Every year there are a handful of cases and other developments that get construction lawyers talking. Here are our top picks from 2018.
1. Probuild Constructions v Shade Systems
This case involved an application to set aside an adjudication determination under the security of payment legislation, where the adjudicator failed to deal with liquidated damages in accordance with the contract.
The key issue was whether an adjudication determination under the NSW security of payment legislation could be quashed for non-jurisdictional error (in this case, an error of law arising from an incorrect contractual interpretation). The High Court found that the answer is ‘no’. Despite the error, the adjudication determination was allowed to stand.
2. Maxcon Constructions v Vadasz
The High Court handed down its decision in this case on the same day as the Probuild decision mentioned above. This case also involved an application to set aside an adjudication determination under the security of payment legislation.
The issue in this case was whether a clause that linked the return of a subcontractor’s security under a subcontract to the operation of another contract (the head contract) was void under the South Australian security of payment legislation as a ‘pay when paid’ provision. The High Court found that it was. That is, the head contractor could not rely on the clause for the reducing the value of a progress payment due to the subcontractor.
The case shows that the ‘pay when paid’ prohibitions will be interpreted broadly, and may render a broad range of clauses ineffective and unenforceable.
You can find the case here.
3. Murray Security of Payment Review
In May 2018, John Murray AM’s review of the national security of payment laws (commissioned by the Australian Government) was released.
Mr Murray made 86 recommendations in total. (You can read our summary of the top 10 recommendations here.) The extent to which these recommendations are adopted remains to be seen.
Among other things, Mr Murray recommended that there should be uniform security of payment laws nationally, based on the East Coast model. He also recommended the introduction of deemed statutory trusts to protect downstream contractors against the risk of an upstream contractor becoming insolvent.
The NSW Government has been quick to respond to Mr Murray’s suggestion of a deemed statutory trust regime, releasing an exposure draft bill, explanatory statement and consultation paper in August 2018. (You can find those documents here.)
You can access Mr Murray’s full report here.
4. Ipso Facto Laws
The Corporations Act has been amended so that ‘ipso facto’ clauses are no longer enforceable. Most types of construction contract, but not all, will be caught by the legislation. You will find a list of exceptions here.
An ipso facto clause is a provision that allows one party (typically a principal or upstream contractor) to terminate the contract or suspend its obligations merely because another party enters into administration, receivership or a scheme of arrangement. Under an ipso facto clause, the right to terminate or suspend is expressed to arise regardless of whether the party affected by the event is otherwise continuing to perform its obligations.
The objective of the reform is to ensure businesses can continue trading in order to recover from an insolvency event, and to ensure formal insolvency processes do not commence prematurely.
The regime applies to all contracts entered after 1 July 2018. You can read more about the changes here.
5. Hamersley Iron v Forge Group Power
This litigation arose out of a payment dispute between a head contractor and an insolvent subcontractor.
The key issue was whether a contractor should be permitted to make an offsetting claim in answer to a claim brought by an insolvent subcontractor, in circumstances where the subcontractor had granted a PPSA security interest to its bank.
The Court of Appeal of Western Australia found in favour of the head contractor. That is, its off-setting claim was permitted so that it would effectively be given priority over all of the subcontractor’s other creditors (including secured creditors).
This is the first occasion where a superior court has been asked to consider how the PPSA regime interacts with offsetting rights. Given the amounts involved, it is generally expected that an application for special leave to the High Court will be made.
You can find the case here.