Construction update: J Hutchinson Pty Ltd v Glavcom Pty Ltd

Background

In the recent NSW Supreme Court decision of J Hutchinson Pty Ltd v Glavcom Pty Ltd [2016] NSWSC 126, Justice Ball considered an adjudicator’s determination made under s 22 of the Building and Construction Industry Security of Payment Act 1999 (NSW) (SOP Act).

J Hutchinson Pty Ltd (Hutchinson) and Glavcom Pty Ltd (Glavcom) entered into a subcontract under which Glavcom agreed to undertake the design, fabrication and installation of joinery in a new residential and commercial redevelopment in return for payment of $5.3m.

Under the terms of the subcontract Hutchinson was required to give Glavcom exclusive access to the site on 14 August 2014. Despite this requirement, Glavcom was not given access until late March or early April 2015.

In November 2015, Glavcom served Hutchinson with a payment claim for the sum of $2,948,510.80. In response to this payment claim, Hutchinson served a payment schedule stating the amount owing as -$6,322,578.96, comprised largely of a setoff of $4,325,200.00 in liquidated damages for delay in completing the work.

The adjudicator found that Hutchinson could not rely on a fundamental breach of the subcontract (being the failure to grant exclusive access to the site by the agreed date) to claim liquidated damages and consequently determined that Hutchinson owed $1,263,399.72 to Glavcom in respect of the payment claim.

Hutchinson sought to have the adjudication determination set aside on a number of grounds.

The statutory declaration

Justice Ball considered Glavcom’s submission that clause 37 of the subcontract, which required Glavcom to provide Hutchinson with a statutory declaration that all subcontractors and employees had been paid, was void as it was a precondition to a reference date arising.

Justice Ball noted that while section 8 of the SOP Act provides that a contract can fix or provide a method for fixing a reference date, it should not be interpreted as permitting other conditions to be attached to the occurrence of a reference date or a right to receive a progress payment. As section 34 of the SOP Act prevents provisions of a contract from restricting or modifying the operation of the SOP Act, clause 37 of the subcontract was found to be void for modifying or restricting the entitlement to a progress claim.

As clause 37 was found to be void, it was severable from the subcontract and therefore could not be considered by the adjudicator in his determination.

Jurisdictional issues

Hutchinson submitted that the adjudicator made a number of jurisdictional errors in his determination.

One main jurisdictional error was that the adjudicator failed to comply with the rules of natural justice by considering a principle that was not raised by Glavcom in its adjudication application.  The relevant principle considered by the adjudicator was that a party cannot take advantage of its own fundamental breach of a contract.

Despite the adjudicator not exploring a number of issues concerning the principle in his determination, Justice Ball  found that Glavcom did raise the principle and that Hutchinson had an opportunity to deal with it, but for whatever reason did not do so. Accordingly, Justice Ball did not consider that there had been a denial of natural justice.

Adjudicator’s power to deduct liquidated damages

Although Justice Ball did not consider it strictly necessary, he considered Glavcom’s submission that even if the adjudicator did make a jurisdictional error, Hutchinson was not entitled to deduct for liquidated damages from the amount claimed by Glavcom.

It was accepted that the subcontract did not provide a method for calculating the amount of a progress claim, so the amount must be determined in accordance with section 9(b) of the SOP Act. This section provides that the amount is to be calculated on the basis of the value of the construction work carried out or undertaken to be carried out.

Justice Ball found that in the face of clear language it was difficult to see how a right of setoff can be implied into section 9 of the SOP Act. If the parties had wanted such a right of setoff, they were free to do so by including a provision in the subcontract this this effect.

Despite this finding, Justice Ball held Glavcom would have been prevented from raising this issue during this proceeding, as it was an issue relevant to the determination of the amount payable to Glavcom in respect of its payment claim, but was not raised by Glavcom before the determination by the adjudicator.

Key take home messages

• Clauses which set out preconditions to a contractor’s entitlement to claim or be paid a progress payment are likely to be void and severable from the contract pursuant to the NSW SOP Act.
• A right of setoff in the calculation for progress payments (eg for liquidated damages) must be expressly provided for in the contract as it will not be implied by the NSW SOP Act.