Australia: Recovering Damages When A Contractor Is Terminated

Case note – Heavy Plant Leasing Pty Ltd (in liquidation) v McConnell Dowell Constructors (Aust) Pty Ltd (No2)

When a contractor has failed to complete their contracted works and is terminated, the principal will have to engage another contractor to finish the job and then claim the costs to complete the works from the defaulting contractor. It should be noted that not all of the principal's costs can be recovered.

The Supreme Court in its recent decision in Heavy Plant Leasing Pty Ltd (in liquidation) v McConnell Dowell Constructors (Aust) Pty Ltd (No2) [2022] NSWSC 1775 (Heavy Plant) shed some light on the computation of the costs that are recoverable from a defaulting contractor.

Background

The disputes in Heavy Plant arose from the termination of a subcontract between McConnel Dowell (MacDow) and Heavy Plant Leasing (HPL) in relation to a major liquefied natural gas project in Queensland. While the judgment in Heavy Plant resolved multiple issues surrounding that termination, this article focuses on the Court's decision in relation to the calculation of recoverable costs arising from the completion of the subcontract works.

How to prove costs to complete

There must be a casual connection between breach and damages

First of all, as with other contractual claims, the principal must show a causal nexus between the breach and the damages. In other words, the costs incurred by the principal to complete the works must flow from the breach of contract which lead to termination.

Changes to the original work are acceptable

Further, the Court accepts that the work completed by the second contractor may not be exactly the same as the work originally contemplated under the terminated contract. That work could be more costly or there may be changes to the original work. This is acceptable as long as it is reasonable.

In this respect, the Court in Heavy Plant accepted the position set out in the authoritative English textbook Hudson's Building and Engineering Contracts, that is, a principal will be allowed a reasonable discretion in the way in which they complete the work.

The Court in Heavy Plant also referred to a similar position set out in an old New Zealand Supreme Court case¹ that:

"the employer should be allowed a large discretion in the way in which he completes [the work], and that the contractor, in the absence of fraud or extreme negligence, cannot complain if the work be carried out in an uneconomical manner."

Intervening events need to be considered

Any intervening event that is separate from the defaulting contractor's conduct but contributed to the costs to complete has to be considered.

In the Heavy Plant case, MacDow received a payment of $17.5 million for delay and disruption cost from the head contractor in the course of completing the subcontract works after the termination of HPL. The significance is that some costs in completing the works such as overheads and management were attributable to delays and disruptions caused by the head contractor. It was held that such costs must be excluded from the costs to complete recoverable from HPL.

HPL also pleaded that some of costs associated with re-works and activities beyond HPL's original scope under the subcontract should be excluded. While the Court indicated that those contentions do not appear to be unreasonable, the Court was not satisfied with the evidence that HPL had provided to support these contentions.

Key takeaway

An assessment of the costs to complete the work recoverable from a defaulting contractor after termination is not an item-by-item comparison between the original work and the final work. It is recognised that principals are allowed some flexibility for changes to the original work. However, consideration should be given to the costs of intervening events which are not attributable to the conduct of the defaulting contractor. These costs should be excluded when seeking to recover costs from a defaulting contractor.

Footnote

1. Fulton v Dornwell (1885) 4 NZLR

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.