The Supreme Court of NSW Court of Appeal decision of Bathrust CJ, Bell P and Gleeson JA involved the interpretation of an expert determination clause in a building and construction contract and determining whether the decision of the primary judge that the expert determination was final and binding should be upheld, providing a clear summary of the construction considerations of ‘text’, ‘context’ and ‘purpose’.
The matter concerns the proper construction of an ‘issue-resolution clause’ in two building contracts between the contractor Lahey and the NSW Minister for Education for the performance of building and construction works at two government school locations. The Contracts both incorporated standard government general conditions and identical ‘issue-resolution’ provisions for expert determination of issues that were unable to be resolved between the parties subject to specified exceptions. The determination of the expert was to be treated as final and binding and litigation was only permitted under the relevant exception clause where the determination exceeded the ‘jurisdictional threshold’ amount of $500,000. In assessing whether the threshold amount had been met the relevant clause required that the determined amount be calculated without having regard to ‘any amount that had been paid pursuant to the Building and Construction Industry Security of Payment Act 1999 (NSW)’ (SoP Act).
Lahey brought proceedings in the Technology and Construction List of the Equity Division of the Supreme Court in relation to the issues that had been referred to the expert for determination and the Department successfully sought an order for summary dismissal of the proceedings at first instance: Lahey Constructions Pty Ltd v Department of Education  NSWSC 1158. The primary judge (Henry J) concluded that the expert determination for each of the contracts was final and binding because the threshold exception clause had not been met for either contract.
Separate to the determination process, although at the same timing as the process, Lahey sought payment from the Department in relation to various adjudication determinations under the provisions of the SoP Act, some relating to issues referred to expert determination, and the Department made a payment to Lahey in relation to them.
The Court of Appeal concluded that the primary judge erred in the construction of the clause and that when the payments made under the SoP Act are disregarded, as required, the determination the threshold for each contract was met permitting litigation.
The appeal contains three related grounds challenging the decision of the primary judge:
- the primary judge’s construction of the clause.
- the application of that construction to the facts.
- the conclusion of the primary judge that each of the determinations of the expert is final and binding.
There was no dispute as to the applicable principles of construction identified by the primary judge:
- ‘The clause of the contract is to be construed objectively by reference to its text, context, and commercial purpose, asking what a reasonable person would have understood it to mean. This requires an examination of the language used, the surrounding circumstances known to the parties, and the commercial purposes or objects to be secured by the contract’: Electricity Generation Corporation v Woodside Energy Ltd (2014) 251 CLR 640;  HCA 7 at ; Mount Bruce Mining Pty Ltd v Wright Prospecting Pty Ltd (2015) 256 CLR 104;  HCA 37 at -.
- ‘The court is entitled to approach the task of giving a commercial contract a business-like interpretation on the assumption that the parties intended to produce a commercial result. The court should construe the contract so as to avoid it making commercial nonsense or working commercial inconvenience: Electricity Generation at .’
- ‘If the language of the contract is open to two constructions, preference will be given to that which avoids consequences which appear to be capricious, unreasonable, inconvenient or unjust, “even though the construction adopted is not the most obvious, or the most grammatically accurate”: Australian Broadcasting Commission v Australasian Performing Right Association Ltd (1973) 129 CLR 99 at 109 (Gibbs J);  HCA 36.
Giving consideration to the jurisdictional ‘threshold clause’ their Honours gave consideration under the headings ‘text’, ‘context’ and ‘purpose’ of the construction of the clause with conclusions supporting the determination collectively.
After referring to specifics in the text regarding the requirement that ‘any’ rather than ‘some’ of the payments should be disregarded, Gleeson J turned to context, to support the text conclusion by referring to cases specifically relating to the purpose of the relevant SoP Act and further that the apparent purpose of the provision in the SoP Act is to preclude only minor claims under $500,000 from litigation following expert determination. The parties chose to remove this provision by calculating their claims exclusive of the SOP payments. The court concluded that this was the ‘purpose’ of the clause as intended by the parties and that ‘the primary judge’s construction would create a perverse incentive for Lahey not to resort to making progress claims under the SoP Act for fear that it would lose the possible right to litigate disputes about important matters in terms of monetary significance: -.’
Further, that the intention of the legislation is that it operates in a “rough and ready” way ‘to preserve the cash flow to a builder notwithstanding that the builder might ultimately be required to refund the money received and yet have the inability to repay’: Chase Oyster Bar Pty Ltd v Hamo Industries Pty Ltd (2010) 78 NSWLR 393;  NSWCA 190 at - (McDougall J), cited with approval in Saville v Hallmarc Constructions Pty Ltd (2015) 47 VR 177;  VSCA 318 at  (Warren CJ and Tate JA, Kaye JA agreeing).
This case note is provided for general interest only. It is not legal advice.