Australia: Superintendents Wearing Two Hats Risk Abuse Of Power

Last Updated: 13 September 2010
Article by Scott Alden and Alyson Eather

Facts

Lindsay Bennelong Developments Pty Ltd (the principal) entered into a contract with Kell and Rigby Holdings Pty Ltd (the contractor) for the construction of a mixed residential and commercial development (the contract). The principal also acted as superintendent under the contract.

The works were to be completed in three stages. At the time of the dispute, stage 1 had been completed and stages 2 and 3 were under construction. Two years into construction, the parties entered into an advance payment deed (the deed), by which the principal agreed to advance to the contractor part of the balance of the original contract sum to the value of $2 million (the advance payments). The deed provided for two advance payment bonds, each in the form of an unconditional bank guarantee in the amount of $1 million (the guarantees).The contract provided that, with respect to the advance payments, if they had not been repaid on or before the date of the issue of the certificate of practical completion for stage 3, the advance payments would immediately become a debt due and payable by the contractor to the principal.

In May 2010, there were substantial works, comprising stages 2 and 3 of the project, yet to be completed to a stage at which the sales to purchasers could be completed.

In June 2010, the principal, acting in its capacity as superintendent, issued:

  • a notice of variation to works,which deleted the remaining stage 2 works and the remainder of the incomplete stage 3 works from the scope (the variation instruction); and
  • a certificate of practical completion in respect of the stage 3 works.

The principal then almost immediately made demand on the bank for the full payment of the guarantees on the basis of the issue of the certificate of practical completion, and the provisions of the contract which provided that the balance of the advance payments outstanding on the date of the issue of the certificate of practical completion immediately became a debt due and payable.

The dispute

The contractor challenged the right of the principal to call on the guarantees on the basis that the principal was not entitled to do so as the variation instruction and subsequent issue of the certificate of practical completion were not valid and therefore unenforceable.

Issue 1: Was the variation instruction beyond the power of the superintendent?

The contract empowered the superintendent to vary the works by deleting any work that the superintendent specified. The court stated that the superintendent's power to vary the work by deletions was undoubtedly wide, but it was not unlimited.

Clause 2 of the contract defined works to mean the whole of the work to be executed in accordance with the contract, including variations provided for by the contract.

It also defined practical completion to mean that stage in the execution of the work under the contract when the works are completed, except for minor omissions and minor defects, which do not prevent the works from being reasonably capable of being used for their stated purpose.

The principal argued that the 'stated purpose' was ambulatory and could be changed by the superintendent varying the contract. The court found that this interpretation would produce an uncommercial position where the stated purpose would be 'uncompleted commercial and residential buildings'. Further, the court provided that leaving aside the uncommercial nature of that interpretation, this definition was unsustainable because the contract circumscribes the superintendent's powers and not the other way around.

The court found that the contract should be constructed as at the date that it was entered into and 'the works' was to be given its meaning accordingly [1].

In the court's view, 'the plain meaning of the words seen in the context of the contract as a whole do not confer a power to effect variation to the contract which changes the works so that what is constructed cannot reasonably be capable of being used for their stated purpose. Moreover it would not be commercial, sensible or conducive to the congruent operation of the contract as a whole so to construe that power'.

Issue 2: Did the superintendent act unfairly and or unconscionably when issuing the variation instruction and certificate of practical completion?

The contract provided that the principal shall ensure the exercise of the functions of the superintendent under the contract, and required the superintendent to act honestly and fairly. The court noted that this provision of the contract was in any event an express imposition of a duty which would anyway be ordinarily imposed on a person in the position of the superintendent [2].

If a person in a position of the superintendent does not act honestly and fairly, then any certificates issued by such person can be ignored [3].

The obligation to act fairly in this case required the superintendent to exercise his own independent and impartial judgment, to reach a decision without taking improper considerations into account and to take account not only of the interests of the principal, but also those of the contractor.

It was common ground that if, in giving the variation instruction and the certificate of practical completion, the superintendent acted unfairly, those instructions should be regarded as being of no force and effect. The fact that the superintendent and the principal were one entity did not relieve the superintendent from acting fairly to both parties to the contract.

The court found that the superintendent did not act fairly in issuing the variation Instruction or the certificate of practical completion for the following reasons:

  • the superintendent did not pay sufficient attention to the contractor's interests;
  • the superintendent did not act with impartiality, let alone the degree of impartiality that is required;
  • in the case of the stage 2 works, by bringing about practical completion, rather than terminating the works, the superintendent preserved the defects liability obligations to the detriment of the contractor;
  • the omission of the works through a variation instruction was driven by improper considerations. It was found that the variation instruction was a means by which the principal could take over the project rather than a means to bring about appropriate variations to the works;
  • the superintendent did not discuss the variation with the contractor prior to it being issued;
  • the superintendent saw that the current progress of the works was a threat to the principal and as such issued the variation instruction, not in its capacity as superintendent, but in its capacity as principal; and
  • there was no evidence that the superintendent took account of the potential disadvantages of the contractor in the issuing of the certificate of practical completion.

As a result, the court found that the superintendent did not act fairly and the certificate of practical completion was deemed to be vitiated as a result. Having found that the superintendent did not act fairly, it was not necessary for the court to consider, in addition, if it acted unconscionably in issuing the notice of practical completion.

Conclusion

It is not uncommon for the superintendent to be a member of the owner's team. Practically, this can give rise to an inherent conflict of interest in the use of the superintendent's powers in administering the contract. While such potential for a conflict of interest exists, so too does the risk of invalid directions by the superintendent, if such directions are not underscored by impartiality.

Principals may want to give thought to amending the contract to remove the usual implications of fairness and impartiality of the superintendent, and instead give the superintendent 'absolute discretion'.

For example, in Hervey Bay (JV) Pty Ltd v Civil Mining and Construction Pty Ltd [2008] QSC 58, the principal successfully amended the contract to ensure the discretion of the superintendent was only to be exercised for the benefit of the principal.

A slightly different arrangement for contract administration has been established by the NSW government's GC21 General Conditions of contract. Under GC21, both the contractor and principal appoint a representative whose role it is to liaise with each other to administer the contract. In addition, the contract provides for an external valuer to be appointed to make determinations in regard to variations and for issues of conflict to be resolved through expert determination. As such, the principal and contractor generally administer the contract themselves under GC21 and can resort to third party involvement to value variations and resolve disputes as and where necessary.

Alternatively, principals may want to consider engaging an external superintendent, such as an independent valuer or certifier. Although such an appointment is more costly, an external appointment has particular benefits relating to the distribution of risk through the contract and provides a greater degree of both actual and perceived independence.

Endnotes

1. Maggbury Pty Ltd v Hafele Aust Pty Ltd (2001) 210 CLR 181 at 188.

2. Perini Corporation v Commonwealth [1969] 2 NSWR 530.

3. Baulderstone Hornibrook Pty Ltd v Qantas Airways Ltd [2003] FCA 174 at [89].

© DLA Phillips Fox

DLA Phillips Fox is one of the largest legal firms in Australasia and a member of DLA Piper Group, an alliance of independent legal practices. It is a separate and distinct legal entity. For more information visit www.dlaphillipsfox.com

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