Heavy Plant Leasing Pty Ltd (In Liquidation) v McConnell Dowell Constructors (Aust) Pty Ltd (No 2) [2022] NSWSC 1775 

Andrew Hales  |   Maciej Getta  |  Sean Cooley

Key takeout

With the rise of insolvencies in the construction industry it is timely to look back on the issues resulting from the failure of Reed Constructions in the early 2010’s and to remember the importance of closely considering the terms of your contract.

Depending on the contract, a principal or superintendent may have the right to:

• ‘reassess’ both paid and unpaid amounts that have been previously certified as payable to a party as part of a new payment certificate assessment; and

• retain and withhold amounts that have been certified to be paid to meet indemnities and set off contingencies of any amounts that might be payable (as damages or otherwise) if a subcontractor breaches the contract.

It is also important to ensure that any such actions are undertaken in good faith and reasonably. Even if not expressly stated in the contract this duty may be implied.

Facts

This dispute arose out of a long running coal seam gas project in Queensland.  Fluor Australia Pty Ltd (Fluor) was appointed as head contractor.  Fluor subcontracted the works to McConnell Dowell Constructions (Aust) Pty Ltd (MDC), who subcontracted the civil works to Reed Constructions Australia Pty Ltd on 30 November 2011 (contract).  Before Reed was placed into voluntary administration, the contract was novated to Heavy Plant Leasing Pty Ltd (HPL) in June 2012.  A year later on 14 March 2013, HPL also had receivers and managers appointed and the contract was terminated.

Contentious claims

Before the contract was terminated there were a number of payment claims made and payment certificates issued:

Previously certified claims

Prior to PC14A and PC15, MDC had certified a number of earlier payment claims for various work items.

During February 2013, Fluor notified MDC that it was not satisfied that HPL had done the work it contended it had done.

Clause 10.2 of the contract entitled MDC to ‘take into account any dispute, withholding, claim, set-off, defence or counter claim of [Fluor]‘ in respect of any act or default of HPL when assessing HPL’s entitlement to payment.

The dispute

On 16 February 2013, MDC issued a notice of ‘breach of contract’ (1st notice) to HPL which stated that HPL had failed to pay its subcontractors.  In the 1st notice, MDC put HPL on notice that pursuant to clause 25.2 of the contract, it:

‘is entitled to retain out of any payment which would otherwise be payable to HPL…such monies as it may reasonably require to meet any contingent claim, action, proceeding, loss, damages, costs or expenses arising from or in connection with any breach by HPL of its obligations under the [contract].‘

On 25 February 2013, HPL issued payment claim PC16.

It was common ground that from 25 February 2013 onwards, HPL became insolvent.  On 28 February 2013, MDC and HPL met to discuss the amounts due and payable to HPL’s subcontractors by HPL.  The agreed (February arrangement) that:

1. if HPL could show that the amount owing to its subcontractors was less than the amount outstanding under the contract, MDC would pay to HPL the sum of the amounts due and payable to HPL’s creditors; and
2. once proof of payment was made to HPL’s creditors, MDC would pay the balance owning to HPL.

On 14 March 2013, receivers were appointed to HPL.  On 21 March 2013, MDC gave notice to HPL terminating the contract (2nd notice).  MDC then, primarily using HPL’s subcontractors, completed the civil works.

MDC sought to recover from HPL the loss that it alleged it had suffered as a result of this.

HPL however contended that MDC was in breach of the contract and it was not entitled to ‘de-certify’ previously certified payments (but not paid) and also previous amounts both certified and paid.  HPL alleged that it was implied in the terms of the contract that MDC would act reasonably and in good faith in the exercise of its powers under the contract, and that MDC breached the implied term when it certified PC16.

The question arose as to whether MDC was entitled to:

1. ‘de-certify’ payments previously certified (but not paid) and also previous amounts both certified and paid;
2. set off monies for contingent claims; and
3. terminate the contract.

Decision

‘De-certifying’ payments

The court held that clause 10 of the contract provided that certified amounts that had been paid to HPL were not evidence of the value of the work done or that the work had been done satisfactorily, and were not an admission of liability to pay, but were to be provisional and on account only.  This entitled MDC to reconsider and reverse amounts previously certified and paid to HPL.  The effect of clause 10.2 was that MDC was entitled to ‘take into account’ a dispute or withholding by Fluor when considering, among other things, the value of the work performed to date by HPL.

Set-off

The court held that under clause 25.2 of the contract, MDC was entitled to retain the amounts as stated in Certificate 16, and that it was not in breach of the contract.

While there is no authority that states a duty of good faith is to be implied in all commercial contracts, there is a recognised obligation of a certifier, assessor, valuer or administrator of a construction contract to act reasonably and in good faith in accordance with the contract and to benefit the parties to the contract.  MDC’s assessment of PC16 was made in good faith, as MDC:

• was entitled to ‘take into account’ such matters as necessary when considering the value of the work; and

• had no obligation to make payments to HPL’s subcontractors, but exercised its powers under the contract to do so anyway.

The amount retained was reasonably required to meet the contingency that MDC might itself have to pay HPL’s subcontractors or otherwise meet the contingent damage, cost or expense by reason of HPL’s failure to comply with its obligations under the contract and pay its subcontractors.  To the extent that MDC retained amounts prior to 28 February 2013 (ie Certificates 14A and 15), the effect of the February arrangement was that HPL waived any entitlement to rely upon, or was otherwise precluded from relying upon, any breach of contract that such retention might have represented.

Termination

The court held that MDC was entitled to terminate the contract if HPL:

• was insolvent; and

• committed a substantial breach of the contract.

HPL submitted that the effect of the February arrangement was that MDC affirmed the contract, despite HPL becoming insolvent 3 days prior on 25 February 2013.  MDC did not have sufficient knowledge of HPL’s financial position to justify a conclusion that it affirmed the contract knowing HPL was actually insolvent.

HPL’s failure to pay its subcontractors was ‘undoubtedly a “substantial breach” of the contract’, and that HPL failed to remedy that breach.

Accordingly, HPL’s claims for breach and wrongful termination were dismissed.

MDC’s claim for damages

MDC was entitled to an award of damages to place it in the same situation (as far as money can) as if HPL had performed the contract.  The calculation is to be made by deducting the amount that MDC would have paid to HPL to complete the entirety of the civil works from the sum of the costs incurred by MDC in completing the civil works and the amounts already paid to HPL.

The court was not in a position to determine precisely what relief MDC is entitled to.  The parties are to confer and agree on the next steps to finalise the proceedings.