Impact of certificate issued after expiry of Defects Liability Period
A Certificate identifying the value of defects at the end of the Defects Liability Period merely fixes the maximum amount of the security to be held to secure the Contractor’s ultimate liability for unrectified defects.
Laing O’Rourke (BMC) Pty Limited v Estate Property Holdings Pty Limited (2007) NSWSC 1199
Facts
On 15 November 2002 Laing O’Rourke (BMC) Pty Limited (“Laing”) contracted with Estate Property Holdings Pty Limited (“Estate Property”) to build a residential development at Gosford for $41,688,474.
As required by the amended AS4300-1995 contract used (“Contract”), Laing provided security in the form of bank guarantees from ANZ Bank. Practical Completion was reached and the Defects Liability Period was set to expire on 31 March 2006. Laing made no final Payment Claim and on 24 May 2007 requested the Superintendent to issue a Final Certificate and to release the security held under the Contract.
The Superintendent then wrote to Laing stating that there had been reported defects that remained outstanding and that the Final Certificate would not be issued until all obligations were met and subsequently that the security held by Estate Property would not be released. On 4 July the Superintendent issued 2 certificates:
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A Certificate pursuant to Clause 5.6(b) of the Contract (Reduction of Security and Retention Monies) which states:
“At the expiry of the Defects Liability Period, the Superintendent will assess the value of defects, if any, which remain unrectified, and will issue a certificate to the Contractor and the Principal stating, in its opinion, the value of such defects.”
This certificate provided that defects in the works remained unrectified to a value of $166,000 and Estate Property’s entitlement to security should accordingly be reduced to this amount.
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A Final Certificate identifying $166,000 as payable by Laing for the cost of unrectified defects.
Estate Property gave notice to Laing that it would draw on the security. Laing then sought an injunction restraining Estate Property. Laing also sought a declaration that Estate Property had no entitlement to the security.
Issue
The issues in the matter were:
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Whether the Certificate pursuant to Clause 5.6(b) of the Contract identified defects beyond those unrectified at the expiry of the Defects Liability Period;
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Whether the Certificate pursuant to Clause 5.6(b) was invalid because it was issued out of time;
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Whether (if invalid) the Certificate pursuant to Clause 5.6(b) affected the operation of the Final Certificate; and
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Consequently, whether Estate Property had the right to call upon the security.
Decision
Hammerschlag J found:
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Security is to be held only in respect of liability of the Contractor for defects that were unrectified at the date of the expiry of the Defects Liability Period;
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The issuing of the Certificate (pursuant to Clause 5.6(b)) out of time did not invalidate the Certificate. It was held that time was not of the essence under Clause 5.6(b) and that submitting the Certificate within reasonable time (and no later than the Final Certificate) would be sufficient;
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The existence of a valid Certificate under Clause 5.6(b) has no impact on the liability of the parties under the Final Certificate; and
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It was found that Estate Property had the right to call upon the security.
Commercial commonsense over literal interpretation
The Court will construe a construction contract to give effect to its underlying commercial purpose rather than a literal interpretation at the expense of commercial commonsense.
Vos Construction & Joinery Qld P/L v Sanctuary Properties P/L & Anor [2007] QSC 332
Facts
Sanctuary Properties Pty Ltd and Mirvac Developments Pty Ltd (“Sanctuary Properties”) entered into a contract (as joint venturers) with Vos Construction & Joinery Pty Ltd (“Vos Construction”) in August 2005 for the performance of building work. The contract price was for $7,010,606 and the date of Practical Completion was 21 March 2006. The architect issued his final certificate on 8 June 2007 and Vos Construction gave a notice of dispute response on 12 June 2007.
Clause C5 of the contract stated that the owner may draw on the security provided that certain factors are met “and the contractor has not disputed the owner’s rights under clause A8”. Clause A8 of the contract allowed the contractor to dispute the certificate within 20 days.
On 12 June 2007 Vos Construction’s solicitors asserted that the fact Vos Construction disputed the final certificate meant that Sanctuary Properties had no right to draw upon Vos Construction’s security.
On 25 June 2007 the architect rejected Vos Construction’s submission and concluded that its final certificate should stand. On the same day Sanctuary Properties gave notice of an intention to draw on the security to pay the outstanding certificate issued by the architect for $173,800.
Issues
The issues were whether Sanctuary Properties:
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had a right under the contract to draw on the security despite the dispute; and
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gave notice of an intention to draw on the security in a timely manner according to section 67J of the Queensland Building Services Authority Act 1991. Vos Construction argues that Sanctuary Properties should have given the required 28 day notice from Practical Completion, that is, 21 March 2006 rather than 25 June 2007 (the date which the architect rejected Vos Construction’s submissions).
Decision
Douglas J found that the mere fact that Vos Construction disputed the architect’s certificate under clause A8 of the contract should not be enough to prevent Sanctuary Properties from drawing on the security. The obvious commercial purpose of clause 5 was to prevent recourse to security where the dispute initiated by the contractor was successful.
Douglas J also found that Sanctuary Properties’ right to obtain the amount owed to them by drawing on the security did not accrue until the architect’s Final Certificate was issued and there was confirmation of the rejection of Vos Construction’s dispute. Until that had occurred the respondents could not have been aware of their right to obtain the amount owed under the contract.
A contractual basis critical to pursue legal rights
The Court applies a principled rather than flexible approach when determining the existence of a contract. Where loose commercial arrangements are relied upon the court will turn to original documents between the parties to decide whether a contract was made and the identity of the parties to the contract.
Berem Interiors Pty Ltd v Shaya Constructions (NSW) Pty Ltd [2007] NSWSC 1340
Facts
On 12 December 2006 Berem Constructions Pty Ltd (“Berem Constructions”) issued an invitation to tender to Shaya Constructions (NSW) Pty Ltd (“Shaya”) for the supply, delivery and installation of suspended ceilings, petitions and lining works to an existing industrial building.
Shaya commenced works on the site and sent progress claims to Berem Interiors Pty Ltd (“Berem Interiors”). A final payment claim remained unpaid and Shaya applied for adjudication and the determination was in its favour.
Shaya argued that it could claim against Berem Interiors as there were loose commercial arrangements between numerous Berem companies and that the Berem letterhead identified 4 companies, namely Berem Constructions, Berem Interiors, Berem Industrial Pty Ltd and Berem Administration Services Pty Ltd.
Berem Constructions maintained its argument that no contract existed between itself and Shaya to provide the adjudicator with the relevant jurisdiction.
Issue
Whether the adjudication determination made in relation to a claimed $208,325.70 sum was void in the absence of an existing construction contract between Berem Interiors and Shaya.
Decision
Justice Bergin found that no construction contract existed between Berem Interiors and Shaya and therefore an essential prerequisite requirement to a valid adjudication determination had not been satisfied. Bergin J was not convinced that the fact the invoices had Berem Interiors company name established any contractual relationship between Berem Interiors and Shaya. The adjudication determination was held to be void.
Queensland welcomes PPP developments
The Queensland Government intends to call upon expressions of interest at the end of 2008 for the development of a $940 million Sunshine Coast Hospital to be based at Kawana. This will become the State Governments 3rd PPP after the Southbank TAFE redevelopment, valued at $230 million and the $3 billion airport link.
Premier Anna Bligh stated that “If the benefits and costings stack up and cabinet determines a PPP will give us the best deal for taxpayers, then we will pursue that option.” Provided that this is the case, the private sector will be engaged for the construction and maintenance of the Sunshine Coast Hospital with construction expected to begin in 2010.
Numerous development opportunities are likely to emerge as the Queensland Government turns to the private sector for PPP infrastructure developments. Future proposed PPP projects in Queensland include 7 schools on the Sunshine Coast, Gold Coast and west Brisbane valued at $200 million and the $1 billion Toowoomba Range Bypass.
Mark Ludlow, “Qld hospital PPP lights the way”, The Australian Financial Review, 11 December 2007
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