Andrews v ANZ and penalty clauses - Federation Press v ANZ and penalty clauses.pdf · Andrews v ANZ and penalty clauses ... Andrews v Australia and New Zealand Banking Group [2012]

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AndrewsvANZandpenaltyclauses

©PhilipDavenport20121

ThispaperwaspresentedattheseminaroftheAdjudicationForumon13November2012.

AndrewsvAustraliaandNewZealandBankingGroup[2012]HCA30decidedon6September2012willhavemostprofoundimplicationsforconstructionlawandadjudication.Forconstructionlaw,itisthemostimportantcasesincePavey&MatthewsvPaul(1986)162CLR221recognisedthatunjustenrichmentispartofthecommonlawofAustralia.SoonAndrewswillbethecasemostoftencitedbyclaimantsinadjudication.Constructioncontractsarerepletewithpenaltyclauses.Inparticular,timebarclauseshavebeenusedtopenalisecontractorsandsubcontractors.Examplesofotherpenaltyclausesareconsideredbelow.Themessagethispaperisintendedtoconveyisthatcontractorsandsubcontractorsshouldnotsubmittosuchpenalties.Penaltyprovisionsarevoid.Atpresent,IfindthatthecasemostoftencitedinadjudicationsisJohnGossProjectsvLeightonContractors[2006]NSWSC798.InthatcaseMcDougallJconsideredaclausethatprovidedthattherespondentLeightonwouldnotbeliableuponanyclaimbythecontractorJohnGossinrespectofanymatterarisingoutofthecontractincludingbutnotlimitedtovariationsandclaimsfordamagesunlesstheclaimtogetherwithfullparticularsthereofwaslodgedwithLeightonnotlaterthantenbusinessdaysafterthedatethecontractorbecameawareorshouldreasonablyhavebecomeawareoftheoccurrenceoftheeventsorcircumstancesonwhichtheclaimisbased.Thecontractorarguedthattheclausewasrenderedvoidbys34[Nocontractingout]oftheBuildingandConstructionIndustrySecurityofPaymentAct1999(NSW)becauseclause45providedatimelimitationforthemakingofclaimsundertheActwhichwasinconsistentwiths13(4)oftheActwhichallowsaclaimanttoserveapaymentclaimwithinof12monthsafterconstructionworkwaslastcarriedout.McDougallJfoundthatthetimebarwaseffectiveandwasnotinconsistentwiththeAct.Hesaid:

80WhereJohnGosswishestoclaimanamountoverandabovetheContractAmount(forexample,foravariation,orfordelayordisruptioncosts),itisrequired,asapreconditionofsuchaclaim,togivenoticeunder,andcomplyingwiththetermsof,cl45.ItisobviouswhyaheadcontractorinLeighton’spositionmightstipulateforsuchnotice.Firstly,itwillenabletheclaimtobeinvestigatedpromptly(and,perhaps,beforeanyworkcomprisedinitisrebuilt,orbuiltover).Secondly,itwillenableLeightontomonitoritsoverallexposuretothesubcontractor.Thirdly,itwillenableLeightonto

1PhilipDavenportisasolicitor,adjudicatorandanadjunctprofessoratUNSW.HeistheauthorofAdjudicationintheBuildingIndustry3rdedn2010FederationPressandConstructionClaims2ndedn2006Federationpress.

Adjudicaton in the Construction Industry 3rd edition by Philip Davenport

All Rights Reserved The Federation Press


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assessitsownpositionvisavisitsprincipal.Nodoubt,thereareothergoodreasonsforstipulationsofthekindfoundincl45.

81Itiscorrecttosaythatcl45operatestobarclaimsifthenoticeprovisionsinitarenotfollowed.Butitdoesnotfollowthatcl45istherebyinconsistentwiththerightsgivenundertheAct,soastoattracttheoperationofoneorotherofthealternativessetoutins34(2).

Mostmajorconstructioncompaniesnowhavesimilartimebarsintheirconstructioncontractsandinadjudicationtheyinvokethetimebarstoavoidpayingasubcontractorwhatwouldotherwisebethesubcontractor’sentitlement.Theyalsousethetimebar(whentheclaimanthasfailedtoclaimanextensionoftimewithintheprescribedperiod)toenablethemtorecoupliquidateddamageseventhoughtheyhavedelayedtheclaimant.Onemajorcontractorhasgeneralconditionsofsubcontractthatprovidethatthesubcontractorhasnoentitlementtoanextensionoftimeunlessthesubcontractorhasgivenawrittennoticeofclaimwithin3businessdaysaftertheeventcausingthedelayfirstoccurs.Thosesamegeneralconditionsprovidethatthesubcontractormustcomplywithanydirectionofthecontractorandifthesubcontractordoesnot,beforecomplyingwiththedirectionandwithin3businessdaysofthedirection,provideawrittennoticeofaclaimforadditionalpaymentandanextensionoftime,thesubcontractorwillnotbeentitledtoanyadditionalmoneyortimeforcomplyingwiththedirection.WhentheissueofatimebararisesinadjudicationtherespondentalmostinvariablycitesJohnGossProjectvLeightonasauthorityfortheeffectivenessofthetimebar.Whatwasnotconsideredinthatcasewaswhethertheeffectofthetimebarwastoimposeapenalty.Todate,Ihavenotfoundanyclaimantwhohasattackedthetimebarclauseonthegroundthatitisapenalty.However,followingtheHighCourtdecisioninAndrews,Ianticipatethatthatwillbecomeamajorissueinadjudication.Andrewshasnotchangedthelaw.Itmerelyclarifiesthelawonpenalties.AstheCourtacknowledgesat[38],eveninRomanlawapenaltymightbereducediffoundtobeexcessive.PriortoAndrewstherewasawidespreadbeliefthatacontractprovisioncouldonlybeapenaltyifitpunishedapartyforbreachingthecontract.Forexample,inInterstarWholesaleFinancevIntegralHomeLoans[2008]NSWCA310theCourtofAppealat[106]heldthatthedoctrineofpenaltiesislimitedtothecircumstancesofbreachofcontract.InAndrewsat[50]theHighCourtsaidthattheCourtofAppealmisunderstoodthescopeofthepenaltydoctrine.Interstarwasinthebusinessoflendingmoneyonthesecurityofmortgages.IntegralcontractedwithInterstartointroduceborrowersandtomanagetheloans.Thereweretwocontracts.InterstarterminatedthecontractsonthebasisthatIntegralhadengagedindeceptiveactivityinrelationtoloanapplicationfiles.Thevalidityoftheterminationwasnotinissue.Clause20ofthecontract




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providedthatuponterminationIntegralwouldhavenorighttoanyfees.TheconsequencewasthatIntegralcouldnotearnfeeswhichhadnotaccruedatthedateofterminationbutwouldhavebeenearnedbutfortermination.TheCourtofAppealfoundthattherewasnoforfeitureofearnedamountsandnorelevantbreachofcontractthatcouldengagethelawofpenalties.InInterstarthecontractorprovidedservicesbutthetimeforpaymenthadnotyetarrivedbecausetheserviceswereincomplete.Theprincipalclaimedthatthecontractor’sentitlementtopaymentwasextinguishedbytheterminationofthecontract.InJohnGossthesubcontractorhadcarriedoutwork.Theprincipalcontendedthatthesubcontractor’sentitlementtopaymentwasextinguishedwhenthesubcontractorfailedtogiveanotice.Bothareinstancesoftheforfeiturebyonepartyofanentitlementtomoneywheretheamountforfeitedborenorelationshiptothedamagessufferedbytheotherparty.InAndrews,theHighCourtfoundthatInterstarwaswronglydecided.Forthesamereason,JohnGosswaswronglydecided.Granted,theclaimantinJohnGossfailedtoraisetheargumentthatthetimebarwasapenalty.However,thetimebarclearlypenalisedJohnGoss,Leighton’ssubcontractor.Nowanyclaimantfacedwithsuchatimebarclauseshouldarguethatthetimebarisapenalty.ThereasonsgivenbyMcDougallJforupholdingthevalidityofthetimebararenotgoodlaw.AndrewsinvolvedaclassactionbycustomersagainsttheANZBank.TheargumentoftheBankcustomerswasthatcertainfeeschargedbytheBankwerevoidbecausetheywereapenalty.Thefeeswerenotpayableforbreachbythecustomersoftheircontractswiththebank.Ifan‘instruction’[forexampleachequeororderforaperiodicalpayment]totheBankbyacustomerwouldhavetheeffectofoverdrawingthecustomer’saccount,theBankcouldeitherhonourtheinstruction[allowtheaccounttobeoverdrawn]ordishonourit.TheBankwouldthenchargethecustomeran‘HonourFee’forhonouringtheinstructionoran‘OutwardDishonourFee’fordishonouringtheinstruction.Thecustomersarguedthatthesefeeswereapenaltyandwerethereforeunenforceable.TheyarguedthatthefeeswereimposeduponorindefaultoftheoccurrenceofstipulatedeventsbutwereoutofallproportiontothelossordamagewhichmighthavebeensustainedbytheBankbyreasonoftheoccurrenceoftheevents.(Andrewsat[27]).TheBankarguedthatsincethefeeswerenotchargedforbreachofcontract,theycouldnotbeapenalty.TheprimaryjudgefollowedtheCourtofAppealdecisioninInterstarandfoundthatthefeeswerenotapenalty.TheHighCourtsaidthatInterstarwaswronglydecidedand,consequently,theprimaryjudgeerredinconcludingthatintheabsenceofacontractualbreachthefeescouldnotbecategorisedaspenalties(Andrewsat[78]).ThepenaltydoctrineisdescribedinAndrewsat[10]asfollows:

Ingeneralterms,astipulationprimafacieimposesapenaltyonaparty(“thefirstparty”)if,asamatterofsubstance,itiscollateral(oraccessory)toa




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primarystipulationinfavourofasecondpartyandthiscollateralstipulation,uponthefailureoftheprimarystipulation,imposesuponthefirstpartyanadditionaldetriment,thepenalty,tothebenefitofthesecondparty.Inthatsense,thecollateraloraccessorystipulationisdescribedasbeinginthenatureofasecurityforandinterroremofthesatisfactionoftheprimarystipulation.Ifcompensationcanbemadetothesecondpartyfortheprejudicesufferedbyfailureoftheprimarystipulation,thecollateralstipulationandthepenaltyareenforcedonlytotheextentofthatcompensation.Thefirstpartyisrelievedtothatdegreefromliabilitytosatisfythecollateralstipulation.

Iwillparaphrasethepenaltydoctrineinthecontextofaconstructioncontract.Assumethataconstructioncontractprovidesthatthecontractormayormustdosomething.Thatisaprimarystipulation.Ifthecontractordoesnotdothat,thentheprimarystipulationhasfailed.Ifthenthecontractimposesuponthecontractoranadditionaldetrimenttothebenefitoftheotherparty,theadditionaldetrimentisacollateraloraccessorystipulationandthatsecondstipulationmaybeapenalty.Ifcompensationcanbemadetotheotherpartyfortheprejudicesufferedbythefailureofthecontractortodothethingfirststipulated,theadditionaldetrimentcanonlybeenforcedtotheextentthatthatisnecessarytocompensatetheotherparty.Totheextentthattheadditionaldetrimentexceedsthatcompensation,itisapenaltyandunenforceable.ConsiderthatdoctrineinthecontextoftheJohnGosscase.Leighton’ssubcontractprovidedthatthesubcontractorJohnGosscouldmakeaclaimfordamagesordelayprovidedthattheclaimtogetherwithfullparticularsthereofwaslodgedwithLeightonnotlaterthantenbusinessdaysafterthedatethecontractorbecameawareorshouldreasonablyhavebecomeawareoftheoccurrenceoftheeventsorcircumstanceonwhichtheclaimisbased.Thatwasaprimarystipulation.Acollateralstipulation[thebarringofanyclaimnotnotifiedwithintime]imposeduponthesubcontractoranadditionaldetrimenttothebenefitofLeighton.ThepenaltydoctrineprovidesthatifcompensationcanbemadetoLeightonfortheprejudicesufferedbythefailureofthesubcontractortogivethenoticewithintime,theadditionaldetrimentcanonlybeenforcedtotheextentthatthatisnecessarytocompensateLeighton.Iftheadditionaldetrimentexceedsthatcompensation,itisapenaltyandunenforceable.Ifthenoticeofclaimisonedaylate,willLeightonincuranydamage?Ifitisamonthlatewhatdamage,ifany,willLeightonincur?Thecollateralstipulationwouldresultintheforfeitureofanentitlementtopaymentofthesameamountwhetherthedelayisonedayoronemonthoranyotherperiod.Similarly,alumpsumforliquidateddamagesfordelaywouldbeapenaltyifthesameamountwaspayableirrespectiveofthelengthofthedelay.InJohnGossat[80]McDougallJsaid:




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ItisobviouswhyaheadcontractorinLeighton’spositionmightstipulateforsuchnotice.Firstly,itwillenabletheclaimtobeinvestigatedpromptly(and,perhaps,beforeanyworkcomprisedinitisrebuilt,orbuiltover).Secondly,itwillenableLeightontomonitoritsoverallexposuretothesubcontractor.Thirdly,itwillenableLeightontoassessitsownpositionvisavisitsprincipal.

Thereisnothingwrongwithstipulatingforthenotice.AsMcDougallJsaid,theremaybegoodreasonsforsuchanotice.Thequestionisnotwhetherthestipulationforthenoticewasvalid.Thequestioniswhetherthecollateralstipulation[thebarringoftheclaim]isapenalty.ThecollateralstipulationimposesanadditionaldetrimentonthesubcontractortothebenefitofLeighton.ThepenaltydoctrineprovidesthatifcompensationcanbemadetoLeightonfortheprejudicesufferedbythefailureofthecontractortogivenoticewithintenbusinessdays,theadditionaldetrimentimposeduponthesubcontractorcanonlybeenforcedtotheextentthatthatisnecessarytocompensateLeighton.Iftheadditionaldetrimentexceedsthatcompensation,itisapenaltyandunenforceable.McDougallJidentifiesthreepossibleprejudicestoLeighton,namely,theinabilitytoinvestigatetheclaimpromptly,theinabilitytomonitoritsexposuretothesubcontractorandtheinabilitytoassessLeighton’spositionvisavisitsprincipal.AssumingthatLeightonsufferedtheseoranyotherprejudices,canthelosstoLeightoncanbequantifiedanddamagesassessed?Thedetrimentimposeduponthesubcontractorbearsnorelationshiptotheloss,ifany,sufferedbyLeighton.Consequently,ifthelosstoLeightoniscapableofassessmentthesecondstipulation[thebarringofthesubcontractor’sclaim]isapenaltyandunenforceable.TheHighCourtat[11]saidthatthepenaltydoctrinedoesnotapplywheretheprejudiceordamagetotheinterestsofthesecondparty[Leightonintheaboveexample]isinsusceptibleofevaluationandassessmentinmoneyterms.TheCourtsaid,‘Itistheavailabilityofcompensationwhichgeneratesthe“equity”uponwhichthecourtintervenes;withoutit,thepartiesarelefttotheirrightsandobligations.’NodoubtrespondentsinthepositionofLeightonsinJohnGosswillpointtothethreepossibleprejudicesidentifiedbyMcDougallJinJohnGoss,andotherallegedprejudices,andarguethattheprejudiceanddamagethattheywillsufferifnoticeofaclaimisnotgivenwithintheprescribedtimeisnotsusceptibletoassessmentinmoneyterms.Theywillarguethatthereforethepenaltydoctrinedoesnotapply.Thefactthatitisdifficulttoassessdamagesinmoneytermsdoesnotmeanthatthedamagesarenotassessableinmoneyterms.ThefirstofthethreepossibleprejudicesidentifiedbyMcDougallJistheinabilitytoinvestigatetheclaimpromptly.Hegivestheexampleofwheretheworkcompromisedisbuiltover.Byreasonofdelayinreceiptofthenotice,Leightonmayhaveadditionalcostofinvestigationoftheclaim.Thiscanbeassessedinmoneyterms.




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TheotherpossibleprejudicesidentifiedbyMcDougallJaretheinabilityofLeightontomonitoritsexposuretothesubcontractorandassessitspositionvisavisitsprincipal.ThedelayinreceiptofthenoticeofaclaimmaymeanthatattimesLeighton’sexposuretothesubcontractormaybegreaterthatLeightonthinksitis.WillthisclauseanylosstoLeighton?Ifasaconsequenceofthedelayinreceiptofthenoticeofaclaim,Leighton’sexposuretothesubcontractororitspositionvisavistheprincipalchanges,itseemsthatthechangecanbemeasuredintermsofdamages.WhethertheprejudiceordamagetoLeightonisinsusceptibleofevaluationinmoneytermswouldbeamatterforevidence.Forthepenaltydoctrinetoapplytoatimebar,itisnotnecessarythatthereisanexpresscontractualrequirementfortheclaimanttogiveanoticewithinthespecifiedtime.Itissufficientthattheabsenceofanoticewithintheprescribedtimewillimposeupontheclaimantadetrimentthatisapenalty.SeeAndrewsat[67].Thedetrimentdoesnothavetobethepaymentbytheclaimanttotherespondentofasumofmoney.SeeAndrewsat[12].AwellknownandsoundauthorityonpenaltiesisGilbert‐Ash(Northern)vModernEngineering[1973]1BLR75.Paragraph3ofclause14ofthesubcontractthesubjectofthatcaseprovided:

IftheSub‐contractorfailstocomplywithanyoftheconditionsofthisSub‐contract,theContractorreservestherighttowithholdpaymentofanymoniesdueorbecomingduetotheSub‐contractor.

TheHouseofLordsheldthatthatprovisionwasapenalty.LordSalmonsaid:

Paragraph3purportstoconfermuchmoreoncontractorsthanthelawallows.Accordingtothenaturalmeaningofitslanguage,itwouldenablecontractorstosuspendorwithholdpaymentofverylargesumsofmoneyduetothesub‐contractorsintheeventofthesub‐contractorscommittingsomeminorbreachofcontractcausingonlytrivialdamageinnowaycomparabletotheamountowedtosub‐contractors.Theparagraphis,therefore,unenforceablesinceitprovidesfortheextractionofapenalty.

ThefollowingisanextractfromthestandardformofsubcontractofamajorAustraliancontractor:

TheBuilderisnotobligedtomakeanypaymentundertheSubcontractuntiltheSubcontractorhas…providedevidencesatisfactorytotheBuilderthatasattherelevantdate,theSubcontractorisnotinbreachoftheSubcontract.

ThatisapenaltyclausesimilartothatinGilbertAsh.Thatsamesubcontractprovidesthataprogressclaimmustcomplywithnumerousrequirements,intheabsenceofanyofwhich,thecontractorisnotliabletomakeaprogresspayment.Onesuchrequirementisastatutorydeclarationbythesubcontractorthatthesubcontractorisnotinbreachofthesubcontractandthatallsecondarysubcontractors[iesubcontractorsandsupplierstothesubcontractor]havebeenpaidallamountsdueandpayableandtherearenodisputesinrelationtothosepersons.




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Therequirementsforaprogressclaimareaprimarystipulation.Thedetrimentimposeduponthesubcontractorintheeventoffailureofthisprimarystipulationisthelossofarighttoaprogresspayment.Thatdetrimentbearsnorelationshiptothelosssufferedbytheheadcontractorbyreasonoftheprogressclaimnotcontainingallthestipulatedcontents.Consequently,thesecondstipulation[thebarringofthesubcontractor’sclaim]isapenaltyandunenforceable.WhileIamonthatsubcontract,Iwillpointoutsomeotherpenaltyprovisions.Theusualdefinitionof‘practicalcompletion’hasbeenexpandedsothatpracticalcompletionisnolongerthestagewhentheworksarepracticallycompleteandavailableforoccupation.‘Practicalcompletion’underthesubcontractisnotachieveduntilallpartsofthesubcontractworksincludingrectificationofanydefectsarecomplete.Theprimarystipulationisthatthesubcontractormustachieve‘practicalcompletion’byaspecifieddate.Thesecondarystipulationisthatifthesubcontractordoesnotachieve‘practicalcompletion’bythatdate,thesubcontractormustpayliquidateddamagesof$40,000perday.Thedetrimentwhichtheheadcontractorincursasaconsequenceofallpartsoftheworkincludingrectificationofanydefectsnotbeingcompletemaybenominal.Theliquidateddamagesarethereforeapenalty.Apartywhowantstoretaintherighttoliquidateddamagesforfailuretoachievepracticalcompletionbythedateforpracticalcompletionmustbecarefultoensurethat‘practicalcompletion’isnotdefinedtoincludemattersthatwillnotcauselosscommensuratewiththeamountofliquidateddamages.Thatsamesubcontractprovidesthatthesubcontractorisonlyentitledtoclaimanextensionoftimefordelayscausedbytheheadcontractor.Itprovidesthatifthesubcontractorwishestoclaimanextensionoftimeforpracticalcompletionthesubcontractormustwithinthreebusinessdaysgiveawrittennoticespecifyingvariousmatters.Thatisaprimarystipulation.Thecollateralstipulationisthatifthesubcontractordoesnotgivethatnoticewithintime,thesubcontractorisnotentitledtoanextensionoftime.Iftheconsequenceisthatthesubcontractorisbarredfromanentitlementtodelaycostsandliableforliquidateddamagesforaperiodofdelaycausedbytheheadcontractor,thesecondarystipulationwillresultinapenalty.Thesubcontractprovidesthatthesubcontractormustcomplywithalldirectionsoftheheadcontractorunderthesubcontract.Ifthesubcontractorbelievesthatcompliancewiththedirectionwillinvolveadditionalpayment,thesubcontractormustgivetheheadcontractoranoticeinwritingwithin3businessdays.Thatistheprimarystipulation.Thecollateralstipulationisthatifthesubcontractordoesnotgivethenoticewithinthattime,thesubcontractormustcomplywiththedirectionandwillnotbeentitledtoanypaymentfordoingso.Thiswouldapplynomatterhowlargeavariationdirectedbytheheadcontractormightbe.




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Ifthecollateralstipulation[thebaronanentitlementtobepaidforextrawork]imposesuponthesubcontractoradetrimentthatbearsnorelationshiptothelosssufferedbytheheadcontractorbyreasonofthefailureofthesubcontractortogivenoticewithintime,thecollateralstipulationisapenalty.Forthefailureofthesubcontractortogivenoticewithintime,theheadcontractorwouldonlybeentitledtocompensationthatisequivalenttothelossthatthesubcontractor’sdelayingivingnoticecausedtotheheadcontractor.Thesubcontractcontainsaclausetitled‘NotificationofClaims’whichstatesthatifanyprovisionofthesubcontractspecifiesatimelimitbywhichaclaimmustbemadeandthesubcontractorfailstobringtheclaimwithinthetimelimitspecified,thesubcontractorwillhavenoentitlementtobringtheclaim.Italsoprovidesthatifthereisnotimelimitspecifiedforaclaim,thesubcontractormustmaketheclaimwithin5businessdays.Otherwisethesubcontractorwillhavenoclaimforanymoney,extensionoftime,cost,expenseordamagewhatsoeverwhetherpursuanttothecontract,intort,understatuteorinrestitution.Thatisclearlyapenaltyclause.Theclauseprovidesthattheheadcontractorwillhave40daystoassesstheclaim.Ifthesubcontractordisputestheassessmentthesubcontractormustgiveanoticeofdisputewithin5businessdays.Ifthesubcontractorfailstodoso,theheadcontractorwillnotbeliableontheclaimandthesubcontractorwillbebarredfrompursuingtheclaim.Thatisanotherpenaltyclause.Anotherpenalprovisioninthissubcontractthatisalsofoundinmanyotherconstructioncontractsistherequirementthatbeforereleaseofthefinalpayment,retentionorsecurity[usuallyabankguarantee]thesubcontractormustgivetheheadcontractoradeedofrelease.Therequireddeedmustreleasetheheadcontractorandallassociatedcompaniesfromallpast,presentoffutureclaimsarisingoutoforinconnectionwiththesubcontractworks.Theprimarystipulationisthatthesubcontractorwillgivetheheadcontractorthedeed.Thecollateralstipulationimposesuponthesubcontractoradetriment[namely,thewithholdingoffinalpaymentandreleaseofsecurity]thatbearsnorelationshiptothelosssufferedbytheheadcontractorbyreasonofthefailureofthesubcontractortogivethedeed.Thecollateralstipulationisapenalty.Forfailuretoprovidethedeed,theheadcontractormaybeableclaimdamagesif,infact,theheadcontractorincursanydamages.Terminationclausesinconstructioncontractsarefrequentlypenal.ThesubcontractthatIhavebeenreferringtohasaprovisionthatifthesubcontractorcommitsanybreachofthesubcontract,theheadcontractorcansuspendpaymentandrequirethesubcontractortoshowcausewhytheheadcontractorshouldnottakethewholeoranypartoftheworksoutofthehandsofthesubcontractororterminatethesubcontract.Theclauseprovidesthatifbythetimespecifiedintheshowcausenoticethesubcontractorfailed‘inthediscretionoftheheadcontractor’,toshowcause,theheadcontractorcantakeworkoutofthehandsofthesubcontractor,andusethe




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subcontractor’splant,materialsandsubcontractstocompletethework,orterminatethecontract.Itprovidesthatfollowingtermination,theheadcontractorisnotrequiredtomakeanyfurtherpaymentstothesubcontractor.Iwon’tbothercitingtherestoftheclause.Itsufficestosaythatforaminorbreachbythesubcontractor,thecollateralstipulationmayimposeuponthesubcontractoradetrimentthatbearsnorelationshiptothelosssufferedbytheheadcontractorbyreasonofthebreach.Thecollateralstipulationmaybeapenalty.Theheadcontractorwouldonlybeentitledtosuchdamagesasflowfromthebreachbythesubcontractor.Lossofbargaindamageswouldonlyberecoverablebytheheadcontractorwherethebreachbythesubcontractorissoseriousthatterminationbytheheadcontractorwasjustified.InAndrewsat[13]theHighCourtsaysthatthereisnodistinctioninprinciplebetweenastipulationupondefaultforthetransferoruseofpropertyandthepaymentofmoney.TheCourtreferredtoForestryCommissionofNewSouthWalesvStefanetto[1976]HCA3.InthatcasetheHighCourtconsideredaclausethatallowedtheprincipaltotakeoverandusethecontractor’splanttocompletetheworksupondefaultbythecontractor.Clause43.3providedthatnocompensationwouldbepayabletothecontractorfortheuseoftheplantbytheprincipal.TheCourtfoundthattheadditionalcosttotheprincipalofcompletionoftheworkwouldbereducedbytheuseoftheplant.Therewasnoevidencethattheprincipal’suseoftheplantwouldimposeanimpermissibleburdenorpenaltyonthecontractor.JacobsJat[6]said:

Theadditionalcostoftheworkstotheappellantpayablebytherespondentundercl.43.3wouldhavebeenreducedbythefactthattheappellanthadusedtheplantandmaterialsinsteadofincurringthecostofobtainingotherplantandmaterials.Inthepossiblebuthardlyprobableeventthattheworksshouldbecompletedforasumlessthantheoriginalcontractprice,thequestionwouldarise,andonlythenwouldarise,whetherequitywouldtreattheprovisionincl.43.3,thatnocompensationorallowanceshouldbemade,asimpermissiblypenalandwouldinterferebydeclaringthatprovisionvoidandwouldrequireuponafinalaccountthatcompensationorallowancefortheuseoftheplantandmaterialsbemadebytheappellanttotherespondent.Itmaybethatequitywouldnotallowtheappellanttomakeaprofitfromtherespondent’sbreachofcontract.Acourtofequitycanmoulditsreliefsothatthesubstantialpurposeofitsdoctrineofreliefagainstforfeitureandpenaltiesisachieved.Itcanleavethecontractualrighttousetheplantandmaterialsunaffectedandcanavoidthatpartandthatpartonlyoftheagreementbetweenthepartieswhichis,ormaybe,opentochallengeundertheequitabledoctrine.

Thisisanexampleofaclausethatwasanotapenaltyclausebut,nevertheless,shoulditeventuatethattheeffectoftheclausewouldbetoallowtheprincipaltomakeaprofitfromthecontractor’sbreach,thatwouldbeapenaltyandtheCourtcouldmakeordersthatwouldrelievethecontractorfromliability.Thatwouldsimplybeapplicationofthemaxim‘Forbreachofcontract,apersonisentitledtodamagesbutnottomakeaprofitfromthebreach’.InthesubcontractthatIhavebeenciting,thereisaclausetotheeffectthattheheadcontractormaynotifythesubcontractorofadefectinthesubcontract




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worksandstatethattheheadcontractorintendstoacceptthedefect.Theclauseprovidesthattheheadcontractormaythen,initsdiscretion,deductorrecoverfromthesubcontractorthecosttorectifytheworksorthediminutioninvalueofthesubcontractwork‘havingnoregardtoanyresultingincreaseinvaluetotheheadcontractor’.Theheadcontractorisentitledtodamagesforthesubcontractor’sbreach[thedefectivework]butisnotentitledtomakeaprofit.Ifthereisanyincreaseinvalue,theheadcontractormust,despitethisclause,creditagainstdamagesanyincreaseinvalue.InHoenigvIssacs[1952]2AllER176thecontractor,aninteriordecorator,contractedtodecoratethedefendant’sflatfor£750.Thecontractorsubstantiallycompletedtheworkbutleftdefectsthatwouldcost£55tomakegood.Thedefendantrefusedtopaytheunpaidbalanceofthecontractprice,namely£350.TheCourtheldthatthedefendantwasboundtopay£350less£55forthecostofrectification.Whenaclaimanthascompletedalltheworkthataclaimantispreparedtocarryout,iftheworksaresubstantiallycomplete,therespondentisonlyentitledtowithholdpayment[orreleaseofretentionorsecurity]ofanamountequivalenttothedamagesactuallyincurredbytherespondentbyreasonoftheworknotbeingcomplete.However,itisnotuncommonforrespondentstowithholdmoreandtherebyseektomakeaprofitoutoftheclaimant’sbreach.Thatprofitwouldbeapenalty.UndertheparticularsubcontractIhavebeendiscussing,thedefectsliabilityperiodis52weeksandthereafteruntiltheheadcontractorissatisfiedthatalldefectshavebeenrectified.Thesubcontractprovidesthatfinalcompletionwillnotbeachieveduntilthewholeofthesubcontractworksisapprovedbytheheadcontractor.Releaseofretentionandthebankguaranteeissaidtobedependentuponrectificationbythesubcontractorofalldefects.Retentionis10%ofeachprogresspayment.Thiscouldbeaconsiderablesum.Theprimarystipulationisthatthesubcontractormustrectifyalldefects.Uponfailure,thecollateralstipulation[therightoftheheadcontractortowithholdthefinalpaymentandreleaseofsecurityandretentionmoneys]mayimposeuponthesubcontractoranadditionaldetrimentthatisoutofallproportiontothelosssufferedbytheheadcontractoronaccountofthedefects.Theadditionaldetrimentimposeduponthesubcontractorcanonlybeenforcedtotheextentthatthatisnecessarytocompensatetheheadcontractorforthedefect.Iftheadditionaldetrimentexceedsthatcompensation,itisapenaltyandunenforceable.Inanadjudicationwheretheclaimantclaimsthattherespondentisendeavouringtopenalisetheclaimant,therespondentmayraiseanargumentthatonlyacourtwithjurisdictioninequitycangrantreliefagainstapenalty.Itistruethatanadjudicatorcannotgrantequitablerelief.However,itdoesnotfollowthatanadjudicatormustallowtherespondenttopenalisetheclaimant.Ifit




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appearsthattherespondentispenalisingtheclaimant,theonusisontherespondenttosatisfytheadjudicatorthatthisisaninstancewhereacourtinequitywouldnotgrantrelieftotheclaimant.Iftheadjudicatorissatisfiedthatacollateralstipulationrelieduponbytherespondenttowithholdpaymenttotheclaimantwouldimposeupontheclaimantadetriment[tothebenefitoftherespondent]thatwouldexceedtheloss,ifany,thattherespondenthasdemonstrated,theadjudicatorshouldnotallowtherespondenttowithholdmorethanlossflowingfromthefailureoftheprimarystipulation.Theexcesswouldbeapenalty.Usuallytherespondentwhoreliesuponacollateralstipulationsuchasthetimebarsdiscussedabove,makesnoattempttoshowthatthefailureoftheprimarystipulation[eggivingofanoticewithinaprescribedtime]causedtherespondentanyloss.RespondentswillpointtoMusicovDavenport[2003]NSWSC977.InthatcaseMcDougallJquashedmydeterminationonthegroundthatIfailedtohaveregardtotherelevantprovisionsofthecontract.SeeMusicoat[119].Iconcludedthattheliquidateddamagesclausewasapenalty.At[107]McDougallJsaid:

Ifanadjudicatorismindedtocometoaparticulardeterminationonaparticulargroundforwhichneitherpartyhascontendedthen,inmyopinion,therequirementsofnaturaljusticerequiretheadjudicatortogivethepartiesnoticeofthatintentionsothattheymayputsubmissionsonit.

Itisthereforemostimportantthatifaclaimantconsidersthattherespondentisinvokingaprovisionofthecontracttopenalisetheclaimant,theclaimantshouldsaysointheadjudicationapplicationandsayhowtheclaimantisbeingpenalised.TheclaimantshouldrefertoAndrews.IhavegivenconsiderationtowhatfindinganadjudicatormightmakeifarespondentreliesuponatimebarasagroundforwithholdingpaymentandcitesJohnGossandtheclaimantassertsthatthetimebarisapenaltyandcitesAndrews.Inanyparticularadjudicationtheadjudicator’sfindingswouldbebaseduponthesubmissionsoftheparties.Consequently,thefollowingmerelyahypotheticalreasoningbyahypotheticaladjudicatoruponhypotheticalsubmissions:

Theclaimantclaimsanentitlementto$...for…Therespondentsaysthattheclaimisbarredbecausetheclaimantfailedtogivewrittennoticeoftheclaimwithinthetimeprescribedbyclause…ofthecontract.TherespondentcitesJohnGossProjectsvLeightonContractors[2006]NSWSC798at[80]‐[81]asauthorityfortheeffectivenessofatimebar.TheclaimantreliesuponAndrewsvAustraliaandNewZealandBankingGroup[2012]HCA30.Thetimebarisacollateralstipulationthatcomesintoeffectiftheclaimantfailstogivetheprescribednoticewithintime.InAndrewsat[10]theHighCourtsetoutingeneraltermsthatastipulationprimafacieimposesapenaltyontheclaimantifitiscollateraltoaprimarystipulationandthecollateralstipulation,uponthefailure




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oftheprimarystipulation,imposesontheclaimantanadditionaldetriment[thepenalty]tothebenefitoftherespondent.TheCourtheldthatifcompensationcanbemadetotherespondentfortheprejudicesufferedbyfailureoftheprimarystipulation,thecollateralstipulationandthepenaltyareenforcedonlytotheextentofthatcompensation.Thisisaninstancewherethecollateralstipulation[thebartomakingaclaim]imposesupontheclaimantasubstantialdetrimentthatbearsnorelationshiptothelossthatthefailuretogivethenoticewithintheprescribedtimecouldcausetherespondent.Infact,therespondenthasnotdemonstratedwhatlossifany,therespondenthasincurredasaconsequenceofthedelaybytheclaimantingivingnoticeoftheclaim.InJohnGoss,itwasnotarguedthatthetimebarimposedapenalty.JohnGossisirrelevant.Andrewsismostrelevant.Iamsatisfiedthatbutforthecollateralstipulation[thetimebar],theclaimantwouldbeentitledtotheamountclaimed.Thecollateralstipulationwouldcauseseriousdetrimenttotheclaimant.Therespondentreliesuponthetimebar.Theonusisontherespondenttosatisfymethatthecollateralstipulationisenforceable.Therespondenthasfailedtodoso.Itappearstomethattofindtheclaimbarredbythetimebarwouldbetopenalisetheclaimant.Iamnotpreparedtodothat.Iamsatisfiedthattherespondentisnotentitledtorelyuponthetimebartodefeattheclaim.

AsfarasIamaware,thisisthefirstpapertoraisethepossibleimplicationsofAndrewsforconstructioncontracts.Ilookforwardtoalivelydebate.



Documents

Andrews v ANZ and penalty clauses - Federation Press v ANZ and penalty clauses.pdf · Andrews v ANZ and penalty clauses ... Andrews v Australia and New Zealand Banking Group [2012]