Quasar (Constructions) Commercial Pty Limited v Trilla Group Pty Limited

[2017] NSWSC 860

Supreme Court

New South Wales

Medium Neutral Citation:	Quasar (Constructions) Commercial Pty Limited v Trilla Group Pty Limited [2017] NSWSC 860
Hearing dates:	22/06/2017
Date of orders:	22 June 2017
Decision date:	22 June 2017
Jurisdiction:	Equity - Technology and Construction List
Before:	McDougall J
Decision:	Summons to be dismissed. Money in court to be paid out to first defendant. Parties to bring in draft orders.
Cases Cited:	Chase Oyster Bar Pty Limited v Hamo Industries Pty Limited (2010) 78 NSWLR 393 Facade Treatment Engineering Pty Limited (In Liq) v Brookfield Multiplex Construction Pty Limited (2016) 337 ALR 452 Mackay v Dick (1881) 6 App Cas 251 Martinek Holdings Pty Limited v Reed Construction (Qld) Pty Limited [2009] QCA 329 Musico v Davenport [2003] NSWSC 977 R J Neller Building Pty Limited v Ainsworth [2009] 1 Qd R 390 Turner Corporation Limited v Coordinated Industries Pty Limited (1994) 11 BCL 202 Veolia Water Solutions & Technologies v Kruger Engineering (No 3) [2007] NSWSC 459
Category:	Principal judgment
Parties:	Quasar (Constructions) Commercial Pty Ltd (Plaintiff) Trilla Group Pty Ltd t/as Australian Plumbing Solutions (First Defendant) Philip Martin (Second Defendant)
Representation:	Counsel: D M Macfarlane (Plaintiff) M Christie SC / D Hume (First Defendant)   Solicitors: Vincent Young Lawyers (Plaintiff) CCS Legal Pty Ltd (First Defendant)
File Number(s):	2017/94971

Judgment   (ex tempore – revised 22 june 2017)

1. HIS HONOUR:   The plaintiff (Quasar) as head contractor and the first defendant (Trilla) as sub-contractor were parties to a construction contract whereby Trilla was to undertake hydraulic work for Quasar for a development at Forest Lodge.

The dispute

2. In the usual way, the parties fell into dispute. Trilla served a payment claim upon Quasar on 31 January 2017 claiming, in round figures, $861,000 excluding GST. Quasar responded by a payment schedule stating that, by reason of the setting off of substantial liquidated damages, the scheduled amount was nil.

3. The dispute was referred to adjudication and the second defendant (the adjudicator) undertook that task. He determined that Trilla was entitled to receive an adjudicated amount, again in round figures, of $462,000 including GST.

4. Quasar has commenced proceedings to recover of the order of $2.5 million by way of liquidated damages, together with a relatively small sum for damages for breach of the contract. Those proceedings have only just started in this Court, and it is unlikely that will be heard in the near or even in the medium term.

The issues in this court

5. In these proceedings, Quasar claims, alternatively:

1. a declaration that the adjudicator's determination is void, and consequential relief restraining Trilla from enforcing it; or

2. in the event that the primary case fails, an order restraining Trilla from enforcing the determination until such time as Quasar's claim can be heard and determined.

Issues in the adjudication

6. The claim that the determination is void is based upon an asserted denial of natural justice. It focuses on a passage in the adjudicator's reasons where he dealt with Quasar's claimed offset for liquidated damages. I assume that this issue was ventilated in the payment schedule. It was certainly ventilated in the submissions that Trilla provided to the adjudicator as part of its adjudication application, and the submissions that Quasar provided to the adjudicator as part of its adjudication response.

7. In substance, Quasar submitted to the adjudicator that the date of practical completion was delayed by some 192 days from the date for practical completion, in circumstances where the date for practical completion (Quasar said) had not been extended. At the rate of $13,000 per day for liquidated damages, that led to the claim of the order of $2.5 million to which I have referred.

8. In its submissions in support of the adjudication application, Trilla dealt with this issue. As Mr Christie of Senior Counsel, who appeared with Mr Hume of Counsel for Trilla, submitted, Trilla had to do so because it went first, without knowing (in detail) what it was that Quasar might say on the topic.

9. Trilla pointed to what it said was evidence that Quasar had been well behind the contemplated construction program and that because Trilla’s works were a "follow on" trade, those works were necessarily delayed in consequence. It referred to evidence of its complaints to Quasar in this regard, to promises by Quasar to provide a revised construction program, and to the asserted breach of those promises.

10. Trilla made the point that it had retained a programmer to assist it, but that by reason of what Trilla said were the lamentable deficiencies in the information available to it from Quasar, that programmer could not carry out his task.

11. After referring to many more matters of fact, some at least of which may have been in evidence before the adjudicator, (and I should express my extreme gratitude to the parties for not putting before the Court all of the material that was before the adjudicator), Trilla submitted that time was at large, because of Quasar's acts of prevention. Those asserted acts of prevention included, apart from the matters to which I have referred, the asserted failure to appoint a superintendent who would manage the works in an appropriate fashion.

12. On the issue of liquidated damages, Quasar responded by denying some of the matters of fact to which Trilla had referred. However, the principal argument advanced by Quasar was that the prevention principle had no application because the contract specifically made provision for extension of time. It relied on the judgment of Rolfe J in Turner Corporation Limited v Coordinated Industries Pty Limited [1] . His Honour there held, in substance, that usually at least, the prevention principle would only apply where the contract did not itself provide for the consequences of the acts that were said to be breaches and acts of prevention.

    1. (1994) 11 BCL 202 at 212, 217

13. Quasar's submissions then turned to cl 34.3 of the contract. That clause provided that, with an irrelevant exception, Trilla would be entitled to extensions of time if four conditions were satisfied. Summarising those conditions briefly, one was that it would be delayed (or had been delayed) by a "qualifying cause of delay" to which it had not contributed itself. The next was that it give written notice within three days of becoming aware of the causal event. The third was that "the delay claimed affects the critical path of the progress of the WUC". The fourth was that Trilla should have taken all reasonable steps to mitigate the effects of the delay.

14. Quasar's submissions canvassed that clause and its application. They pointed out that no claim for an extension of time (EOT) had been made by Trilla. I should note that Trilla disputes this, saying it did on at least one occasion claim an EOT. That is not a dispute that either the adjudicator or this Court (in this matter) could resolve.

15. Quasar also disputed that it had any obligation to provide a construction program (coherent or otherwise) to Trilla. It reiterated its submission that the prevention principle had no relevance, and said that whatever the superintendent did or did not do had nothing to do with the case.

The adjudicator’s reasons

16. The adjudicator dealt with the issue over two pages of his reasons. He referred to a review of the status program that Trilla had given him which, apparently, showed that none of the tasks listed could be completed by a date to which he referred. He noted that there was no updated program showing the impact, on completion of Trilla’s works, of the delay in completion of those tasks.

17. The adjudicator then referred to cl 32.2(a) of the contract. That clause says, in substance, that Trilla cannot depart from an approved construction program. There was no evidence that there was any relevant approved construction program (that is to say, one which had any relationship to reality) with which Trilla could comply, but nothing seems to turn on this.

18. The adjudicator then said that although there was no requirement for Quasar to provide an updated program, the lack of an updated program would have an impact on the planning of construction work (I think he meant, on the work to be undertaken by Trilla under its contract with Quasar). He referred to clause 5(a) of the contract, which in effect stated in express terms what otherwise would be the Mackay v Dick [2] implied obligation: the parties agreed to do everything reasonably necessary to give effect to the contract. He said that by failing to supply an updated program, Quasar had not met its contractual responsibilities. Neither party had adverted to clause 5(a) in its submissions or elsewhere.

    2. (1881) 6 App Cas 251

19. The adjudicator then turned his attention to the real dispute, which was the impact of the prevention principle on Trilla's claimed entitlements to EOTs in circumstances where the contract made express provisions for EOTs in cl 34.3. He noted the requirements of sub-para (iii), that the delay claimed must affect the critical path of the progress of the WUC. He then said that although there was no requirement for Quasar to provide a construction program, where it had not done so (or had not updated the program initially provided), Trilla could not comply with the requirements of that sub-paragraph because it simply could not know whether the delay had had any impact on the critical path of its works.

20. Accordingly, the adjudicator concluded, the prevention principle was no answer to Trilla's answer to the claim for liquidated damages. Since it was the claim for liquidated damages that was the principal offset, that removed a substantial obstacle to Trilla's success.

21. Trilla had submitted to the adjudicator, in the alternative, that if it were wrong as to the application of the prevention principle, nonetheless he should conclude, in the alternative, that he was unable to determine the quantum of any liquidated damages. The adjudicator referred to that alternative submission, but expressed no view as to whether or not he was satisfied that it had been made good.

22. In the end (on this aspect of the dispute) the adjudicator decided that Quasar could not set off liquidated damages, because Trilla was unable to request an EOT in accordance with the provisions of the contract. That was so, he said, because Trilla could not assess if a qualifying cause of delay would have any impact on the critical path, because the critical path had not been defined in an updated construction program.

The submissions in this court

23. Mr Macfarlane of Counsel, who appeared for Quasar, submitted that by deciding the question in this fashion, the Adjudicator had decided it on a basis for which neither party contended. In those circumstances, he submitted, there was a material or substantial denial of natural justice. He referred to authorities on the point, but the principle is so well known that I see no need to refer to or quote from them. Mr Christie did not dispute the basic principle. The dispute was, rather, as to whether there had been any material or substantial denial of natural justice.

Decision – natural justice

24. In my view, there was no substantial or material denial of natural justice. It was Quasar itself that put cl 34.3 into issue, as an answer to Trilla's claim insofar as that claim relied on the prevention principle. Trilla had no ability to respond to Quasar's submissions on that point. It was up to the Adjudicator to wrestle with the issue as best he could.

25. The factual material that the adjudicator took into account, including the absence of a current construction program and the consequences of that, were in the evidence before him. Quasar was in a position to answer those factual matters, and to the extent that it wished to do so, it did.

26. The legal issue that Quasar presented was whether cl 34.3 imposed an insuperable obstacle to Trilla's defence (an inaccurate but sufficient term for present purposes) of Quasar's response to the adjudication application based on its claimed entitlement to set off liquidated damages. Neither party could anticipate in any real detail the way in which that argument might work out. But it was an argument that had been put before the adjudicator, and it was an argument that he dealt with, as best he could in the very tight timeframe allowed by the Building and Construction Industry Security of Payment Act 1999 (NSW).

27. I have no doubt that if the adjudicator had notified the parties of the matter, and requested further submissions, he would have been bombarded with even more paper. It may be that, after that bombardment, he might have come to a different view. It may be that he might have retained or adhered to the tentative view that, presumably, might have led him to request further submissions. But regardless, at the most, they would have been further submissions as to an issue already raised with the parties, and to an extent covered by their submissions. It is entirely different to a case such as Musico v Davenport [3] where an adjudicator resolves the dispute on a basis which has not been hinted at in any of the documents put before him or her.

    3. [2003] NSWC 977

28. In my view, the issue having been raised, it was incumbent upon the adjudicator to deal with it as best he could on the material provided. That, I think, is precisely what he did. He may have been right or wrong in his interpretation of the contract. But if he were, that would be an error within jurisdiction, and nothing more.

The stay application

The principles

29. I turn to the application for a stay. There is a recognised jurisdiction to stay enforcement of adjudication determinations in circumstances where the claimant is insolvent and where there is a cross-claim. Although it is by no means a current decision, I dealt with the origins of that jurisdiction in Veolia Water Solutions & Technologies v Kruger Engineering (No 3) [4] . I should say that the state of the jurisprudence, and the understanding of the basis on which the Court intervenes, has progressed since those days. The only point of referring to that decision is to show, as I have said, that the jurisdiction is well recognised.

    4. [2007] NSWSC 459.

30. One thing that has happened since the decision in Veolia is that in this State and in States with equivalent legislation, the courts have recognised that one of the necessary side effects (if I may call them that) of the Act is to alter, in a fundamental way, the risk of insolvency between the time when an adjudication determination is enforced and the time when any proceedings for final relief are sorted out in a court or in an arbitration.

31. Keane JA has referred to that at least twice. First, in Martinek Holdings Pty Limited v Reed Construction (Qld) Pty Limited [5] , his Honour (with whom the Chief Justice and Holmes JA agreed) said at [19] that the risk that a builder might not be able to refund moneys ultimately found to be due was a risk which, as a matter of policy, the Queensland equivalent of the Act had assigned to the owner. His Honour reiterated that view in R J Neller Building Pty Limited v Ainsworth [6] . It was applied in the Court of Appeal in this State in Chase Oyster Bar Pty Limited v Hamo Industries Pty Limited. [7]

    5. [2009] QCA 329.

    6. [2009] 1 Qd R 390 at [40].

    7. (2010) 78 NSWLR 393 at [52] [53] and [207].

32. Finally (for present purposes) the matter was considered by the Court of Appeal in Victoria in Facade Treatment Engineering Pty Limited (In Liq) v Brookfield Multiplex Construction Pty Limited [8] . In a joint judgment, the Court (the Chief Justice, Tate and McLeish JJA) referred at [86] to what Keane JA had said in Neller. Those observations, their Honours said, "were concerned with the situation where the builder may be teetering on the edge [of insolvency], but has not yet fallen over." Their Honours said that as a matter of policy, permitting the builder to recover, so that it could be rescued from possible insolvency and allowed to continue to trade, was justifiable having regard to the fundamental policy underlying the Victorian equivalent of the Act. However, their Honours said, that rationale could not apply once the winding up process had commenced.

    8. (2016) 337 ALR 452.

33. Although it may not be true as a statement of absolute application, it is undoubtedly correct to note that most of the cases where a stay has been granted are cases where the claimant before the adjudicator has been insolvent, or is undergoing some form of administration in insolvency, and no longer trading. In those cases, as the Court said in Facade Treatment Engineering, the rationale for allowing the statutory shift of the risk of insolvency to continue is no longer applicable.

The evidence

34. The evidence in the present case is to the effect that Trilla has been trading for about ten years, and that its principal, Mr John Mifsud, had been operating the same business as a sole trader for the previous ten years. Trilla's activities have not been spectacularly profitable, but have afforded a living to Mr Mifsud and his family, and have afforded employment to a number of employees or subcontractors. Mr Mifsud has pointed to difficulties, including laying off employees, caused by the disruption to Trilla's cash flow resulting from the withholding of the adjudicated amount.

35. Trilla's financial result for the last four complete years shows that it has operated at a small but reasonably consistent loss. The loss might not be large, in the context of the total cash flows; but it is, nonetheless, a loss.

36. Unaudited accounts to 30 April 2017 show that Trilla had a deficiency in net assets of about $22,000. It is self-evident that if the adjudicated amount were paid to Trilla, its net asset position would improve substantially.

37. There must be some doubt as to the reliability of the 30 April accounts, because they appear to understate the amount of loans from directors and related entities. Mr Mifsud said, and I accept, that if the adjudicated amount is paid to Trilla, he would cause it to repay loans from his brother, Mr Fabio Mifsud, but would retain the balance of the money in the company as working capital. Nonetheless, it is the impact on the veracity of the accounts rather than the precise dollar amount that might remain that is a matter of some concern.

38. I note that Quasar has relied on no less than three reports prepared by an independent expert accountant, Mr Giliberti. Despite the fact that Mr Giliberti apparently had available to him, before he prepared his latest report (dated yesterday), what now appears to be the true figure as to related party loans, he did not comment on that in his latest report, including as to its impact (if any) on his conclusions as to the financial position of Trilla. Thus, in a sense, the Court is being left to fashion its own conclusions when the expert who was called and who could have assisted did not do so.

39. I do not mean to be critical of Mr Giliberti in saying that. He was given a mass of information comprising two lever arch folders and asked to digest and report upon it in a very short time. It is entirely possible that one page buried in the middle of that information might have escaped his attention, and it would not be any criticism of him if that were in fact the case.

Decision

40. What stands out is that the present financial position of Trilla would be reversed if it were paid the adjudicated amount. It would not be teetering on the edge of insolvency. Even if the full impact of the suggested true figure for related party loans were taken into account, Trilla would still be comfortably, although not to a substantial degree, solvent.

41. Mr Mifsud has given evidence that the company is still trading and has bid for and won four substantial subcontracts. Presumably, it did so on the basis that it expected those subcontracts to be profitable.

40. I accept that the amount of Quasar's cross-claim (and I know that calling it a cross-claim is incorrect because it is a plaintiff in its own right), is very substantial. Even if it should be held that, apart from the cross-claim, Trilla were entitled to the full amount of $861,000 claimed by it, the resulting debt in favour of Quasar, assuming it proved its entire claim for liquidated damages, would be of the order of $1.6 million. It does not seem to me that there is any real prospect that Trilla could repay that if called upon to do so.

41. However, to reason in that way is to ignore the policy of the Act, and the relevant aspects of its operation in relation to solvent trading companies, that have been referred to in the intermediate appellate court decisions that I have summarised above. The mere fact that an amount might not be repaid does not justify withholding it until the entitlement to that amount can be determined on a final basis.

42. I conclude that the claim for a stay fails.

Conclusion

45. It follows that the summons filed on 29 March 2017 should be dismissed, and that the money paid into court by Quasar, as the price of obtaining an interlocutory stay, should be paid out to Trilla.

46. The question as to costs is a little complicated. Quasar having failed, costs should follow the event. However, it is necessary to note that this matter was set down for hearing last week, and was adjourned because Trilla was not ready to proceed.

47. I am not satisfied that it was anything other than Trilla's own default in preparing its case that necessitated the adjournment. Putting the matter more positively, I am satisfied that had Trilla made even a halfway decent attempt to comply with its obligations under the Court’s orders, the matter could have proceeded last week. Accordingly, I think, Trilla should pay Quasar's costs of and thrown away by reason of the adjournment of the hearing on Thursday last, 15 June 2016.

48. Costs should be set off.

49. I have dealt with the matters in issue. The appropriate course is to direct the parties to bring in orders to give effect to my reasons.

50. I direct the parties to bring in short minutes of order by 5pm tomorrow.

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Endnotes

Decision last updated: 28 June 2017