By Scott Laycock, Partner 

On 25 February 2020, the NSW Court of Appeal handed down judgment in Duffy Kennedy Pty Ltd v Galileo Miranda Nominee Pty Ltd [2020] NSWCA 25.  The decision of White JA, Brereton JA and Barrett AJA upheld the earlier decision of Parker J on 6 September 2019 in Galileo Miranda Nominee Pty Ltd v Duffy Kennedy Pty Ltd [2019] NSWSC 1157.  This confirmed the effectiveness of the Principal’s ‘take out’ notice.  Mills Oakley represented the Principal, Galileo Miranda Nominee Pty Ltd (Galileo) in these proceedings.

Key take-aways

1. Principals should be mindful as to which party has the right under a contract to issue particular notices (i.e. the Principal or the Principal’s Representative/Superintendent).
2. Although the Principal’s Representative acts as an independent certifier in some instances, this does not mean that in carrying out that function it must exercise judgment independently of the Principal.
3. It would be “an unbusinesslike construction” to preclude the involvement of the Principal in the exercise of the Principal’s Representative’s discretion to issue a notice to show cause.[1]
4. Not having a written record of consideration of a Contractor’s response to a notice to show cause and making plans in anticipation of an unsatisfactory response does not mean that the Principal or its Representative pre-empted or did not genuinely consider the Contractor’s response.
5. Just because a meeting is expressed to be without prejudice, does not mean the information disclosed cannot be used by a party to inform itself of the attitude or position of another party.

Triggering rights to terminate a contract or take work out of a Contractor’s hands should be carefully navigated with the advice of appropriately skilled legal advisors; a misstep may invalidate the process, resulting in serious consequences.

Background of facts

Galileo and Duffy Kennedy Pty Ltd (Duffy Kennedy) entered into a construction contract for the construction of 97 residential apartments in Miranda, New South Wales (Contract).

As was found by the Court, Duffy Kennedy committed the following breaches of Contract:

1. it had wrongfully suspended its performance of the work under the Contract; and
2. it had failed to proceed with the works with due diligence in that:
   1. it had failed to procure a final occupation certificate for the development; and
   2. it had refused to rectify defective balustrades.

On 29 March 2019, pursuant to the relevant clause of the Contract, Galileo issued to Duffy Kennedy a notice show cause as to why Galileo should not take the works out of the hands of Duffy Kennedy or terminate the Contract.

On 12 April 2019, Duffy Kennedy responded to the notice to show cause.  Galileo considered that the response to the notice to show cause was not sufficient and, on 29 April 2019, issued a notice taking the work out of Duffy Kennedy’s hands.

On 1 May 2019, Duffy Kennedy responded to Galileo’s 29 April notice stating that the action was repudiatory conduct, following which Duffy Kennedy elected to terminate the Contract. As a consequence, Duffy Kennedy argued that Galileo was obligated to return the security held by it, which secured Duffy Kennedy’s performance under the Contract. Galileo opposed this position and affirmed the Contract. It commenced proceedings to compel Duffy Kennedy to comply with the terms of the Contract flowing from taking works out.

The Court both at first instance and on Appeal found that Galileo’s notice to show cause was valid and that the works were properly taken out of Duffy Kennedy’s hands. Galileo is therefore entitled to engage others to complete the works taken out and have recourse to security to satisfy costs properly incurred, and the Court granted the relief claimed.

Issuing a notice to show cause

Principals should be weary of which party has the entitlement to issue certain notices under a contract and ensure that it complies strictly with those terms.  In this instance, the Contract stated that the Principal’s Representative (Superintendent) may issue a notice to show cause on the Contractor.  Duffy Kennedy argued that because the notice to show cause was on the Principal’s letterhead, it was not issued by the Principal’s Representative and was therefore invalid.

Although issued on Galileo’s letterhead, the notice to show cause was co-signed by the Principal’s Representative.  Evidence led in the proceedings at first instance showed that the Principal’s Representative was involved in the drafting of the notice and verified its contents. The Court of Appeal agreed with Galileo’s position that the Contract’s requirement that the Principal’s Representative issue the notice, “…did not mean that [the Principal’s Representative] had to exercise its judgment independently of the Principal”.[2]

The Court at first instance found that a notice to show cause is “…at most a precondition to a debate about whether the Principal should be entitled to terminate the contractor or take the work out of the Contractor’s hands.”[3]  The Court of Appeal upheld this finding and confirmed, “…the issue of a notice to show cause did not immediately affect the contractor’s rights”.[4] As a consequence, the fact that the notice to show cause was on Galileo’s letterhead and was not prepared by the Principal’s Representative did not invalidate the notice.

Additionally, Galileo, as Principal, had an obligation under the Contract to ensure that the Principal’s Representative acted in accordance with the Contract – which is common amongst most construction contracts.  As the Court of Appeal found, this produces a requirement for, “…a degree of supervision by the principal of the work of the Principal’s Representative”.[5] This does not, however, preclude the Principal’s Representative from exercising its independent functions under the Contract, if the Contract so provides.[6]

Taking work out

Principals should be careful to consider Contractors’ responses to notices to show cause to prevent their conduct being construed as repudiatory.  In Renard Constructions,[7] the New South Wales Court of Appeal found that in considering whether the written representations of a Contractor in response to a notice to show cause are sufficient, a Principal must give “bona fide, proper and due consideration to them.  A pretended consideration will not suffice”.

If a Principal is found to have wrongfully exercised a right to terminate or take work out of a Contractor’s hands, that action could be found to have been repudiatory. This could entitle a Contractor to terminate the contract and bring a quantum meruit claim against a Principal (a claim for fair and just compensation for the benefit actually received under the contract, which will not be limited by the contract sum).

Duffy Kennedy argued that the Principal’s Representative did not consider the response to show cause, rather it followed the direction of Galileo.  It also argued that the Principal’s Representative pre-judged the response to the show cause and that an obligation of good faith and reasonableness should be implied in the decision to take work out.  Duffy Kennedy based this argument on an email (discovered by way of subpoena) where Galileo instructed the Principal’s Representative to start preparing for the next steps once work had been taken out – this email was sent prior to receipt of Duffy Kennedy’s response to the show cause notice.

Notwithstanding that the parties agreed there was no written evidence of the Principal’s Representative’s consideration of the response to show cause (only affidavit evidence of meetings and discussions), the primary judge rejected this argument and found:

“[o]bligations of good faith and reasonableness required an open mind…but not a blank one.  There was nothing wrong in Galileo making plans in advance against the possibility that the show cause response would prove unsatisfactory.”[8]

The Court of Appeal upheld this finding and added:

“…the fact that Galileo and inferentially [the Principal’s Representative] assumed before DK’s response was received that steps would need to be taken to issue a take-out notice does not mean that [the Principal’s Representative] did not give genuine consideration to the response”.

Without prejudice information

Duffy Kennedy also argued that the Principal’s Representative wrongly formed its judgment of the response to the show cause notice based on statements made by a representative of Duffy Kennedy at meetings said to be held ‘without prejudice’.  The primary judge found:

“…the fact that the meeting was conducted on a without prejudice basis is irrelevant when it comes to considering the validity of action taken in reliance, or partial reliance, on what was said at that meeting for contractual purposes…The rule that without prejudice communications are privileged is simply a rule of evidence. It applies only in curial proceedings to prevent the admission of evidence…it had no application to [the Principal’s Representative] when [the Principal’s Representative] was considering the [response to the show cause notice].”

The Court of Appeal upheld this reasoning.

Should you require any assistance with navigating the web of termination and take out, or if you’re experiencing issues with a Contractor and would like further advice as to your rights under your contract, please contact us.

[1] [2020] NSWCA 25 at [100].

[2] [2020] NSWCA 25 at [91].

[3] [2019] NSWSC 1157 at 221; [2020] NSWCA 25 at [90].

[4] [2020] NSWCA 25 at [92].

[5] [2020] NSWCA 25 at [95].

[6] Ibid.

[7] Renard Constructions (ME) v Minister for Public Works (1992) 26 NSWLR 234.

[8] [2019] NSWSC 1157 at [240].