In Lacen Belder Pty Ltd v Leather Living (Vic) Pty Ltd (Building and Property) [2021] VCAT 1128, the Civil and Administrative Tribunal of Victoria (the Tribunal) held that even though a contract provides that the superintendent is to carry out its functions as agent of a principal rather than as an independent assessor, the superintendent must still conduct itself reasonably and in accordance with the contract.
If a superintendent merely adopts the principal’s preferred valuation, any resulting certificate by that superintendent will be invalid.
What happened?
In Lacen Belder Pty Ltd v Leather Living (Vic) Pty Ltd (Building and Property) [2021] VCAT 1128, the Respondent, a developer, entered into a contract with the Applicant, a builder, to construct 15 connected townhouses with a large basement carpark (Contract).
The Contract included a termination for convenience clause, allowing the Respondent to terminate the Contract at any time for no reason.
Towards the end of the construction of the basement carpark, the Respondent terminated the contract for convenience and relying on a negative certification in a payment schedule issued by the Superintendent, proceeded to cash in two bank guarantees provided by the Applicant.
The Role of the Superintendent – agent or independent certifier?
Clause 20 of the Contract provided that in carrying out its functions under the Contract, the Superintendent would do so as agent for the Respondent and not as an independent certifier.
The Applicant claimed that in contravention of clause 20 of the Contract, the Superintendent carried out its functions under the direction of Mr Taouk, a Director of the Respondent. The Applicant asserted that this affected the validity of the payment schedules issued by the Superintendent and was a breach of clause 37.2 of the Contract.
In assessing a payment claim, the Superintendent would start with the amount claimed by the Applicant, then proceed to set-off the amount against a list of items provided by Mr Taouk. The only reasoning provided for the difference in amounts was reasoning provided by Mr Taouk.
What did the Tribunal find?
The role of the Superintendent
Senior Member Walker considered the comments of Finkelstein J in Baulderstone Hornibrook Pty Ltd v Qantas Airways Ltd [2003] FCA 173 and the joint judgement in Dura (Australia) Constructions Pty Ltd v Hue Boutique Living Pty Ltd (formerly SC Land Richmond Pty Ltd) (No. 3) [2013] VSCA 179 (Dura) in finding that when making a determination in accordance with the terms of a contract, there is ordinarily an implied term that the process of making a determination will be conducted honestly, bona fide and reasonably. He reasoned that a power to issue certificates or schedules that have contractually binding force and significant commercial consequences needs to be exercised with a level of impartiality even if a contract allows for a superintendent to act as agent of a principal. Of particular relevance to this case was the interference of Mr Taouk with the independence of the Superintendent when carrying out its function to issue payment schedules.
Senior Member Walker turned again to the case of Dura, which in turn relied upon the judgement of the Full Court of the Supreme Court of Western Australia in W M C Resources Ltd v Leighton Contractors Pty Ltd (1999) 20 WAR 489 where a distinction was drawn between a ‘mechanical’ determination and one that requires the exercise of discretionary judgement. In the latter case, there was no ‘correct’ determination, just one that is carried out in accordance with the terms of the contract. Here, Senior Member Walker found that a determination made at the direction of someone else, being Mr Taouk, was not in accordance with the agreed process under the Contract and therefore was not in accordance with the terms of the Contract.
The evidence put forwarded by the Applicant revealed substantial interference by Mr Taouk given the Superintendent did not assess the first six claims (the parties initially adopted a procedure whereby Mr Taouk would approve the payment claims himself) and thereafter, payment schedules were issued in a form approved by Mr Taouk’s solicitors.
The decision in this case highlights that even though a contract may allow for a superintendent to carry out its functions as agent of a principal rather than as an independent certifier, the superintendent must still be careful to conduct itself reasonably and in accordance with the contract and must not merely act as directed by the principal.
How can HWLE help you?
HWL Ebsworth Lawyers has expertise in drafting building contracts and advising developers, builders and superintendents of their rights and obligations under a building contract. Please contact Leighton Moon of our Construction and Infrastructure team with any enquiries.
This article was written by Leighton Moon, Partner, and Eleanor Ng, Solicitor.
