Building & Construction Update, September 2006.

Contents

ACN V ABN

Implications Of The Australia-US Free Trade Agreement Regarding Tender Processes

Case Note: Biseja V NSI Group [2006] NSWSC 835

Reform Of Building And Development Certifications. The Detail Revealed.

A Valuable Lesson? John Goss Project V Leighton Contractors & Anor [2006] NSWSC 798

ACN V ABN

Should building contracts and all legal agreements generally contain a company's Australian Company Number (ACN) or Australian Business Number (ABN). Such a choice may prove critical with the enforcement of, or reliance on, a contract.

What Is The Difference?

ACN's were introduced many years ago with the purpose of providing each company with a unique identification number. Today, a builder or contractor can even have its name as its ACN. A company can only have one ACN.

ABN's were introduced with the GST on 1 July 2000. ABN's are typically the ACN plus a two digit prefix.

A single company, or a building company for example, may have more than one ABN. Joe's Building Pty Ltd may in fact hold an ABN in its own right, pursuant to a GST joint venture and also in its capacity as trustee of a discretionary or unit trust.

What Is The Best Number To Use In A Building Contract Or Legal Agreement Generally?

The use of an ABN could unintentionally reduce or limit the operation of a contract.

For example, Joe's Building Pty Ltd may have an ABN for itself and also an ABN for the discretionary trust under which its main business is conducted. If Joe's Building Pty Ltd enters into a building contract using the ABN for the company, arguments could arise as to whether the other party will have recourse to the trust assets. This would still be so despite a general clause in the contract citing that Joe's Building Pty Ltd enters into the contract in its own right and as trustee of a trust. This argument could arise as the specific use of an ABN may override general catch-all provisions within a contract.

An even more difficult situation could arise if the discretionary trust's ABN was used. Discretionary trusts do not comprise a separate legal entity and so arguments could arise as to whether the trustee is a party to the transaction at all.

Therefore it is important to use an ACN rather than an ABN when preparing a contract. An ABN is only appropriate on tax invoices.

by Rob St.Clair

Implications Of The Australia-US Free Trade Agreement Regarding Tender Processes

Background

The Australia-United States Free Trade Agreement (USFTA) commenced on 1 January 2005 and is binding on both Federal and State Governments. The agreement specifies new standards for government procurement and tender processes. The NSW Government, and its relevant departments, are all named within the agreement. In short, the agreement aims to ensure that government procurement is conducted with transparency and certainty, such that there are now obligations on government departments to rigidly adhere to tender evaluation procedures that have been advertised to prospective tenderers.

Tender Processes In Australia

Traditionally, government tender processes in Australia have been conducted in a somewhat 'loose' manner such that the government department would retain maximum discretion in selecting a successful tenderer. This was particularly the case in NSW where no legislation regulated their conduct. The landmark decision of Hughes Aircraft Systems International v Airservices Australia (1997) held that a contract could arise in the tender process such that failure to conduct a tender in accordance with a pre-advertised tender criterion could result in contractual breaches. Furthermore, each tender process contract would include an implied term of 'good faith' and 'fairness'. In reaction to this decision, Government has subsequently tried to ensure that tender documents and processes do not give rise to a 'tender process contract'. Many invitations to tender include clauses that either specifically exclude the possibility of a contract arising, or state that Government is 'under no obligation to accept the lowest tender, or any tender'.

Following the Hughes case, the concept of a 'tender process contract' has been widely-accepted in foreign jurisdictions as well as approved judicially within Commonwealth and State jurisdictions.

Recent Case Law

The Hughes decision paved the way for disgruntled tenderers to challenge a tender process. Since then, there have been several attempts in Australia and New Zealand which have argued for the existence of a tender process contract. Each of the leading cases either failed to incorporate sufficient terms to establish a breach or were unable to establish a breach of 'good faith' or 'fairness' (see for example Pratt Contractors Ltd v Transit New Zealand, Cubic Transportation Systems Inc v New South Wales, and Dockpride Pty Ltd v Subiaco Redevelopment Authority). Another issue raised in the Pratt Contractors case was the possibility of incorporating the terms of the government department's procurement code of conduct. In that case however, the relevant codes were not expressly incorporated. This could be a potentially successful argument in the future given that such codes of conduct may contain mandatory language unlike the tender documents themselves. '';KK

US Free Trade Agreement

Chapter 15 of the USFTA concerns 'Government Procurement'. Surprisingly, the USFTA is also binding on state governments named as specific parties. This extends to obligations being placed on every Australian state and many US states, with implications for each state governments' departments. Relevantly, 15.2 prescribes for the removal of any barriers which give rise to national discrimination; 15.6 prescribes that tendering criteria must be clearly advertised; 15.4 prescribes that government procurements should be widely advertised; and most importantly, 15.9 prescribes that:

'Unless a procuring entity determines that it is not in the public interest to award a contract, it shall award a contract to the supplier that the entity has determined satisfies the conditions for participation and is fully capable of undertaking the contract and whose tender is determined to be the lowest price, the best value, or the most advantageous, in accordance with the essential requirements and evaluation criteria specified in the notice and tender documentation.'

Finally, 15.11 prescribes that parties to the USFTA must implement a independent review system for tender processes.

The effect of these clauses, according to a NSW Treasury Circular dated 22 December 2004, is that existing government department procurement practices will have to be amended. Traditional 'loose' tendering processes will have to be discontinued. Further, the USFTA provides that bidders must be told clearly what selection criteria will be used and mandates a tender challenge procedure so that excluding a pre-award contract will be pointless. So far, only the Commonwealth appears to have amended its tendering processes in line with Chapter 15. A key reason for this is the Commonwealth's actual legislative implementation of the USFTA. In contrast to this, NSW has no legislative scheme governing tendering processes and generally has the loosest of all Australian Government tendering arrangements.

The extent of NSW's implementation is minimalist and the Treasury Circular is merely referred to in the NSW Tendering Guidelines [3]. The Guidelines are to be read together with the NSW Code of Practice Code of Practice [4] as a framework for government procurement which is expressly incorporated into tender processes. However, it would be difficult to argue that the USFTA chapter is actually incorporated into tender documents and that the majority of the language within the Guidelines is vague and aspirational rather than specific and mandatory. At this stage, it is doubtful that the USFTA is incorporated into domestic NSW law or tendering practice.

The Future

It is clear that for NSW Government to be in compliance with its obligations under the USFTA, it will have to implement tendering processes that are accountable, certain and can be challenged effectively. Without change, the NSW Government may leave itself open to legal challenge as disgruntled domestic and international tenderers seek to rely on lack of adherence to the USFTA. Continued 'loose' tender practices may be open to challenge on the grounds that their exclusion provisions are contrary to public policy. The USFTA bolsters the legislative currency of Hughes as governments will no longer be able to shy away from the implications of the decision.

by Michael Jools

Case Note: Biseja V NSI Group [2006] NSWSC 835

Background

This dispute relates to a project known as the 'North Entrance Stage 2 Project' between a developer, Biseja (plaintiff), and a builder, NSI (defendant). The plaintiff and defendant had a relationship spanning four years where they carried out a number of property development projects. Arrangement of payments had often been that the project management service fees were 10% of the cost of the building works and satisfied by the transfer of units in the completed development.

The Dispute

The parties fell into dispute and the defendant made a payment claim for payment of the management fee. The project management services were alleged to be "related goods and services" for the purposes of the Building And Construction Industry Security of Payment Act 1999 (the Act) and at no stage was this a contested issue in the adjudication.

The plaintiff did not provide a payment schedule nor an adjudication response to the defendant's subsequent adjudication application. The Adjudicator found that the defendant was entitled to be paid $1,774,494.00 compared to its claim of $2,268,095.08.

The plaintiff's case was that the Act did not apply to the parties agreement. The plaintiff relied on s7(2)(c) which provides that the Act does not apply to a construction contract under which it is agreed that the consideration payable for related goods and services supplied under the contract is to be calculated otherwise than by reference to the value of the related goods and services supplied. Therefore, the plaintiff argued that the determination was defective in a fundamental respect and void, having regard to the decision in Brodyn Pty Ltd v Davenport.

Justice Mcdougall's Decision

The defendant submitted that the agreement was confirmed and re-confirmed on separate occasions and was to the effect that three units were to be provided to the approximate value of $1,471,600 which was to represent their management fee.

Justice McDougall agreed with the Adjudicator and found that the project management fee (i.e. the consideration for the related goods and services) was to be quantified at 10% of the construction cost. The fee was not anything other than the 10%; the three units served to constitute its acquittal for the discharge of the obligation, not its quantification. Justice McDougall therefore found that the Adjudicator was correct in concluding that the agreement for provision of project management services was not caught by s7(2)(c) of the Act.

by Robert St Clair

Reform Of Building And Development Certifications. The Detail Revealed.

The Building Professionals Act (the Act) will regulate the accreditation, certification, discipline and other aspects of the operation of accredited certifiers in NSW, under one roof.

The Act was passed by the NSW Upper House in November 2005. The operation of its provisions is commencing progressively, albeit gradually, with the bulk of the reforms still to commence. Progress is being made towards its full commencement through the release of the exposure draft of the Building Professionals Regulation 2006 (the Regulation).

The exposure draft also sets out the specific requirements for accredited certifiers:

accreditation (categories and capabilities)

record keeping

professional indemnity insurance

matters and circumstances deemed to be a conflict of interest.

Accreditation Of Certifiers

The draft Regulation provides for a vast increase in the number of categories of accreditation. It proposes 32 categories divided into six groups. A certifier may be accredited in more than one category, provided the applicable prescribed qualifications are held and core competencies achieved.

The groups are:

construction certificates (4 categories)

compliance certificate (19 categories)

occupation certificates (3 categories)

subdivision certificate (1 category)

strata certificate (1 category)

complying development certificates (4 categories).

Accreditation Scheme

In support of the categories of accreditation, the Building Professionals Board (BPB) has issued a draft accreditation scheme. The scheme sets out the criteria that the BPB will use to determine if an applicant has the qualifications, skills, knowledge and experience required to be accredited to any given level. The scheme will require a specialty qualification (or equivalent) for the category of accreditation in which the person seeks to be accredited. For accreditation in any category, applicants will also need to satisfy the "core criteria" relating to good business and communication practices and knowledge of the compliance requirements of the Environmental Protection & Assessment Act and its regulations, Australian Standards, the Building Code of Australia (BCA) and other relevant regulations.

The scheme then proceeds to set out the specific knowledge, skill and experience requirements that will be required for each particular category of accreditation.

Insurance

The regulations proposed are based on existing insurance requirements for accredited certifiers set out in the Environmental Protection & Assessment Regulation. Accredited certifiers who operate as individuals will be required to maintain $1m of professional indemnity insurance cover for any one claim with an overall limit of $2m. Company and partnership requirements are determined by multiplying this requirement by the number of their accredited certifiers. There is an overall cap of $20m for all claims in any given year.

Record Keeping

It is proposed that Accredited Certifiers be highly-regulated in the type of records they are to maintain and the period for which such records are to be kept.

Records include:

applications for certificates

determinations

documents, plans and specifications relied upon for the purpose of issuing certificates

a list of projects in connection with which the certifier has issued Part 4A certificates setting out detailed particulars of each project

records of each critical stage or compulsory inspection

missed inspections.

These records are to be maintained for at least ten years. The regulations in relation to record keeping pose a significant administrative burden and will have cost implications for certifiers which will be reflected in the fees they charge.

Conflicts Of Interest

The Act sets out the circumstances in which issuing Part 4A or complying development certificates comprises a "conflict of interest". The proposed regulation makes it clear that where an accredited certifier has provided an advice on how to amend plans and specifications so as to comply with applicable law, the certifier is taken to be involved in the design of an aspect of the development and not entitled to certify it him/herself. This is also the case if the certifier proposed design options for a any aspect of development, including alternative solutions for compliance with the BCA.

No conflict will arise out of the accredited certifier issuing certificates in respect of a project where he or she has:

provided advice on where the plans or specification for that aspect comply with legislative requirements (including the BCA)

provided advice on whether the building or subdivision work complies with plans and specifications that aspect with the requirements of the BCA

identified matters to be satisfied before a construction certificate can be issued

indicated an alternative solution to satisfy the BCA

identified requirements of the BCA applying to the aspect, without giving advice about potential alternative solutions.

Changes, in the nature of "fine tuning", to the accreditation criteria and the conflict of interest provisions are likely to occur before the draft regulation commences, but, significant changes to other areas seem unlikely. The commencement of the regulation, in a form very close to its draft, looks to be primed for a 30 September 2006 start, putting in place the final and most significant part of the new regime for regulation of building certifiers in NSW.

by Robert Riddell

A Valuable Lesson?

John Goss Project V Leighton Contractors & Anor [2006] NSWSC 798

The principal issue in this case was whether an adjudicator had "valued" construction work such that section 22(4) of the Building & Construction Industry Security of Payment Act (1999) (the Act) bound a subsequent adjudicator to give the same work the same value.

Facts

Leighton Contractors (Leighton) entered into a subcontract with John Goss Projects (JG) to carry out construction work on the "Hilton Hotel project". In March 2006, JG made a payment claim for $3.2 million (inclusive of GST), made up of four component claims for construction work (March claim). Leighton responded with a payment schedule only admitting liability to the first component claim. The dispute in respect of the remaining three component claims (which were largely claims for delay and disruption costs) was referred for adjudication. The adjudicator of the March claim reasoned that there was a complete bar to JG's claims as they had not complied with clause 45 of the contract. Clause 45 operated to exclude JG's claims where JG had not provided written notice of its intention to make a claim within 10 business days of the date they became, or should reasonably have been, aware of the circumstances founding the claim.

JG made another payment claim in May 2006 (May claim) which replicated the disputed components of its March claim. Leighton's payment schedule disputed the progress claim primarily on the basis that:

the adjudicator of the March claim had determined the value of the construction work as being 'nil'; and

the adjudicator was bound, pursuant to section 22(4) of the Act, to give the works the same 'nil' value.

In its submissions, JG asserted that the adjudicator of the March claim had decided that JG had no entitlement to its claim, rather than determining the value of the works as 'nil' and, as such, section 22(4) of the Act did not apply. JG cited the Supreme Court's decision in Rothnere v Quasar [2004] NSWSC 1151(Rothnere) in which MacDougall J had discussed the word "value" in the context of section 22(4) of the Act. His Honour drew a distinction between an adjudicator valuing construction work and determining whether a claimant was entitled to be paid for the work, commenting:

"A determination under the Act may involve both questions of quantification - the section 10 issue - and questions of entitlement; or it may involve one or the other."

As Rothnere was decided on other grounds, His Honour's comments were not binding law.

In response, Leighton submitted that the facts in Rothnere were different from the facts before the adjudicator and that the case could be ignored. Leighton did not however submit that the distinction drawn in Rothnere was wrong at law.

Adjudication

The adjudicator decided that the distinction in Rothnere was "incorrect", that the earlier adjudicator had valued JG's claims as 'nil' and that s22(4) applied and bound him to value the May claim as 'nil'. The adjudicator decided that the word "value", in the context of sections 10 and 22(4) of the Act, "can only mean the consideration payable for construction work. If there is no consideration payable then the construction work has no value".

Supreme Court Challenge

JG challenged this determination in the Supreme Court, claiming that they had been denied natural justice and that the adjudicator had failed to exercise his powers under the Act in good faith. JG also separately sought a declaration that clause 45 of the contract was void by operation of section 34 of the Act. His Honour McDougall J heard the matter and found that the determination was void on the basis that the adjudicator had denied the parties natural justice. His Honour's reasoning was that:

the question of whether the adjudicator of the March claim had "valued" the work was a material issue for the adjudicator;

the adjudicator's decision that the distinction in Rothnere was incorrect was material to his determination; and

the adjudicator was obliged to give the parties an opportunity to make submissions as to whether the distinction in Rothnere was correct and had not done so.

McDougall J took the opportunity to bolster the distinction he drew in Rothnere, commenting:

"sections 9 and 10 make it clear that there is a distinction between the calculation of the amount of a progress payment (which is ultimately what the adjudicator is required to do) and the valuation of construction work. That is the distinction that I sought to point out (on reflection, in a way that was perhaps unduly brief and somewhat delphic) in para [43] of my decision in Rothnere."

JG having succeeded on its primary ground. It was unnecessary to consider whether the adjudicator had failed to exercise his powers under the Act in good faith however McDougall J made cautionary comments in relation to the Court overturning determinations for want of good faith.

"I think that courts should be slow to decide applications on the basis of a lack of "Brodyn" good faith unless it necessary to do so. In many cases it will be possible to decide an application on the basis of denial of natural justice; and if this is so, then that should be sufficient."

McDougall decided not to make a declaration that clause 45 of the contract was void by operation of s34 of the Act. His Honour's reasoning was that this notice requirement only operated to limit the work JG might include in a payment claim and did not impair JG's right under the Act to bring a payment claim within the 12-month period after ceasing work under the contract.

Conclusion

Adjudicators should, before making a determination based on a decision that obiter of the Supreme Court is incorrect, allow the parties to make submissions on the correctness of the Court's view.

Although the case does not decide the point, it appears that the Court will be unwilling to part easily with the distinction in Rothnere.

The Courts remain reluctant to find want of good faith in an adjudicators' decision.

A contract requirement to provide notice of an intention to make a claim at short notice does not amount to "contracting out of the Act".

by Daniel Fitzpatrick

> 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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