The NSW Supreme Court considers the "Mining Exception" for the first time

What you need to know

• The NSW Supreme Court considered the "Mining Exception" in the Building and Construction Industry Security of Payment Act 1999 (NSW) (SOPA) for the first time.
• The Court repeated the often made observation that SOPA is remedial in nature and so should be construed favourably to claimants. This favours a narrow reading of the Mining Exception that does not include the work undertaken by Downer, which was "preparatory to" the extraction of minerals.
• The Court also observed that a contract is a "construction contract" if any undertaking in it is to carry out "construction work". The Court held that the Mining Exception will not exclude the contract from the operation of SOPA if any undertaking in the contract is to carry out "construction work".
• Principals wishing to avoid or minimise SOPA risk might consider contracting arrangements that quarantine works that expressly fall within the Mining Exception (i.e. extraction of minerals) from other incidental works that might be construed as "construction work" (e.g. haulage of material and construction of temporary facilities).

Background

Cadia is the operator of the Cadia East underground panel mine, which is the largest underground mine in Australia and contains deposits of gold, silver, copper and molybdenum. Cadia and Downer entered into a "Works Contract", which was described as being "For the Provision of Lateral Development Works" at the mine.

An adjudicator determined that Cadia was to pay Downer $1,017,741.72. Cadia challenged that determination on the basis that, amongst other things, the contract was not a "construction contract" for the purposes of SOPA. Cadia contended that the work performed by Downer under the contract was not "construction work" within the meaning of section 5 of SOPA due to what it described as the "Mining Exception" in section 5(2)(b) of SOPA.

The decision in this case is the first in New South Wales to consider the Mining Exception. It follows two earlier decisions in Queensland that considered provisions to the same effect in the corresponding Queensland legislation: HM Hire Pty Limited v National Plant and Equipment Pty Ltd [2012] QSC 4 and Thiess Pty Ltd v Warren Brothers Earthmoving Pty Ltd [2012] QCA 276.

The Mining Exception

SOPA applies to any "construction contract", being a contract or other arrangement under which one party undertakes to carry out construction work for, or to supply related goods and services to, another party.

The Mining Exception provides that "construction work" does not include "the extraction (whether by underground or surface working) of minerals, including tunnelling or boring, or constructing underground works, for that purpose."

Cadia's case was that the contract was not a "construction contract' because the work that Downer had undertaken to perform fell within the Mining Exception.

Justice Stevenson described the effect of the Mining Exception as to exclude from the definition of "construction work" the following works:

• extraction (whether by underground or surface working) or minerals;
• tunnelling or boring for the purpose of extraction (whether by underground or surface working) of minerals; and
• constructing underground works for the purpose of extraction (whether by underground or surface working) of minerals.

Justice Stevenson also observed that a contract is a "construction contract" if any undertaking in it is to carry out "construction work".

The critical questions for determination were therefore whether:

• the tunnelling or boring or constructing of underground works called for by the contract was for the "purpose of" extraction of minerals; and
• the contract also called on Downer to undertake work beyond "tunnelling or boring" or "constructing underground works" that was "construction work" or the supply of "related goods or service".

Were the tunnelling, boring and underground works for the "purpose" of extraction of minerals?

The Court held that the "purpose" of the works should be determined by reference to what a reasonable person in the position of the parties would conclude was the purpose of the contract. His Honour also held that it was necessary that there be a "close and proximate" connection between the tunnelling, boring and construction of underground works and the extraction of minerals because:

• given the object of SOPA has been described as to provide "a speedy and effective means of ensuring cash flow to builders from the parties with whom they contract" and SOPA is remedial in nature, the Mining Exception is to be construed beneficially to the subcontractor and therefore narrowly;
• the extension of the usual meaning of "extraction" by inclusion of tunnelling, boring or construction of underground works for that purpose, suggests the need for there to be a close "proximity" between the two;
• "extraction" does not include work "associated with" extraction or work "preparatory to" extraction therefore it is difficult to understand why tunnelling, boring or construction of underground works in preparation for future extraction of minerals should be held to be work "for the purpose of" such extraction";
• SOPA specifies the circumstances in which a less proximate relationship is required. For example, section 5(1)(e) expressly provides that "construction work" includes work that is "preparatory to" construction work. No such words are used for the Mining Exception. The Mining Exception simply specifies such works "for" the purpose of extraction of minerals. That suggests a legislative intention that tunnelling, boring or construction of underground works referred to in the Mining Exception must be for the actual purpose of extracting minerals.

His Honour held that the works carried out by Downer were not captured by the Mining Exception. The work undertaken by Downer did not lead to a situation where mineral extraction could take place immediately. As such, the object and purpose of the contract was not to cause Downer to undertake work for the purpose of extracting minerals, but to undertake work preparatory to, and in anticipation of, the ultimate and later extraction of minerals.

Did the contract call for Downer to do "construction work" not caught by the Mining Exception?

Downer contended that much of the work called for by the contract was not work of the kind described in the Mining Exception, but was "construction work" of the kind described in section 5(1) of SOPA. Some examples of this work included haulage of excavated material, establishing facilities, effecting site clean up and dewatering of the mine.

Justice Stevenson accepted Downer's submission that, even if the Mining Exception was engaged because the tunnelling, boring and underground construction works were for the purpose of the extraction of minerals, the contract was nonetheless a "construction contract" because much of the work it called for was "construction work".

Conclusion

Principals should be aware that the Mining Exception will be construed narrowly and should not assume that it extends to all work that might be considered "mining industry operations". Principals wishing to avoid or minimise SOPA risk might consider contracting arrangements that quarantine works that expressly fall within the Mining Exception (i.e. extraction, tunnelling and boring, and construction of underground works) from other incidental works that might be construed as "construction work" (e.g. haulage of material and construction of temporary facilities).

Authors: Adam Firth, Partner; Mariel Hoare, Lawyer; and Iman Barr, Graduate.