Supreme Court New South Wales

• Medium Neutral Citation: Cavasinni Constructions Pty Ltd v New South Wales Land and Housing Corporation [2014] NSWSC 1678
• Hearing dates: 18 November 2014
• Decision date: 28 November 2014
• Jurisdiction: Equity Division - Technology and Construction List
• Before: Darke J

Decision

Proceedings are stayed until further order of the Court.

• Catchwords: BUILDING AND CONSTRUCTION - Home Building Act 1989 (NSW) s 7C makes void a provision in contract requiring disputes under contract to be referred to arbitration - whether whole or only part of agreed dispute resolution regime is such a provision - whether other parts of regime remain effective - severance; ARBITRATION - agreed dispute resolution regime containing provision requiring disputes to be referred to arbitration - provision rendered void by statute - whether other parts of regime remain effective - severance; CONTRACTS - illegality - provision requiring disputes under contract to be referred to arbitration - provision rendered void by statute - whether other parts of regime effective - severance; PRACTICE AND PROCEDURE - civil - stay of proceedings - agreement providing for disputes to be determined in accordance with regime involving expert determination - proceedings commenced contrary to agreement - dispute simultaneously the subject of court proceedings and expert determination - stay granted
• Legislation Cited: Civil Procedure Act 2005 (NSW) s 67; Commercial Arbitration Act 1984 (NSW); Home Building Act 1989 (NSW) s 7C, Part 3A
• Cases Cited: Cessnock City Council v Aviation and Leisure Corporation Pty Ltd [2012] NSWSC 221; Humphries and another v The Proprietors "Surfers Palms North" Group Titles Plan 1955 [1994] HCA 21; (1994) 179 CLR 597; PMT Partners Pty Limited (in liquidation) v Australian National Parks and Wildlife Service [1995] HCA 36; (1995) 184 CLR 301; McFarlane v Daniell (1938) 38 SR (NSW) 337; Savcor Pty Ltd v State of New South Wales and Another [2001] NSWSC 596; (2001) 52 NSWLR 587; United Group Rail Services Ltd v Rail Corporation New South Wales [2009] NSWCA 177; (2009) 74 NSWLR 618
• Category: Principal judgment
• Parties: Cavasinni Constructions Pty Ltd (plaintiff); New South Wales Land and Housing Corporation (defendant)
• Representation: Counsel: D Neggo (plaintiff); T J Breakspear (defendant); Solicitors: Cavasinni Constructions Pty Ltd (in-house) (plaintiff); TressCox Lawyers (defendant)
• File Number(s): 2014/282061
• Publication restriction: Nil

Judgment

Introduction

1 By a Notice of Motion filed on 5 November 2014, the defendant seeks an order under s 67 of the Civil Procedure Act 2005 (NSW) that the proceedings be stayed until further order of the Court. Before dealing with the issues raised by the motion, it is necessary to set out the relevant factual background.

Factual background

2 On 21 June 2010, the defendant (as the Principal) and the plaintiff (as the Contractor) entered into a contract whereby the plaintiff agreed to construct forty residential units and two retail units at a site in Northumberland Street, Liverpool. Disputes arose between the parties in relation to considerable delays in the execution of the project.

3 On 3 June 2013, the defendant issued a notice pursuant to clause 44.1 of the contract, calling on the plaintiff to show cause why the powers specified in the clause (including the power to take over and complete the works) should not be exercised. On 10 June 2013 the plaintiff responded, challenging the validity of the notice and seeking to answer the complaints made in it. However, on 1 July 2013, the defendant gave notice under clause 44.1 that it was exercising a right to take over the works. The defendant then proceeded to engage other contractors to complete the project.

4 On 10 July 2014, the Superintendent under the contract issued a certificate under clause 44.4 of the contract concerning the costs of the works (including the costs of engaging the new contractors), which stated that in accordance with the clause, an amount of $902,207 was due from the plaintiff to the defendant. On the following day, the defendant called upon two bank guarantees (for a total sum of $525,211.08) that had been provided by the plaintiff pursuant to clause 5.3 of the contract.

5 On 25 July 2014, the plaintiff took issue with the certificate and required the dispute to be submitted to the Superintendent in accordance with the dispute resolution regime contained in clause 45.1 of the contract. That regime, which will be referred to in greater detail below, may entail numerous stages, including expert determination and, in certain circumstances, arbitration.

6 The present dispute has reached the stage of expert determination, although no expert has yet been appointed. On 29 September 2014, the plaintiff gave notice that it required the matters at issue to be determined by an expert as specified in clause 45 of the contract. On the same day, the plaintiff commenced these proceedings.

7 By its Summons, the plaintiff seeks declaratory and other relief in relation to the defendant's calling upon the bank guarantees. The Technology and Construction List Statement shows that the validity of the Superintendent's certificate under clause 44.4 (stating that $902,207 was due), as well as the right of the defendant to call upon the bank guarantees, are issues in the proceedings. Clearly, there is a great deal of overlap between the issues the subject of these proceedings, and the issues the subject of the expert determination sought by the plaintiff under clause 45 of the contract.

8 The defendant, through its solicitors, has asserted that the concurrent pursuit of both the proceedings and the expert determination amounts to an abuse of process. On 20 October 2014, the defendant proposed to the plaintiff that the parties agree to waive further compliance with the dispute resolution procedure under the contract and agree to have all disputes relating to the contract or project determined by the Court. That proposal was not accepted, and the defendant proceeded to file its Notice of Motion seeking a stay of the proceedings.

The parties' submissions

9 Mr T J Breakspear of Counsel, who appeared for the defendant, submitted that a stay was appropriate on the following grounds:

(1) the proceedings have been commenced in breach of the mandatory dispute resolution regime contained in clause 45 of the contract; and

(2) the proceedings are an abuse of process as they create a duplicity of proceedings in relation to the same disputes.

10 Mr D Neggo of Counsel, who appeared for the plaintiff, submitted that the grounds for the stay fall away because clause 45 of the contract is void due to the operation of s 7C of the Home Building Act 1989 (NSW). That section is in the following terms:

"A provision in a contract or other agreement that requires a dispute under the contract to be referred to arbitration is void."

11 Mr Breakspear accepted that s 7C applied to the contract, and indeed accepted that it had the effect of rendering parts of clause 45 void, namely, that part of clause 45.1 which permits, in certain circumstances, either the Principal or the Contractor to require the dispute to be referred to arbitration, and clause 45.4 which concerns the arbitration process. However, he submitted that the balance of the dispute resolution regime, including an expert determination that may be final and binding, would remain untouched.

12 The critical issue is thus whether s 7C operates to make void the whole, or only part of, clause 45.

13 Clause 45 relevantly provides:

"45.1 [...] All disputes or differences arising out of the Contract or concerning the performance or non-performance by either party of the obligations under the Contract, shall be determined as follows:

(a) Where the dispute or difference:

(i) [...]; or

(ii) [...]

the Contractor shall, within the times specified herein, submit the dispute or difference in writing specifying with detailed particulars the matter at issue including the contractual basis of the claim, to the Superintendent for decision and the Superintendent shall as soon as practicable thereafter give the decision to the Contractor. [...]

(b) If the Contractor is dissatisfied with a decision given by the Superintendent under subparagraph (a) of this subclause and desires to challenge the decision, the Contractor shall, not later than fourteen days after the decision of the Superintendent is given to the Contractor, submit the matter at issue in writing, specifying with detailed particulars the matter at issue to the Principal for decision and the Principal shall as soon as practicable thereafter give his decision to the Contractor in writing.

(c) If the Contractor is dissatisfied with the decision given by the Principal pursuant to the preceding paragraph, he may, not later than fourteen days after the decision of the Principal is given to him, give notice ("the expert notice") in writing to the Principal requiring that the matter at issue be determined by an expert in accordance with the expert determination process ("the Process") set out in Schedule 1.

The appointment of an expert shall be conclusive evidence that the particular dispute or difference relates to matters properly the subject of expert determination as referred to in this clause.

The decision of the expert shall be made as an expert and not as an arbitrator and shall be final and binding on the parties, except where the expert's decision relating to a dispute or difference is that the Principal shall pay the Contractor an amount in excess of $500,000 (such amount to be calculated excluding any amount of the determination comprising interest or costs), 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."

14 The portion of clause 45.1 which the defendant accepts is void consists of the concluding 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."

15 It was conceded that those words are in terms a requirement that a dispute under the contract be referred to arbitration.

16 It is apparent that the dispute resolution regime contained in clause 45.1 involves up to four steps. In summary, the first step involves the Contractor submitting the dispute to the Superintendent for decision. The second step (which may occur if the Contractor is dissatisfied with such decision) involves the Contractor submitting the dispute to the Principal for decision. The third step (which may occur if the Contractor is dissatisfied with such decision) involves the Contractor requiring the dispute to be determined by an expert in accordance with a certain process described in Schedule 1 to the contract. This is the step that has been reached in relation to the dispute in the present case. Under the terms of clause 45.1, the decision of the expert at the third step is final and binding except where the decision is that the Principal pay the Contractor more than $500,000 (excluding any interest or costs). The fourth step arises in that exceptional case. In that situation, either party may require the dispute to be referred to arbitration in accordance with clause 45.4.

17 Mr Breakspear submitted that s 7C operates only in respect of a provision of a particular character, namely, one that requires a dispute under the contract to be referred to arbitration. He then submitted that s 7C was not intended to strike down other parts of a contract that do not require a dispute to be referred to arbitration, such as those parts which concern the first three steps of the dispute resolution process. It was put that it was only in the concluding words of clause 45.1 that the contract provided that a dispute under it was required to be referred to arbitration. Finally, it was submitted that those words constituted a provision of the relevant kind, and if such provision was void, the remaining parts of clause 45.1 were severable from it, and could stand without significantly altering the nature of the dispute resolution regime.

18 Mr Neggo submitted that s 7C should be construed in a manner consistent with the reasoning of Barrett J (as his Honour then was) in Savcor Pty Ltd v State of New South Wales and Another [2001] NSWSC 596; (2001) 52 NSWLR 587, and on that basis, the whole of clause 45, which contains an arbitration agreement, would be held to be void. Mr Neggo submitted, in the alternative, that severance was not possible because the part of clause 45 concerning arbitration could not be removed without substantially changing the nature of the agreement between the parties. He also submitted that a stay should not be granted because the parties may want to litigate the issues in this Court if the determination of the expert is not final and binding, and because it was possible that discretionary relief might be sought in the proceedings. It was put that the Court was thus a more desirable forum.

Determination

19 For the reasons which follow, it is my opinion that s 7C of the Home Building Act renders void only that part of clause 45.1 which provides that either party may require a dispute under the contract to be referred to arbitration. That part, which consists of the 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", in my opinion constitutes "a provision [...] that requires a dispute under the contract to be referred to arbitration" within the meaning of s 7C of the Home Building Act.

20 Section 7C is, in its terms, evidently directed only at provisions that require contractual disputes to be referred to arbitration. The section calls for the identification of a provision that bears that particular character. It is not directed at provisions that concern other forms of dispute resolution, such as mediation or expert determination.

21 In keeping with that intention, "provision" within s 7C should not be given a meaning of such breadth that it would have the effect of bringing down provisions which do not themselves require contractual disputes to be referred to arbitration. Rather, "provision" within s 7C should be construed so that it is limited to identifiable parts of a contract that themselves bear the prohibited character.

22 In this case, the concluding words of clause 45.1 can be identified as a part of the contract that bears that character. It is a provision that requires, in certain circumstances, a dispute under the contract to be referred to arbitration. It does not matter, in my view, that such requirement only arises if the expert's decision falls within a particular description and one of the parties then elects to give a notice (see PMT Partners Pty Limited (in liquidation) v Australian National Parks and Wildlife Service [1995] HCA 36; (1995) 184 CLR 301 at 310 and 323). Accordingly, applying the construction I prefer, those words constitute a provision that falls within s 7C, and such provision is void.

23 I do not think that the reasoning of Barrett J in Savcor Pty Ltd v State of New South Wales and Another (supra) calls for a different conclusion. In that case, his Honour was dealing with a different question arising under a different statute, namely, whether the plaintiff was a party to an arbitration agreement within the meaning of the Commercial Arbitration Act 1984 (NSW). For that purpose, Barrett J dealt with admittedly similar dispute resolution provisions as found in clause 46 of the contract before him. An "arbitration agreement" was defined, for the purposes of the Commercial Arbitration Act, as "an agreement in writing to refer present or future disputes to arbitration". Barrett J held, applying the observations made by the High Court in PMT Partners Pty Limited (in liquidation) v Australian National Parks and Wildlife Service (supra) at 310 and 323, that clause 46, or at least part of clause 46, was an arbitration agreement as defined (see at [21], [23]-[25] and [27]-[28]). It was not critical for his Honour to decide whether the whole of clause 46, or only a part or parts of it, was an arbitration agreement. It was sufficient to find that the clause encompassed an agreement in writing to refer to present or future disputes to arbitration, hence the plaintiff was a party to an arbitration agreement.

24 Further, I do not think that holding the concluding words of clause 45.1 to be void by reason of s 7C leads to the conclusion that the balance of clause 45.1 should also be treated as of no effect. In my view, those provisions are severable from the void provision. Only a relevantly minor alteration to the contract is brought about by the intervention of the statute.

25 I was referred by counsel to the discussion by Allsop P of the principles of severance (in the context of a contractual provision void for uncertainty) in United Group Rail Services Ltd v Rail Corporation New South Wales [2009] NSWCA 177; (2009) 74 NSWLR 618 at [90]-[97], as well as the statement of Jordan CJ in McFarlane v Daniell (1938) 38 SR (NSW) 337 at 345 where his Honour said:

"When valid promises supported by legal consideration are associated with, but separate in form from, invalid promises, the test of whether they are severable is whether they are in substance so connected with the others as to form and indivisible whole which cannot be taken to pieces without altering its nature: Horwood v Millar's Timber and Trading Co Ltd. If the elimination of the invalid promises changes the extent only but not the kind of the contract, the valid promises are severable: Putsman v Taylor."

26 That statement has been cited with approval in the High Court and the Privy Council (see Humphries and another v The Proprietors "Surfers Palms North" Group Titles Plan 1955 [1994] HCA 21; (1994) 179 CLR 597 at 618-619).

27 The effect of holding the concluding words of clause 45.1 to be void is essentially that the fourth step of the regime (which can only arise if the decision of the expert meets a certain description and is thereby not final and binding) is taken away, such that the parties can no longer require the dispute to be referred to arbitration. Instead, they can resort to the courts or the other avenues provided for under Part 3A of the Home Building Act, as appropriate. There is no effect upon any of the first three steps of the regime, each of which can be, but are not necessarily, final. In particular, there is no effect upon the circumstances in which the determination of the expert is, or is not, final and binding.

28 Whilst all four steps are contained in the regime under clause 45.1, I do not think, to adopt the words of Allsop P in United Group Rail Services Ltd v Rail Corporation New South Wales (supra) at [96], that there is an "unseverable nexus" between the fourth step and the earlier steps. The removal of the fourth step, leaving the parties with alternative means of dealing with the dispute and leaving the first three steps unchanged, does not seem to me to give the parties a regime of a character significantly different from that they agreed to. Put another way, the removal of the void provision does not alter the essential nature of the agreed regime (see McFarlane v Daniell (supra) at 345).

29 It follows from the above that clause 45.1, up to the point where an expert determination takes place, remains binding upon the parties to the contract. Whilst it is possible that expert determination might not yield a decision that is final and binding, it is my view that the parties should be held to their bargain that certain disputes shall be determined in accordance with the clause 45.1 regime (see Cessnock City Council v Aviation and Leisure Corporation Pty Ltd [2012] NSWSC 221 at [31] per Hammerschlag J). It is prima facie inappropriate that such disputes are sought to be litigated in court. The position is a fortiori where, as in this case, the agreed contractual regime has already been invoked. In those circumstances, the commencement of court proceedings creates a situation of duplicity, and may be considered vexatious, where issues are simultaneously subject to determination in different places. There is no doubt that in the present case, issues such as whether the defendant was entitled to take over the works pursuant to clause 44.1 of the contract, and whether $902,207 was due from the plaintiff to the defendant in accordance with the Superintendent's certificate under clause 44.4 of the contract, are currently the subject of both these proceedings and the expert determination that has been required (by the plaintiff) under clause 45.1 of the contract.

30 In my opinion, neither the possibility of litigation in this Court if the determination of the expert is not final and binding, nor the possibility (which at present seems to me rather remote) that discretionary relief might be sought in these proceedings, affords a good reason to permit the proceedings to continue. In all the circumstances, I consider that it is appropriate for the proceedings to be stayed until further order of the Court, so as to allow the matters in dispute to be further dealt with in accordance with the agreed regime. The Court will make such an order, together with an order that the plaintiff pay the defendant's costs of the Notice of Motion.

31 The defendant sought an order that, if successful, it should have its costs paid on the indemnity basis. It was submitted that indemnity costs was justified in circumstances where the plaintiff was promptly put on notice that the proceedings were an abuse of process and liable to be stayed, the plaintiff did not accept the defendant's proposal that all disputes in relation to the contract or project be determined by the Court, and the plaintiff only belatedly raised the argument that clause 45 of the contract was void. There is some force in that submission.

32 Nevertheless, the fact remains that the fate of the stay application was essentially dependent upon whether clause 45.1 was rendered wholly void by virtue of s 7C of the Home Building Act. Whilst that argument was only raised by the plaintiff very late in the piece, it was a substantial argument, properly agitated. I do not think that a special costs order is warranted. The plaintiff should pay the defendant's costs of the Notice of Motion on the ordinary basis.

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Decision last updated: 28 November 2014