Australia: Contract is king and time bars that bite: CMA Assets Pty Ltd v John Holland Pty Ltd [No 6] [2015] WASC 217

Construction Law Update - October 2015

KEYWORDS: TIME BARS AND PREVENTION PRINCIPLE

KEY TAKEAWAYS

The Western Australian Supreme Court has upheld a strict time bar even where the contractor would otherwise have been entitled to an extension of time. The case serves as a reminder that clearly drafted time bars will bite if parties do not put their notices in on time.

The case also stands for the proposition that a clearly drafted extension of time regime may exclude the operation of the prevention principle (meaning that the contractor will take the risk of accelerating where no extension of time is granted).

The facts

In 2005, BHP engaged the defendant (John Holland) to upgrade and extend a wharf at Finucane Island, Port Hedland. In part, John Holland was required to demolish and reconstruct Berth C. John Holland subcontracted the demolition of Berth C (and the associated berthing and mooring "dolphin" structures unconnected to the wharf) to the plaintiff, (CMA). The project also required John Holland to re-construct the wharf and deepen the adjacent berthing pocket.

John Holland planned the works so that CMA would move along the along the wharf demolishing and John Holland's piling and construction crews would follow behind. It was to be a relatively straight forward linear construction project.

There was one complicating factor, namely the shiploader which BHP planned to keep on the wharf. As a result, John Holland planned to move it to the far end of the wharf, demolish the bulk of the wharf and build the new sections, then move the shiploader from the old section of the wharf to the new section, demolish the remaining old wharf and build the final section of new wharf. Thus, the movement of the shiploader was a significant interim milestone in the project.

However, the biggest problem John Holland and CMA encountered was that the dolphins were more difficult to demolish than CMA had anticipated.

Originally, CMA had planned to secure a heavy lift barge, send divers to the bottom of the ocean to cut the piles at the sea bed and then lift each dolphin (and its piles) out of the water and carry out the demolition work on land. CMA was unable to secure the heavy lift barge, so an alternative method was adopted:

  1. CMA would completely demolish (by explosive means) the dolphin headstocks so that 100% demolition with "extremely good fragmentation" was achieved;
  2. in the blasting process, the fragments would fall to the floor of the ocean; and
  3. John Holland would then be responsible for removing the fragments from the ocean floor using the excavator barge it had secured to undertake the berth pocket deepening works.

Difficulties emerged. First, CMA's blasting subcontractor was not able to achieve 100% demolition with extremely good fragmentation so that what fell to the floor of the ocean was not, as planned, small fragments of dolphin headstock, but rather large blocks of concrete and reinforcing. Many blocks weighed more than 20 tonnes. The result of this was that the debris removal operation was far more complicated and expensive than either John Holland or CMA had planned.

The second difficulty was that the reinforcing in some of the berthing dolphins was different from the plans that had been provided to CMA, making the drilling required to prepare the dolphins for blasting more time consuming and expensive than planned. CMA fell into delay as against the subcontract milestones but did not submit notices of delay as that subcontract required.

Disputes arose as to who should bear the unexpected costs associated with the debris removal works and the delays. John Holland also fell into dispute with BHP. That dispute (which was wider ranging than the dispute with CMA) settled in April 2008.

In March 2008, CMA commenced proceedings against John Holland, claiming the balance owing under the subcontract and amounts for disputed variations and delay claims. John Holland denied the majority of the claims and counterclaimed to recover amounts it expended in recovering and conveying demolition debris, and for disruption of its own works.

Many of the disputes were settled in the lead up to the trial, subject to John Holland's right to set off the amounts counterclaimed. As a consequence the decision is largely focussed on the counterclaim that CMA disputed (Mostly on factual grounds but also on the basis that John Holland's had been compensated for any loss by the settlement with BHP).

The decision

CMA's claims

CMA's contested claims were:

  1. its claim for additional work to demolish berthing dolphins BD1, BD2 and BD6 (Variation 79); and
  2. a series of extension of time and consequent delay costs claims.

CMA's variation claim

The dispute about claim for additional work was largely factual and the Court found for CMA finding that the relevant drawings

"did not accurately describe the structures to be demolished, in a manner that directly affected the demolition methodology proposed by CMA and not rejected by John Holland." 77

In making that finding, Allanson J rejected John Holland's defence, which was premised on a clause in the subcontract by which John Holland expressly did not warrant the accuracy of any information provided to CMA on the basis that the drawings were incorporated into the terms of the subcontract and therefore something more than information made available to CMA.78

CMA's delay claims

CMA claimed that:

  1. it had been delayed by the variation works associated with Variation 79 (between 25 October 2006 and 13 December 2006);
  2. John Holland had delayed it by delaying the move of the shiploader (between 29 January 2007 and 10 May 2007);
  3. it was denied access to part of the site (the transfer station), causing it to be delayed (between 13 February 2007 and 10 April 2007; and
  4. it was denied access to part of the site (MD4A), causing it to be delayed (between 21 March 2007 and 2 June 2007).

The contractual framework

The terms of the subcontract regarding extensions of time and delay damages were reasonably typical for a subcontract in a project such as this. In short, CMA was required to notify John Holland (in accordance with "harsh"78 time limits) in order to be entitled to an extension of time.

The language of the relevant clause80 stated that CMA may claim for an extension of time it if "is or will be delayed".81 The Court held that that language (in the broader context of the relevant clause) required a prospective delay analysis to determine the extent of any entitlement to an extension of time.82 The subcontract further required that that prospective analysis be undertaken by reference to the approved construction programme and whether at the time the claimed delay event took place CMA was on schedule (or was being delayed by its own prior delays).83

A consequence of finding that an entitlement to an extension of time was governed by a prospective delay analysis was that the Court could adopt a relatively unsophisticated approach to the overlapping nature of the delay periods claimed by CMA. In short, the Court held that, in the context of the particular subcontract, the entitlement to any extension of time was to be determined at the moment that the delay event begins to operate, so that

"Where a subsequent delay event begins to operate concurrently, it is only taken to affect the critical path from when the event earlier in time ceases to be effective." 84

CMA's was delayed by the late movement of the shiploader

There was no dispute between the parties that the movement of the ship loader was delayed, nor that as between John Holland and CMA, that delay was John Holland's responsibility. However, John Holland claimed that the debris removal operation (which was, as a matter of contract, CMA's responsibility85) was an over-riding fact that defeated CMA's delay claim.86 The Court did not accept that argument because of:

  1. firstly, the Court's finding that the entitlement to an extension of time was to be determined prospectively at the moment the delay event commenced operating; and
  2. secondly, the fact that while the debris removal was CMA's obligation, it was not a programmed activity and as such could not be analysedwhen determining whether CMA was behind schedule by reference to the approved construction programme, as required by the relevant clause.87

Thus, the Court found that, as a matter of fact, CMA was delayed in its works by the late movement of the shiploader.

John Holland had also raised an argument that even if CMA had been delayed by the late movement of the shiploader, that made no real difference because CMA never had sufficient resources on site to undertake all of its works (relevantly, the demolition of the wharf and transfer station at the same time) had the shiploader been moved on time. The Court rejected that argument because, as a matter of prospective analysis, the entitlement to an extension of time arose due to the shiploader delay before CMA had the opportunity to conduct the two work areas concurrently.88

CMA's failure to notify

Despite finding that John Holland had delayed CMA, the Court upheld John Holland's argument that CMA's extension of time claim should nonetheless be denied on the basis of the "harsh" time bars in the subcontract. The relevant clause was clearly drafted so that compliance with the time bar (in this case 7 days) was a pre-condition to any entitlement to an extension of time. As a matter of fact, CMA did not submit a notice within the required time. Thus, John Holland denied the claim on that basis. CMA sought to argue that the time bar should not apply for a variety of reasons, including that at the time it did not know how long the delay would persist; that the time bar should only "bite" for the time before it actually notified John Holland; and that there was an estoppel by conduct such that strict adherence to the notification regime was not required.

The Court rejected all of these arguments. As to the construction of the clause, the Court stated:

"There is also no doubt that a strict application of cl 10.12 is harsh. But I am not satisfied that it is without purpose and absurd, so that an alternative construction must be given, notwithstanding the apparently clear words". 89

Thus, the Court found that John Holland was entitled to reject the extension of time claims and consequent delay costs claims.

CMA's remaining delay claims

A similar analysis applied to the delay claims arising out of the delayed access to MD4A and the additional works associated with Variation 79. In each case the Court found that as a matter of fact CMA had been delayed by a cause which would entitle it to an extension of time,90 but that a failure to notify in accordance with the clear words of the subcontract meant that John Holland was entitled to reject the claims.91

John Holland's discretion to extend time

CMA made the (common) argument that notwithstanding CMA's failure to submit notices on time John Holland ought to have exercised unilateral power to extend time and thereby "cure" the failure to notify in accordance with the clear terms of the subcontract. The Court rejected that argument. In doing so it relied on the language in the relevant clause that stated that John Holland could "in its absolute discretion and without affecting any rights or attracting obligations" extend the Date for Completion.92 The Court held that the effect of that language was that the discretion to extend time was truly unfettered and that in the face of such clear drafting there was no need to consider implied obligations to act reasonably or in good faith.

John Holland's counterclaims

John Holland's counterclaim was primarily for the costs associated with removing the blasting debris from the sea floor and transferring it to the shore. John Holland also made a claim for disruption to its piling works occasioned by the presence of debris on the sea floor, and a claim for liquidated damages.

John Holland put its counterclaim on a number of alternative bases, namely:93

  1. that there was an agreed variation to the terms of the subcontract about the mechanism by which the parties would share the costs of debris removal and transport;
  2. if there was no variation, in quantum meruit;
  3. as damages for a breach of the subcontract; and
  4. as a debt arising under the provision of the subcontract allowing John Holland to perform obligations under the subcontract that CMA had not performed.

John Holland also pressed a claim for misleading or deceptive conduct in relation to part of its loss.

CMA breached the Subcontract

The Court rejected John Holland's variation and quantum meruit claims.

As to the variation claims, the Court's rejection was based on an analysis of the correspondence which revealed that as a matter of fact no agreement on cost sharing had ever been made between the parties.94

As to the restitutionary claims, the Court held that given the contractual framework left no room for such a claim. The Court was particularly persuaded to this conclusion by the presence in the Subcontract of clause 17.5 in which the parties expressly agreed:

"the circumstances in which John Holland may perform an obligation the CMA was obliged to perform under the Subcontract, and its entitlement in debt for the costs, expenses and damages it has occurred in doing so." 95

However, the Court did find, by a construction of the scope of work, an obligation on CMA to remove debris from the sea bed, which obligation CMA had breached, causing John Holland to suffer loss and damage.96 The Court also found that John Holland was entitled to claim a debt under clause 17.5.97

Misleading or deceptive conduct

John Holland claimed that part of its loss related to damage sustained to the dredging barge, the Hippopotes, was also caused by CMA's misleading or deceptive conduct. The relevant conduct was CMA's description (at a meeting in March 2007) of the size of the debris on the sea floor in early 2007 and the capacity of the Hippopotes to remove it.98 The Court upheld this claim on the facts..99

An agreement in relation to specific vessels

John Holland claimed that part of its loss related to the hire of specific debris removal vessels (the Westsea barges) was also claimable under the terms of a separate agreement captured in a letter sent on 5 June 2007.100 The evidence was that the letter recorded the agreement following prior correspondence on the topic.101 The Court examined how the letter came into existence and the parties' conduct following the letter being exchanged and concluded that the parties' subsequent conduct was consistent with an agreement being made.102

The damages that flowed from each of the specific findings (that is, in relation to misleading or deceptive conduct, and the letter agreement in relation to the Westsea barges) were broadly coextensive with the wider finding that CMA breached the terms of the subcontract and that John Holland was entitled to claim a debt under clause 17.5.103

John Holland's disruption claim

John Holland claimed it was disrupted in the progress of its piling operation by the presence of debris on the sea floor. The Court accepted that there had been some disruption to the operation but, given it had only been provided with very general evidence of the disruption, could make no finding as to the quantification of that disruption.104

Liquidated damages and the prevention principle

Because the Court upheld John Holland's rejection of CMA's extension of time claims, it followed that John Holland was entitled to liquidated damages associated with the CMA's delay to completing the debris removal works. CMA defended this claim on the basis of the prevention principle, arguing that the delays were not caused by CMA's breaches so it would be wrong for John Holland, in effect, to profit from its own wrongs.

However, the Court, again, relied on the clear words in the Subcontract which stated that if CMA failed to comply with the notice provisions it would have:

"no entitlement to an extension of time and any principle of law or equity which might render the Date for Practical Completion unenforceable shall not apply." 105

The Court held that provision was effective at excluding the operation of the prevention principle, relying on McLure P's earlier characterisation of the prevention principle as a "particular manifestation of the obligation to cooperate implied as a matter of law in all contracts."106 Although it is not stated in the judgment, this finding may have significant impacts within the construction industry as it confirms that a clearly worded contract may exclude the operation of the prevention principle with the consequence that contractors signing up to such terms effectively run the risk of acceleration in circumstances where no extension of time is available regardless of the actual cause of the delay.107

The Head Contract claims

As a reasonably general argument against John Holland's counterclaims, CMA argued that any loss which John Holland had sustained ought to be reduced to account for the settlement John Holland had secured with BHP in so far as that settlement related to the claims in issue between John Holland and CMA. The Court did not reject this as a possible means of defending the action.108 However, on the facts, it found that CMA had not been able to prove that any amount of the settlement between BHP and John Holland was referrable to the claims between John Holland and CMA. Thus, this avenue of defence to the counterclaim failed.109 It follows from this finding that head contractors are well advised to structure settlements with principals so that there is no clear itemisation of the claims in the settlement deed, especially in circumstances where there are claims from "down the line" as well.

Conclusion

While the decision is lengthy (it stretches to 903 paragraphs), the most interesting aspects for construction industry participants are:

  1. the willingness of the Court to uphold a clearly drafted time bar;
  2. the commentary about the possibility of excluding the prevention principle; and
  3. the impact that the structure of the settlement with BHP had on CMA's claims against John Holland.

The clear message that emerges is that courts will give effect to a clearly worded contract even where that effect is "harsh". Put more shortly, the Contract is King!

http://www.austlii.edu.au/au/cases/wa/ WASC/2015/217.html

Footnotes

77 At [240]
78 At [245]
79 At [375]
80 Relevant portions are extracted at [255]–[269]
81 At [324]
82 At [323]
83 At [333]
84 At [326]
85 At [616]
86 At [345]
87 At [346]
88 At [350]
89 At [375]
90 At [389], [411]
91 At [394], [416]
92 At [430]
93 At [452]
94 At [590]
95 At [596]
96 At [616]
97 At [624]
98 At [625]–[628]
99 At [666]
100 At [683]
101 At [693]
102 At [709]
103 At [668], [711]
104 At [850], [855]
105 At [865]
106 Spiers Earthworks Pty Ltd v Landtec Projects Corporation Pty Ltd [No 2]
(2012) 287 ALR 360 at [47], cited at [865]
107 See, eg, SMK Cabinets v Hili Modern Electrics Pty Ltd [1984] VR 391, 394–5 (Brooking J)
108 Cf Clark v Macourt (2013) 253 CLR 1
109 At [899]

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