No need for 'surgical intervention' to resolve inconsistencies between contractual clauses

In the case of?Argyle Building Services Pty Ltd v Dalanex Pty Ltd (No 2)?[2022] VSC 452, the Supreme Court of Victoria (Court) held that a construction contract that requires “significant surgery to its language” in order to arrive at a consistent and identifiable reference date is?not?a construction contract that makes express provision for a reference date.

Background

Argyle Building Services Pty Ltd (Argyle) engaged Dalanex Pty Ltd t/as RK Basement and Structure Solutions (RK) to carry out concreting and basement works on a building project located at 68-74 Chapman Street, North Melbourne.

The relevant subcontract documents included the following three separate and inconsistent provisions which concern the making of progress claims / payment claims:

• Part A of Annexure A to the Formal Instrument of Agreement provided, against the heading ‘Time for payment claims (clause 37.1)’: “Claims submitted by the 20th?day of the month with payment no later than 30 days after the end of the month in which the claim is made”;
• Item 18 of Annexure B to the FIA deletes clause 37.2 of the general conditions of contract and replaces it with the following: “The Subcontractor is required to submit claims no later than the 21st?of each month with a full break up of items of work and percentage (%) complete for each item of work. Claims received after this date will be included in the claim for the following month”; and
• Item 4.4 of the scope of works states: “Progress claims to be submitted on the 20th?day of each month for works up to the 25th?day of the month claimed”;

The relevant subcontract did not contain a clause which:

• provides a hierarchy which is to be applied in the case of inconsistency or conflict in subcontract documents; or
• determines how any inconsistency between contractual terms is to be resolved.

Security of Payment Act

There are two sections in the?Building and Construction Industry Security of Payment Act 2002?(Vic) (the Act) by which a ‘reference date’ may be determined.?

The first, section 9(2)(a), states that where the contract itself specifies a reference date (or manner of determining such a date), then that date shall be the reference date for the purposes of the Act.

The second, section 9(2)(b), provides a mechanism that sets a reference date (linked to the date on which work is first carried out) which applies where a reference date (or means of determining such a date) is not specified in the contract.

Adjudication and appeal

On 15 October 2021, RK applied for adjudication under the Act and Argyle provided its response on 22 October 2021.??On 9 November 2021, the relevant adjudicator determined that the majority of the amount claimed by RK was due and payable by Argyle under the Act.

Dissatisfied with the adjudicator’s decision, Argyle applied to the Court (Appeal) for an order that the adjudication determination be quashed or, alternatively, be declared void.

One of the issues that required determination in the Appeal was whether a ‘reference date’ arose under section 9(2)(a) or section 9(2)(b) of the Act.?For completeness, I note that there were also other issues requiring determination, but they are not the subject of this case note.

In the Appeal, Argyle submitted that ‘surgery’ was required to both the substituted clause 37.2 and to clause 4.4 of the scope of works in order to overcome ‘clear mistakes’ and because it is ‘clearly necessary to avoid absurdity or inconsistency’.??In the case of the substituted clause 37.2, the ‘surgery’ required was said to be the removal of the words ‘no later than’ and replacement with the word ‘before’, and in the case of the scope of works, the ‘surgery’ required was said to be the removal of the word ‘on’ and replacement with the word ‘by’.

Argyle also submitted that section 9(2)(a) of the Act was satisfied as the inconsistencies in the express terms of the construction contract were capable of being reconciled by these surgeries as a matter of contractual construction.

Conversely, RK submitted that due to the inconsistencies, the relevant construction contract did not provide with certainty or clarity the date on which a progress payment claim is to be made, with the result being that the subcontract failed to specify a reference date as contemplated by section 9(2)(a) of the Act.

The Court’s decision

The Court agreed with RK and held that the adjudicator was correct to determine that there was no single reference date under the subcontract.?

The Court relevantly stated:

• (at [76]): “If it is necessary in order to construe a contract to delete words, not from a standard form contract, but words that have been deliberately inserted by the parties in two separate parts in the contract documentation … in order to arrive at a reference date, it is clear that the contract itself does not make ‘express provision’ for a reference date. If it made express provision there would be no need for surgical intervention”;
• (at [77]): “I do not consider that, when s 9(2) is read as a whole, it is intended that a contract that requires such significant surgery to its language … in order to arrive at a consistent and identifiable reference date is a contract that makes ‘express provision’ for a reference date”; and
• (at [80]): “… Applying the language of the High Court in?Fitzgerald v Masters, for the purposes of the statutory scheme it is clearly unnecessary to alter the language of the subcontract in order to find a reference date. That is so because s 9(2)(b) fills the void that exists in such cases”.

Key takeaways

If a construction contract contains conflicting provisions which concern the making of progress claims / payment claims, and the subcontract does not contain a clause which provides a hierarchy which governs how inconsistencies or conflicts are to be resolved, an adjudicator will not be required to resolve the conflicting provisions as a matter of contractual construction or perform contractual ‘surgery’.

More information

For information on this case or advice please contact me on (03) 8600 8851 or?[email protected].

Note:?This?article contains general information only and is a guide which is not intended to constitute, and is not a substitute for obtaining, legal advice.