Vcon v Oliver Hume
[2020] VSC 767
•18 November 2020
| IN THE SUPREME COURT OF VICTORIA | Not Restricted |
AT MELBOURNE
COMMERCIAL COURT
TECHNOLOGY, ENGINEERING AND CONSTRUCTION LIST
S ECI 2020 02381
| VCON PTY LTD (ACN 054 559 429) | Plaintiff |
| v | |
| OLIVER HUME PROPERTY FUNDS (ROYAL PARADE) PARKVILLE PTY LTD (ACN 168 808 857) | First Defendant |
| and | |
| JOHN O’BRIEN (in his capacity as adjudicator appointed under s 20(1) of the Building and Construction Industry Security of Payment Act 2002 (Vic)) | Second Defendant |
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JUDGE: | Stynes J |
WHERE HELD: | Melbourne |
DATE OF HEARING: | 13 October 2020 |
DATE OF JUDGMENT: | 18 November 2020 |
CASE MAY BE CITED AS: | VCON v Oliver Hume & Anor |
MEDIUM NEUTRAL CITATION: | [2020] VSC 767 |
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BUILDING CONTRACTS — Trial — Building and Construction Industry Security of Payment Act 2002 (Vic) — Adjudication conducted under Part 3 Division 2 of the Act — Whether properly characterised, the payment claim is for contractual entitlements or is an attempt to recoup liquidated damages — Whether First Adjudication Determination created an issue estoppel that precluded the first defendant from relying on the earlier deductions of liquidated damages — Whether drawing down of two bank guarantees reduced the amount of the progress payment to which the plaintiff was entitled — Whether the first defendant’s contractual entitlement to enforce the bank guarantees operated to exclude, modify or restrict the operation of the Act in a manner prohibited by s 48 of the Act — Whether the claim is for an excluded amount — Building and Construction Industry Security of Payment Act 2002 (Vic) ss 10, 10B, 14(3), 15(2), 21, 23, 47 and 48 — Seabay Properties Pty Ltd v Galvin Constructions Pty Ltd [2011] VSC 183, applied — Shape Australia Pty Ltd v Nuance Group (Aust) Pty Ltd [2018] VSC 808, applied — Dualcorp Pty Ltd v Remo Constructions Pty Ltd (2009) 74 NSWLR 190, applied — Blair & Perpetual Trustee Co Ltd v Curran (1939) 62 CLR 464, applied — Fabtech v Laing O’Rourke Australia Construction Pty Ltd [2015] FCA 1371, applied.
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APPEARANCES: | Counsel | Solicitors |
| For the Plaintiff | Mr M Roberts QC Ms C Symons | Moray & Agnew Lawyers |
| For the First Defendant | Mr M Robins QC | Mills Oakley Lawyers |
HER HONOUR:
INTRODUCTION
In August 2017, the plaintiff as contractor and the first defendant as principal, entered into a contract for the construction of four blocks of townhouses located at 535–541 Royal Parade, Parkville (the Contract).[1]
[1]Exhibit (AG-1) to Affidavit of A Georgalis sworn 29 May 2020 at 94–207 (Tab 1) of the Court Book.
On 10 January 2020, the first defendant made a demand on two bank guarantees that had been provided by the plaintiff under the Contract on account of an asserted entitlement to liquidated damages.[2]
[2]Exhibit to Affidavit of A Tuck sworn 27 July 2019 at 804–5 (Tab 8) of the Court Book.
On 6 February 2020, the plaintiff issued Payment Claim 26 under the Contract which included a claim for $889,407, over and above its claim for the value of works completed, expressed to be ‘an amount for which the Principal has unlawfully, having regard to s 10B of the Building and Construction Industry Security of Payment Act 2002 (Vic) (the SOP Act), had recourse to the contractor’s security on account of liquidated damages’ (the LD Claim).[3]
[3]Exhibit (AG-1) to Affidavit of A Georgalis sworn 29 May 2020 at 505–12 (Tab 13) of the Court Book.
Payment Claim 26 was the subject of an adjudication determination made by the second defendant (the Second Adjudicator) on 31 March 2020 (the Second Adjudication Determination).[4] He determined that the LD Claim was a claim for an excluded amount which the SOP Act prohibited him from taking into account.
[4]Exhibit (AG-7) to Affidavit of A Georgalis sworn 29 May 2020 at 601–31 of the Court Book.
In summary, the plaintiff says the Second Adjudicator erred for the following reasons:
(a) the effect of the drawdown against the bank guarantees in the accounting period of Payment Claim 26 (the PC-26 Accounting Period) was to reduce the payment made to the plaintiff in that period on the basis of liquidated damages;
(b) such a deduction must not be taken into account in calculating the amount of a progress payment under s 10B of the SOP Act;
(c) in reaching his determination that the LD Claim was an excluded amount, the Second Adjudicator in effect and erroneously allowed that deduction in favour of the first defendant; and
(d) in those circumstances, the Second Adjudicator mischaracterised the LD Claim, which when properly characterised was actually a claim for contractual entitlements.[5]
[5]Transcript at T31.10–T32.2.
The plaintiff seeks relief in the nature of certiorari to quash the Second Adjudication Determination and an order remitting the plaintiff’s adjudication application to the Second Adjudicator to be determined in accordance with law.[6]
[6]Originating Motion dated 29 May 2020 at 7 [1]–[2] of the Court Book.
The success of the plaintiff’s claim depends on it establishing that the first defendant deducted liquidated damages in the PC-26 Accounting Period. The plaintiff relies on the principles of issue estoppel arising from an earlier adjudication to make good this proposition. However, the plaintiff conceded that if liquidated damages were deducted in earlier accounting periods then the LD Claim would be a claim for an excluded amount.
For the reasons that follow, the Originating Motion dated 29 May 2020 (Originating Motion) will be dismissed. In summary:
(a) the issue estoppel created by the earlier adjudication did not preclude the first defendant from relying on the earlier deductions of liquidated damages;
(b) in any event, the enforcement of the bank guarantees was not a deduction that reduced the amount of the progress payment to which the plaintiff was entitled under Payment Claim 26. Nor did the first defendant’s contractual entitlement to enforce the bank guarantees otherwise operate to exclude, modify or restrict the operation of the SOP Act in a manner prohibited by s 48 of the SOP Act;
(c) properly characterised, the LD Claim was a claim for an excluded amount; and
(d) in those circumstances the Second Adjudicator did not err.
BACKGROUND AND EVIDENCE
The plaintiff relies on the affidavits of:
(a) Ms Georgalis sworn on 29 May 2020; and
(b) Mr Morton sworn on 12 August 2020.
The first defendant relies on the affidavits of:
(a) Mr Duster sworn 27 July 2020; and
(b) Mr Tuck sworn 27 July 2020.
Payment Claims 23 and 24 — the first defendant deducted liquidated damages
The first defendant asserts that the adjusted dates for practical completion under the Contract were:[7]
[7]Affidavit of A Duster sworn 27 July 2020 at 818 [21] of the Court Book.
(a) Separable Portions 1 and 2 — 5 June 2019; and
(b) Separable Portion Display Suite — 8 October 2018.
These dates are disputed by the plaintiff.[8]
[8]Affidavit of A Morton sworn 12 August 2020 at 633 [5] of the Court Book.
On 12 July 2019, the Superintendent issued Payment Schedule 23 in respect of Payment Claim 23.[9] A corrected schedule was issued by the Superintendent on 15 July 2019 and again on 24 July 2019. By Payment Schedule 23 the Superintendent certified a payment of $368,975.49 in favour of the plaintiff. It included a deduction for liquidated damages in the sum of $449,480.91.[10]
[9]Exhibit (AMM-6) to Affidavit of A Morton sworn 12 August 2020 at 699–701 of the Court Book.
[10]Exhibit (AMM-10) to Affidavit of A Morton sworn 12 August 2020 at 733–5 of the Court Book.
The plaintiff disputes the defendant’s entitlement to liquidated damages but did not apply for an adjudication of Payment Claim 23 under the SOP Act.
On 15 August 2019, the Superintendent issued Payment Schedule 24 in respect of Payment Claim 24, certifying a payment of $202,778.72 in favour of the first defendant.[11] Payment Schedule 24 included the following deductions for liquidated damages:
(a) for liquidated damages previously applied, $449,480.91; and
(b) a further deduction of $359,070.91.
[11]Exhibit to Affidavit of A Duster sworn 27 July 2020 at 839–41 (Tab 6) of the Court Book.
Again, the plaintiff did not apply for adjudication of Payment Claim 24 under the SOP Act.
On 16 August 2019, a certificate of practical completion was issued by the Superintendent.[12]
Payment Claim 25 and the First Adjudication Determination — relied on by the plaintiff in relation to the creation of an issue estoppel
[12]Exhibit (AG-1) to Affidavit of A Georgalis sworn 29 May 2020 at 211 (Tab 3) of the Court Book.
On 13 November 2019, the plaintiff served Payment Claim 25 in the sum of $1,542,265.73 (excluding GST).[13]
[13]Ibid 231 (Tab 5).
On 26 November 2019, the Superintendent issued Payment Schedule 25 in respect of Payment Claim 25, certifying a payment of $114,419.43 (excluding GST) in favour of the first defendant. Unlike Payment Schedules 23 and 24, this schedule did not seek to account for any of the liquidated damages that had been certified by the Superintendent in earlier payment periods. This fact is critical to the plaintiff’s submissions and is not disputed.
On 10 December 2019, the plaintiff made an application under the SOP Act for adjudication of Payment Claim 25. Mr Tonkin (the First Adjudicator) was appointed to determine the adjudication.
On 18 December 2019, the first defendant lodged an adjudication response under s 21(1) of the SOP Act. The adjudication response did not make any mention of a deduction on account of liquidated damages.
On 8 January 2020, the First Adjudicator made a determination under s 23(1) of the SOP Act that the amount of the progress payment to be paid by the first defendant to the plaintiff was $869.190.94 (including GST) (the First Adjudication Determination). No allowance was made on account of liquidated damages.
The first defendant enforces the bank guarantees
On 12 January 2020, the plaintiff was notified by its financier that the first defendant had made a demand upon each of the two bank guarantees provided by the plaintiff to the first defendant under the Contract (the BankGuarantees ) being:
(a) Bank Guarantee GOP27464033418 in the amount of $543,883.00; and
(b) Bank Guarantee GOP27464183418 in the amount of $543,883.00.
On 16 January 2020, the first defendant wrote to the plaintiff stating, amongst other things), that the plaintiff was indebted to the first defendant for liquidated damages under the Contract in the sum of $889,407.00, and by reason of this indebtedness, the first defendant had elected to convert the security under the Contract.
Payment Claim 26
On 6 February 2020, the plaintiff served Payment Claim 26 for the sum of
$1,597,439.10 (excluding GST) comprising:
(a) Value of contract completed to date (ex GST) $26,058,751.05
(b) Less previous payments (ex GST) $25,350,718.95
(c) Plus an amount for which the Principal has unlawfully having regard to section 10B of the SOP Act, had recourse to the contractor’s security on account of liquidated damages (emphasis added) $889,407.00
(d) Grand total $1,597,439.10
(e) Plus GST $159,743.91
(f) Amount applied for $1,757,183.01
The sum of $26,058,751.05 comprised a contract amount of $24,650,802 plus a sum for variations of $1,410,874.05. The claim for the sum of $889,407, that is the LD Claim, was expressed to be in addition to the claim for the value of work completed.
On 19 February 2020, the first defendant served Payment Schedule 26 on the plaintiff which certified an amount payable by the plaintiff to the first defendant of $384 (excluding GST) calculated as follows:
(a) Value of Works Claimed this month by the Contractor $24,647,877
(b) Value of Variations Claimed this month by the Contractor $1,410,874
(c) Value of Liquidated Damages this month claimed by the Contractor $889,407
(d) Progress Claim adjustments assessed by the Superintendent -$1,597,824
(e) Sub Total $25,350,334
(f) Adjusted Value of Works completed to date $25,350,334
(g) Plus other monies dues by the Principal to the Contractor $0
(h) Less Retention $0
(i) Sub Total $25,350,334
(j) Less payments previously certified $25,350,718
(k) Amount Certified as due -$384
(l) Plus GST (10%) -$38
(m) Total amount due for payment -$423
Included in the deduction of $1,597,824, was the sum of $889,407. The inclusion of a deduction of $889,407 in line (d) above operated to negate the plaintiff’s claim for the same sum allowed for in line (c) above. It did not operate to reduce the specified value of works or the value of variations claimed by the plaintiff. In relation to the deduction of $889,407 Payment Schedule 26 records:[14]
The superintendent assesses that the contractor (VCON Pty Ltd) is claiming the sum of $889,417 [sic] in the Payment Claim which it is not entitled to claim as it is indebted to [the first defendant] for liquidated damages. The liquidated damages has been assessed and certified by the Superintendent in payment Certificates 23 and 24 being the liquidated damages payable under the [Contract] for the period between when [the plaintiff] reached Practical Completion on 16 August 2019 and the Date for Practical Completion of 5 June 2019 which was the date [the plaintiff] was required to reach Practical Completion under the [Contract].
Furthermore, following the issue of progress certificates 23 & 24, no formal dispute of the liquidated damages amounts have been issued by the [plaintiff]. The [plaintiff] also issued a tax invoice for progress claim 23 in line with the Superintendent’s certificate which included the liquidated damages amounts.
The [first defendant] also issued a tax invoice following the Superintendent’s Progress certificate 24. This invoice was not paid by the [plaintiff].
[14]Ibid 541 (Tab 16).
On 3 March 2020, the plaintiff made an application under s 18(1)(a)(i) of the SOP Act for adjudication of Payment Claim 26. The second defendant was appointed to determine the adjudication.
On 2 April 2020, the second defendant issued his determination under s 23(1) of the SOP Act that the amount of the progress payment to be paid by the first defendant to the plaintiff was $nil. In compliance with the obligation under s 23(3) of the SOP Act, the Second Adjudication Determination was in writing and included the reasons for the determination (the Reasons).
The Second Adjudication Determination and Reasons
Of the amounts claimed in Payment Claim 26, the plaintiff only pursued payment of three amounts in the adjudication:[15]
[15]Exhibit (AG-7) to Affidavit of A Georgalis sworn 29 May 2020 at 612–3 [73]–[80] of the Court Book.
(a) the LD Claim in the sum of $889,407;
(b) the ‘final clean’ in the sum of $275; and
(c) the ‘signage PC Adjustment’, a credit in the sum of -$660.
In the Reasons, the Second Adjudicator summarised the plaintiff’s submissions in support of the LD Claim.[16]
[16]Ibid 616–7 [96]–[102], 625–7 [158]–[173].
The Second Adjudicator noted that Payment Schedule 26 did not identify any of the claims in Payment Claim 26 as being an excluded amount[17] but he referred to Appendix 1 of Payment Schedule 26[18] where the first defendant had recorded some details of its earlier certification of liquidated damages against the plaintiff.[19]
[17]Ibid 614–5 [87].
[18]Exhibit (AG-1) to Affidavit of A Georgalis sworn 29 May 2020 at 541 (Tab 16) of the Court Book.
[19]Exhibit (AG-7) to Affidavit of A Georgalis sworn 29 May 2020 at 615 [89] of the Court Book.
Further, the first defendant submitted to the Second Adjudicator that the LD Claim was a claim for an excluded amount that must not be taken into account in calculating the amount of the progress payment.
The Second Adjudicator found that the first defendant did not purport to deduct any liquidated damages in Payment Schedule 26 but ‘simply defended its entitlement to retain the monies secured on account of LDs, as assessed in Payment Schedules 23 and 24, by having recourse to the [bank guarantees] under clauses 35.6(e)(ii) and 5.6(a) of the Contract, by saying the [plaintiff] had no entitlement to repayment of those amounts.’[20]
[20]Ibid 627 [176].
In relation to the First Adjudication, the Second Adjudicator noted that:
(a) the First Adjudicator made no findings in relation to liquidated damages as the matter was not raised in the First Adjudication; and
(b) he did not see how it had any bearing on the entitlement of the first defendant to retain the monies obtained on account of liquidated damages through enforcing the bank guarantees.
The Second Adjudicator rejected the plaintiff’s submission that the LD Claim was a claim for monies previously paid on account of Contract Works and Variations. He stated:[21]
I do not accept that to be the case, even though the fact that the [first defendant] has had recourse to the security monies means that, in effect, the amount previously paid to the [plaintiff] for Contract Works and Variations has been reduced by the amount claimed and obtained for alleged LDs by the Respondent. I see no correlation between those 2 issues.
[21]Ibid 628 [182].
The Second Adjudicator concluded that the amount sought by way of recompense for monies converted by the first defendant on account of liquidated damages remained exactly that, a claim for restitution of monies deducted on account of purported liquidated damages. On that basis and irrespective of the validity or otherwise of that appropriation, he was satisfied the claim was a claim for an excluded amount which he was prohibited from taking into account.[22]
[22]Ibid 629 [185]–[188].
APPLICABLE PRINCIPLES — THE SOP ACT AND EXCLUDED AMOUNTS
The SOP Act creates a statutory right to promptly recover entitlements to progress payments.[23]
[23]SOP Act ss 1, 3(1).
That purpose is achieved by a regime for the adjudication of disputes over the amount due for a claimed progress payment.[24] The dispute is decided on an interim basis by an adjudicator and that interim entitlement is to be paid.
[24]Ibid pt 3.
The SOP Act preserves the rights that a claimant or respondent may have under the relevant construction contract.[25] In any proceedings before a court or tribunal in relation to any matter arising under a construction contract, the court or tribunal is required to make allowance for any sum paid pursuant to the SOP Act in any order which is made and may make appropriate orders for the restitution of any amount paid under the SOP Act on an interim basis.[26]
[25]Ibid s 47.
[26]Ibid s 47(3).
The amount of a progress payment is to be calculated in accordance with ss 10, 10A, 10B and 11 of the SOP Act.
Of particular relevance to this matter, is that an excluded amount, as defined in s 10B of the SOP Act, must not be taken into account in calculating the amount of a progress payment to which a person is entitled.[27]
[27]Ibid s 10(2).
Consistent with that prohibition:
(a) a payment claim must not include any excluded amount;[28]
[28]Ibid s 14(3)(b).
(b) a payment schedule must identify any amount of the claim that the respondent alleges is an excluded amount;[29]
[29]Ibid s 15(2)(c).
(c) in determining an adjudication application an adjudicator:
(i) must not take into account any part of a claimed amount that is an excluded amount;[30]
[30]Ibid s 23(2A).
(ii) must not take into account any deduction that is an excluded amount;[31] and
(d) an adjudicator’s determination is void to the extent it takes into account an excluded amount.[32]
[31]Seabay Properties Pty Ltd v Galvin Constructions Pty Ltd [2011] VSC 183, [124]–[128] (Vickery J) (Seabay).
[32]SOP Act s 23(2B).
Liquidated damages are an excluded amount. This is because liquidated damages are compensatory and the SOP Act excludes, among other things, any amount claimed under the construction contract for compensation due to the happening of an event.[33]
[33]Ibid s 10B(2); Seabay [2011] VSC 183, [110] (Vickery J); Shape Australia Pty Ltd v Nuance Group (Aust) Pty Ltd [2018] VSC 808, [85] (Digby J) (Shape).
Further, any attempt by a party to recoup liquidated damages levied in a previous accounting period is a claim for an excluded amount that must not be taken into account in calculating the amount of a progress payment. This principle derives from the decision of Digby J in Shape,[34] a decision relied on by both parties.
[34][2018] VSC 808.
In Shape, Digby J considered, amongst other things, whether a claim for the reimbursement of liquidated damages was a claim for an excluded amount under s 10B of the SOP Act.
The relevant facts of that case were these:
(a) Shape had issued a payment claim (PC-13) which included a mixture of claims including claims for liquidated damages that had been certified and deducted;
(b) Nuance responded with a schedule identifying the amount payable to Shape as nil;
(c) PC-13 was the subject of an adjudication and a review adjudication under the SOP Act;
(d) Digby J, by an earlier proceeding, quashed the first adjudication and associated review adjudication;
(e) following that decision, Shape issued a payment claim (PC-14) which purported to be for construction work that was claimed in PC-13 which had been the subject of the first adjudication determination;
(f) Nuance issued a payment schedule identifying the amount payable to Shape as nil; and
(g) PC-14 was the subject of an adjudication. The adjudicator found, amongst other things, that the entirety of PC-14 was for an excluded amount being an attempt to recoup the first defendant’s asserted entitlement to liquidated damages.
Digby J considered, amongst other things:
(a) whether PC-14 was a claim to recoup liquidated damages that had been levied over time and deducted from sums otherwise due; and
(b) if so, whether that claim to recoup liquidated damages was excluded under s 10B(2) of the SOP Act.
I note that his comments in relation to these issues were obiter.
Digby J concluded that PC-14 was a claim to recoup liquidated damages. In doing so he accepted that whether a payment claim seeks to recover previously levied liquidated damages is a matter to be determined by construing the substance of the claim, not how the claim is expressed.[35]
[35]Ibid [83] (Digby J).
In considering whether a claim to recoup liquidated damages was an excluded amount Digby J made the following observations:
(a) Seabay[36] was relevant in two ways to the case before him:[37]
[36][2011] VSC 183.
[37]Shape [2018] VSC 808, [85] (Digby J).
(iii) firstly, the exclusion of certain amounts from payment claims under the SOP Act applies to both claimants and respondents; and
(iv) secondly, liquidated damages are an excluded amount; and
(b) the Adjudicator had reasoned that an amount to recoup liquidated damages is to be considered a claim for an excluded amount for analogous reasons to those Vickery J referred to in relation to liquidated damages per se in Seabay.[38]
[38]Ibid [87] (Digby J).
Digby J then considered whether the Adjudicator’s application of the decision in Seabay accords with the proper meaning of s 10B(2) of the SOP Act. In construing s 10B to answer this question, his Honour noted that the Court should prefer a construction of the provision that promotes the purpose or object of the Act.[39]
[39]Ibid [88] (Digby J).
He set out the observations of Vickery J in Seabay in relation to the rationale for the excluded amounts provisions of the SOP Act as follows:[40]
[40]Ibid [90] (Digby J), citing Seabay [2011] VSC 183, [120]–[123] (Vickery J).
(a) ‘the “excluded amounts” are in construction disputes “often attended with considerable complexity and speedy resolution can be an elusive goal”’;
(b) ‘the [SOP] Act is not designed to accommodate such claims given the timeframes imposed for adjudications, and that these amounts are more suitably determined under the general law, either in Court or via arbitral proceedings, such that the “pay now argue later” policy of the SOP Act can be given full effect’; and
(c) ‘a respondent’s ability to raise contentious matters in a proceeding to recover progress payments could deprive a claimant of the cash flow that the SOP Act is designed to protect.’
Digby J then observed that determining an entitlement to liquidated damages will require a detailed forensic examination of the construction work and its progress and that such an exercise is unsuited to the SOP Act regime.[41] Clearly this same observation can be made in relation to determining a contractor’s entitlement to the return of liquidated damages previously accounted for. As Digby J noted ‘amounts levied or claimed as liquidated damages are ordinarily juxtaposed to the entitlement asserted by the Contractor in relation to events causing compensable delay and time related costs.’[42] Those claims are often interdependent.
[41]Ibid [91] (Digby J).
[42]Ibid [92] (Digby J).
Digby J concluded that the adjudicator was correct to consider that the Seabay decision supported his finding that claims to recoup liquidated damages that had been earlier levied were to be excluded[43] and that the language of ss 10B(1) and (2) of the SOP Act is broad enough to support that conclusion stating: ‘I consider that s 10B(2) of the SOP Act extends to cover claims for compensation due to the happening of an event and extends further to include any amount relating to a claim for time related costs.’[44]
[43]Ibid [97] (Digby J).
[44]Ibid [95]–[96] (Digby J).
APPLICABLE CONTRACTUAL PROVISIONS
The Contract is an extensively modified version of AS 4300-1995.
General Condition 5 addresses the provision of security.
General Conditions 5.2 and 5.3, with Item 13 of Annexure Part A, required the security to be in the amount of 5% of the Contract Sum, in the form of four bank guarantees as follows:
(a) two bank guarantees each for 2.5% of the Contract Sum attributable to Separable Portion 1; and
(b) two bank guarantees each for 2.5% of the Contract Sum attributable to Separable Portion 2.
The plaintiff provided the bank guarantees, being unconditional guarantees, with Australian and New Zealand Banking Group Limited.[45]
[45]Exhibit to Affidavit of A Tuck sworn 27 July 2020 at 807–10 (Tab 9) of the Court Book.
General Condition 5.6 permitted the first defendant to have recourse to the Bank Guarantees, inter alia, where it had a bona fide right to payment of money by the plaintiff arising out of the Contract in relation to work under the Contract.
General Condition 42.9 separately provided that the first defendant could have recourse to the security if the plaintiff failed to pay any amount due under the Contract.
General Condition 35.6 provided that the first defendant would be entitled to liquidated damages for Separable Portion 1 at a rate of $9,500 per day, and for Separable Portion 2 at a rate of $2,117 per day, if the plaintiff failed to achieve practical completion by the date for practical completion that applied to that separable portion.[46]
[46]Exhibit (AG-1) to Affidavit of A Georgalis sworn 29 May 2020 at 171–2, 204 (Tab 1) of the Court Book.
By subparagraph (e) of General Condition 35.6, the first defendant was entitled to recover liquidated damages:
(a) on demand;
(b) by deducting such amount from any amount certified by the superintendent; or
(c) by deducting such amount from any security held under clause 5,
after the date for practical completion had elapsed.
SUBMISSIONS
The plaintiff’s submissions
The plaintiff contends that the Second Adjudicator made the following determinations in error:
(a) the First Adjudication Determination did not have any bearing on the entitlement of the first defendant to retain the monies obtained on account of liquidated damages;
(b) the LD Claim was a claim for restitution of monies previously deducted on account of reported liquidated damages and that he was unable to distinguish that circumstance from the facts in the decision of Shape; and
(c) irrespective of the validity or otherwise of the appropriation of monies by the first defendant on account of reported liquidated damages, the plaintiff’s claim was a claim for an excluded amount within the meaning of s 10B(2)(b) of the SOP Act.
The plaintiff submitted that:
(a) the error of the Second Adjudicator was principally one of mischaracterisation. Specifically, he mischaracterised the LD Claim as a claim for restitution of monies deducted on account of purported liquidated damages. It was instead in the nature of a claim for work performed under the Contract and therefore not an excluded amount for the purpose of s 10B(2)(b) of the SOP Act; and
(b) that error stemmed from the Second Adjudicator’s failure to disallow an attempt by the first defendant to deduct the amount of $889,407 in the PC-26 Accounting Period.
The plaintiff accepts that if the liquidated damages were deducted by the first defendant in earlier accounting periods, as asserted by the first defendant, the principles set out in Shape would apply to defeat its claim.[47]
[47]Transcript at T14.5–9.
Therefore, the success of the plaintiff’s claim is dependent on it establishing that:
(a) the first defendant deducted liquidated damages in the PC-26 Accounting Period; and
(b) that deduction of liquidated damages was erroneously taken into account by the Second Adjudicator.
There is no dispute that liquidated damages were deducted by the first defendant in the accounting periods of Payment Claims 23 and 24.
The plaintiff submits that the First Adjudication Determination operated to preclude the first defendant from relying on those earlier deductions.[48] That is, the First Adjudication Determination created an issue estoppel within its field of operation in respect of Payment Claim 25.[49] The plaintiff says:[50]
In circumstances where PC-25 made no allowance for any amount on account of liquidated damages, the first defendant was precluded, on and from 8 January 2020 (being the date of the First Adjudication Determination) from seeking to claim and/or recover liquidated damages, including by its purported reliance on earlier payment claims 23 and 24 and through the vehicle of the two bank guarantees.
[48]Plaintiff’s Submissions dated 13 August 2020 at 26 [47] of the Court Book.
[49]Ibid 26 [46].
[50]Ibid 26 [47].
It is the plaintiff’s position that:
(a) any attempt to deduct liquidated damages following the First Adjudication was a deduction in the PC-26 Accounting Period;
(b) under the SOP Act, a principal is not entitled to seek to deduct liquidated damages from payment claims made under the Act and that analogous considerations apply here;[51]
[51]Plaintiff’s Reply Submissions dated 7 September 2020 at 47–8 [2] of the Court Book.
(c) as the deduction was in the current accounting period and not an earlier period, Shape should be distinguished;
(d) to the extent that the Second Adjudicator took the deduction into account, his determination is void; and
(e) in those circumstances the LD Claim was not to recoup liquidated damages but a claim for works done.
In response to the first defendant’s submission that the right to call on security is separate from the SOP Act regime, the plaintiff submitted:
(a) the right to call on security is circumscribed by the SOP Act;[52]
[52]Ibid 47 [1].
(b) following the First Adjudication Determination there was no extant and certified liability for liquidated damages;[53]
[53]Ibid 48 [3].
(c) the first defendant was bound to pay the adjudicated amount and was estopped from denying liability for it in respect of any subsequent payment claim, including by purporting to assert entitlements arising under the Contract. The assertion of any such contractual entitlement was contrary to the position established conclusively by the First Adjudication Determination;[54]
[54]Ibid 48 [4].
(d) section 47 of the SOP Act does not alter this analysis. Instead the provision is expressly subject to, and therefore yields to s 48 of the SOP Act. Section 48 provides that the provisions of the SOP Act have effect despite any provision to the contrary in any contract and that a provision of any agreement under which the operation of the SOP Act is, or is purported to be, excluded, modified or restricted, or that has any of these effects is void;[55]
(e) the hierarchy effected by these provisions makes it clear that the SOP Act does not promote contractual freedom at all costs and instead seeks to strike a balance between such freedom and the protection of the statutory right to progress payments;[56] and
(f) the assertion of the purported contractual right had the effect of shutting a party out of its rights under the SOP Act.[57] Specifically, it controverted the risk allocation established by the First Adjudication Determination in a manner that was antithetical to s 48 of the SOP Act.[58]
[55]Ibid 48 [5].
[56]Ibid 48–9 [6].
[57]Ibid.
[58]Ibid 49 [7].
The first defendant’s submissions
The first defendant submitted that:
(a) by cl 5.6 of the Contract, the first defendant was permitted to draw down on the contractual security to satisfy its ‘extant and certified liability for liquidated damages’;[59]
[59]First Defendant’s Submissions dated 25 October 2020 at 36 [2] of the Court Book.
(b) the SOP Act has no impact on either right as liquidated damages are not a matter that may be taken into account when calculating a progress payment, and nothing in Part 2 of the [SOP] Act affects any right a party may have under its construction contract;[60]
[60]Ibid.
(c) ‘[e]ven if [the first defendant] did not have an accrued contractual right to draw down on the two bank guarantees … [the plaintiff] cannot use the machinery of the [SOP] Act to recover what is at best a misconceived damages claim and not a permissible claim for a “progress payment”’;[61]
[61]Ibid 36 [3].
(d) nothing that occurred in the First Adjudication Determination, which was handed down two days earlier on 8 January 2020, affected the first defendant’s right to draw down on the security;[62]
(e) ‘[a]ny issue estoppel that arose out of [the First Adjudication Determination] … arose only in respect of the precise issues decided in it.’[63] Liquidated damages were not raised in that adjudication.[64] Further, they couldn’t be raised by reason of s 10B(1) of the SOP Act;[65] and
(f) the payment claim both expressly and on its proper reconciliation, sought to recoup liquidated damages.[66]
[62]Ibid 37 [4].
[63]Ibid 37 [4], 42 [37].
[64]Ibid 42 [38].
[65]Ibid.
[66]Ibid 41 [30]–[31].
CONSIDERATION
What are the critical issues for determination?
The issues that arise for determination are:
(a) Did the First Adjudication Determination create an issue estoppel that precluded the first defendant from relying on the earlier deductions of liquidated damages in the accounting periods of Payment Claims 23 and 24?
(b) Is the first defendant’s right to call on the bank guarantees circumscribed by the SOP Act?
(c) How should the LD claim be characterised?
(d) Did the Second Adjudicator err?
Did the First Adjudication Determination create an issue estoppel impacting the first defendant’s entitlement to liquidated damages?
Decisions of adjudicators under the SOP Act create issue estoppels[67] but only within their field of operation.[68] As stated by Macfarlan JA in Dualcorp Pty Ltd v Remo Constructions Pty Ltd:[69]
The Act however, creates special statutory rights to progress payments. When a claim is made, a dispute arises and an adjudication determination resolves that dispute. I consider that determination to be final and binding between the parties as to the issues determined, except to the extent that the Act allows the determination to be revisited.
[67]Dualcorp Pty Ltd v Remo Constructions Pty Ltd (2009) 74 NSWLR 190, 205 [68] (Macfarlan J).
[68]Chase Oyster Bar v Hamo Industries (2010) 78 NSWLR 393, 457 [258] (McDougall J).
[69](2009) 74 NSWLR 190, 203 [60] (Macfarlan JA).
It follows that any issue estoppel created by an adjudication determination:
(a) applies only in respect of the issue decided, and the matters which were necessary to decide and which were actually decided as the groundwork of the decision itself,[70] and
(b) is subject to the contractual rights of the parties preserved under s 47 of the SOP Act.
[70]Blair & Perpetual Trustee Co Ltd v Curran (1939) 62 CLR 464, 510 (Starke J), 532 (Dixon J).
Issue estoppel created by the First Adjudication Determination will apply only to the issues decided in it.
The issue of liquidated damages was not raised in the First Adjudication at all. This is not in dispute.
On the one hand, the plaintiff submitted that it was significant that the first defendant could have, but did not raise the issue of liquidated damages for consideration by the First Adjudicator.[71] On the other hand, the first defendant submitted that the issue of liquidated damages could not be raised by reason of s 10B(1) of the SOP Act.[72] I reject both submissions.
[71]Transcript at T43.13–19.
[72]First Defendant’s Submissions dated 25 August 2020 at 37 [4] of the Court Book.
The first defendant had deducted liquidated damages by Payment Schedules 23 and 24. Therefore, the amounts determined to be payable by the first defendant took into account liquidated damages. Payment Schedules 23 and 24 were not challenged by the plaintiff under the SOP Act. They could have been challenged but were not.
Then, by Payment Claim 25 the plaintiff claimed payment, ignoring the earlier deductions for liquidated damages. By doing so the plaintiff was in effect attempting to recoup liquidated damages earlier deducted. Contrary to its submission, the first defendant could have relied on the principles articulated in Shape to contest that part of the plaintiff’s claim at the First Adjudication but it did not.
As a consequence, the First Adjudicator determined the amount payable in relation to Payment Claim 25 as if no liquidated damages had been deducted. The first defendant was bound to pay the adjudicated amount and was estopped from denying liability for it.
However, contrary to the plaintiff’s submission, the First Adjudication Determination does not preclude the first defendant from seeking to recover an asserted entitlement to liquidated damages by drawing down on the Bank Guarantees. Any issue estoppel created by the First Adjudication Determination does not extend that far. While the First Adjudication Determination did impact on the accounting of liquidated damages between the parties (by ignoring deductions previously applied), it did not address, and no decision was made about, the parties’ contractual entitlements to assert or resist a claim for liquidated damages or to have recourse to the Bank Guarantees.
I would venture to add that even if the first defendant had disputed Payment Claim 25 to the extent the plaintiff sought to recoup previously deducted liquidated damages, the First Adjudicator would not have needed to make any decision about the first defendant’s entitlement to liquidated damages or to draw down the Bank Guarantees. His consideration of the issue would have been limited to determining the substance of the plaintiff’s claim and whether or not it was a claim for an excluded amount.
For these reasons I find that no issue estoppel arose from the First Adjudication Determination that precluded the first defendant from relying on earlier deductions of liquidated damages in the accounting periods of Payment Claims 23 and 24 or seeking to recover an asserted entitlement to liquidated damages by drawing down on the Bank Guarantees.
Is the first defendant’s right to call on the bank guarantees circumscribed by the SOP Act?
It was submitted by the plaintiff that the effect of the drawdown was to reduce the payment made to the plaintiff. Plaintiff’s counsel stated that, in broad figures, the plaintiff had been seeking payment for $26 million and it has only effectively been paid $24.5 million.[73]
[73]Transcript at T32.11–13.
I reject that submission.
By Payment Claim 26, the plaintiff:
(a) claimed against the contract sum of around $26 million; and
(b) recorded that it had been paid around $25.35 million.
The drawing down of a separate fund provided under a security arrangement did not operate to reduce the amount of the payment that could be determined by the Second Adjudicator under Payment Claim 26 by reference to those figures, neither of which had been reduced on account of liquidated damages.
Plaintiff’s counsel asked that I consider the impact of the drawdown in this way:[74]
If you look at the dates of when the adjudication determination No. 25 was handed down, it was handed down on 8 January 2020. It identified that my client was to be paid just over $890,000. When was the bank guarantee pulled, Your Honour? 16 January. Why was it pulled, Your Honour, to pay us.
[74]Ibid T91.26–T92.1.
Similar submissions were made in the case of Fabtech v Laing O’Rourke Australia Construction Pty Ltd.[75] In that case an application was made for an interlocutory injunction restraining the respondent from having recourse to two bank guarantees. Besanko J stated:[76]
The applicant submits with some force that it was not contemplated by the Act that the effect of an adjudicator’s decision in terms of payment could be reversed shortly after the payment is made by the payer having recourse to bank guarantees. The difficulty for the applicant is to extract from the Act an “effect” which prevents enforcement of the Bank Guarantees. The applicant does not argue that the respondent cannot pursue its claims by way of proceedings in court or by way of arbitration and presumably, could not have recourse to the Bank Guarantees if it is successful. For what period then is the applicant to be precluded from enforcing the guarantees? On what basis is one to infer that the applicant is to enjoy the fruits of the adjudicator’s decision until a court or arbitrator decides to the contrary? The fact that the Act provides no answer to these questions means, I think, that recourse to the Bank Guarantees does not have the effect of excluding, modifying, restricting or otherwise changing the effect of a provision of the Act. Once the payment pursuant to the adjudicator’s decision is made, the Act ceases to have any effect on events thereafter and the respondent’s rights under the Subcontract Agreement are expressly preserved by s 100(1) of the Act.
[75][2015] FCA 1371 (Fabtech).
[76]Ibid [38] (Besanko J); see also Patterson Building Group Pty Ltd v Holroyd City Council [2013] NSWSC 1484, [73] (White J) and Duro Felguera Australia Pty Ltd v Samsung C&T Corporation [2016] WASC 119, [45]–[48] (Le Miere J).
The provision of security and any entitlement to draw it down are matters arising under the Contract. The SOP Act does not preclude the first defendant from having recourse to the Bank Guarantees in the manner that it did, even if the drawing down of the security put money in the hands of the first defendant in a manner:
(a) not provided for in the First Adjudication Determination; or
(b) that cannot be accounted for in the Second Adjudication Determination.
Indeed s 47 of the SOP Act expressly preserves such an entitlement.
The plaintiff submitted that as s 47 must be read subject to s 48, the entitlement to drawn down the bank guarantees should be constrained. However, contrary to that submission and as stated in Fabtech, ‘recourse to the Bank Guarantees does not have the effect of excluding, modifying, restricting or otherwise changing the effect of a provision of the Act’[77] and therefore does not fall foul of s 48 of the SOP Act.
[77]Fabtech [2015] FCA 1371, [38] (Besanko J).
How should the LD Claim be characterised?
The LD Claim is expressed to be for recompense for monies converted by the first defendant on account of liquidated damages.
It does not relate to work done in the PC-26 Accounting Period. Had the Bank Guarantees not been drawn down, the LD claim would not have been made. There is no way to characterise the LD claim other than as an attempt to recoup monies converted on account of liquidated damages.
Applying the principles articulated in Shape, the LD Claim was therefore a claim for an excluded amount.
Did the Second Adjudicator err?
Having regard to my findings that:
(a) the liquidated damages were deducted in the accounting periods of Payment Claims 23 and 24 and not in the PC-26 Accounting Period; and
(b) the LD Claim was properly characterised as recompense for the enforcement of the bank guarantees on account of liquidated damages,
the Second Adjudicator did not err in determining that the LD Claim was a claim for an excluded amount, which he was prohibited from taking into account.
Remitter
Having decided that the Second Adjudicator did not err, it was not necessary to address and resolve the issue of remitter.
ORDERS
Accordingly, I order that the plaintiff’s Originating Motion be dismissed.
The plaintiff pay the first defendant’s costs of and incidental to this proceeding, to be taxed on a standard basis if not agreed.
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