Consequences of poor construction contract drafting

A Supreme Court decision reinforces the need for care and precision when entering into a contract, for parties to understand the scope and application of exclusion of liability clauses and to ensure compliance with contractual notice requirements throughout a contract's duration.

Key points to take away

One of the key points arising from this decision is that the Courts may rely on strict contractual terms even where a party can prove they have suffered loss due to one or multiple breaches. The terms of the contract will guide the Court's reasoning, even where this may lead to an outcome that is considered 'harsh' to the party that has suffered the loss.

We have summarised this and other key points arising from this decision below:

1. The Court will apply limitation or exclusion of liability clauses even in circumstances where such an application operates to defeat otherwise valid claims.
2. Consideration should be given to the terms and scope of consequential loss clauses. A broadly drafted consequential loss clause can operate to prevent any recovery, even where a breach is established.
3. The Court considered it was doubtful that the prevention principle could operate to ground a cause of action.
4. The power to set off moneys in payment claims is unlikely to include the power to deduct amounts arising out of a disputed claim to restitution.
5. Contractors should ensure that they submit claims in accordance with the terms of the contract to avoid the application of time bars.

Below is a summary of the case providing more detail on the background and how the Court arrived at its decision.

The case

In the decision of the Honourable Justice Allanson in AGC Industries Pty Ltd v Karara Mining Ltd [2019] WASC 140, AGC Industries Pty Ltd (AGC) brought a range of claims against Karara Mining Ltd (Karara) in respect of conduct occurring in the lead up to, and during the performance of its structural, mechanical and piping works (SMP works) on the Karara Iron Ore Project (The Project). The Project involved the construction and operation of an open pit mine North East of Perth. AGC was contracted by Karara to carry out SMP works estimated at approximately $200 million. AGC would be reimbursed by Karara for its costs and would be entitled to receive an agreed rate of Corporate Overhead Profit (COP) calculated as a percentage of their costs.

The Court dismissed the majority of claims brought by AGC, and a significant factor in this was reliance on the strict contractual terms, which included an entire agreement clause, an exclusion of consequential loss clause and contractual time bars.

Claims of misleading and deceptive conduct

AGC claimed that had it not been for Karara's misleading and deceptive representations made in two pre-contractual meetings, it would have entered into an alternative contractual arrangement and not the primary contract (the Contract). AGC pleaded that a host of representations were made, including that the agreed rate of COP would apply to the whole of the Contract works, that there was no down side to AGC and that Karara would not delay AGC's performance.

In dismissing AGC's claim, the Court had regard to the whole course of conduct of both parties and considered the following factors were significant:

1. The parties negotiated a detailed written agreement, and the alleged representations occurred in a conversation between two people not part of the negotiating team.
2. The Contract itself contained a whole agreement clause, prescribing that it was the entire, final and concluded agreement between the parties. The Court held that such clauses point to the parties' understanding that their relationship was governed by the terms of the written agreement.
3. At least one of the alleged representations was subject to an express written term that unequivocally contradicted the alleged representation.
4. AGC's allegations relied on oral representations. AGC was unable to establish that these representations were made due to the inadequate notes taken at the meetings, and the imprecise recollection of AGC's witness.

Prevention principle

In the absence of any extension of time mechanisms in the contract, AGC asserted that it was prevented by Karara in meeting contractual milestones which would have entitled AGC to payment of a higher percentage of COP. It sought to rely on the prevention principle (where a party cannot insist on another party's performance of a contractual obligation if they are the cause of the non-performance) as a basis for liability.

It was not necessary for a decision to be made on this point, as AGC's claims were for consequential loss which was contractually excluded. However, the Court considered it doubtful that the prevention principle could act as a sword rather than a shield in grounding a cause of action.

Exclusion of consequential loss

The Court held that Karara's action, in removing work from AGC and giving it to another contractor, constituted a contractual breach from which AGC suffered loss. However, the Court considered that General Condition 28.2 in the Contract prevented AGC from recovering damages arising from that breach. General Condition 28.2 provided:

In no event will the Company (Karara) be liable for the Contractor's (AGC's) Consequential Loss arising out of or in connection with the Contract.

Consequential loss was defined as loss or damage arising out of or in connection with the Contract including loss of opportunity, loss of revenue and loss of profit/anticipated profit.

The Court concluded that the clause prevented AGC from being entitled to payment for loss of opportunity for earning anticipated profits on work taken away from AGC. It considered the following factors were relevant:

1. The clause expressly excluded liability for losses of the kind claimed by AGC.
2. The clause was expressed to operate according to the nature of the loss, not the act/event which caused it.
3. The phrase 'in no event' demonstrated an intention of the parties that the exclusion was to apply broadly.
4. The words 'arising out of or in connection with the Contract' were of wide application.
5. The seven paragraphs of the definition were joined by 'or', and thus the terms should not be constrained by assumptions as to their scope.

This judgment serves as an important reminder about the need to carefully consider clauses which may exclude or limit liability prior to entry into a contract. Whether the particular circumstances in which consequential loss can be recovered should be specified (for example, in the event of wilful misconduct by the party) and the scope of what is included in the definition of consequential loss are important considerations.

Application of time-bars to prevent claims

During the Project, Karara reimbursed AGC for the cost of a SPEC allowance (an allowance whereby AGC was required to pay its leading hands an extra hour's pay each day). However, there was a dispute as to whether this cost was properly payable by Karara to AGC. In finding that Karara had no right to deduct or set-off this amount from a payment certificate, or to issue a subsequent payment certificate correcting the 'error' (being the difference between what was paid and what was said to be the 'true value'), the Court considered that:

1. It would be an uncommercial reading of the Contract to permit 'error' to be construed in the way contended by Karara, and instead considered that 'error' in clause 47.1.13 would include things such as arithmetical and clerical error, not the resolution of disputes; and
2. The power to deduct money 'due or which may become due from the Contract to the Company' is not intended to include the power to deduct amounts arising out of a disputed claim to restitution.

Despite this finding, the Court held that any claim by AGC was time barred due to General Condition 49.1.1, which provided that AGC had 20 business days after the expiry of the last Defects Liability Period to give Karara a written Final Payment Claim, including details of all other Claims arising out of the Contract. This period had expired without AGC submitting the required claim.

AGC contended it was not required to make a Final Payment Claim due to the ongoing SPEC allowance dispute between the parties. However, the Court concluded that AGC should have and was now time barred from doing so.

Conclusion

Allanson J declared in summing up "the effect of Karara relying on its strict contractual entitlements is … harsh. That is not itself reason to deny to it the effect of the agreement." In accordance with His Honour's statement, this case demonstrates that the Court's approach when dealing with disputes between contracted parties will be to, first and foremost, look to and give substantial weight to their agreed upon contractual terms. Even where a party can point to their loss suffered due to one breach or multiple breaches, the terms of the contract will guide the Court's reasoning. The decision proves that, if contracted cleverly, parties, like Karara, can contract out of the breaches they have committed. In light of the Court's admittedly "harsh" approach, overwhelming care must be taken when drafting or entering into contractual arrangements.

If you would like to discuss any aspect of this blog and/or would like us to review your contracts in light of this decision, please contact a member of our Construction and Infrastructure team.

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