19 November 2019

Are you in substantial breach of your contract? Unauthorised subcontracting & failing to appoint a Superintendent

This article was written by Scott Watson and Aisling Scott.

Two recent decisions of the New South Wales and Queensland Court of Appeal come as a reminder to carefully consider your contractual obligations or risk being in substantial breach, entitling the counter party to terminate. By way of summary:

  1. Advanced National Services Pty Ltd v Daintree Contractors Pty Ltd [2019] NSWCA 270: personal performance may be required by the terms of the relevant contract, even where the relevant obligations do not require any specific or particular skill. Parties should carefully consider what they are required to do under contracts to which they are a party, or risk the other party avoiding payment or terminating the contract altogether.
  2. SHA Premier Constructions Pty Ltd v Niclin Constructions Pty Ltd [2019] QCA 201: the important role that the Superintendent has under construction contracts and that a failure to appoint a person to that role may constitute a serious breach of contract.

More detailed notes on the two decisions follow below.

Unauthorised subcontracting–it does matter who mops the floors

The NSWCA considered whether a cleaning contractor could perform cleaning services through the use of subcontractors without approval from the principal where the contract expressly prohibited unauthorised subcontract labour. There was no dispute between the parties that the cleaning services had been carried out, and no complaint as to the quality of such services. However, the principal had not paid for a significant portion of cleaning services rendered by reason of the breach, and the contractor sought payment for such amounts.

Gleeson JA (with whom White JA and Barrett AJA agreed) concluded that the contractor had not “earned” the contract price in respect of cleaning services it had provided by using unauthorised subcontractors. Accordingly, the contractor could only recover amounts connected with services the contractor had itself carried out. Further, as no restitutionary claim was brought, the Court was not concerned with whether this conclusion led to a windfall in the principal’s favour.

Background

Daintree Contractors Pty Ltd (Daintree) as “Principal” and Advanced National Services Pty Ltd (Advanced) as “Contractor” entered into a contract whereby Advanced was to perform cleaning services for clients of Daintree (such as Woolworths and Dan Murphy’s stores) for a monthly fee.

Approximately 90% of the cleaning services that Advanced was obliged to carry out under the contract were carried out by subcontractors. Relevantly clause 4.5 of the contract prohibited Advanced from subcontracting without Daintree’s prior written approval. The failure to obtain approval would be a “fundamental breach of the Contract” by Advanced, entitling Daintree to “terminate the Contract immediately without notice and with no obligation to compensate the Contractor from that date.” The approval regime included an obligation that Advanced submit a monthly subcontractor form, which included a declaration as to payment of wages and payroll tax, employees’ police clearances, currency of workers compensation insurance and public liability insurance etc.

It was not in dispute that Advanced had not sought prior approval from Daintree in respect of its subcontractors, in breach of clause 4.5.

Through the course of the contract, Advanced issued invoices to Daintree, approximately half of which were paid by Daintree. The balance remained unpaid despite attempts by Advanced to obtain payment. There was no dispute that the cleaning services had been carried out, and no complaint as to the quality of such services. Daintree subsequently terminated the contract without prior notice to Advanced. Advanced commenced proceedings against Daintree seeking the unpaid invoices as a liquidated amount, or alternatively, damages for breach of contract

The primary judge found that:

  1. the cleaning services the subject of the unpaid invoices had been provided, however they had been, for the most part, performed by unauthorised subcontractors such that Advanced had substantially breached the contract;
  2. the contract included obligations around subcontracting and Advanced’s own employees, such that important protections for Daintree’s benefit could be avoided if Advanced could substitute unauthorised subcontracted labour for its employees;
  3. the right to payment under a contract only matures into a debt if the performance to which the payment relates was in fact given”, such that his Honour only allowed the liquidated claim for the cleaning services actually performed by Advanced itself (circa 10% of the cleaning services);
  4. His Honour also found that Daintree was entitled to terminate the agreement without prior notice for Advanced’s breach of clause 4.5.

Decision on Appeal

Advanced appealed against that parts of the primary judge’s decision which rejected 90% of its claim. The appeal turned on the question of whether the amount claimed by Advanced had been “earned” at the date of termination.

The Court of Appeal found that, notwithstanding that the performance of cleaning services did not require particular skills, the contract was not merely to produce a result. Further, the contract subject matter was “not cleaning services per se.” Rather, the contract required the “performance of cleaning services by Advanced in a particular manner, and on certain conditions”. The Court emphasised that it was not a matter of “indifference to the parties” whether the work should be performed by Advanced itself or by an unauthorised subcontractor – there was an elaborate regime for approval of subcontractors under the contract.

The Court found that the contract placed great significance on the particular manner and conditions of performance by Advanced. The contract also provided important protections for Daintree’s benefit, which “would otherwise be set at naught” if Advanced could discharge its performance obligations by the use of unauthorised subcontractors. The Court concluded that Advanced had not “earned” the contract price, save in respect of the cleaning services actually performed by Advanced itself. As Barrett AJA remarked, it was a “superficial impression” to conclude “that it was of no moment who mopped floors”.

As to Advanced’s submission that Daintree’s position produced “an uncommercial result” and a “windfall” , the Court found that the commercial purpose of the contract was that Advanced itself perform the cleaning services unless Daintree approved subcontracting arrangements. The notion that Advanced could perform the contract vicariously without approval was expressly rejected in the terms of the agreement. The Court further observed that an answer might be that Advanced has a claim in restitution based on a quantum meruit or that the relevant clauses amounted to an unenforceable penalty. However, no such claims were made by Advanced at trial.

Dismissing the appeal, the Court concluded that Advanced had not earned the contract price for the cleaning services provided by the use of unauthorised subcontracted labour such that there was no error by the primary judge in dismissing 90% of the liquidated claim.

Are you in substantial breach for failing to appoint a Superintendent?

The QCA considered the ramifications of a principal not having clearly nominated a Superintendent in the context of an amended AS 4902-2000 contract. The Court concluded that, where the principal had not clearly nominated a separate Superintendent then the effect of the defined term “Superintendent” in the standard form contract was that the role was to be filled by a person nominated from “time to time” by the principal.

Background

SHA Premier Constructions Pty Ltd (SHA Premier) entered into a D&C Contract with Niclin Constructions Pty Ltd (Niclin) for the construction of certain petrol stations. Subsequently, a dispute arose regarding whether certain unpaid progress claims were valid payment claims under the Building and Construction Industry Payments Act 2004 (Qld). The validity of such claims, and SHA Premier’s liability to pay, turned on whether SHA Premier had been appointed itself Superintendent under the Contract.

The dispute turned on the interpretation of the Annexure to the contract between SHA Premier and Niclin, which required, among other things, that SHA Premier ensure that there was a Superintendent at all times. As is typically the case, the contract also provided that the administration of certain contractual regimes (including receiving payment claims and issuing payment schedules) was to be carried out by the Superintendent.

The primary judge held that the proper construction of the contract permitted SHA Premier to be nominated and to act as Superintendent. The questions for the Court on appeal were:

  1. whether the agreement permitted SHA Premier to fill the role of Superintendent; and
  2. whether a term should to be implied requiring SHA Premier to act as superintendent where no superintendent was nominated.

Decision

Morrison JA (Sofronoff P and Flanagan J agreeing) allowed the appeal and set aside the orders of the primary judge.

As to the first issue, Morison JA found that it was “fanciful to conclude that the parties intended for the Principal to act as Superintendent”, explaining that the proper construction of the definition of “Superintendent” did not permit the appointment of the Principal as its own Superintendent. Further the contract was “replete with clauses that proceed on the basis that the Superintendent will be an entity distinct from either the Principal or the Contractor”. His Honour considered that such functions “require the Superintendent to exercise obligations where the rights of the Contractor and the rights of the Principal are distinct and may conflict.” His Honour noted that while it might be theoretically possible for the Principal to act in some capacity as a Superintendent, the contract clearly contemplates that the Superintendent will be a separate entity from the Principal.

As to the second issue, his Honour disposed of this issue on the question of “business efficacy”, stepping through the contract terms to find that:

  1. the contract obliged SHA Premier to “ensure that at all times there is a Superintendent for the purpose of the contract” such that Niclin would be entitled to damages if SHA Premier failed to do so;
  2. the failure of SHA Premier to nominate a Superintendent affected Niclin’s ability to obtain payment of progress claims submitted under the contract such that it is likely that such a breach would be a “substantial breach” under the contract, entitling Niclin to suspend work and/or terminate the contract under the explicit contractual terms;
  3. accordingly, the contract was “efficacious” without the need to imply a term that in the absence of nomination of a Superintendent, the role must be performed by SHA Premier.

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