Australia: Building & Construction Update - July 2006

• How low can the hurdle go?: the minimum requirements for a valid payment claim

• Shell Refining v A J Mayr Engineering

• Claims for related goods and services provided outside NSW

• Legislative watch

• Independent Contractors bill unfair contracts – a new national jurisdiction

In the recent the case of Nepean Engineering Pty Limited v Total Process Services Pty Limited (In Liquidation) [2005] NSWCA 409 (Nepean’s case) the Court of Appeal reviewed the minimun requirements for a valid payment cliem under the Building and Construction Industry Security of Payment Act 1999 (Act).

The claimant, Total Process, was a subcontractor who supplied and installed pipes for the construction of a large alternative waste treatment plant at Eastern Creek known as the UR 3R Facility. In March 2005, Total Process served a $260,048.93 payment claim on the head contractor, Nepean. The claim attached copies of payment claims five and six. (Payment claims one to four had already been satisfied.)

Nepean did not provide a payment schedule and did not pay the amount claimed in the payment claim. Total Process commenced proceedings in the District Court, as it was entitled to under s15(2)(a)(i) of the Building and Construction Industry Security of Payment Act 1999 (Act), to recover the amount claimed as a debt due to it. It moved for summary judgment.

Nepean opposed the application on the basis that there was insufficient information in the payment claim, and that Nepean could not identify the work to which the claim related. It asserted that this was a triable issue that was not appropriate for summary disposal, in light of General Steel Industries Inc. v Commissioner of Railways (NSW).

The court thought otherwise. The court suggested that the fact that four payment claims (which were in similar form) had already been processed and paid, indicated that Nepean could sufficiently understand the payment claims. An appeal by Nepean was heard by Hodgson JA, Santow JA and Ipp JA in the Court of Appeal.

Hodgson JA noted the principles he established in Brodyn & Davenport [2004] NSWCA 394, where he found that the requirement for a payment claim to comply with s13(2) of the Act is not a "basic and essential requirement" of a valid adjudication. He found it to be one of the "more detailed requirements" which should be left to the adjudicator to determine, unless patent on the face of the payment claim.

Santow JA disagreed, instead finding the test to be:

Santow JA also took issue with the Brodyn v Davenport approach in the context of debt recovery action where no payment schedule was provided, stating:

Ipp JA, in a three-paragraph judgment, purported to follow the Brodyn v Davenport line but came to a different conclusion:

The Court of Appeal has left us with no less than three formulae for determining what is required of a payment claim to support a summary judgment application under s15(2).

Ipp JA only requires the payment claim to be made in good faith and to purport to comply with the requirements of s13(2) of the Act.

Hodgson JA only treats payment claims as a nullity where a failure to comply with s13(2)(a) is patent on its face; and this will not be the case if the claim purports in a reasonable way to identify the particular work in respect of which the claim is made.

Santow JA finds the test to be that the construction work (or related goods and services) be identified sufficiently, to enable the respondent to understand the basis of the claim.

Nepean’s case leaves the precise height of the hurdle presented by s13(2) a matter for conjecture; what the case does confirm is that it is not a difficult hurdle to clear.
By Robert Riddell, Sydney

SHELL REFINING V A J MAYR ENGINEERING

"Global claims" are a type of delay and/or disruption claim. They are a response to the complex nature of construction work and the cumulative effect of matters beyond the contractor’s control that may escalate the cost of the works well beyond that anticipated at the time the contract was made.

Generally, delay and disruption claims require the contractor to relate each item of unanticipated expense to a delay and/or disruption event or cause for which the principal is financially responsible. If it cannot be shown which particular cause or event gave rise to each expense, item of damage or loss, the item will likely not give rise to a sustainable claim. Traditionally the costs of proving each item of claim can involve great quantities of evidence, assuming it is available. It also involves sizeable legal and expert costs and has an appetite for management resources and time.

If the plaintiff shows its claim should be permitted to be advanced on a global basis it may be entitled to proceed without particularising the nexus between each breach, the delay claimed and the resulting loss. The savings can be immense, although the principal is likely to resist.

Global claims are claims pleaded in such a way that the connection between the matters complained of and their consequences, in terms of time and/or money, is not fully "spelt out". These claims have been successful in England in some limited circumstances. Although the courts in Australia have not yet had the opportunity to fully digest a global claim, there has been judicial acknowledgment indicating that they are possible.

Shell Refining (Australia) Pty Limited v A J Mayr Engineering Pty Limited [2006] NSWSC 94 concerned a challenge to an adjudication determination under the Building and Construction Industry Security of Payment Act 1999 (NSW) (Act) in which a global claim was made in a payment claim under the Act. In that case the adjudicator allowed a global claim made by the claimant (Mayr). Shell Refining (Australia) Pty Limited (Shell) was unsuccessful in challenging that determination.

Facts

Mayr served a payment claim under the Act on Shell for a sum of $11,137,998.30. Of that amount, $6,286,182 was identified as "Reimbursement of Costs, Losses and Damages". Those costs, losses and damages were asserted to be incurred as a result of delays, disruptions and other breaches caused by Shell and were framed as a "global claim".

Mayr conceded that there were a myriad of different factors causing disruptions that lead to the increased costs, losses and damages and that it was extremely difficult to accurately allocate them to individual incidents. Accordingly, Mayr quantified or valued its global claim using a "modified total costs method" which it submitted demonstrated the veracity of the costs incurred.

In its response, Shell suggested no alternative method of valuation, instead asserting that the global claim was unsubstantiated and indicating that it would assess those claims once adequate substantiation of the claim had been provided.

The adjudicator was satisfied that Shell caused delay and disruption and caused Mayr to incur some damages of the nature claimed. The adjudicator accepted Mayr’s methodology of the calculation of the global claim and determined that it was irrelevant whether the claims be categorised as global claims. He determined that they were claims for costs that fell within the definition of "Delay Costs" under the contract between both parties.

Shell challenged the determination on the basis that the adjudicator determined the amount payable in respect of the "global claim" without considering and determining the merits of the claim.

Decision

The Supreme Court was satisfied that the adjudicator had discharged his obligation under section 22(2) of the Act, in that he considered that the delays were caused by Shell and that he accepted Mayr’s calculation (valuation) of delay costs (albeit "globally") was reasonable in the circumstances of the contractual relationship between both parties.

Implications of the Decision

An adjudicator will not have failed to fulfil his statutory obligations merely because he values and determines a global claim. This has significant implications for claimants seeking payment for costs for delay and disruption, particularly larger and more complex claims.

Making a global claim through a payment claim under the Act provides a strategic advantage to contractors. Not only does it side-step the uncertainty of such claims, it shifts the considerable burden of proof to the principal. That burden is easily underestimated in complex delay and disruption claims and has been the undoing of many otherwise successful construction and specialist contractors.

Shell v Mayr has tested the limits of payment claims and adjudications under the Act. Indeed, if there had been a trophy for the longest drive, Mayr definitely won it. Shell v Mayr illustrates the versatility and availability of the Act’s processes. It also demonstrates that the courts will not resist the application of the Act in a context arguably not contemplated when the Act was debated and proclaimed.

Shell v Mayr also contains guidance to adjudicators in respect of self-serving statements as to what the adjudicator has read and considered. The case also addresses extra territorial application of the Act; this is dealt with in a separate item in this update.
By Ranjan Rajagopal

CLAIMS FOR RELATED GOODS AND SERVICES PROVIDED OUTSIDE NSW

While the major contention in Shell v A J Mayr was the question of global claims being framed in payment claims, that case also raised another concern: can payment claims for the provision of related goods and services outside NSW, in respect of construction work carried out in NSW, be made under the Building and Construction Industry Security of Payment Act 1999 (NSW) (Act)?

Facts

Part of Mayr’s contract was the fabrication, assembly and transportation of modules for use in Shell’s refineries in Clyde, NSW and Geelong, Victoria. As the modules were fabricated and pre-assembled in NSW, Mayr’s claim included the cost of transporting them into Victoria (Transport Claim).

The adjudicator awarded the full amount of the Transport Claim.

Shell argued that the Transport Claim should be excluded by operation of section 7(4)(b) of the Act and that its inclusion in the determination was beyond the jurisdiction of the adjudicator.

Decision and implications

The Supreme Court held that, so long as the "related goods and services" (ie: transportation of modules) are provided in respect of construction work carried out within NSW, the contractor who provides the related goods and services is able to recover progress payments under the Act for those related goods and services, whether or not they are provided in NSW.

The court pointed out that the industry with which the Act deals includes professionals and tradespersons who provide services across state borders. This decision allows those professionals and tradespersons to rely on the Act in circumstances where they provide related goods and services outside NSW - as long as the actual construction work is carried out within NSW.
By Ranjan Rajagopal

LEGISLATION WATCH

Security of Payment remains flavour of the month for updates and presentations. It is, however, important to remain vigilant for other significant reforms that keep "bubbling along". There have been a number of recent legislative changes with consequences for the construction industry. Some may have passed "under the radar". A short summary of some of these developments and upcoming changes follows. Should you require further information or assistance, please contact us.

Payroll Tax

In December 2005 the NSW Government amended the definition of wages in the Payroll Tax Act 1971. The new expanded definition will operate from 1 July 2006, and will now capture the following:

• superannuation payments made on behalf of employees

• retirement contributions to redundancy benefit schemes and contributions to portable long service leave funds

• fringe benefits (except exempt fringe benefits under the Fringe Benefits Tax Assessment Act 1986).

These now need to be included in your calculations.

The Payroll Tax ‘threshold’ figure of $600,000.00 (being an employer’s total annual taxable wages above which Payroll Tax will be charged) remains unchanged, as does the Payroll Tax rate of 6%.

Certification

The roll out of the Building Professionals Act 2005, has begun with amendments to the Environmental Planning and Assessment Act 1979 in force from 3 March 2006.

The in force amendments are part of the new rules which are to govern certification. They provide that construction certificates for building or subdivision work cannot be issued after work physically commences, and that obtaining compliance certificates cannot be made a condition of development consent or a condition on complying development certificates.

The major provisions of the Building Professionals Act 2005 will not commence until about mid 2006 when the Building Professionals Regulation and the Accreditation Scheme are introduced. A summary of the new provisions is set out in our December 2005 update, click here.... to view the full version.

Workers Compensation

In December 2005 the NSW State government introduced a number of changes to the Workers Compensation System which will affect employers and insurers. The changes include:

• amended threshold tests for the ‘small’, ‘medium’ and ‘large’ classifications of employers

• amended experience adjustment thresholds

• employers may now be eligible for retrospective adjustments to premiums excluding the costs of fraudulent claims successfully prosecuted after 1 January 2000, and excluding the costs of claims were the claimant has been found not to be a ‘worker’

• the Claims Excess Payment is no longer a flat fee of $500.00. The fee charged is equal to one week of the injured worker’s weekly compensation.

• the winding down of participation in the Premium Discount Scheme (PDS)

The changes will affect new or renewed polices that commence after 31 December 2005.

In December 2005, the workers compensation premium rate was reduced from 2.57% to 2.44% of wages. On 29 March 2006, a further reduction to 2.17% of the workers compensation premium rate was announced. This reduction will come into effect on 30 June 2006.

Smoke Alarms

The Building Legislation Amendment (Smoke Alarms) Act in July 2005 made it compulsory for all homes to be fitted with smoke alarms from 1 May 2006. This will be enforced via conveyancing practice, as from 1 November 2006 all contracts for sale must include a statement that the property to be sold has the required smoke alarms. If this statement is not included, the purchaser will have grounds to rescind the contract. If the statement is included but is incorrect, the vendor may be fined up to $500.00, however the purchaser is not entitled to rescind.

The Federal Government’s legislative response to the findings of the Cole Royal Commission into the Building and Construction Industry, the Building and Construction Industry Improvement Act 2005, came into full effect on 12 September 2005. The Act established the Office of the Australian Building and Construction Commissioner, the office of Federal Safety Commissioner, and also tightened the definition of protected industrial action under the Workplace Relations Act.

The Office of the Australian Building and Construction Commissioner is now charged with the task of enforcing the National Code of Practice applicable to all construction activity undertaken by or on behalf of Australian government departments and agencies, and to construction projects to which the Australian government has contributed funding: these include building, civil, construction, material supply contracts and consultants. Any person or company wishing to do business with the Australian Government must comply with the provisions of the Code. The ABC Commissioner has power to obtain information, and power to enter and inspect premises.

The Office of the Federal Safety Commissioner is now developing and administering the Australian Government Building and Construction OHS Accreditation scheme, applicable to all Australian Government construction projects. The Federal Safety Commissioner also has powers to inspect premises to ascertain compliance with the OHS Accreditation scheme and compliance with a Building Code published by the Minister. To date, no such Building Code has been published, but the National Code of Practice for the Construction Industry continues to apply; construction industry employers need to review their agreements and practices to ensure they are code compliant and therefore entitled to bid for federally funded work -whether as Head contractor or further down the contract chain.

Changes to the NSW Occupational Health and Safety Act 2000 have been proposed by the Minister for Commerce, John Della Bosca, issued in a draft bill on 6 May 2006.

The Department of Commerce has taken submissions on possible amendments to the Building and Construction Security of Payments Act and made recommendations to Cabinet last year. It would be fair to say that the recommendations (whatever they may be) did not set the Cabinet room alight.

No further announcement about the reforms has been made. Commentators have differing views as to the likely changes but, at this stage, it is mainly speculation. It is suggested that the most likely reform is the introduction of a registrar, along the lines of the Queensland model, with functions including publication of adjudication determinations, adjudicator accreditation, and complaints handling.

It is also mooted that the 12-month time limit for claims is to be reduced and that adjudication applications have a maximum monetary cap. One matter does however appear to be agreed. That is, no changes are likely to come into effect until after the state election in March 2007.

Submissions have now closed in the Office of Fair Trading’s review of licensing arrangements and regulation of owner builders in NSW. The review is chaired by Irene Moss and Kevin Rice. The review’s recommendations are awaited.

Please click here... for important developments on this subject.
By Daniel Fitzpatrick and Robert Riddell

INDEPENDENT CONTRACTORS BILL UNFAIR CONTRACTS – A NEW NATIONAL JURISDICTION

The much talked about Independent Contractors Bill 2006 (Bill) was introduced into Parliament on 22 June 2006. Also introduced was the Workplace Relations Legislation Amendments (Independent Contractors) Bill 2006 (Workplace Relations Bill) which sets out consequential amendments to the Workplace Relations Act 1996.

In his second reading speech, Minister Andrews identifies that the principle of the Bill is "that genuine independent contract relationships should be governed by commercial not industrial law."

Unfair contracts – a new national jurisdiction

Part 3 of the Bill sets up a national jurisdiction for the review of "services contracts" on the grounds that they are unfair and/or harsh. The jurisdiction will be vested in the Federal Court of Australia and Federal Magistrates Court (court).

A services contract is a "contract for services" to which an independent contractor is a party that relates to the performance of work by the independent contractor and that has the requisite constitutional connection.

For the "contract for services" to have the requisite constitutional connection one of the parties to the contract must be:

• a constitutional corporation within the meaning of paragraph 51(xx) of the Constitution;

• the commonwealth or a commonwealth authority;

• a body incorporated in a territory;

or the work concerned is wholly or principally performed in a territory; or the contract was entered into in a territory; or at least one party is a natural person who resides in a territory or a corporation that has its principal place of business in a territory.

The Bill does not answer the complex question of whether a person is an independent contractor or an employee. This is left to the court to determine applying the common law test. The leading Australian authorities are the case of Stevens v Brodribb Sawmilling Co Pty Limited and Hollis v Vabu Pty Limited (Crisis Couriers No. 2). The test operates by looking at the whole relationship between the parties not only the written contract. This is the so-called multi-factor test.

Yes. Whilst an independent contractor that is corporation can access the jurisdiction, access is limited to those corporations where a director of the corporation, or member of the director's family, is the relevant person who mainly performs the work under the contract. The purpose of the limitation is to restrict large corporations bringing claims under the part.

In addition, the jurisdiction cannot be accessed where the services contract relates to the performance of work for private and domestic purposes for the other party to the contract.

The terms "unfair" or "unjust" are not defined. However, there are a number of matters which the court may have regard to when reviewing a services contract to determine whether it is unfair and/or harsh. These are:

• the relative strengths of the bargaining positions of the parties;

• whether a party was subjected to any unfair tactics, undue influence or pressure;

• whether the contract provides for remuneration that is less than that remuneration of an employee performing similar work; and

• any other relevant matter.

The Court may make an order setting aside the whole or part of the contract or an order varying the contract. The purpose of any order is to place the parties to the contract in the position they were in had the contract not been unfair and/or harsh.

In addition, there is limited scope for the Court to order costs. For example, where an application is made vexatiously or without reasonable cause.

Excluded state and territory laws

The Bill seeks to exclude a range of state and territory industrial laws that apply to parties to services contracts. The excluded laws are those laws affecting the rights, entitlements, obligations or liabilities of a party to a services contract in relation to a "workplace relations matter". The Bill defines what constitutes and what does not constitute a workplace relations matter.

Matters that do not constitute workplace relations matters include discrimination, superannuation, workers’ compensation, occupational health and safety, child labour, public holidays (and more). This means that state and territory laws dealing with these matters (ie. non-workplace matters) that apply to service contracts will continue to apply.

In addition, state and territory laws that deem a party to a services contract to be an employee or that provide for the services contract to be voided, set aside or varied for unfairness are also excluded.

The Workplace Relations Bill introduces a new Part 22 to the Workplace Relations Act 1996 setting out anti-avoidance mechanisms by imposing penalties on employers who seek to avoid their obligations under employment law by disguising their employees as independent contractors or who coerce their employees to become independent contractors.

A workplace inspector or union can apply to the court for the imposition of a penalty for a breach of the Part. The Bill proposes a maximum penalty for an individual is $6,600 and for a body corporate is $33,000.

• Outworkers - State and territory laws protecting textile, clothing and footwear outworkers are not excluded by the Bill. The Bill sets out minimum rates of pay (as part of the Australian Fair Pay and Conditions Standard) for contract outworkers in the textile, clothing and footwear industry in cases where an outworker is not guaranteed a minimum rate or pay under state or territory laws.

• Owner-drivers – Existing New South Wales and Victoria laws with respect to owner-drivers are not excluded by the Bill (ie. they are preserved).

• Transitional arrangements - There are transitional arrangements for persons who, at the time the provisions commence, are independent contractors at common law but are deemed under state or territory law to be employees or who have employee style entitlements under state or territory laws. The relevant state or territory laws continue to have effect until the end of the contracting relationship, or to the end of 3 years after the commencement of the act if the relationship does not end before then or at any earlier time as agreed by the parties. However, state or territory laws dealing with unfair contract rights will be excluded.

You should undertake a review of your independent contractor arrangements and consider how the proposed new laws will impact on these arrangements.
By Mark Sant

This publication is provided to clients and correspondents for their information on a complimentary basis. It represents a brief summary of the law applicable as at the date of publication and should not be relied on as a definitive or complete statement of the relevant laws.