Duffy Kennedy Pty Ltd v Galileo Miranda Nominee Pty Ltd

WHITE JA: This is an appeal from orders of the Equity Division (Parker J) in relation to a dispute concerning a design and construction contract of two residential tower buildings (Galileo Miranda Nominee Pty Ltd v Duffy Kennedy Pty Ltd [2019] NSWSC 1157). The appellant, Duffy Kennedy Pty Ltd (“DK”) was the Contractor. The respondent, Galileo Miranda Nominee Pty Ltd (“Galileo”) was the Principal.

On 18 April 2017 the parties entered into a contract for DK to design and construct two residential buildings, car park, pool and other facilities as part of a development at Miranda known as the Palisade. The Contract Price was a lump sum amount of $65,758,576 exclusive of GST.

Practical completion was due on 18 February 2019.

On 26 February 2019 DK issued payment claim 26 claiming payment due of $1,010,161.72.

On 12 March 2019 Galileo’s Principal Representative (Resource Co-ordination Partnership Pty Ltd (“RCP”)) issued a payment certificate for progress claim 26 for $293,984.42 and a payment schedule assessing that as the amount due. (These figures are exclusive of GST.)

The contract provided that the Principal was to pay the Contractor the amount certified for payment in the Payment Certificate within 15 business days of the issue of the Payment Certificate (Clause 19.6(1) and Item 31). It is common ground that the amount of $293,984.42 plus GST was payable by Galileo to DK on 19 March 2019. That sum was not paid on that day. The primary judge found that Galileo initiated an electronic payment of the amount due ($323,382.86) on 22 March, which was a Friday. Payment did not reach DK until the following Monday, 25 March (Judgment [29]).

On Monday, 25 March 2019 at 4:43pm DK gave two notices to Galileo. One notice was given under s 16(2)(b) of the Building and Construction Industry Security of Payment Act 1999 (NSW) (“the Security of Payment Act”). That notice stated:

DK also issued a notice under clause 23 of the Contract. That clause gave it the right to suspend works if the Principal defaulted in making any payment to the Contractor under the Contract and that default continued for more than 14 days after the Principal received written notice from the Contractor that it intended to exercise a right under that clause. DK did not rely on the notice under clause 23 of the Contract.

Neither notice stated that the default alleged was in failing to pay interest.

Clause 19.8 and item 6 of the schedule to the contract provided for interest to be payable at the rate of 10 per cent per annum from the date after payment was due until the date the amount was paid.

Section 11(2) of the Security of Payment Act gave DK a statutory right to interest on the unpaid amount of a progress payment that had become due and payable.

Section 16 (which is considered in more detail below) provided that where the Principal failed to pay the scheduled amount on or before the due date for the progress payment to which the payment claim related (viz. 19 March 2019), the claimant (DK) could (amongst other things) “serve notice on the respondent of the claimant’s intention to suspend carrying out construction work ... under the construction contract.”

Section 27 relevantly provides:

On 28 March 2019 DK gave notice to Galileo that it was immediately suspending work. The notice was purportedly given under s 23(1) of the Security of Payment Act. This was an evident mistake. Nothing turns on the mistake.

The primary judge found that DK was entitled to suspend the carrying out of construction work on the day of 28 March (that being the next day after the expiry of two business days after service of the notice of intention to suspend work) (Judgment [59])). The primary judge found that that right expired at the end of 28 March, that being the end of three business days after DK received payment of the “scheduled amount”.

DK contended that it had a statutory right to continue to suspend work until interest on the scheduled amount was paid. It did not articulate that contention until 12 April 2019 in its response to a “show cause” notice referred to below. It then claimed an entitlement to interest of $177.20. That amount was paid on 15 April 2019.

Clause 24.1 of the contract provides:

On 29 March 2019 DK was served with a notice purportedly given under clause 24.1 requiring it to show reasonable cause why Galileo should not exercise a right referred to in clause 24.1(8) to terminate the contract or take work out of the hands of the contractor. The notice was signed by a Mr Martoo on behalf of RCP and a Ms Elizabeth Jumikis on behalf of Galileo. The notice was on Galileo’s letterhead. The notice alleged that DK had breached the contract in a number of respects.

The respects in which Galileo sought to maintain the validity of the notice at trial were that DK had wrongly and without reasonable cause suspended the carrying out of works, and had failed to proceed with the works with due diligence or in a competent manner, in breach of warranties in the contract. In respect of the latter contention, the notice asserted that DK had failed to achieve Practical Completion by not having provided the Principal Certifying Authority (McKenzie Group Consulting (NSW) Pty Ltd) (“McKenzie Group” or “the PCA”) with items required to be completed in order to obtain the occupation certificate required for Practical Completion.

Practical Completion was defined (clause 1.1(44)). Practical Completion was not achieved merely by the Works being complete and fit for their Intended Purpose except for Minor Defects. Practical Completion also required the provision to the Principal’s Representative of documents specified in item 17 of schedule A. These included a Final Certificate of Occupation under the Environmental Planning and Assessment Act 1979 (NSW). The show cause notice identified tasks which were required to be completed to the PCA’s satisfaction in order for the Occupation Certificate to be issued and consequently Practical Completion to be achieved. The notice asserted that DK was required to complete those tasks.

On 26 March 2019 RCP had given a “Principal’s Representative Direction” (“PRD”) No. 56 requiring the contractor to submit a “completed certification list and schedule for installed fire-stopped penetrations of control joints in a form described in figures B1 and B2 to AS4072.” RCP said that those forms clearly required the Contractor to provide an itemised penetration schedule. McKenzie Group had insisted on the provision of such a schedule as a condition for issuing an Occupation Certificate.

The notice to show cause of 29 March also required DK to comply with what were said to be legislative requirements in respect of “balustrade compliance in four apartments”. The notice stated that DK had been aware of this particular failure since 9 October 2018 when it had been notified by the PCA and had continued to fail to remedy the non-compliance.

DK was directed to provide “a list of all the things required to achieve Practical Completion and the date upon which it expects to achieve Practical Completion.”

On 12 April 2019 DK provided a response to the Notice to Show Cause. It did not challenge the fact that the Notice had been issued on the letterhead of Galileo and signed for Galileo as well as RCP. In its response DK identified for the first time that it relied upon non-payment of interest of $177.20 payable in respect of the late payment of the scheduled amount specified in RCP’s payment schedule of 12 March 2019. DK asserted that the unpaid interest formed part of the scheduled amount. On this basis it claimed that it had validly suspended the works.

DK denied that it had not proceeded with the works with due diligence or in a competent manner to bring the works to completion by the date of Practical Completion. It claimed that it was entitled to an extension of time for the date for Practical Completion.

On the hearing of the appeal Mr Hicks SC, who appeared with Mr Ahmed and Mr Anwar for DK, accepted that DK was required to comply with the Principal’s Representative’s Direction under clause 7.1(4). That clause provided that if the Principal’s Representative gave a Direction, the contractor was required to comply with the direction either within the stated time, or, if no time were stated, promptly. Mr Hicks submitted that DK had complied with its contractual obligation to provide information about fire penetration locations, but accepted that DK could not refuse the direction of 26 March 2019. He submitted in substance that the direction changed the contractual position, but submitted that DK did not refuse to provide the document and was not in breach as at the date of the show cause notice because DK had not refused to provide the information sought and had not had time to do it.

In its response of 12 April 2019, DK did not acknowledge that it would provide a fire penetration schedule or raise the height of the balustrades. Instead, it said it intended to prepare a letter to be sent by the Principal to the PCA which would ask the PCA to explain why it had changed its opinion in respect of the balustrades and would ask the PCA why it considered it appropriate or necessary to “go behind” any of the certificates given, particularly having regard to s 6.30 of the Environmental Planning and Assessment Act. It is not clear how this response was relevant.

DK stated that it had analysed the work required to be done to achieve Practical Completion and set out those works in schedule 2 to its response. In its schedule 2 it did not acknowledge that it was required to provide the penetration schedules sought by McKenzie Group or to raise the balustrades. In substance it asserted that it had completed all works required of it.

Clause 24.2 provides:

On 29 April 2019 Galileo gave a “take out notice” to DK. The notice was also signed by Mr Mark Dibben of RCP. The notice stated that the Contractor had failed to show reasonable cause by the date and time stipulated in the Show Cause Notice. It stated that pursuant to cl 24.2(1)(d) the Principal “... hereby takes out of the contractor’s hands the whole of the work under the Contract remaining to be completed.”

On 1 May 2019 DK, through its solicitors, gave notice that it considered Galileo’s take out notice of 29 April 2019 to be a repudiation of the contract. DK stated that it accepted the repudiation and elected to terminate the contract.

On 2 May 2019 McKenzie Group issued an interim occupation certificate excluding four apartments on level 7. In a covering letter to DK, McKenzie Group stated:

Also on 2 May 2019 Galileo filed a summons in the Technology and Construction List. It sought various orders to give effect to the take out notice. It also sought orders that DK immediately provide it with a completed penetration schedule as required by the PCA and in accordance with details at annexure A to its notice of 29 April 2019, and an order that DK provide to it a copy of all contracts with subcontractors.

On 10 May 2019 DK filed a cross-summons. It sought the following relief as well as costs:

The primary judge recorded that the proceedings were initially brought on an urgent basis, but that Galileo accepted that DK had left the site. Some claims for relief associated with that had fallen away and another claim in the summons had been resolved. The primary judge recorded that shortly before the hearing an interim occupation certificate was issued for the four remaining units on level 7. The primary judge then recorded that as a result of those developments, the only order sought by Galileo was the order that DK complete the penetration schedule and an order that it provide Galileo with copies of its subcontracts. His Honour noted that to establish its entitlement to that relief Galileo needed to show that the take out notice was valid. DK’s claim for relief in its cross-claim depended upon its showing that the take out notice was invalid. It was common ground that the take out notice could not validly rely on an alleged breach of contract by DK unless DK were in breach at the time the show cause notice was issued (Judgment [20]).

The primary judge rejected DK’s submission that it had a statutory entitlement to maintain its suspension of works on 29 March (and subsequently up to 18 April) by reason of Galileo’s failure to pay interest (Judgment [43]-[59]).

DK argued before the primary judge that even if it did not have a statutory right to suspend work for non-payment of interest payable as a result of the late payment of the scheduled amount, its suspension was not “without reasonable cause” (Clause 24.1(1)). The primary judge rejected that argument. He noted that DK had not specifically identified the failure to pay interest in its correspondence with Galileo up to 29 March as a ground for suspending the works (Judgment [61]). His Honour said that the amount of interest was miniscule in the scheme of things and the suspension of work was a completely disproportionate response to the failure to pay interest (Judgment [68]).

The primary judge found that when the show cause notice was given DK was also in breach of contract by not having provided the penetration schedule required by McKenzie Group. The breach was twofold. First, provision of the schedule was required in order to procure an occupation certificate (Judgment [128], [138]-[143]). Secondly, the penetration schedule was required by terms of the contract which picked up the requirements of Australian Standard AS4072.1 (Judgment [144]-[146]).

The primary judge also held that DK was in breach of contract by not complying with McKenzie Group’s requirement to increase the height of the balustrades (Judgment [152]-[153]).

The primary judge rejected DK’s submission that the show cause notice was invalid because it was not “issued” by the Principal’s Representative (Judgment [215] and [216]). The primary judge also rejected DK’s submission that the Principal’s Representative had not given adequate or proper consideration as to whether the notice should be issued. His Honour held that the issue of a show cause notice under clause 24.1 did not depend on the exercise of any judgment by the Principal’s Representative and there was no implication that the Principal’s Representative, in issuing the notice, was required to act in good faith, or honestly, or reasonably (Judgment [221] and [225]). The primary judge also held that, in any event, the relevant officers of RCP did consider the provisions of the contract. They concluded that DK was in breach in the respects identified in the draft notice, and this conclusion was not only reasonably open to them, but was correct. The primary judge concluded there was no lack of honesty, good faith or reasonableness (Judgment [226]).

The take out notice was given pursuant to clause 24.2 of the contract, which is quoted at [29] above.

The primary judge assumed that clause 24.2(1) imposed an obligation on RCP to act in good faith and reasonably in forming a state of dissatisfaction with DK’s show-cause response (Judgment [238]). The primary judge concluded that there was no lack of reasonableness or good faith in RCP’s declining to be satisfied that DK had shown cause (Judgment [248]). The primary judge rejected DK’s argument that RCP improperly took into account what was said by a Mr Pratt of DK in a “dispute meeting” between representatives of RCP and DK which was said to have been held on a without prejudice basis. The primary judge held that the meeting was conducted on a without prejudice basis, but that did not preclude RCP from relying upon what was said in the meeting in forming a view as to its satisfaction or lack of satisfaction with DK’s response to the show cause notice (Judgment [250]-[253]).

The primary judge also held that in any event, nothing that was said at the meeting by Mr Pratt added anything that RCP did not already know and what was said involved no change to DK’s position (Judgment [254]). The primary judge rejected DK’s attack on the validity of the take out notice.

Finally, the primary judge rejected DK’s claim that it was entitled to the return of security. His Honour held that the security was required for due performance of the contract as obligations under the contract (clause 18.2), and that included liabilities that could arise after the take out notice, including liability to pay damages, as well as accrued liabilities (Judgment [267]).

For the reasons which follow, I agree with each of the primary judge’s conclusions and generally with his reasons. The appeal should be dismissed with costs.

Grounds 1 and 2 of the notice of appeal were:

As noted above (at [16]), DK submitted that it had a statutory right to continue to suspend work after 28 March 2019 because Galileo had not paid interest on the scheduled amount of $293,984.42 for the period from 19 March 2019 to the date of payment (25 March).

The primary judge rejected this contention.

Sections 15 and 16 of the Security of Payment Act are contained in Div 1 of Pt 3. Part 3 is headed “Procedure for recovering progress payments”. Division 1 is headed “Payment claims and payment schedules”.

Sections 17 and 24 are contained in Div 2 of Pt 3. Division 2 is headed “Adjudication of disputes”.

Section 27 is in Div 3 of Pt 3. Division 3 is headed “Claimant’s right to suspend construction work”.

Sections 13 and 14 (also in Div 1 of Pt 3) provide for the making of progress claims by persons who, under a construction contract, have undertaken to carry out construction work (or to supply related goods and services) and who are or claim to be entitled to progress payments. In response to service of a payment claim the respondent may reply to the claim by providing a payment schedule to the claimant (s 14(1)). Section 14(2) provides:

The definition of “scheduled amount” in s 14(2) is consistent with the definition of that expression in s 4. Section 4 provides that “scheduled amount” means “the amount of a progress payment that is proposed to be made under a payment schedule, as referred to in s 14”.

Section 15 deals with the case where the respondent fails to provide a payment schedule within the time allowed by s 14. It relevantly provides:

“Claimed amount” is defined in s 4 as follows:

Section 16, upon which DK relies, relevantly provides:

If a claimant elects to make an adjudication application in relation to the payment claim pursuant to s 16(2)(a)(ii) the adjudicator is to determine the amount of the progress payment to be paid by the respondent to the claimant (the “adjudicated amount”), the date on which such amount became payable and the rate of interest payable on such amount (s 22(1)).

If an adjudicator determines that a respondent is required to pay an adjudicated amount, the respondent must pay that amount within five business days unless the adjudicator determines a later date for payment (s 23).

Section 24 relevantly provides:

The adjudication certificate can be filed as a judgment debt (s 25).

Section 11 relevantly provides:

None of ss 15(1), 16(1) or 23(2) provides for the payment of interest on an amount that is payable by the respondent under any of those provisions.

It is clear from the definition of “scheduled amount” that the amount does not include interest payable under s 11 on the unpaid amount of a progress payment unless that amount is included in a scheduled amount. Interest under s 11(2) is payable not on a scheduled amount as such, but on a progress payment that is due and payable. A contractor can include in its payment claim a claim for interest on amounts of progress payments to which it claims to be entitled and which have not been paid or have not been paid in full. However, interest payable because of the late payment of the scheduled amount is not itself part of the scheduled amount. That follows from the definition of scheduled amount. It is also consistent with the heading and structure of Pt 3.

Part 3 deals with the procedure for recovering progress payments, not with the recovery of all amounts that might be payable under the Act. It is open to a claimant to make an adjudication application in relation to an unpaid portion of a claimed amount where the respondent has failed to provide a payment schedule within the time allowed by s 14, or where a respondent fails to pay the whole or part of a scheduled amount on or before the due date for the progress payment to which the payment claim relates (s 16(1)(d)). If a claimant proceeds by way of making an adjudication application, the adjudicator’s determination must specify the rate of interest payable on an adjudicated amount (s 22(1)). The nominating authority can be asked to specify the amount of such interest that is to be included in an adjudication certificate to be registered as a judgment debt (s 24(4)). These provisions are inconsistent with such interest being part of the scheduled amount. They are consistent with the definition of “scheduled amount” in ss 4 and 14(2)(b) as being the amount identified by the respondent in its payment schedule as the amount it proposes to pay.

If interest payable on the late payment of a scheduled amount were itself to be taken as part of the scheduled amount for the purposes of s 16(1)(d), then by parity of reasoning it would have to be part of the “unpaid portion of the scheduled amount” within the meaning of s 16(2)(a)(i) that was recoverable as a debt due to the claimant in a court of competent jurisdiction. In such proceedings the respondent would not be entitled to raise any defence “in relation to matters arising under the construction contract” (s 16(4)(b)(ii)). That would be so even if the claimant claimed interest from the date the scheduled amount became payable at a rate different from the rate of interest payable under s 11(2), for example 20 per cent rather than 10 per cent as specified under the construction contract in issue in the present case.

DK argued that this consequence would not follow. It argued that it would be open to the respondent to challenge the amount of interest claimed in such proceedings if the interest was not payable as provided for by s 11(2). But if interest were claimed at a rate said to be specified under the construction contract, it would not be possible for the respondent to raise a defence to the claim by reason of s 16(4)(b)(ii). This is a further indication that interest that is payable as a result of the late payment of a scheduled amount is not itself part of the scheduled amount.

The current provisions were introduced by the Security of Payment Amendment Act 2002 (NSW). DK relied upon the Minister’s Second Reading Speech and the Explanatory Memorandum. The Minister in his Second Reading Speech stated that “It is proposed to allow the claimant up to three business days to resume work after the claimant has been paid all moneys due under the Act.” The Explanatory Note stated that “Schedule 1 [41] provides that the right of a claimant to suspend work under a construction contract exists up until three business days after the date the claimant receives payment for the amount that is payable by the respondent under the Act.”

In fact, the Act does not so provide. Section 27(2) provides that the right to suspend construction work exists until three business days after the claimant receives payment for the amount payable by the respondent under s 15(1) (the “claimed amount” where the respondent failed to provide a payment schedule), s 16(1) (the “scheduled amount”), or s 23(2) (“the adjudicated amount”). It does not provide that the contractor is entitled to suspend works until those amounts and interest payable by reason of the late payment are paid.

It is not possible by adopting a purposive construction of the Act to reconstruct the text of the Act so to provide (Taylor v The Owners – Strata Plan No 11564 (2014) 253 CLR 531 at [37]-[39]; Wentworth Securities Ltd v Jones [1980] AC 74 at 105-106).

The primary judge reached the same conclusion for substantially the same reasons: He said:

I agree.

DK argued before the primary judge that even if its construction of the Security of Payment Act were wrong it did not suspend work without reasonable cause within the meaning of cl 24.1, because it acted in good faith and on a bona fide (and reasonable) construction of the Act. As noted at [37] above the primary judge rejected this submission (Judgment [60]-[68]). It was not pressed on appeal.

Ground 3a. of the Notice of Appeal was as follows:

As noted above at [18] the Show Cause Notice of 29 March 2019 was issued on Galileo’s letterhead. It was prepared by Galileo’s lawyers. It was sent to DK on 29 March 2019 at 2.04pm by Ms Jumikis, who was Galileo’s internal lawyer. It was signed by Mr Martoo on behalf of RCP and by Ms Jumikis on behalf of Galileo.

Clause 24.1 is quoted at [17] above.

The issue raised by ground 3(a) of the notice of appeal is whether the show cause notice of 29 March 2019 was issued by the Principal’s Representative within the meaning of clause 24.1. DK submitted that it was not because of Galileo’s involvement in the preparation, signing and sending of the notice. In her affidavit of 1 May 2019 Ms Jumikis deposed that on 29 March 2019 Galileo served on DK the notice to show cause. She deposed that Galileo issued the notice to show cause because DK had wrongfully and without reasonable cause suspended the carrying out of the work under the contract and had failed to proceed with the works with due diligence or in a competent manner and was in breach of warranties under certain clauses.

DK submitted that RCP (the Principal’s Representative) made little or no independent assessment of the assertions in the notice to show cause, and simply countersigned the document at the request of Galileo. It submitted that under clause 24.1 the Principal’s Representative was required to exercise its own discretion as to whether or not a notice to show cause should be issued and that RCP failed to do that.

As to DK’s argument that the show cause notice was not “issued” by RCP, the primary judge said (at Judgment [216]):

As to the submission that RCP had not given adequate or proper consideration to whether the notice should be issued, the primary judge said:

The primary judge was correct in holding that RCP was satisfied that the notice should be issued and was satisfied with the grounds for the giving of the notice as stated in it.

A draft of the show cause notice was prepared by Galileo’s external lawyers, Mills Oakley. They sent a draft version of the notice to Ms Jumikis of Galileo at 3.14pm on 28 March 2019. This was forwarded by Ms Jumikis to Messrs Hughes and Dibben of RCP. Ms Jumikis asked that RCP review the draft notice as a matter of urgency and advise Galileo if they had any issues with it.

Twenty minutes later Mr Hughes forwarded that email to Mr Martoo, a director of RCP, stating:

Mr Martoo responded at 5:06 PM in an email addressed to Messrs Hughes and Dibben. That email was in the following terms:

An hour later Mr Dibben sent an email to Mr Martoo and Mr Hughes (all of RCP) attaching a hyperlink to the draft show cause notice and attaching his comments on the document. Mr Dibben’s comments on the draft notice were extensive. Against critical assertions, such as that “the contractor has failed to achieve Practical Completion by the Date for Practical Completion.” He stated, “this is correct”.

On the morning of 29 March 2019 Ms Jumikis’ emailed Mills Oakley with a copy of the draft notice incorporating RCP’s comments and suggestions. They were incorporated in a redraft of the notice.

The draft of the notice as originally prepared by Mills Oakley provided for the document to be sent on RCP’s letterhead. Ms Jumikis sent a further email advising that the notice would be sent on Galileo’s letterhead as “RCP would need to get external legal advice in order to put it on their letterhead.”

Mr Dibben replied with further comments and suggestions as to the notice and said that RCP was happy to countersign the notice on Galileo’s letterhead.

At 12.26pm on 29 March Mr Martoo forwarded the show cause notice signed by him for RCP stating that RCP had signed the letters as the Principal’s Representative. He noted that “the correspondence has been prepared by Galileo ... on the basis of their own legal advice.”

The notice to show cause was served at 2.04pm on 29 March 2019.

The primary judge said:

It does not follow that because the parties agreed that whether clause 24.1 was triggered depended upon whether the contractor was actually in breach and not upon whether the Principal’s Representative believed that it was in breach, that the decision whether to issue the show cause notice (called by the primary judge a “default notice”) could not involve the exercise of a discretion as prima facie indicated by the use of the word “may”. As I understood it, Galileo was prepared to concede such a construction. But it submitted that that did not mean that RCP had to exercise its judgment independently of the Principal. I agree. RCP was of the view that DK was in breach. It agreed with the final version of the show cause letter after making amendments to the earlier draft. It agreed that the notice should be issued by signing the notice and agreeing to its being sent. It issued the notice as the primary judge correctly found.

DK submitted that RCP had a dual role, acting as the agent of Galileo in certain functions and as an independent assessor in other functions. It submitted that because the power to issue the notice under clause 24.1 was vested in the Principal’s Representative and not in the Principal, its role in issuing the notice was as an independent assessor and not as an agent of Galileo. Otherwise the power to issue the notice to show cause would have been given to the Principal and not to the Principal’s Representative. It reasoned that it followed that Galileo should not have been involved in RCP’s exercise of the power under clause 24.1.

I do not agree. As the primary judge observed, the issue of a notice to show cause did not immediately affect the contractor’s rights, but allowed it to show cause why the Principal should not terminate the contract or take the work out of its hands or, depending on the nature of the breach, to remedy the default. Under clause 24.2 the right of the Principal to terminate the Contract or to take the remaining work out of the hands of the Contractor only arose if the Contractor failed to show cause or remedy the default to the satisfaction of the Principal’s Representative (clause 24.2(1)).

Clause 7.1(1) provided:

Because the Principal was required to ensure that the Principal’s Representative acted in accordance with the Contract, there was necessarily a degree of supervision by the Principal of the work of the Principal’s Representative. That would not preclude the Principal’s Representative from exercising an independent function if that were provided for by the Contract.

However, there is nothing in clause 24.1 and 24.2 to indicate that the Principal’s Representative cannot have regard to the views of the Principal in deciding whether to issue a notice to show cause under clause 24.1.

Clause 24.1 states that the clause does not limit any right of the Principal. One of the Principal’s rights is to see that the Principal’s Representative acts properly to protect the Principal’s interest in the due performance of the Contract. It would be inconsistent with that right if the Principal could have no involvement in the Principal’s Representative’s decision whether or not to issue the notice under clause 24.1.

Galileo submitted that it was clear that the Principal should have an involvement in the decision to issue a notice under clause 24.1 because the notice had to do one, or perhaps more than one, of three things as specified in clause 24.1(8) and (9): that is, either show cause why the Principal should not terminate the contract, or show cause why the Principal should not take the remaining work out of the hands of the Contractor, or remedy the default.

I do not accept the latter aspect of this submission. The better construction of clause 24.1 is that depending upon the nature of the default, the notice should require the Contractor either to show cause under subclause (8) or remedy the default under subclause (9) (if the default is capable of remedy). I do not accept that the notice must specify only one of the courses that may be open to the Contractor in the event of a default that gives rise to the issue of the notice.

Nonetheless, the fact that it is ultimately for the Principal to decide under clause 24.2 as to what action might be taken under that clause (if clause 24.2(1)(a) is engaged) shows that it would be an unbusinesslike construction to say that the Principal could have no involvement in the exercise of the Principal’s Representative’s discretion to issue a notice under clause 24.1 (McCann v Switzerland Insurance Australia Ltd (2000) 203 CLR 579 at 589 [22]; [2000] HCA 65; Muriniti; Newell v Lawcover Insurance Pty Ltd (No 2) [2018] NSWCA 311 at [41], [51]).

DK challenged the primary judge’s finding at [226] (quoted at [79]) above that it was not suggested to Mr Dibben or to Mr Hughes in cross-examination that they did not actually believe that DK was in breach. DK submitted that this was an irrelevant finding because there was no finding that anyone with appropriate authority formed the view that DK was in breach. DK submitted that it was only Mr Martoo who had that authority and he was not called.

However, it is clear that Messrs Dibben and Hughes formed the view that DK was in breach. There is no reason that Mr Martoo was not entitled to rely on their views in deciding to sign the notice. In any event, their views could be attributed to RCP. Mr Dibben was not a director of RCP at the date of the notice. He was appointed a director on 1 April 2019, a bare three days after the notice was issued. He deposed to his understanding that DK was in substantial breach of the Contract in the respects identified in the notice. When the notice was issued he was the New South Wales manager of RCP and had been in that position since 1 December 2013.

Contrary to DK’s submission, the evidence clearly establishes that RCP through its relevant officers had formed the view that DK was in breach of contract and that a notice under clause 24.1 should be issued.

Ground 3(b) of the notice of appeal stated that the primary judge erred in concluding that the show cause notice was valid.

The show cause notice alleged a number of breaches by DK. Three were relied upon and upheld at trial. They were:

For the reasons above, DK fails in its challenge to the primary judge’s finding that it had wrongly suspended its construction of works.

It follows that clause 24.2 was enlivened irrespective of DK’s other challenges.

In respect of failure to achieve Practical Completion by 18 February 2019 the show cause notice stated:

As noted at [38] and [39] above the primary judge found that when the show cause notice was given DK was in breach in both respects, that is, in not providing the penetration schedule required by McKenzie Group (the PCA) and not complying with McKenzie Group’s requirement to increase the height of the balustrades.

In its written submissions, DK contended that the primary judge did not identify the relevant obligations DK was found to have breached in refusing to provide a penetration schedule. That criticism is wrong. The primary judge did identify the relevant contractual terms.

Clause 9.1(1) required the Contractor to “... carry out and complete, or cause to be carried out and completed, all of the work required so as to design, construct and complete the Works in a proper and workmanlike manner and bring the Works to Practical Completion on or before the Date for Practical Completion”. Clause 9.1(7)(c) provided that the Contractor was required to design and construct the Works so that the Works when completed, would comply with “all of the requirements of the Contract, including the Principal’s Project Requirements and all Variations”.

“Works” meant the completed works to be handed over to the Principal in accordance with the Contract. “Principal Project Requirements” was defined as follows:

The effect of these terms was that the Works to be constructed by DK were to comply with the Principal’s Project Requirements. Those Requirements included:

Clause 11.1(3) of the Contract provided:

To achieve Practical Completion DK was required, amongst other things, to provide to the Principal’s Representative documents in item 17 (clause 1.1(44)(f)).

The documents in item 17 included:

Clause 4.47(h) of the Principal’s Project Requirements required DK to provide “... all certificates and other information required by the Private Certifying Authority (PCA)”.

Clause 4.06 of the Principal’s Project Requirements required that DK deliver the Works in accordance with the “Architectural documents”. Clause 1.7 of Part 0182 of the Architectural documents contained a requirement that the Contractor should “Submit evidence of conformance with the recommendations of AS 4072.1 Appendix B” and:

Australian Standard 4072.1 (“AS4072.1”) contains in Appendix B a series of recommendations relating to record-keeping and documentation of fire penetration points. AS4072.1 is divided into two parts; mandatory provisions and recommendations.

The relevant part of Appendix B to AS4072.1 reads:

Figure B1 in Appendix B is a recommended form of providing the above list.

Although Appendix B to AS 4072.1 contains recommendations rather than mandatory provisions, DK was required by clause 1.7 of the Architectural schedule to submit evidence in accordance with the list form in Figure B1 and the schedule form in Figure B2 to AS 4072.1. The recommended format for listing penetrations control joints was set out in Figure B1 of AS 4072.1 as follows:

RPC’s direction PRD No 56 referred to in the show cause notice quoted at [17] stated:

The Direction then set out the relevant terms of the architectural requirement part 0182 “fire-stopping” and figures B1 and B2 of Appendix B to AS 4072.1.

The primary judge held that DK was required to provide the penetration schedule called for by McKenzie Group both because a penetration schedule was called for by the terms of the contract (Judgment [144]) and because McKenzie Group reasonably required the provision of such a schedule as a condition of providing an occupation certificate and DK was required to provide that schedule in order to satisfy McKenzie Group’s requirements. There was no error in this reasoning.

The primary judge said:

I agree.

As events transpired, an interim occupation certificate was issued by McKenzie Group without a penetration schedule. DK submitted that it was not in breach because, if an interim certificate could issue, then a penetration schedule was not required.

This is not correct. Independently of its obligation to do everything necessary to procure an occupation certificate, DK was required to provide a penetration schedule to comply with the requirements of AS 4072.1 and the recommendations in Appendix B to that standard. Further, it was required to procure not merely an interim occupation certificate, but a final certificate.

The primary judge correctly concluded that DK was in breach of its obligation to provide a fire penetration schedule.

In issuing the interim occupation certificate on 2 May 2019, McKenzie Group stated:

As to the balustrades, the primary judge said:

So far as the primary judge’s reasons went, I agree with them.

The level 7 balustrades were railing barriers that were constructed on top of the outer edge of the balcony. It was not in dispute that the floor of the balcony on level 7 was more than 4 metres above the surface beneath it.

The dispute about the balconies centred on a horizontal concrete hob below the balustrades on their balcony side. The top horizontal surface of the hob was 280 millimetres above the surface of the balcony. The PCA’s position in July 2018 was that the balustrade’s height had to be raised to 1280 millimetres above the surface of the balcony so as to maintain a height of 1 metre, measured from the horizontal surface of the hob.

The requirements of cl D2.16 of the Building Code of Australia were extracted by the primary judge. (The Building Code was not provided with the appeal papers). As recorded by the primary judge that clause provides:

The primary judge also recorded:

The primary judge recorded that architects retained by DK stated that they did not consider the hob to be a climbable object for the purposes of BCA D2.16. Considering the picture of the balustrade contained in the primary judge’s judgment, this would be a surprise to parents of small children. It is clear from the parts of clause D2.16 contained in the primary judge’s reasons that a barrier height measurement is to be taken from the “surface beneath”. The “surface beneath” the top of the railing barrier as originally constructed was not one metre above the top of the hob which was a surface (and a climbable surface) beneath the top of the railing barrier. But whether or not the hob was a climbable surface, the “surface beneath” the top of the barrier was to be measured from the horizontal surface of the concrete hob which was the surface immediately beneath that barrier.

I do not share the primary judge’s caution in accepting Galileo’s argument as to whether DK was in breach in relation to the construction of the balustrades. Otherwise I agree with his Honour’s reasons on this issue.

Accordingly, I agree with the primary judge that each of the three breaches relied upon in the show cause notice was established.

Ground 4 of the notice of appeal was as follows:

DK provided a response to the show cause notice on 12 April 2019. In relation to the first alleged breach in the show cause notice (wrongly suspending the works) DK stated that it was entitled to suspend works because interest on the late payment of the scheduled amount had not been paid. As noted above, this was the first time that DK identified this basis for its continuing to suspend works after 28 March 2019.

In relation to the asserted breach that DK had failed to proceed with the works with due diligence, DK said that alleged deficiency in works were the subject of directions given by the Principal’s Representative on 26 March 2019, being only three days before the issue of the show cause notice. It said there had not been (nor was there at the time of giving the notice) a reasonable time for the contractor to comply with those directions.

DK also said that it was entitled to a number of extensions of time which had been claimed but wrongly refused.

DK stated that it had done all work required by it to obtain Practical Completion. It stated that it had completed all work required by item 17 of schedule A and foreshadowed preparing a letter to be sent by Galileo to the PCA which would request the PCA to explain why it considered it appropriate or necessary to “go behind” any of the certificates that had been provided and why it had “changed its opinion” in respect of the balustrades and would request that the PCA revise and update the “occupation certificate pro forma package” to reflect any updated view of its position.

The primary judge’s conclusions in relation to this ground are set out at [42] and [43] above.

The primary judge found that DK’s response to the default notice consisted of a series of arguments to the effect that it was not in breach and that a fair reading of the response was that “DK was taking the position that it was not in breach and that was that” (Judgment [246] and [247]). That finding was not challenged.

Under clause 24.2(1) Galileo’s right to either terminate the contract or take the remaining work out of DK’s hands only arose if DK failed to show cause or failed to remedy the default “to the satisfaction of the Principal’s Representative”.

The primary judge proceeded on the basis that in forming the judgment required by clause 24.2(1) RPC was required to act in good faith and reasonably (applying Service Station Association Ltd v Berg Bennett & Associates Pty Ltd (1993) 45 FCR 84 at 94 (Gummow J); Judgment [234]-[238]).

DK alleged that RCP did not make its own judgment as to whether or not it should be satisfied with RCP’s response, but followed the dictates of Galileo; that if it did form its own judgment, it pre-judged the issue before the show cause response was received; and if it did form its own judgment, it did so on the basis of statements made by Mr Pratt of DK at a meeting or meetings held in April 2019 to the effect that DK did not intend to provide the penetration schedules required by McKenzie Group or to raise the height of the balustrades, or would only do so if that work were accepted as variations to the contract. DK submitted that because the meeting at which those sentiments were expressed was held on a without prejudice basis, it was not open to RPC to have regard to them in forming its opinion as to whether it was satisfied or dissatisfied with DK’s response to the show cause notice.

The primary judge found that the relevant officers of RCP did consider the provisions of the contract and concluded that DK was in breach in the respects identified in the notice to show cause (Judgment [226]). His Honour accepted the evidence of Ms Jumikis of Galileo and Mr Dibben of RCP in which they denied that there had been a pre-judgment of the show cause response (Judgment [240]).

The primary judge concluded that there was “... no lack of reasonableness or good faith in RCP declining to be satisfied that DK had shown cause on this point (being the default involving the suspension of works)” (Judgment [248]). His Honour found that the fact that RCP’s view was informed by statements made by Mr Pratt at a meeting held on a without prejudice basis was irrelevant when it came to considering the validity of action taken in reliance or partial reliance on what was said at that meeting for contractual purposes (Judgment [251]). His Honour said that in any event, what Mr Pratt said at the meeting did not add anything to that which RCP already knew because even before the issue of the notice to show cause DK’s position was that it was aware of McKenzie Group’s requirements but disagreed with them and did not intend to comply with them (Judgment [254]).

The assertion in ground 4(b) of the notice of appeal that the primary judge did not make necessary findings of fact or address evidence or submissions on this topic is without foundation.

DK submitted that there was no finding that the Principal’s Representative gave consideration to DK’s response. I understand that this submission was premised on DK’s further submission that only Mr Martoo was the relevant decision-maker for RCP. Otherwise it is incomprehensible. DK challenged the primary judge’s finding (at Judgment [226]) that relevant officers of RCP did consider the provisions of the contract and concluded that DK was in breach in the respects identified in the default notice; i.e. the show cause notice.

DK submitted that the primary judge had found that the relevant person for the Principal’s Representative to determine whether to allow Galileo to act under clause 24.2 of the contract was Mr Martoo. The primary judge made no such finding. Rather, he found that Mr Martoo was the signatory of the show cause letter. He did not find that Mr Martoo was the relevant person in RCP to consider DK’s response to the show cause notice. Mr Dibben was a director of RCP by the time the response was received. The fact that Mr Martoo did not receive the response was neither here nor there. Mr Dibben was the mind of RCP for the purpose of forming a judgment as to whether RCP was satisfied or dissatisfied with DK’s response.

At trial DK submitted that Mr Dibben made no real or genuine attempt to consider its response to the show cause notice. DK issued subpoenas to RCP and Mr Dibben seeking production of documents recording RCP’s review of DK’s response to the show cause notice. The subpoenas were presumably wider. It was an agreed position before the primary judge that although a large amount of material had been produced by RCP and Mr Dibben in answer to subpoenas, there was “... no written communication or record in respect of any review of the response to the show cause notice.”

However, Mr Dibben gave evidence that he, in consultation with his colleagues at RCP, did consider the response to the show cause notice and that:

DK submitted before the primary judge that his affidavit was plainly crafted by Galileo’s lawyers. DK challenged Mr Dibben’s credibility and veracity. That challenge was unsuccessful. The primary judge found both that the relevant officers of RCP believed that DK was in breach in respect of the breaches asserted in the notice to show cause (Judgment [226]) and that RCP considered DK’s response to the show cause notice and did not act unreasonably or not in good faith in declining to be satisfied that DK had shown cause (Judgment [248]). DK did not show that the primary judge misused his advantage in making those findings.

At trial DK submitted that the decision to take the work out of its hands was made by Galileo before the receipt of DK’s response to the show cause notice. It relied on an email dated 11 April 2019 (that is, the day before the response to the show cause notice was due) that was sent by Mr Paul Marshall of Galileo to Mr Dibben and Mr Stephen Hughes of RCP. The sending of that email had been preceded by meetings between Galileo, RCP and DK. Mr Marshall wrote:

Mr Marshall then outlined action that would be required from RCP in order “... to hit the ground running come Tuesday/Wednesday next week.” This included RCP’s giving advice as to an appropriate builder to complete outstanding works and ascertain availability to take over, to deal with subcontractors, and to put together a list of consultants required to complete the penetration schedule and to contact the certifier to confirm its endorsement of the proposed lifting of the balustrades to achieve compliance to obtain certainty that the proposed design would be approved by the certifier.

The primary judge found:

The fact that Galileo and inferentially RCP assumed before DK’s response was received that steps would need to be taken to issue a take-out notice does not mean that RCP did not give genuine consideration to the response.

Contrary to Mr Marshall’s apprehension that Galileo and RCP would need to “hit the ground running”, the take-out notice was not issued until 29 April 2019. In the meantime, a meeting was held on a without prejudice basis between DK, RCP and Galileo. Mr Dibben said that the first dispute meeting took place after the “notice of dispute” (i.e. the notice to show cause) and before the response to that notice. He also said that there was a second notice of dispute meeting with DK onsite after 12 April 2019 where DK still said that they were not going to provide the penetration schedule the way the PCA wanted it and they still said that the balustrade complied and they were not going to rectify it. This evidence was not objected to. It was elicited in cross-examination. DK did not ask for the answer to be struck out.

There was a dispute about what position DK had taken on the meeting of 16 April, but that is not relevant for present purposes. DK submitted that it was not open to RCP to rely on anything said at a without prejudice meeting in deciding whether it was satisfied or not satisfied with DK’s response to the show cause notice.

The primary judge dealt with this submission as follows:

I agree.

The authorities cited by DK did not support its submission that Mr Dibben was not entitled to take account of what was said at a without prejudice meeting between representatives of Galileo, DK and RCP. In Cutts v Heads [1984] CH 290 Oliver and Fox LJJ held that a letter containing an offer of compromise expressed to be without prejudice except as to costs (at (299)) was admissible on the question of costs (not following Walker v Wilshire (1889) 23 QBD 335). The privilege rested in part upon public policy and in part upon an express or implied agreement that without prejudice negotiations should be protected from disclosure (at 306). Public policy was in favour of allowing a Calderbank letter to be available to be used on questions of costs once liability had been determined. The change in the practice of courts and the profession following the decision in Calderbank v Calderbank [1976] Fam 93 meant that the conventional import of the words “without prejudice” had been modified where the offer was made without prejudice save as to costs, so as to protect negotiations from disclosure only whilst liability was still in issue and not on the question of costs (at 310, 316).

Cutts v Heads provides no support for DK’s submission.

DK also cited Unilever plc v The Proctor & Gamble Co [2001] 1 All ER 783. There, the Court of Appeal of England and Wales dismissed an appeal from an order striking out an action commenced by Unilever plc against Proctor & Gamble Co as an abuse of process. Unilever had sought a declaration that it had not infringed Proctor & Gamble’s European patent. Its entitlement to commence that proceeding depended upon its establishing that Proctor & Gamble had threatened to commence proceedings in the United Kingdom against Unilever for infringement of the patent. It was common ground that the threat had been made, and only made, in a without prejudice meeting that was held to seek to negotiate a resolution of proceedings that had been commenced in the European Patent Office by Proctor & Gamble against an indirect subsidiary of Unilever (at 786).

Parts of the reasons for judgment of Robert Walker LJ (as his Lordship then was) and Simon Brown LJ, if read without context, provide some support for DK’s position that a party to a without prejudice meeting cannot be allowed to use to its advantage anything said by the other party if the statement is not within a recognised exception to the privilege. Robert Walker LJ said (at 796-797):

Simon Brown LJ said (at 800):

These passages do not go so far as DK’s submissions require them to go. In any event, when read in context of Robert Walker LJ’s discussion of the authorities in relation to without prejudice communications, that uniformly refer to without prejudice privilege as a rule governing the admissibility of evidence, no wider conclusion should be drawn from Unilever plc v Proctor & Gamble Co than that it is an abuse of process to commence proceedings relying wholly on evidence that is inadmissible (Pihiga Pty Ltd v Roche [2011] FCA 240; (2011) 278 ALR 209 at [71]).

That would be consistent with the classic statement of the nature of the without prejudice privilege of Dixon CJ, Webb, Kitto and Taylor JJ in Field v Commissioner for Railways for NSW (1957) 99 CLR 285 (at 291):

It is unnecessary to consider how far later authorities might have extended the privilege beyond the making of admissions as part of an offer of settlement (Pihiga Pty Ltd v Roche at [81] and cases cited).

DK’s submission is neither supported by authority nor consistent with principle. The principles upon which the privilege exists are the requirements of public policy or the implied agreement arising from the fact that negotiations are conducted on a without prejudice basis that the parties will keep their communications confidential. It has never been suggested so far as I am aware that the privilege is based upon an implied agreement that if the negotiations do not result in an agreement for settlement of the dispute, the parties will make no use of what has been disclosed by the other party in the negotiations.

Such an implication would be inconsistent with the policy that supports the privilege which is to encourage the negotiated settlement of disputes. Take the case of unsuccessful negotiations to compromise a claim where prior to the commencement of those negotiations the defendant considers the plaintiff’s claim to be weak. As a result of the negotiations the defendant apprehends that the plaintiff’s claim is stronger than initially thought. After negotiations fail to reach a compromise the defendant makes a formal offer of compromise in accordance with the rules. Had the negotiations not taken place the defendant would either have made no offer of compromise or would have made an offer in a substantially lower sum than that offered. The offer of compromise is not accepted. The plaintiff obtains judgment for less than the offer of compromise. Could the plaintiff be heard to say that the usual costs consequence should not follow because the defendant took into account and used for his advantage what he learned about the strength of the plaintiff’s case during the without prejudice negotiations by making a higher offer than he would otherwise have made? I think not.

In any event, the primary judge found that what Mr Pratt said at the meeting did not add anything to that which RCP already knew. It follows that RCP’s position was not materially altered by reason of Mr Dibben taking into account what Mr Pratt said at the without prejudice meeting in forming his opinion that he was not satisfied with DK’s response to the show cause notice.

For these reasons ground 4 should also be dismissed.

As noted above at [44], the primary judge found that DK was not entitled to release of security it provided after Galileo took the work out of its hands. By ground 5 of the notice of appeal DK challenges that finding.

The primary judge dealt with DK’s submissions in detail at Judgment [262]-[268]. I agree with the primary judge’s disposition of this argument for the reasons he gave.

For these reasons I propose that the appeal be dismissed with costs.

BRERETON JA: I agree with White JA.

BARRETT AJA: I agree with White JA.