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Courts provide guidance on the operation of S 7C of the Home Building Act 1989 (NSW)

CaseFlash 05 December 2014

Cavasinni Constructions Pty Ltd v New South Wales Land and Housing Corporation [2014] NSWSC 1678

On 28 November 2014, Justice Darke of the Supreme Court of NSW decided a Notice of Motion application filed by the Defendant in Cavasinni Constructions Pty Ltd v New South Wales Land and Housing Corporation [2014] NSWSC 1678.

The decision concerned the effect of s 7C of the Home Building Act 1989 (NSW) (the Act) where a construction contract contained a clause referring disputes to arbitration. The decision provides much needed guidance on how dispute resolution clauses in contracts, the subject of the Act, will be treated where a part of the provision is found to be prohibited.

What are the industry lessons?

The context of this dispute has enabled a relatively rarely considered provision, s 7C of the Act, to be clarified by the Court. Darke J found that while part of the clause in the relevant contract referring parties to arbitration was a prohibited provision, s 7C did not impact on the parts of the dispute resolution clause that were severable to the prohibited portion and were not themselves prohibited. As such, in a contract that contains referral to arbitration, consider if the dispute resolution clauses are structured so as to provide divisible and distinct steps in the dispute resolution process, or if the steps within the clause may be so interrelated so as to make the clause void in its entirety. With this in mind, parties should focus on ensuring that the steps within their contractual dispute resolution regime are adequate to allow for a dispute to be resolved without arbitration.

Finally, parties should expect to be held accountable to their bargains, including the bargains they make in relation to dispute resolution procedures. Failure to abide by an agreed process will result in unduly incurred expenses for all involved and may leave that party open to a claim of vexatiousness.

What are the background facts?

New South Wales Land and Housing Corporation (the Defendant) and Cavasinni Constructions Pty Ltd (the Plaintiff) entered into a contract for the construction of forty residential units and two retail units in Liverpool NSW on 21 June 2010 (the Contract).

Following delays in construction, various disputes arose between the parties, resulting in the Defendant taking over the works and calling on bank guarantees provided by the Plaintiff under the Contract. As a result of this, the Plaintiff initiated the dispute resolution regime contained in cl 45.1 of the Contract, which is paraphrased below:

  1. sub-cl 45.1(a), the dispute is submitted to the Superintendent;
  2. if a party is dissatisfied with the Superintendents determination, sub-cl 45.1(b) allows the party to submit the issues in contention to the Principal;
  3. continuing to sub-cl 45.1(c), if a party is dissatisfied with the decision by the Principal, it is able to give notice requiring the matter to be determined by an expert;
  4. finally, the expert determination at sub-cl 45.1(c) is binding on the parties, except where the decision “is that the Principal shall pay the Contractor an amount in excess of $500,000… then such decision shall not be final and binding, but the Principal or the Contractor may give notice requiring the dispute or difference to be referred to arbitration in accordance with the provisions of subclause 45.4.”

On 25 July 2014 the Plaintiff submitted the dispute to the Superintendent. On 29 September 2014, dissatisfied with the outcome of the Superintendent’s determination, the Plaintiff gave notice requiring the matter to be determined by an expert. On the same day, the Plaintiff commenced the proceedings in the Supreme Court.

Observing the overlap of the expert determination and Supreme Court proceedings, the Defendant offered to waive compliance with the Contract’s dispute resolution procedure and have the matter dealt with by the Court. The Plaintiff rejected that proposal. As a result, the Defendant filed its Notice of Motion to have the Supreme Court proceedings stayed.

Counsel for the Plaintiff argued against the stay on the basis that cl 45 of the Contract is void, due to the operation of s 7C of the Act. S 7C renders void a contractual provision that requires a dispute to be referred to arbitration.

Counsel for the Defendant, Mr Breakspear, with TressCox Lawyers as his instructing Solicitors, submitted that whilst s 7C rendered parts of cl 45 of the Contract void, the balance of the dispute resolution regime should remain untouched. The Defendant submitted that only a portion of cl 45.1 is void, being the portion consisting of the following words: “but the Principal or the Contractor may give notice requiring the dispute or difference to be referred to arbitration in accordance with the provisions of subclause 45.4.”

The main issues

The primary question for his Honour Justice Darke to consider was whether s 7C of the Act operates so as to make void the whole or only part of, cl 45. In determining this issue his Honour was required to consider the intention of s 7C and the severability of the arbitration portion of cl 45.1.

What did the Court decide?

Darke J observed that the dispute resolution regime under the Contract contained four steps; the Superintendent step, the Principal step, the expert determination step and the arbitration step.

In considering the impact of one step of the clause on its remainder, his Honour considered the operation of s 7C, observing that s 7C targets only contractual ‘provisions’ that require a dispute to be referred to arbitration, and not those provisions that relate to other forms of dispute resolution.

In determining what forms a ‘provision’ within s 7C, his Honour found that it should be construed so as to be limited only to the parts of a Contract that bear the “prohibited character.” In his Honour’s opinion, the final words of cl 45.1 did have the requisite requirement to arbitrate and ultimately formed a provision that is prohibited under s 7C.

However, his Honour determined that despite this finding, the remainder of cl 45.1 should not itself be treated as having no effect. Darke J observed that “only a relevantly minor alteration to the contract is brought about by the intervention of the statute”. [1] Discussing the issue of severance, his Honour referred to previous Court findings [2] on the test of interconnectedness of provisions, and the question of whether a promise in a contract is “so connected with the others as to form and indivisible whole which cannot be taken to pieces without altering its nature.” [3]

His Honour observed that by taking away the prohibited words of cl 45.1, the fourth step of the arbitration clause would be removed, yet the first three steps remain unchanged. Despite all being contained within cl 45.1, there was no “unseverable nexus” [4] between the fourth step and the earlier steps. Ultimately, the fact that the character of cl 45.1 remained unchanged by the removal of the arbitration step, led his Honour to conclude that only the prohibited portion of sub-cl 45.1(c) could and should be removed.

In this context, the parties were to be held to their bargain, being the valid parts of the dispute resolution process contained in the Contract. As such, the commencement of Supreme Court proceedings was inappropriate and potentially vexatious. On this finding his Honour found in favour of the Defendant and ordered a stay of the proceedings, with costs awarded to the Defendant.

This case provides a valuable lesson on the interpretation of s 7C of the Act and on the severability of tiered contractual provisions in the face of a prohibited portion.

It is important to note that similar provisions to s 7C of the Act exist in the domestic building legislation throughout Australian States. As such, the lessons from this case can be adopted by those contracting for home building work across any of the jurisdictions.

[1] Cavasinni Constructions Pty Ltd v New South Wales Land and Housing Corporation [2014] NSWSC 1678 at 24.
[2] United Group Rail Services Ltd v Rail Corporation New South Wales [2009] NSWCA 177; (2009) 74 NSWLR 618 at [90]-[97]; McFarlane v Danlell (1938) 38 SR (NSW) 337; Privy Council (see Humphries and another v The Proprietors "Surfers Palms North" Group Titles Plan 1955 [1994] HCA 21; (1994) 179 CLR 597.
[3] McFarlane v Danlell (1938) 38 SR (NSW) 337 at 345.
[4] United Group Rail Services Ltd v Rail Corporation New South Wales [2009] NSWCA 177 at [96].


Brian Ambler, Partner
Sydney

CaseFlash 05 December 2014
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