Australia: Are SOP claims made after termination valid and can unincorporated materials/plant or demobilisation be claimed?

Last Updated: 12 November 2014
Article by Julian Mellick and Nick Crennan

In brief – SOP claims will be more restricted where contracts do not state that reference dates survive termination or do not define the work to include preparatory/subsequent activities.

Assuming it is not overturned on appeal, a recent NSW Supreme Court case may change the way you make claims, defend adjudications and draft your construction contracts.

Contract terminated for convenience before completion

In the case Patrick Stevedores Operations No. 2 Pty Ltd v McConnell Dowell Constructors (Aust) Pty Ltd [2014] NSWSC 1413, Patrick Stevedores engaged McConnell Dowell to upgrade its Port Botany Container Terminal, but terminated for convenience before completion. McConnell Dowell made a $55 million claim under the Building and Construction Industry Security of Payment Act 1999 (Act). It relied upon clause 39A.2 of the contract which entitled it to claim for work performed and plant/materials ordered before termination, for demobilisation costs and for a fixed termination fee.

Construction company withdraws and resubmits application under section 26

The first adjudicator awarded $8 million but valued some claims at $0 because he ran out of time.

McConnell Dowell withdrew and resubmitted its application under section 26 of the Act which applies where an adjudication is not validly determined in the time allowed. The second adjudicator awarded $23 million.

Adjudication determinations declared void

Justice Ball declared both adjudication determinations void after considering the following salient issues, each of which has broader ramifications:

  • Was the claim for "construction work or related goods/services"?
  • What effect did termination have on the reference dates?
  • Was the first determination invalid because of the $0 "valuations"?
  • Could McConnell Dowell withdraw its first application and resubmit it?

Are claims for plant or materials ordered (but not yet incorporated into works), for demobilisation costs or for a lump sum termination fee valid under the Act?

Justice Ball held that such claims were not valid because:

  • ordering plant and materials was not "construction work or the supply of related goods and services" under the Act, but rather preparatory to it
  • the demobilisation of equipment was not "construction work or the supply of related goods and services" under the Act but rather subsequent to it
  • a lump sum contract allowance at termination bore no relationship to the value of the construction work (and presumably fell within the section 7(2)(c) carve-out).

Arguably, this principle also applies to pre-termination claims involving procurement or mobilisation/demobilisation costs. Examples could include variations, latent condition or delay cost claims.

Defining the works broadly and prescriptively may avoid invalidity

Such a narrow characterisation of "construction work or related goods and services" will be concerning to many as it would not seem to promote the flow of progress payments which is the purpose of the Act.

One potential workaround might be to stipulate in your contract that construction works under the contract include these kinds of activities. However, it is not clear how effective this would be.

Does termination prevent claims under the Act?

Justice Ball held that termination extinguishes reference dates and prevents claims being made under the Act, unless the contract states that reference dates survive termination (or there is no contractual regime for reference dates because then the default dates in the Act apply and continue after termination).

The McConnell Dowell's contract did not contain such a survival clause and hence its post-termination payment claim was invalid. It did not matter that the payment claim sought legitimate contractual entitlements including for work performed prior to termination.

It is difficult to reconcile this with other cases such as Brodyn v Davenport [2004] NSWCA 394 (where the Court held that McDougal J was incorrect in Holdmark Developers v G J Formwork [2004] NSWSC 905 at [26] in holding that there was only one reference date after termination) or Parkview Constructions Pty Ltd v Sydney Civil Excavations Pty Ltd [2009] NSWSC 61 (where the existence of post-termination reference dates seems to have been taken for granted).

Providing that reference dates survive termination may avoid invalidity

Until the inconsistency is resolved by the appeal or subsequent authority, Patrick Stevedores is the most recent law. Accordingly, to make SOP claims after termination, you should ensure that your contract states that reference dates survive termination.

Can an adjudicator validly assess claims at $0 because he/she runs out of time?

By giving a $0 value to items he did not have time to consider, the first adjudicator did not determine the claim within the time limit specified in the Act. As a result, Justice Ball held that his decision was invalid.

Respondents may now be more motivated to refuse adjudicators' requests for more time in the hope that that they will be unable to determine all parts of the claim. Applicants may now wish to simplify their adjudication applications, so that adjudicators have more time to deal with the key issues.

When preparing applications and responding to an adjudicator's requests for an extension, consider whether the adjudicator will have time to deal with the issues.

When is a claimant entitled to withdraw and resubmit a claim under section 26 of the Act?

Since the first adjudication determination was invalid, Justice Ball confirmed that McConnell Dowell was entitled to withdraw and resubmit its application under section 26 of the Act. However, timeframes are strict. If an adjudicator fails to determine an application by the 10th business days after notifying his acceptance, or such later date period as is agreed, then under section 26 you need to withdraw your application and submit a new one within five days of that date.

Don't wait for a declaration before resubmitting or you may be out of time

Like McConnell Dowell, that may mean you withdraw and resubmit before obtaining any declaration that the first adjudication is invalid. The Cardinal Project Services Pty Ltd v Hanave Pty Ltd [2011] NSWCA 399 line of authority makes it clear that if you wait until after a declaration is obtained, it will be too late.

What are the takeaways for principals, contractors, suppliers, consultants and other construction practitioners?

Principals and other upstream parties should:

  • ensure that their contracts do not provide that reference dates survive termination
  • rely upon this decision when responding to claims made after termination
  • rely upon this decision when responding to claims for activities preparatory to or subsequent to construction work (or the supply of related goods and service)
  • consider, on a case-by-case basis, whether they are benefited from refusing any extension of time requested by adjudicators.

Contractors and other downstream parties should:

  • ensure that their contracts provide that reference dates survive termination
  • clarify in their contracts that the construction works contracted for includes incidental preparatory or subsequent activities and specify these activities
  • claim as much work as possible in each payment claim, so there is less overhang at termination
  • simplify adjudication applications to reduce the chance that adjudicators will fall into error.
Nick Crennan Julian Mellick
Construction and engineering
CBP Lawyers

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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Julian Mellick
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