Focus: Construction – June 2008

Extensions of time: what discretion does the Superintendent have?

In brief: A recent Supreme Court of Queensland decision has demonstrated how a carefully worded extension of time clause can give the Superintendent an absolute discretion in the exercise of their reserve power to grant an extension of time. Partner Nick Rudge (view CV) and Articled Clerk Lucinda Hill look at what the decision means.

• The facts
• Practical considerations

How does it affect you? The decision in Hervey Bay (JV) Pty Ltd) v Civil Mining and Construction Pty Ltd upholds the decision of Peninsula Balmain v Abigroup Contractors Pty Ltd and confirms that in the absence of certain amendments to the standard form of AS2124, the Superintendent will need to exercise the power to grant an extension of time, absent of an entitlement to one, honestly and impartially and for the benefit of either the contractor or the principal. The decision demonstrates that clauses which stipulate that the Superintendent is under 'no obligation' and that the reserve power is within the Superintendent's 'absolute discretion' will, if unambiguous, be upheld by a court. Such clauses will avoid the obligations found in Peninsula Balmain.

The facts

The contract in dispute was an amended form of AS2124-1992.¹ Hervey Bay (JV) Pty Ltd (the principal) had contracted with Civil Mining and Construction Pty Ltd (the contractor) for construction work at Pialba. The contractor submitted a payment claim of $1,004,708 to which the principal responded with a payment schedule where it proposed only to pay $135,793. The bulk of the amount in dispute was made up of a claim for costs incurred by the contractor because of delay.

The contractor submitted an application for adjudication, which resulted in the adjudicator deciding the amount of $921,079 was due and payable by the principal.

The principal sought a judicial review that the decision was void as the adjudicator had erred in law by misinterpreting the contract and that the amount payable was $740,000 more.

The principal argued that the adjudicator had misconstrued Clause 35.5A and Clause 35.5 B of the contract which stipulated that:

35.5 A Not withstanding that the Contractor is not entitled to or has not claimed an extension of time, the Superintendent may at any time and from time to time before the issue of the Final Certificate by notice in writing to the Contractor extend the time for Practical Completion for any reason in the Superintendent's absolute discretion and without being under any obligation to do so. (the words in italics highlight the difference from the standard form) 35.5B Despite clause 35.5 the Contractor shall not be entitled to an extension of time to the Date for Practical Completion or any other Claim unless it has: complied strictly with Clause 35.5 (including without limitation) given all the notices required by Clause 35.5 in the forms and within the time periods specified in clause 35.5; and demonstrated to the satisfaction of the Superintendent that the delay has affected the Contractor's critical path for work under the Contract (including without limitation demonstrating that the critical path of the latest approved construction program is affected).

Clause 23 of the contract dealt with the Principal's obligation to ensure that, in the exercise of certain functions, the Superintendent acted honestly and fairly. Clause 23A was then added to emphasise that 'the Principal and Superintendent may exercise those discretions and rights given to them under the Contract in whatever way the Principal or Superintendent decide in their absolute discretion'.

The contract also stated that the contractor would not be entitled to an extension of time unless it had strictly complied with the contract and that delay costs were only to be payable where an extension of time for practical completion had been granted.

The adjudicator decided that on a proper construction of the contract, the Superintendent should have granted an extension of time and correspondingly should have allowed the delay costs. He found that the contract entitled the Superintendent to allow delay costs absent the grant of an extension of time if the Superintendent concluded that the contractor was entitled to one. He considered the decision in Peninsula Balmain², where Appeal Justice Hodgson found that the 'power is one capable of being exercised in the interests both of the owner and the builder, and...the Superintendent is obliged to act honestly and impartially in deciding whether to exercise this power'³. Following the Peninsula Balmain decision, the adjudicator concluded that, in considering whether to grant an extension of time under clause 35.5A, the Superintendent was required to act honestly and fairly. Therefore he found that the Superintendent should have granted the extensions under clause 35.5A because that is what an honest and fair Superintendent 'on the balance of probabilities' would have done.

The court upheld the submissions of the principal that the adjudicator had misconstrued the contract and that no delay costs were payable. Justice McMurdo found that the adjudicator's interpretation of the contract was inconsistent with the express provision in the clause that the Superintendent was under no obligation to grant an extension of time and also inconsistent with the express provision that the Superintendent's discretion was 'absolute'.

Justice McMurdo accepted the correctness of Peninsula Balmain but stated that:

In this contract however the parties have substituted different terms and the expressed intention was to confer a power on the Superintendent without imposing any obligation as to the exercise of that power. Indeed the deletion of the relevant paragraph in cl 35.5 and the addition of cl 35.5A and cl 35.5B appear to have been drafted with Peninsula Balmain in mind. In my view there is no tenable construction of cl 35.5A by which the Superintendent could be said to be under any obligation and in particular an obligation to extend time if it would be fair to do so.

Justice McMurdo found that in the absence of such an obligation there was no entitlement to an extension of time without compliance with clause 35.5 and, as such, the adjudicator was wrong to have included delay costs in the progress payment.

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Practical considerations

Although criticised, the decision in Peninsula Balmain remains good law in, at least, Victoria, New South Wales and Queensland.

In those states, the unamended version of AS2124-1992 will require the Superintendent to exercise the 'reserve' power to grant an extension of time, honestly and impartially, for the benefit of either the contractor or the principal.

Extension of time clauses are vital in construction contracts to address when a party's obligations are required to be performed, to defer an entitlement to liquidated damages and, from a principal's point of view, to ensure that the right to liquidated damages is not lost due to the prevention principle.

A valid extension of time clause that reserves the Superintendent's discretion to extend time can be drafted in such a way that the Superintendent is not under an obligation to extend time and the discretion remains one that is absolute.

Footnotes

1. Hervey Bay (JV) Pty Ltd v Civil Mining and Construction Pty Ltd and Ors [2008] QSC 58.
2. Peninsula Balmain Pty Ltd v Abigroup Contractors Pty Ltd [2002] NSWCA 211.
3. Peninsula Balmain was cited in the decision of Kane v Sopov [2005] VSC 237 and applied in the decision of 620 Collins St v Abigroup Contractors Pty Ltd (No 2) [2006] VSC 491.

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For further information, please contact:

Nick Rudge Partner, Melbourne Ph: +61 3 9613 8544 Nick.Rudge@aar.com.au		John Cooper Partner, Sydney Ph: +61 2 9230 4804 John.Cooper@aar.com.au
John Baartz Partner, Brisbane Ph: +61 7 3334 3254 John.Baartz@aar.com.au		Stephen McComish Partner, Perth Ph: +61 8 9488 3767 Stephen.McComish@aar.com.au

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