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Pty Ltd v The State of New South Wales  NSWCA 69
This recent Court of Appeal decision clarifies how the monetary threshold for commencing litigation is to be calculated under the dispute resolution mechanism of the NSW GC21 (ed 2) contract. It is vitally important that contractors and principals understand the application of the threshold limits and how these limits may affect the right to litigate disputes of monetary significance.
The Court unanimously decided that any amounts paid to a contractor under the Building and Construction Industry Security of Payment Act 1999 (NSW) (Act) will not form part of the calculation for determining any monetary threshold for commencing litigation under the dispute resolution mechanism. The basis for the decision was that any amounts paid to a contractor under the Act are interim in nature and the clause was not intended to have the consequence that the right to litigate would be dictated by the outcome of an adjudication process under the Act.
Lahey Constructions Pty Ltd (Lahey), as contractor, and the Minister for Education for New South Wales (Department), as principal, entered into two separate contracts on identical terms, under which Lahey was required to carry out building and construction works at Manly Vale Public School and Bardia Public School (together, the Contracts).
During the course of the works, the parties fell into dispute regarding four variations under the Manly Vale Public School contract and two variations under the Bardia Public School contract. The Department raised defences, cross-claims and set-offs in response to each of these claimed variations. These disputes were ultimately referred to expert determination under the Contracts.
Relevantly, clauses 71.6 – 71.8 of the Contracts were unamended forms of the standard terms. They provided:
“71 Expert Determination
6 In response to any Issue referred to the Expert by a party, the other party may raise any defence, set-off or cross-claim.
7 Subject to clauses 71.8 and 71.9, the parties must treat each determination of an Expert as final and binding and a party that owes money to the other pursuant to the determination must pay that amount to the other party within 28 days after receiving the determination.
8 Neither party may commence litigation in respect of the matters determined by the Expert unless the determination:
The relevant item in the 'Contract Information' specified the amount of $500,000 as the monetary threshold to commence litigation.
The parties commenced expert determination of the unresolved issues under clause 71 of the Contracts.
In parallel with the expert determination process, Lahey made two adjudication applications under the Act, claiming amounts in respect of the disputed variations which were the subject of the expert determination process. Determinations were made in favour of Lahey and the Department paid the determined amounts, prior to the expert making his decision in the expert determination process.
Following the adjudication process, the expert made the following determination pursuant to clause 71:
(1) The expert determined that Lahey is entitled to payment of $3,772,997.56 by the Department in respect of the subject matter of Lahey’s claims under the MV contract.
(2) Given that Lahey has been paid $5,286,616.07 pursuant to the Adjudications, the Department is entitled to “set-off” or “repayment” of the amount it has paid to Lahey in excess of Lahey’s entitlement.
(3) The expert determined that the excess amount to which the Department is entitled to repayment by Lahey is $1,634,730.55.
(4) The expert determined that Lahey is entitled to payment of $5,152,071.41 by the Department in respect of the subject matter of Lahey’s claims under the Bardia contract.
(5) Given that Lahey has been paid $7,405,506.54 pursuant to the Adjudications in relation to the Bardia contract, the Department is entitled to “set-off” or to “repayment” of the amount it has paid to Lahey in excess of Lahey’s entitlement.
(6) The expert determined that the excess amount to which the Department is entitled to repayment by Lahey is $2,253,435.24.”
Lahey disagreed with the expert’s finding and commenced proceedings in the Supreme Court of NSW in relation to the issues that had been referred to expert determination. The Department, in its defence, contended that the expert’s determination under each of the Contracts was (on a proper construction of clause 71.8.2) below the $500,000 threshold and was accordingly final and binding. The Department was successful in seeking an order for summary dismissal of the proceedings (Lahey Constructions Pty Ltd v Department of Education  NSWSC 1158).
Lahey sought leave to appeal the orders for summary dismissal of the proceedings.
In considering the interpretation of clause 71.8.2, His Honour, Justice Gleeson, summarised the Department’s preferred construction as follows:
“ On the Department’s preferred construction, which the primary judge accepted, cl 71.8.2 requires that “of the Determined Amounts, no regard is to be had to ‘any amount that has been paid pursuant to the SoP Act’” [emphasis added]. That is, the adjustment required by cl 71.8.2 to the determined amounts … only deducts or adds back that part “of” the “determined amount” that has been paid pursuant to the SoP Act, and not all amounts that have been paid pursuant to the SoP Act.”
Gleeson JA summarised the Lahey’s preferred construction as follows:
“ On Lahey’s preferred construction, cl 71.8.2 requires an adjustment to be made to the amount which the determination requires one party to pay to the other by disregarding any payments the builder has already received under the SoP Act. That is, cl 71.8.2 requires the calculation of an “adjusted amount” by “adding back” or “deducting” from the “determined amount” any amount paid to the builder under the SoP Act.”
The basis for Lahey’s position was that any payments made under the Act are 'on account' only, and do not impact the parties’ final rights under the construction contract. Lahey further submitted that if the Department’s reading of the clause was preferred, a downstream contractor would be discouraged from submitting payment claims under the Act due to the potential risk of losing any right to litigate later disputes that may arise under the contract.
His Honour found that the proper construction of clause 71.8.2 was that put forward by Lahey. That is, an adjustment to the 'determined amount' is to be calculated by deducting or adding back amounts paid pursuant to the Act. This includes all payments whatsoever made pursuant to the Act and not merely the payments under the Act which were part of the “determined amount” (by the expert).
This construction is consistent with the nature of payments made under the Act, which are made on an interim basis only and not intended to impact the parties’ contractual rights. Expanding on this, his Honour stated that the objective purpose of clause 71.8.2 is:
“ …the parties have agreed that the value of their disputes for the purposes of the jurisdictional provision in cl 71.8.2 is to be ascertained by reference to the value of their claims unaffected by any payments made under the SoP Act, given that the parties’ contractual rights under the contract are unaffected by those payments.”
His Honour was in agreement with Lahey’s submission that, if the Department’s construction of the clause was preferred, there would be a perverse incentive for a contractor not to make payment claims under the Act, due to the risk that it may lose any possible right to litigate disputes. It was found that this result would be unreasonable and capricious.