What you need to know
- The WA Supreme Court has recognised that the ability of a contractor to recover progress claims by summary judgment is an important feature of construction contracts and policy requires that disputes relating to progress payments should be resolved summarily if possible.
- Even proper termination of a construction contract will not necessarily displace a principal's obligation to pay progress claims.
- Careful drafting of contractual payment and termination provisions is essential if you want to ensure that the principal is not obliged to pay outstanding progress payments after termination of the contract.
- Tianqi has appealed Master Sanderson's decision, so this will be one to watch in the coming months.
Arbitration did not stop progress claim summary judgment
As outlined in our recent update MSP was engaged by Tianqi to construct a lithium hydroxide processing plant in Kwinana, through two largely identical contracts.
A dispute arose between the parties over around $32 million in certified progress payments that Tianqi refused to pay.
In an effort to recover the payments, MSP applied to the WA Supreme Court for summary judgment. The next day, Tianqi issued notices of dispute under the contracts activating the dispute resolution procedure, which included an arbitration agreement. It then applied for a stay of the summary judgment proceedings on the basis that s 8 of the Commercial Arbitration Act 2012 (WA) required the Court to refer the proceedings to arbitration.
Tianqi's application for a stay was refused, and its subsequent appeal was dismissed.
In the meantime, Tianqi served notices of termination under both contracts. This raised the question whether summary judgment was available for those payment claims where the underlying contracts had been terminated.
Termination did not stop summary judgment
Tianqi defended MSP's application for summary judgment on three bases: (1) that it had rights of set-off under the contracts; (2) that it had rights of set off at law or in equity; and (3) that the contracts were liable to be set aside, avoided or declared unenforceable. Tianqi contended that any rights MSP may have under the contracts could not be enforced until the dispute had been decided at arbitration.
For the purpose of the summary judgment application, the Court had to assume that the contracts had been validly terminated by Tianqi and that Tianqi may ultimately be entitled to damages greater than the amounts owing to MSP under the progress certificates.
Even on this basis, the Court rejected each of Tianqi's arguments.
In rejecting Tianqi's first argument, the Court applied a largely contextual interpretation of the set-off right in the termination clause to conclude that on its proper construction the contract did not permit Tianqi to set off unliquidated contingent claims against amounts that had been certified as payable to MSP under progress certificates.
The Court also rejected Tianqi's second argument indicating that Tianqi undertook to pay the relevant progress certificates, and it was not offensive in equity to require Tianqi to honour that undertaking. Equity requires a close connection between the claims for a set off to arise. The Court found there was no close connection between the progress claims (that arose when the contract was on foot) and Tianqi's damages claims (that arose on termination).
In relation to Tianqi's third argument, the Court pointed out that Tianqi was relying on the contract to bring the arbitration proceedings. Tianqi's reliance on the dispute resolution procedure in the contracts to bring arbitration proceedings appeared inconsistent with its contention that the contracts were liable to be set aside or avoided or declared unenforceable.
In any event, problems arising from delay and the difficulties with restitution stood in the way of declaring the contract void or setting it aside.
Summary judgment applications often fail where a dispute is complex and requires a full trial to resolve. However here the Court took into account that the ability of a contractor to recover progress payments summarily is an important feature of construction contracts. Therefore, policy required that the issues be carefully considered and resolved summarily if possible.
The Court accordingly found that MSP was entitled to summary judgment.
Analysis
It follows from this decision that a principal's obligation to pay progress claims certified under a construction contract can be difficult to displace, even where the underlying contract has been terminated.
For this reason, parties should carefully consider whether they intend to implement a "pay now argue later" regime in respect of certified amounts, or whether a principal should be entitled to withhold certified amounts pending resolution of any overarching dispute.
As always, careful drafting will be required either way.
Authors: Adam Firth, Partner; Catherine Pedler, Partner; and Melissa Yeo, Senior Associate.
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