Australia: Corrs High Vis: Episode 8 – Corrs Construction Law Update

This week Corrs High Vis considers some of the key cases and industry updates from our latest Construction Law Update. Corrs Construction Partners Andrew McCormack and Matthew Muir and Consultant Wayne Jocic consider the landscape with Senior Associate Jaclyn Smith.

The podcast series, brought to you by the Corrs Construction team, offers analysis and insights to help you make smarter decisions.

These podcasts do not provide legal or other advice. Obtain legal or other professional advice as required.

TEXT VERSION

Jaclyn Smith: Senior Associate – Construction

Matthew Muir: Partner – Construction, Brisbane

Andrew McCormack: Partner – Construction, Brisbane

Wayne Jocic: Consultant – Construction, Melbourne

JACLYN: Hello and welcome to High Vis, the Corrs Chambers Westgarth Construction podcast. My name is Jaclyn Smith and I am a senior associate in the Construction team. The Corrs Construction team recently released its quarterly construction law update. We review cases, recent developments with legislation and other industry updates that might be of interest to construction professionals. Today I'm joined by three of my Corrs colleagues to talk about the most recent update. I'm joined by Matthew Muir and Andrew McCormack who are partners in our Brisbane team, and Wayne Jocic, a consultant in our Melbourne team. So welcome to Matthew, Andrew and Wayne. Andrew, perhaps we'll start with you. Could you walk us through the recent decision of the High Court in Southern Han which listeners might know as the first decision of the High Court considering security of payment legislation, and in this case it was the New South Wales legislation.

MATTHEW: Thanks, Jackie. I think it's important to recognise that this is the first time the High Court has considered security for payment legislation. So the Southern Han decision is quite exciting for construction lawyers and people who work in the construction industry. The case concerned a payment claim under a construction agreement for about $3.2 million. A payment schedule was served in response and an adjudicator ultimately determined that an amount of around $1.2 million was payable. The principal, Southern Han, sought to set aside the adjudicator's determination on the basis of a jurisdictional error. The issue before the High Court was whether the existence of a reference date under the relevant construction contract is a precondition to the making of a valid payment claim under the New South Wales security of payment legislation. Overturning the New South Wales Supreme Court's decision on the issue, the High Court found that the existence of a reference date was a precondition to the making of a valid payment claim. In this case there was no reference date and therefore the payment claim was invalid and the adjudicator had erred in making the decision and his decision was overturned. The other particularly interesting observation made in this case was whether in circumstances where Southern Han had an entitlement to suspend payment under the contract or the contractor had accepted repudiation of the contract, a reference date was still capable of having occurred. The High Court's answer to that question was "no". Under either scenario there was no further reference date and in the absence of a reference date there's no entitlement to make a payment claim under the security of payment legislation. The High Court's decision means that in practical terms it's going to be difficult for parties to argue in the future whether any further reference dates have accrued after termination of a construction contract.

JACLYN: Now Wayne, moving on to another decision of the High Court in Simic v New South Wales Land and Housing Corporation - can you perhaps walk us through some of the issues that come out of this decision? I know the facts themselves might give rise to some practical considerations for people working in the construction industry.

WAYNE: Thanks Jac. Simic is a really interesting case but it's also a scary one. So it's a case about a bank guarantee, unconditional undertaking that had a few slips in it. So the name of the principal wasn't quite right, there was a different job number - those sorts of minor things. No one noticed until the principal went to the bank to call on the bank guarantee and then the bank said "no, you aren't the named principal" and refused to pay. And it took the case to get to the High Court before the High Court said "well, as a matter of law, we can rectify this document so that you can call on the bank guarantee even though you aren't the named party". So things worked out in the end but after very complex legal argument going all the way to the High Court. So to me there are a couple of simple lessons from this case. The first is that banks are appropriately going to interpret these bank guarantees strictly and will not pay out where there are errors. And so the second thing in consequence is that principals have to be absolutely rigorous in scrutinising every detail of these bank guarantees when they are provided under construction contracts. And they need to reject any bank guarantee that has the slightest error to ensure that they don't end up in this process requiring extensive litigation to get to a sensible conclusion.

JACLYN: Andrew, if we could come back to you again. The decision of the New South Wales Court of Appeal in Shade Systems v Probuild Constructions. This was a decision looking at whether you can appeal a decision from an adjudication under the Building and Construction Industry Security of Payment Act. Can you perhaps walk us through some of the key points coming out of that case? We're particularly interested in hearing about this decision given that there's a special leave application due to be heard in the High Court on 12 May.

ANDREW: The decision in Shade Systems v Probuild is really interesting because it considers whether an adjudicator's determination under the security of payment legislation can be quashed on the grounds of a non-jurisdictional error of law. It's widely accepted that jurisdictional errors of law are reviewable but previously under the decision in Brodyn v Davenport the understood or received wisdom has been that non-jurisdictional errors of law are not capable of review. In this case the trial judge reached the conclusion that the incorrect application by the adjudicator in his interpretation of a liquidated damages clause, so that's a non-jurisdictional error of law, was something that was capable of being reviewed and the adjudicator's determination set aside. The Court of Appeal considered this to be a significant issue and it was actually heard before five justices of the Court of Appeal in New South Wales. The Court of Appeal reached a contrary view and one that is more in accord with what the received wisdom of Brodyn v Davenport says. They formed the view that, look, the security of payment legislation is not a finding, a final finding. If you are dissatisfied with a decision by an adjudicator you still have legal remedies to go to court or arbitration, depending on what your contract says. So it's not the end of the line. Furthermore they were strongly of the view that the expeditious procedure that's provided by the security of payment legislation would be undermined if the determination of an adjudicator was subject to judicial review by a court based on an error of law. It would undermine the real purpose of the Act which is to get a binding albeit interim and not final decision, that parties can then proceed to make payment against. As you mentioned earlier, the dissatisfied party in this matter has sought special leave to have the Court of Appeal's decision reviewed. That special leave application is set down for mid-May so we wait and see whether the story has some more chapters to run but I'd say it is probably more likely than not that the Court of Appeal's decision will stand and it will be interesting to see whether the High Court accepts the invitation to further consider matters relevant to the security of payment legislation so soon after its first dalliance with it in the Southern Han case.

JACLYN: Coming back to you, Wayne, the next decision that we'd like to speak about in this update is the Walker Group Constructions v Tzaneros decision coming out of the New South Wales Court of Appeal. Now there are lots of key takeaways from this decision - it's quite an important one for people in the industry to be aware of - but one of the key ones that we want to speak about today is in regard to rectification damages.

WAYNE: Sure. This is a case that's a bit like a show bag; it's just full of plenty of exciting things. A lot of interesting discussion about assignment as well. I want to focus on the issue of rectification costs. So we're thinking here about a situation where there are defects. So those defects might arise as a result of some defective design and in that situation you might not get defects absolutely everywhere in every part of the work that's affected by that design. So the question is: "Can you still get rectification costs for every aspect of the design?" and the answer in this case is "yes". The second really interesting issue about rectification is whether those damages should be reduced because the plaintiff might be better off because it might get something newer or better and the answer there is again full rectification costs, that's if the defendant can't show that there's some cheaper way for the works to conform with the contract. So this is I think in short a good decision for principals and for people who take on these properties. As I say there's a great deal in this case. It's one that's really worth reading.

JACLYN: Now Wayne, there have been some developments in the standard form construction contract space. The New Engineering Contract, or NEC as it's probably most familiar to people, are looking to release a new contract suite in June this year. Can you give us some insights into what's happening in this area?

WAYNE: Well, now that the development of AS11000 seems to have stalled, it's probably an appropriate time to look elsewhere and so one of the questions I suppose is whether NEC 4 offers a new hope. And I think there are a couple of things to note about this: this is a new suite of contracts; it's a revised version of NEC 3 – so we're going to revisions of the existing ones. The other thing that's really interesting to note is that there are going to be a couple of new contracts. There's going to be a design, build and operate contract – completely new – and a completely new alliance contract. So they'll certainly be ones for Australian practitioners to look out for. Even if these contracts are not used a lot here, they're used in Hong Kong, they're used in the UK.

JACLYN: One of the decisions come out of the Victorian Supreme Court in December last year that's caused quite a stir in the industry is the decision in McConnell-Dowell Constructors v Santam. Now this was the first decision in Australia where a special referee was appointed to implement a technology assisted review process. This decision follows in the same vein as a few international decisions in the United Kingdom and the United States on technology assisted review. It's worth noting that in these judgements it's often commented that there are significant cost and time savings that could be afforded to parties choosing to employ a technology assisted review process. Now Matthew perhaps if we can turn to you now, one of the processes that you've been involved with is also an associated technology process looking at e-discovery. Can you tell us a little bit more about this?

MATTHEW: Thanks Jaclyn. I've been using e-discovery processes now for about 18 years. Except in about the last two years, there's really been no substantive change in how discovery is undertaken using e-discovery processes. However now with the advancements in technology assisted review the changes really are significant. Corrs was one of the first firms in Australia to adopt technology assisted review systems and we used those recently in a matter I was managing. The matter involved about half a million documents that needed to be reviewed for the purposes of discovery. To put that in context, using traditional discovery methods, the review of that number of documents would take somewhere in the region between two to two and a half thousand man-hours. Using technology assisted review software we were able to undertake that in a significantly less number of hours. The system that we used in this particular case using a technology known as continuous active learning or CAL. So how does continuous active learning work? Well, to put it simply, a single reviewer reviews documents and gives them that relevant score. That relevant score is used to teach the algorithm which supports the system. The algorithm then applies that relevant scoring across the rest of the documents in the database to ensure that only the most relevant documents are reviewed first by a reviewer. People often ask me "Well, how much more efficient is this process than normal?" and to give a typical lawyer's answer: it really depends on the manner [and questions the sort of] documents that you are reviewing. What I can say in this case, instead of taking two to two and a half thousand man-hours, this particular review was completed in 93 man-hours. That really is a significant saving in time and obviously money. But what it does mean more significantly I think is that clients can now spend their money on other more forensic exercises which can have a real bearing on the outcome of the matter rather than spending significant amounts of money completing disclosure exercises which ultimately don't have a key bearing on the outcome of the matter itself. Looking forward, I think technology assisted review is going to become even more important. An IBM report recently posited that about 90% of the world's data was created in the last two years. That simply means that we're creating more and more data so therefore in disclosure exercises there will be more and more documents. In that context it really is fundamental I think to start using these amazing technologies which we at Corrs have been using now for some time.

JACLYN: Thank you very much for that Wayne, Andrew and Matthew. To our listeners, this is a reminder that if you are wanting to download our construction law update publication, just hop onto our website and you'll be able to sign up to receive the update when it's released. My name is Jaclyn Smith and we hope you'll join us for the next episode of Corrs High Vis.

This Podcast is for reference purposes only. It does not constitute legal advice and should not be relied upon as such. You should always obtain legal advice about your specific circumstances.

This podcast does not give legal or other professional advice and its contents should not be relied upon as such. Formal legal and other professional advice should be sought in particular matters.

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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