Jurisdiction - Australia
News
Australia – Show Cause Means Show Cause.

 31 August, 2012

 

Legal News & Analysis – Asia Pacific – Australia – Construction & Real Estate

 

 In brief

 

Clients issuing or receiving show cause notices under Australian Standard form construction contract AS 2124-1992 should have regard to the legal requirements surrounding such notices, as clarified by the Supreme Court of Victoria in Dura (Australia) Constructions Pty Ltd v Hue Boutique Living Pty Ltd. In brief, the Court held that:

 

  • a show cause notice does not need to provide detailed particulars of each matter constituting a default by a contractor; 
  • the type of breach alleged will determine the level of detail to be included in the notice – a single event (eg a failure to provide insurance) will always be clearly articulated in a show cause notice, but this is not necessary in the case of a show cause notice for ongoing circumstances (eg a failure to proceed expeditiously with the contract);
  • it is the substance of the notice which is of importance and the question will therefore be whether the notice conveys to a reasonable person, in the position of the contractor, what is amiss and that a right to require the contractor to show cause has been invoked;
  • the contract does not require a show cause notice to state which of the remedies under clause 44 of the contract (to take the whole or part of the remaining work out of the contractor’s hands or terminate the contract) a principal intends to exercise;
  • a principal must act reasonably, and make an honest and careful determination as to whether a contractor has failed to show reasonable cause.

 

In Dura (Australia) Constructions Pty Ltd v Hue Boutique Living Pty Ltd, Justice Dixon of the Supreme Court of Victoria considered the requirements for a valid show cause notice given under the Australian Standard form construction contract AS 2124 – 1992 as a pre-condition to taking work out of the hands of a contractor or terminating a contract and the requirements imposed on a principal when evaluating whether cause has been shown by a contractor responding to such a notice.

 

Facts

 

Hue Boutique Living Pty Ltd (“Hue”) engaged Dura (Australia) Constructions Pty Ltd (“Dura“) to construct a four level apartment block comprising 29 residential apartments in Richmond, Victoria. After becoming concerned about the rate of progress, the quality of the work and the quantum of progress claims, Hue served a series of show cause notices under clause 44.2 of AS 2124 – 1992 alleging that Dura was in default by separate substantial breaches of contract and requiring Dura to show reasonable cause why Hue should not exercise a right under clause 44.4 and either take the whole or part of the remaining work out of Dura’s hands or terminate the contract.

 

The allegations of substantial breach by Hue against Dura were that it had:  failed to proceed with the works with due expedition and without delay in breach of clause 33.1 (expedition notice);

 

  • failed to comply with a direction of the superintendent under clause 30.3 in breach of clause 23 of the contract (directions notice); and
  • failed to use the standard of materials or provide the standards of workmanship required by the contract in breach of clause 30.1 (defects notice).

 

Dura responded to each of the notices, attempting to show cause. Hue did not accept that Dura had shown reasonable cause and served Dura with a notice under clause 44.4 to take the remaining works out of Dura’s hands. Dura contended that the notices were invalid on the basis that each was said to be confusing, prolix and obtuse. Further, Dura complained that the notices failed to articulate the precise respects in which it was alleged that it had failed to comply with directions of the superintendent or failed to use the standard of materials or provide the standards of workmanship required by the contract. Further Dura complained that the 7 days permitted in which to show cause was unreasonable having regard to the vast number of issues raised.

 

By taking the works out of its hands, Dura contended that Hue repudiated the contract and that Dura had accepted that repudiation thereby terminating the contract. Dura claimed damages for breach of contract, alternatively damages on a quantum meruit. Hue contended that the exercise of its contractual rights was justifiedand counterclaimed for the additional costs incurred in completing the project.

 

Decision

 

This was a complex piece of construction litigation which occupied 32 hearing days. The Court found in favour of Hue and held that Dura had been in substantial breach of the contract and that the show cause notices served by Hue were valid. Further, the Court found that when Hue gave notice to Dura taking the remaining works out of its hands, it acted properly in accordance with the rights and obligations arising under clause 44.

 

Legal requirements for a valid show cause notice The dispute between the parties focused on the manner and content of the contractual requirement that the directions and defects notices specify the alleged substantial breaches.

 

The Court held that clause 44.3 of AS 2124 – 1992 does not require the principal to detail or particularise each matter constituting the default, but rather, that such a notice will be effective where it conveys what is amiss. In forming this view, the Court had regard to the process contemplated by clause 44 which deferred the principal’s right to determine its response until after an opportunity to show cause has been afforded to the contractor. The Court reasoned that showing cause why a principal should not exercise a choice of whether to elect between different contractual rights contemplates a process of communication between principal and contractor and not necessarily just rectification. This process is in contrast to a self-executing notice which requires rectification within the specified period. Such a notice would need to be detailed and specific in its requirements.

 

In other words, the opportunity provided to the contractor in the period after the notice from the principal under AS 2124 – 1992 is to show cause, not to remedy its breach, is a relevant consideration in determining the approach to be adopted by the principal in giving notice, the contractor in showing cause and the principal in response to cause shown.

 

The Court noted, however, that this is not to say that a notice under clause 44.3 would sufficiently specify the alleged substantial breach if it merely identified one of the sub paragraphs of clause 44.2 (which sets out what matters may amount to a substantial breach). The type of substantial breach in issue will determine the form of specification in the notice. Providing the opportunity for the contractor to show reasonable cause determines the content of the notice. Some forms of substantial breach – such as failing to provide evidence of insurance, or failing to lodge security – relate to single events. In such circumstances the method for showing cause is correspondingly clear. Other forms of substantial breach, such as failing to comply with a direction of the superintendent or failing to use, or provide, the standard of materials or workmanship required may also relate to a single event, but they may be ongoing circumstances.

 

Where ongoing circumstances found a substantial breach, and that will be the case where the breach concerns failing to proceed expeditiously with the contract, the contractor’s reasonable cause shown may relate to continuing processes rather than rectification of an existing condition. In the circumstances, it may be unreasonable to expect a contractor to rectify 1,000 identified defects within, say, 10 days. It may be reasonable for the contractor, within 10 days, to communicate in writing with the principal about how its systems, processes or resources on the project are appropriate to rectify the substantial breach identified and ensure future compliance with the contract according to its terms.

 

In this case, one of Dura’s complaints was that Hue simply bundled together all possibly relevant documents for inclusion in the notice without checking whether the referenced material was still applicable, that is, whether the direction had been complied with or the defect rectified. The identified directions referenced at least 935 individual defects when, prior to the issue of the show cause notices, many of the defects had been rectified. Dura contended that the particulars of substantial breach included:

 

  • directions that had been complied with;
  • directions where it was now not possible to identify precisely the extent or part of the directions not complied with; and
  • directions where the imprecise and vague nature of the referenced material meant it was impossible to identify precisely what was the direction given.

 

Ultimately, the Court rejected Dura’s submission that the notices were objectionable on the basis that they failed to articulate exactly each respect in which Dura failed to comply with the superintendent’s direction or failed to use the standard of materials or provide the standards of workmanship required by the contract as it puts too high the requirement that the notice specify the alleged substantial breach.

 

The Court also rejected Dura’s submission that, in order to be unambiguous, the notice must also state which of the remedies that the principal intended to exercise. The Court reasoned that clause 44 permitted the principal to determine its response after affording an opportunity to the contractor to show reasonable cause.

 

An implied obligation to act reasonably in giving the show cause notices? Dura contended that there was an implied term of the contract to the effect that Hue must act reasonably in serving a show cause notice. Further, that Hue did not act reasonably in giving the directions and defects notices and that, as a consequence, they were invalid.

 

The Court noted, relying on Esso Australia Resources Pty Ltd v Southern Pacific Petroleum NL & Ors [2005] VSCA 228 that, in Victoria, no general obligation of good faith is implied into commercial contracts as a matter of law. Furthermore, the Court found it unnecessary to imply a term of good faith to give business efficacy to the contract.

 

Legal requirements for evaluating cause shown The contract did not address how a principal evaluates cause shown. Dura contended that there was an implied term of the contract to the effect that Hue must act reasonably in assessing whether Dura had shown cause. In order to act under clause 44.4, the principal must first be satisfied that the contractor has failed to show reasonable cause. From the characteristics of the contractual language, the Court expressed the view that the principal must, as part of the process of determining which right to exercise, take into account or give proper consideration to cause shown in response to a notice.

 

Accordingly, the Court stated that Hue was required to determine, honestly, whether the contractor had failed to show reasonable cause why the principal should not exercise a right referred to in clause 44.4. A court should be satisfied that the principal has made an honest decision in good faith about that matter enabling it to exercise the contractual rights in its favour provided by the clause. Further the Court expressed the view that it is not a relevant consideration for a court that the principal’s decision serves only its interests or that an alternative decision on the part of the principal was reasonably open. The Court held that Hue acted reasonably and made an honest and careful determination that Dura failed to show reasonable cause.

 

Due expedition and without delay Dura correctly contended that Hue bore the onus of proving that Dura had failed to proceed with the works with due expedition and without delay in breach of clause 33.1. In establishing whether there is, for the purposes of clause 44.2, a substantial breach of clause 33.1, the Court considered that following a two stage inquiry was appropriate. First, has a failure to proceed with the work with due expedition and without delay been shown? If so, second, does it constitute a substantial breach?

 

At the first stage of the inquiry, the essential requirement is directed to considering the manner in which the contractor is proceeding with the works. The Judge stated that it is necessary to have regard to the whole history of the project and to relevant terms of the contract. Further, that a particularly important consideration is whether the contractor has agreed, by clause 33.2, to execute the works to an approved construction program to achieve the agreed date for practical completion.

 

The Court noted that Hue had to establish that the breach was substantial. This is a question of fact which involves objective considerations. The focus is on the construction activities at the relevant time. A construction activity that is not on the critical path and is not proceeding with due expedition, delayed by the contractor, may not constitute a substantial breach of clause 33.1. Even an assumed extended period of delay may not be material or important. Conversely, if such activity is on the critical path, a short delay or want of due expedition may result in important time consequences and be a substantial breach. Thus, if the works are not progressing with due expedition and without delay because the critical path is extending in circumstances where the reasons for the want of due expedition lie contractually at the risk of the contractor, the breach will be substantial.

 

The Court was satisfied that Hue had made an honest decision in good faith that Dura had committed a substantial breach of clause 33.1. The conclusion was reinforced by the expert evidence and the Court declined to set aside that decision.

 

Court’s comments on show cause notices

 

In many respects, the Court’s comments in relation to the form and content of a show cause notice are consistent with earlier authority to the effect that such a notice will not be interpreted in a rigid or pedantic manner.

 

It is the substance of the notice which is of importance and the question will therefore be whether the notice conveys to a reasonable person, in the position of the contractor, what is wrong and that a right to require the contractor to show cause has been invoked.

 

The case does, however, highlight the subjective nature of the approach that may be taken by a principal when evaluating whether cause has been shown.

 

 

For further information, please contact:

  

Jos Mulcahy, Partner, Ashurst

jos.mulcahy@ashurst.com

 

Ashurst Construction & Real Estate Profile – Australia

 

Homegrown Construction & Real Estate Law Firms – Australia

 

Leave a Reply

You must be logged in to post a comment.