Phillip Vassiliadis is a Senior Associate at Moray & Agnew Lawyers. He has extensive experience advising on residential, commercial, industrial civic, sporting and renewable energy projects across Australia, Asia, Europe and the Pacific region. Phillip has been names as a ‘Key Lawyer’ in the 2020 Legal 500 in the area of building and construction, and ‘rising star’ in the 2021 edition.

Paul Abrahams is a co-founder and director of Debuilt Property. Paul has extensive experience in construction, project management, development management and asset management.

A significant component of our work at Debuilt involves the monitoring of construction loans on behalf of financiers and investors. Through numerous projects we have observed a variety of approaches to contract administration - and the issues that arise as a result.

Almost all construction projects involve an underlying tension between the principal and the contractor - in relation to claims for variations, extensions of time, early bonus completion and the like.

Larger projects typically incorporate more sophisticated processes and resources and are more likely to engage a third-party superintendent with a deep understanding of contractual issues.

Smaller, and what might appear to be simpler projects, often forgo engaging a suitably qualified independent superintendent, which can often lead to an increased risk of dispute between the parties.

We spoke to Phillip Vassiliadis from Moray & Agnew Lawyers about a decision in the Supreme Court of Victoria relating to an infrastructure project and the independence of the superintendent.

To Phillip:

You recently wrote an article about a case in which a contractor claimed that collaboration between the Principal and the Principal’s representative had occurred, which was contrary to his legally required independence as a certifier. Could you provide a brief synopsis of that case?

Vestas – Australian Wind Technology Pty Ltd (Contractor) entered into a contract with Lal Lal Wind Farm Nom Co Pty Ltd (Principal) under which it agreed to provide its services to engineer, procure and construct a wind farm in rural Victoria (the Contract). Under the Contract, the Contractor was required to submit claims and refer disputes to the ‘Principal’s Representative’.

As part of its role under the Contract, the ‘Principal’s Representative’ was required to undertake a ‘Certification Role’ (as that term was defined in the Contract), and in doing so act honestly, reasonably and make fair determinations in accordance with the Contract.

After being unsuccessful in multiple claims and disputes, all of which were assessed and/or certified by the Principal’s Representative, the Contractor alleged that the Principal had been ‘improperly involved’ with the Certification Role. Underpinning concerns of this wrongful influence was the discovery of references to the Principal’s solicitor’s comments on multiple documents issued by the Principal’s Representative, whilst performing its Certification Role.

What exactly did the contractor make application for, and was the application successful?

The Contractor applied for two things:

An injunction to restrain the suspected collaboration between the Principal and Principal’s Representative in the latter’s performance of its role as certifier.
Discovery from the Principal as a prospective defendant.

The injunction was resolved by the Principal giving undertakings to the Court that it would not communicate with the Principal’s Representative in performance of its role as certifier.

The second part of the Contractor’s application was unsuccessful. The Court held that the Contractor had sufficient information to decide whether it should initiate proceedings and did not require further discovery for this purpose.

The court commented on the independence of the Principal’s Representative when acting in the certification role. Could you elaborate on these comments?

An interesting feature of this decision is that notwithstanding the application being denied, the Court held that: “any private communication is sufficient to undermine the independence of the Principal’s Representative when acting in the Certification Role”.

On this basis, any private communication between the Principal’s Representative and the Principal as to the Certification Role, which was not at the same time notified to the Contractor was sufficient to amount to an actionable breach.

Does this case have any relevance to traditional building contracts?

The Court’s decision to provide pointed statements is likely to get the attention of the industry. At face value, these comments do not necessarily compromise the ‘dual role’ of a representative of the Principal also performing the function of certifier, but can be seen as a reminder of a minimum standard of conduct that needs to be observed in this relationship.

The form of contract in Vestas was an ‘engineering, procurement and construction’ (EPC) contract. The cited provisions of the EPC relating to the certification functions are substantially similar to those commonly found in amended standard form contracts.

In Vestas, the Principal’s Representative was required to act honestly, fairly and reasonably when certifying, assessing or determining. In the ‘Australian Standard’ suite of head contracts, this role is performed by the ‘Superintendent’ who will commonly have similar obligations.

Amended Australian Standard head contracts are the ‘go to’ for building and construction projects in Australia. Accordingly, the decision in Vestas has wide ranging application to the building and construction industry.

A large number of projects have a Principal’s Representative also appointed as Superintendent. Have the comments of the court affected the contractual ability of this dual role being undertaken by the same person?

The decision is unlikely to limit the contractual ability of a Principal appointed party to be the contract certifier (whether as ‘Principal’s Representative’ or ‘Superintendent’). However, it will necessitate closer consideration of how this role is performed.

While, in our experience, the use of mutually appointed contract certifiers (e.g. independent certifiers or project engineers) is on the rise, there are still reasons why this approach may not be preferred by project participants.

Then, do you believe that in practice there will be changes in the conduct of the relationship of the Principal and Principal’s Representative if they are also acting as Superintendent?

Change in the discharge of contract certifier duties is the more likely outcome. It appears that Principals and Contractors are becoming more alive to the impact that this conduct can have on the outcome of disputes and differences under the contract.

While many contracts include clauses designed to insulate the Principal from the allegations made in Vestas (e.g. disclaimer clauses, stringent dispute resolution mechanisms and time bars), these protections can come undone, or at least under sustained attack, if the proper performance of the function of the contract certifier is, or appears to be, compromised.

As always, additional drafting in construction contracts can assist to further insulate the Principal. However, Principals be mindful that these contractual provisions are not ‘set and forget’.

Attention needs to be given to communication protocols on a ‘day to day’ basis. While dispute resolution clauses are often intended to resolve such disagreements, they are too often only used at the ‘pointy end’ when there is a series of consolidated claims (as appeared to be the case in Vestas).

Often, improper influence of a contract certifier materialises through a series of incremental divergences from the certifier’s function. At the time of the breach, these may be innocuous (and sometimes, to the advantage of the Contractor), however in totality may have serious consequences for the outcome of disputes that turn on certification (generally of time and cost matters).

I think this is beginning to be recognised, and parties are focusing a lot more on communication protocols and ‘small scale’ dispute resolution clauses so that these issues can be dealt with at a project or mid-range commercial level without the need to invoke a more traditional (and often unpalatable) ‘dispute resolution’ regime in the contract.

Where the project budget allows, project participants are also turning their mind to better equipping the contract certifier to properly perform its functions. This may include express drafting empowering the contract certifier to seek the input of experts on certain matters, or taking more ‘minor’ disputes out of the hands of the contract certifier and referring them directly to binding expert determination.

The Vestas decision is likely to accelerate these types of initiatives.

Are there any final issues related to the independence a Superintendent that you feel might be of interest to our readers?

Parties need to be willing to turn their minds to the management of the contract certifier from the outset of the project. While construction contracts generally allocate the risks associated with improper performance of the contract certifier’s functions, project participants can do more to set down protocols of communication, and ‘day to day’ resolution of differences. In our experience, this goes a long way to avoiding disputes of the kind encountered in Vestas or at least ensures that in the event of such disputes, the functions of the contract certifier are not a central feature. These kinds of initiatives often come at a higher up front and ongoing project cost. However, if the project budget allows, it can be money saved in the long run.

Despite the differing interests of the parties, construction requires all participants to work collaboratively to achieve a truly successful outcome. The best projects are those where the parties have a mutual respect and understanding for each other and are then willing to go beyond contractual obligations to resolve an issue for the other party.

It only requires the perception that contractual decisions are not being made fairly to create a level of mistrust. A Principal’s Representative acting as the superintendent will only amplify this risk. In the end, whether or not these decisions have been made appropriately may in fact become irrelevant in achieving a positive outcome for all.