonly referred to as the rule in Mondel v. Steel;  see also Gilbert-Ash (Northern) Ltd v. Modern Engineering (Bristol) Ltd 1974 A.C. 689 particularly per Lord Diploch at 717. It is of course open to the parties to exclude such a remedy by express agreement but this must be done by clear and express words; Thiess Watkins White Construction Limited (Receivers and Managers Appointed) v. Burmann & Ors. (unreported) Williams J. 11 July 1991 no. 1804/90).  There is arguably no such provision excluding the operation of the rules in this case. 
           The considerations being as I have canvassed it is, in my view, sufficiently arguable that the defendant is entitled to set off amounts overtopping the plaintiff's claims (or to abate them) to have the consequence that summary judgment should be refused.