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ON THE TOOLS magazine, October 2016

1 October 2016

Welcome to the inaugural edition of ON THE TOOLS, HFW’s newest publication which brings together all of our updates in relation to developments in Australian construction law from the last six months.

This document has been prepared by our team of specialist construction and projects lawyers. It is a summary of cases and other developments in the law that are of interest to participants in the property, construction, engineering, infrastructure and resource industries in Australia.

General construction cases and developments

The first half of 2016 saw the Courts deliver the usual gamut of construction cases: applications for stays of court proceedings pending arbitration, applications to try and prevent calls on performance securities and disputes about expert evidence and straight up contract cases. A selection of which are profiled in the following pages.

The courts continued to enforce arbitration agreements rather than let parties be released from the dispute resolution terms of their bargains.1 The courts have also continued to enforce arbitral awards without too much difficulty.2

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Indeed, the emphasis on enforcing contractual terms (where they are clearly drawn) at the expense of other, perhaps more spurious, causes of action, is a theme that applies across all Australian jurisdictions and all types of clauses from warranties to dispute resolution mechanisms.

In the West there has been a rash of unsuccessful attempts to prevent calls on performance securities in relation to downstream disputes arising out of the troubled Roy Hill project.3 In each case the Court reinforced the importance of the unconditional nature of those documents to business. A consequence of all of those actions appears to be that the “gentleman’s agreement” which may have previously existed between contractors about not calling on each others performance bonds is now well and truly broken. It is perhaps an indication of the financial pressures that the sector is under more generally.

On a more positive note the High Court has recently delivered judgment in the much anticipated Paciocco v Australia and New Zealand Banking Group Ltd.4 In a splintered decision (there were five separate judgments delivered) the court held (by majority, Nettle J dissenting) that the bank fees Mr Paciocco complained about could not be considered as penalties. There will no doubt be nuances in the decisions which means that the debate about the applicability of prohibition on contractual penalties to construction and operation contracts still has some way to go before being settled once and for all. We are working on a note which will go some way to unraveling that debate which will be published in due course.


  1. See e.g. Roy Hill Holdings Pty Ltd v Samsung C&T Corporation [2015] WASC 458 (4 December 2015); Australian Maritime Systems Ltd v McConnell Dowell Constructors (Aust) Pty Ltd [2016] WASC 52 (19 February 2016); Samsung C&T Corporation v Duro Felguera Australia Pty Ltd [2016] WASC 193 (28 June 2016).
  2. Indian Farmers Fertiliser Cooperative Ltd v Gutnick (2015) 304 FLR 199.
  3. Best Tech & Engineering Ltd v Samsung C&T Corporation [No. 3] [2015] WASC 459 (30 November 2015); Duro Felguera Australia Pty Ltd v Samsung C&T Corporation [2015] WASC 484 (16 December 2015), Duro Felguera Australia Pty Ltd v Samsung C&T Corporation [2016] WASC 119 (15 April 2016); Laing O’Rourke Australia Construction Pty Ltd v Samsung C&T Corporation [2015] WASC 49 (17 February 2016); Flsmidth Pty Ltd v Duro Felguera Australia Pty Ltd [2016] WASC 191 (27 June 2016). See also, Yuanda Australia Pty Ltd v John Holland Pty Ltd [2015] WASC 453 (25 November 2015); Fabtech Australia Pty Ltd v Laing O’Rourke Australia Construction Pty Ltd [2015] FCA 1371 (4 December 2015); Cf Ottoway Engineering Pty Ltd v Westpac Banking Corporation [2016] FCA 635 (2 June 2016).
  4. [2016] HCA 28 (27 July 2016).

Pitfalls of settlement agreements: how a warranty kept alive led to a AU$7 million claim three years later

Australian Maritime Systems Ltd v Mcconnell Dowell Constructors (Aust) Pty Ltd

Entering into a settlement agreement is often good news at the end of a challenged project; a settlement should bring finality and certainty to the parties and an end to a troubled relationship.

However, that was not the case for Australian Maritime Systems Ltd (AMS), who received a claim for $7,630,908.59 two years after an agreement was made for “full compensation” under its contract with McConnell Dowell Constructors (Aust) Pty Ltd (McConnell Dowell).1

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Understanding what an agreement is meant to encapsulate “as a whole” is not sufficient to protect you against carve-out clauses which may create particular liabilities. Any clause in a settlement agreement that seeks to preserve the existing rights and liabilities of the parties must be carefully considered.

Relevant facts

On 11 September 2012, AMS and McConnell Dowell entered into a contract in which AMS agreed to design, supply and install navigation aids at the Cape Lambert Tug Harbour (the Contract). The original contract sum was $2,162,481.50.2

Disputes arose in relation to the Contract and the parties executed a Supplemental Agreement3 to resolve these disputes on 2 September 2013.

In clause 6 of the Supplemental Agreement, amongst other things, McConnell Dowell waived all rights to recover damages or costs under the Contract and it was agreed that AMS would be discharged from all obligations and liabilities to McConnell Dowell. It was agreed that McConnell Dowell would have no claim, in contract or otherwise, “now or in the future… under or arising out of” the Contract.”

However, the Supplemental Agreement also included clause 6(e) which read:

“Notwithstanding the foregoing, all warranties and indemnities given by [AMS] in respect of the Supply and [AMS’s] liabilities for the Supply shall remain in force”.

Despite that agreement, by letter dated 12 August 2015, McConnell Dowell claimed payment of $7,630,908.59 in respect of a claimed breach of warranty.4 The matter came before the Western Australia Supreme Court on the application of AMS seeking a declaration that the Supplemental Agreement was a full and final release and that it ought to have no liability to pay the warranty claim.5

McConnell Dowell brought a cross application seeking orders that the proceeding be stayed and referred to arbitration under the arbitration agreement in the Contract.6


In the event, the court ordered that the dispute be referred to arbitration on the basis that the arbitration agreement in the Contract was expressly incorporated into the Supplemental Agreement and therefore the substance of AMS’s complaint, regardless of whether it was framed as a controversy under the Supplemental Agreement or a dispute under the Contract, must be resolved by arbitration, not judicial intervention.7 This ought to have been the start and end of the matter before the court. However, in coming to that conclusion the court embarked upon an exercise in constructing the very provision that AMS complained about, namely clause 6(e) of the Supplemental Agreement and, arguably impermissibly given the earlier conclusions about the continuing operation of the arbitration agreement, offered a view on the substance of the underlying dispute. It is that view which, although strictly obiter, is a salutary reminder about the importance of being clear when writing settlement agreements.

The court held that if McConnell Dowell had a valid breach of warranty claim, it would be entitled to bring it under clause 6(e). The court held that the plain meaning of the words of a clause will be adopted as long as:

  • They do not contradict the rest of the agreement read as a whole.
  • There was no extrinsic evidence that directly contradicted the plain meaning of the clause.8

In this case, construing the relevant clause and the Supplemental Agreement was not difficult and the court held that “clause 6(e) clearly indicates that the release of [AMS] from obligations and liabilities is not absolute” and reading the clause as such as not inconsistent with the rest of the Supplemental Agreement which could be construed “harmoniously” as extinguishing any right of claim pursuant to the Contract, while “preserving the operation of warranties and indemnities” otherwise.9

HFW perspective

Settlement agreements are often wrought out of long drawn negotiations and may feel like the conclusion of a hard fought battle. Nonetheless, it is important to carefully consider each of the clauses in the agreement to ensure that it does not compromise the “global” or “holistic” agreement which may have appeared to be the understanding.

If the intention is that the settlement agreement puts to rest all proceedings and claims whatsoever in respect of a particular dispute, ensure that there are no “carve-out” clauses in the agreement that keeps particular liabilities alive.

When negotiating these types of documents it is important that the drafting of the particular agreement capture the parties’ mutual intentions plainly and unambiguously. Relying on the process of negotiations, correspondence between the parties, the context in which the agreement came about, or presumptions that may come from industry practice which may shape a party’s understanding of the agreement will never replace a clearly written document which captures the true agreement.

That said, settlement agreements do not need to be complicated. In most cases, a short agreement setting out the dispute and that terms on which the parties wish to settle the relevant dispute is sufficient. A simple checklist for your next settlement agreement might be as follows:

  • Ensure that there are no clauses which keep liabilities, such as warranties or indemnities, alive.
  • Obtain a mutual releases from any claim or proceeding which may arise in respect of the contract or transaction which gave rise to the dispute.
  • Avoid granting a full release from making future claims if the other party does not provide the same.
  • Finally, be sure that the settlement agreement includes a clause permitting the parties to plead the agreement as a complete defence to any claim in relation to the matters that have been released.

While these matters seem straightforward the fact that the Supplemental Agreement didn’t adhere to these simple rules means that the parties are now entrenched in arbitration proceedings three years after the settlement agreement was made in relation to a sum that is nearly four times greater than the original contract sum!


  1. Australian Maritime Systems Ltd v McConnell Dowell Constructors (Aust) Pty Ltd [2016] WASC 52 (19 February 2016), at [3].
  2. Ibid, [17].
  3. Ibid, Appendix.
  4. Ibid, [3].
  5. Ibid, [4].
  6. Ibid, [5].
  7. Ibid, [11]; [59]; [71].
  8. Ibid, [76]; [78].
  9. Ibid, [75]-[76].

Telling the truth is still the best policy

Laing O’Rourke Australia Construction Pty Ltd v Samsung C&T Corporation

The most recent instalment of the ongoing dispute between Laing O’Rourke Australian Construction Pty Ltd (LORAC) and Samsung C&T Corporation (Samsung)1 is of interest to lawyers in the construction industry as it shows that a court will need very convincing evidence before stopping a party from making a demand on a performance bond on the basis that the demand was not, in the language of the relevant contract, “bona fide” or in good faith.

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Relevant facts

The action arose out of the troubled Roy Hill project. LORAC was engaged by Samsung in 2014 under a modified form of the standard form AS49022 (subcontract) to construct structural steel and associated mechanical piping, electrical and instrumentation works in the port landside package. The subcontract sum was approximately AU$200 million. LORAC was required to provide security for an amount equal to 10% of the subcontract sum. It duly did so.3

Less than a year later Samsung terminated the subcontract with LORAC for convenience.4 In the aftermath of the termination LORAC and Samsung entered into an interim deed (interim deed) which imposed certain rights and obligations on the parties following the termination. Amongst other things, the interim deed provided for the performance securities under the subcontract to be replaced and reduced in value. LORAC complied with that obligation. The replacement security was stated to expire on 20 February 2016.5

It is no secret that LORAC and Samsung are well advanced down the path to dispute.6 During 2015 the parties engaged in some preliminary skirmishes in the Supreme Court of Western Australia.7 Summed up briefly LORAC claims Samsung owes it over AU$90 million while Samsung claims LORAC owes it AU$55 million.8 On any view it is a significant dispute and to prosecute it properly will place substantial financial pressures on the parties.

On 22 January 2016 Samsung gave LORAC notice, as it was required under the clause 7.3 of the interim deed9, that it intended to call upon the replacement security.10 Three days later LORAC commenced proceedings seeking an injunction to stop Samsung from taking that step.11


LORAC raised a number of grounds in support of its argument for the injunction. The most interesting of these was LORAC’s argument that the conditions in which a call on the replacement security could be made had not been satisfied.

The court did not accept that contention, nor any of the other, more spurious, grounds advanced by LORAC12, and accordingly declined to grant the injunction.

Samsung’s right to call on the replacement security was governed by clauses in both the subcontract and the interim deed, relevantly, clause 5.2 of the subcontract stated that Samsung could call on the replacement security where it “considers, acting bona fide, that it is or will be entitled to recover the relevant amount from [LORAC] under or in respect of the subcontract”.13 The interim deed provided (at clause 7.3) that Samsung was obliged to give LORAC 48 hours notice of an intention to call on the replacement security.14

Tottle J considered that the effect of clause 5.2 was to create a negative stipulation on Samsung’s right to call on the replacement security, namely that Samsung must “consider, acting bona fide, that it is or will be entitled to recover the amount sought to be realised from LORAC, in this instance, AU$7.5 million.”15

LORAC contended there were ten matters which, when considered together, gave rise to the inference that Samsung were not acting bona fide. However, the general thrust of LORAC’s submission was that:

  • The valuations of the various claims and counter-claims had changed, in some cases dramatically, as the dispute matured.
  • The basis upon which Samsung had made its assessments could not easily be divined from the correspondence.16

LORAC also attacked Samsung’s evidence arguing it was “vague and convulsionary”17 and invited the court to draw an adverse inference18 against Samsung because Samsung didn’t call evidence of the bona fides of its claims from the subcontract manager responsible for the LORAC subcontract but, instead, relied on evidence from a commercial manager “up the line” from the subcontract manager.19

Despite these attacks, Tottle J was not persuaded that LORAC had “established to the requisite standard that Samsung [had] not acted bona fide.”20 He examined the evidence in detail in order to come to that conclusion.21 However, in coming to that judgment made two general observations which are of broader application:

[First,] a provisional conclusion as to a lack of bona fides can only be made on the basis of persuasive evidence. In assessing the allegation of a breach of bona fides, a court will look for undisputed facts and facts not surrounded by controversy from which to draw inferences. In this case, many of the matters relied upon by LORAC are so bound up in the controversies involved in the underlying dispute that it is difficult to draw the inference of a lack of bona fides for which LORAC contends.

[Second,] the effect of granting the relief sought by LORAC will be to deprive Samsung of the benefit of the bargain for which it contracted… The injunction will not preserve the status quo but will change it. … LORAC must demonstrate a prima facie case of sufficient strength to engender confidence that it would succeed if the matter went to trial. LORAC has raised a serious question but its prima facie case is not sufficiently strong. Put another way, LORAC’s case is not sufficiently strong to tilt the balance of the risk of an injustice in its favour.22

HFW perspective

This decision is an interlocutory application meaning that it is attended by the usual procedural limitations of such decisions.23 However, that is also the reason why it is interesting.

The inclusion of the negative stipulation in clause 5.2 is a departure from the standard form. The inclusion of the term “bona fide” was likely intended to be a means of giving LORAC comfort about the circumstances in which its security would be at risk. It is not unusual for contractors to seek this sort of protection when negotiating these types of clauses.

Nonetheless, this decision appears to stand for the proposition that it will usually be straightforward for a construction principal to establish that they have acted on a bona fide basis. That is particularly so given that the issue will usually only arise in an interlocutory setting, such as an injunction application, where, as Tottle J stated, there are procedural limitations and evidence is not usually tested by cross examination.

An initial view of the decision might be that the requirement for demands on security to be made on a bona fides basis offers no protection to contractors given the relative ease by which Samsung appeared to jump the hurdle.

However, there is another way of looking at the case.

When coupled with a notification period, as was the case here, the inclusion of a requirement that the principal to act reasonably (or bona fides) will, in most circumstances, permit a contractor to argue that they are not. Thus, there will almost always be an opportunity for a contractor to bring an injunction application and thereby force the principal to prove its bona fides.

While that application might not always succeed, indeed, this decision suggests it will usually fail if that is the only argument, the mere ability to legitimately make the argument will usually have an added collateral benefit of buying the parties more time to continue to negotiate. It might even give a contractor who was in a weak negotiating position a stronger position while the principal diverts resources into defending the injunction application.

In parallel, the time taken for the application to make its way through the court process might give the contractor time to negotiate with its bankers so that even if a call on the security is made there are alternative financing arrangements in place to soften the blow of such a call.?So, while it might be easy for a principal to establish its bona fides, forcing it to do so could just be a lifesaver for the contractor!


  1. Laing O’Rourke Australia Construction Pty Ltd v Samsung C&T Corporation [2016] WASC 49 (17 February 2016) (LORAC v Samsung).
  2. Laing O’Rourke Australia Construction Pty Ltd v Samsung C&T Corporation [2015] WASC 237 (3 July 2015) [37].
  3. Supra 1, at [3]-[4].
  4. Ibid, [5].
  5. Ibid, [6]-[7].
  6. Ibid, [10].
  7. Supra, 2 and Samsung C&T Corporation v Laing O’Rourke Australia Construction Pty Ltd [2015] WASC 83 (9 March 2015).
  8. Supra 1, at [10].
  9. Ibid, [107].
  10. Ibid, [11].
  11. Ibid, [14].
  12. Ibid, [17], [50]-[54] [55]-[56].
  13. Ibid, [105].
  14. Ibid, [107].
  15. Ibid, [108].
  16. Ibid, [123].
  17. Ibid, [124].
  18. Relying on Jones v Dunkel (1959) 101 CLR 298.
  19. Supra 17.
  20. Ibid, [133].
  21. Ibid, [136]-[148].
  22. Ibid, [134]–[135].
  23. Ibid, [134].

Stick to the process

Santos Ltd v Fluor Australia Pty Ltd

Santos Limited (Santos) and Fluor Australia Pty Ltd (Fluor) entered into an EPC contract (EPC Contract) for the engineering, procurement and construction of the Gladstone LNG project in Queensland.1

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Relevant facts

The payment regime under the EPC Contract required Santos to pay Fluor an amount consisting of Fluor’s “actual costs”, a fee of AU$210 million and incentives as agreed. The target budget estimate was about AU$3.567 billion. In fact, Fluor claimed, and was paid, about AU$5.43 billion, an overrun to the target budget estimate of about AU$1.854 billion.2 Given the overrun, Santos sought (by letter dated 18 December 2015) to exercise its audit rights under the EPC Contract to assess the “actual costs” components of Flour’s payment claims.3 Fluor resisted Santos’ request for access to its project accounts on the basis that it had already provided the information it was obliged to provide under the EPC Contract.4

Despite corresponding in relation to the request over a number of months, Fluor continued to resist production of the material. Accordingly, on 13 May 2016 Santos filed an application in the Queensland Supreme Court seeking an order that Fluor provide it with access to the materials requested.5 Fluor filed a counter application seeking a stay of Santos’s application pending the parties’ compliance with the dispute resolution process set out in the EPC contract.6 Relevantly, the dispute resolution process required the service of dispute notices and responses, and a number of meetings between increasingly senior representatives of each party.7

Santos defended the application on the basis that enforcement of the dispute resolution process would be impractical or useless.8 It relied on evidence of two similar previous disputes between the parties where there was no substantive progress towards resolution until Santos initiated court proceedings.9 Santos argued that, even though there had been no compliance with the contractual procedure,10 a Court-based process would be more efficient in resolving the dispute.11 Especially so, given that the dispute was essentially a legal debate about proper construction of the audit regime in the EPC Contract. Santos argued that such a dispute would be better suited, and more efficiently determined, in Court.12

Fluor submitted despite these facts that there was utility in the parties undertaking the contractual process. For example, in previous disputes, the contractual process had narrowed the issues to be determined by the Court, influenced the terms of settlement and encouraged both companies to reach a compromise.13


The Court was not persuaded by any of the arguments put forward by Santos and accordingly, upheld Fluor’s application for a stay pending compliance with the contractual dispute resolution process.14 The Court’s decision was in keeping with a well established line of authority about the importance of parties adhering to the contractual dispute resolution process.15

HFW perspective

The case highlights the Court’s reluctance to re-write the parties’ bargain unless there are very good reasons to do so. Here, there were none. It is also a reminder of the utility of such processes. As Fluor argued, there is often utility to undertaking the contractual process. Even if it doesn’t result in resolution it will undoubtedly give the parties an opportunity to learn about each other’s case and to narrow the true issues in dispute, which is essential to the efficient resolution of disputes.


  1. Santos Limited v Fluor Australia Pty Ltd [2016] QSC 129 (13 June 2016) [5].
  2. Ibid, [6].
  3. Ibid, [10].
  4. Ibid, [11]-[13].
  5. Ibid, [1].
  6. Ibid.
  7. Ibid, [3].
  8. Ibid, [4].
  9. Ibid, [14].
  10. Ibid, [21].
  11. Ibid, [22].
  12. Ibid, [17].
  13. Ibid, [15] – [16]
  14. Ibid, [18].
  15. See, e.g. United Group Rail Services Ltd v Rail Corporation NSW (2009) 74 NSWLE 618, 638 [73] (Allsop P); Zeke Services Pty Ltd v Traffic Technologies Ltd [2005] 2 Qd R 563, 569 [21] (Chesterman J); Welker and Ors v Rinehart (No 2) [2011] NSWSC 1238 (7 October 2011) [8]; Mr D Ltd v Dirty Dancing Investments Pty Ltd [2009] NSWSC 332 (1 May 2009) [53]; Cable & Wireless plc v IBM UK Ltd [2002] EWHC 2059 (Comm) (11 October 2002); Downer EDI Mining Pty Ltd v Wambo Coal Pty Ltd [2012] QSC 290 (26 September 2012), [29].

The obligations of a professional contractor – does it suffice to act in a manner widely accepted by industry practice?

Theiss Pty Ltd and John Holland Pty Ltd v Parsons Brinckerhoff Australia Pty Ltd

On 2 November 2005 at approximately 1:40am a roof section of the Lane Cove Tunnel Construction Project (the Project) in Sydney collapsed, causing significant loss of property and property damage.1

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Relevant facts

A joint venture between Thiess Pty Ltd and John Holland Pty Ltd (Thiess-JH) was responsible for the design and construction of the Project. The design of the works was the responsibility of Parsons Brinckerhoff Australia Pty Ltd (PB). Pells Sullivan Meynink Ltd (PSM) was engaged as geotechnical engineers to monitor ground conditions in the excavated tunnels and to, among other things, liaise with PB to tailor the design of the works to the ground conditions experienced. URS Australia Pty Ltd (URS) were engaged as independent verifiers on the Project.2

Following the collapse, Thiess-JH alleged that one or more of PB, PSM or URS was responsible for the collapse. Each denied liability and alleged that Thiess-JH bore the whole (or at least some) liability for the collapse.3 During the course of the hearing Thiess-JH settled their claims against all the defendants except for PSM. Accordingly, the judgement is as confined as it can be to the issues in dispute between Thiess-JH and PSM. Given that PSM raised apportionment issues under the Civil Liability Act 2002 (NSW) the judgement necessarily concerned some of the issues between Thiess-JH and each of PB and URS.4

PB and PSM found liable for breach of contract

The Court held that URS was not in breach of its contractual obligations regarding verification as URS had (in the absence of evidence to the contrary) exercised reasonable care in carrying out its task.5

Accordingly, liability was apportioned between PB and PSM as each of these parties had “departed in a very significant way from the standard imposed upon it by its contract with Thiess-JH”.6 In PB’s case, the design that it had produced did not reflect the design philosophy that it had itself propounded. In PSM’s case, its failure was to continually assess the ongoing suitability of PB’s design and to ensure that PB’s design remained suitable in light of the ground conditions reported as the project progressed.7

PSM’s defence that it had acted in a manner widely accepted by industry practice

PSM argued that its obligation was to assist PB in preparing the designs but that it was not required to check and ensure the adequacy of those designs once they had been finalised by PB.8 In short, PSM argued that the reliability of PB’s design was solely PB’s responsibility.

PSM also sought to invoke section 50 of the Civil Liability Act 2002 (NSW) arguing that it should not be found to be negligent since it had acted in a manner that is “widely accepted in Australia by peer professional opinion as competent professional practice”.9 In making that argument PSM called expert evidence that it had acted in a manner that widely accepted professional opinion would deem competent in light of PSM’s obligations pursuant to its contract with Thiess-JH and PSM.10

Industry practice must be construed by reference to the specific obligations of the contract

The Court held that it would not be acceptable to merely comply with and rely on industry practice if the contract and obligations undertaken were complex and went beyond the scope of a usual straight-forward contract. The specific obligations undertaken must always be considered. In this case, the Court found that the obligations that PSM undertook were very carefully designed to reflect the partic

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John Court
Global Director of Information Technology