12 January 2021
In the recent case of Vestas, the Supreme Court of Victoria considered potential, serious legal risks arising from communications between the principal and superintendent and provided guidance to principals, superintendents and builders (and their respective legal advisors) concerning such communications.1 This alert reviews the legal landscape relevant to the superintendent's independent certification role and makes practical recommendations to assist stakeholders in evaluating and adjusting their current practices relating to principal-superintendent communications.
Key takeaways
The dual nature of the superintendent's role as both agent of the principal and as certifier compels careful consideration of the potential risks arising from communications between the principal and superintendent in particular where those communications relate to the superintendent's certification role. The superintendent's duties are defined by the contract and will consequently differ in nature and scope from project to project. One of the key areas of sensitivity for the superintendent is the maintenance (and appearance) of independence when undertaking certification functions.
When communicating and interacting with the superintendent, principals (and their legal advisors) should carefully consider the nature of the superintendent's role provided in the contract and the potential that those communications could undermine perceptions of independence. Consequently, this has the potential to invalidate the superintendent's decisions and give rise to breach of contract claims against the principal. Generally, principals should endeavour to:
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avoid the following:
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ghost-writing letters for the superintendent to send to the builder
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appointing one of its own employees to the role of superintendent (due to the increased risk of conflict between the obligation of an employee to follow the directions of his or her employer and any obligation to act independently imposed by the construction contract)
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communicating privately with the superintendent regarding performance of its certification role
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take extra care if not avoid entirely the following:
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communicating privately with the superintendent in its role as agent
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using the superintendent to assist with drafting payment schedules or adjudication responses under the security of payment regime which reject the builder's payment claims
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observe the following for best practice:
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draft contracts that clearly delineate the superintendent's responsibilities (particularly which functions are performed as agent of the principal and which as independent certifier) and include a regime for both the builder and principal likewise to challenge the superintendent's certificates
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copy the builder in all correspondence relating to performance of the superintendent's certification functions in a transparent manner
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allow the superintendent to seek independent legal advice in relation to the performance of certification functions when requested by the superintendent
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ensure that certification-related communications with the superintendent are presented in a professional and objective fashion and do not seek to apply inappropriate pressure to make a certification in favour of the principal
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ensure that the superintendent does not stray outside its scope of services by instructing the builder regarding the manner in which the project is to be constructed
Baker McKenzie specialises in advising a wide range of construction industry participants in all phases of projects. If you would like more information regarding interactions with superintendents or require legal advice for a particular project, please contact our experienced construction team.
In more detail
Introduction
Common industry practice may inadvertently undermine the critical certification role of the superintendent, potentially giving rise to a counterproductive increase in legal risk and exposure to the principal. Consider the following scenarios:
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the principal's external law firm ghost-writes a letter for the superintendent to send to the builder rejecting the builder's claim for extension of time, variations or achievement of Practical Completion;
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the principal discusses with the superintendent the valuation of works and potential arguments in support of its refusal to pay for certain items claimed by the builder in circumstances where the builder is not present and is not invited to make equivalent comment; and
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a superintendent (also project manager of the project) assists the principal in drafting a payment schedule and adjudication response under the security of payment legislation rejecting the builder's payment claim / adjudication application.
The above scenarios demonstrate common circumstances in which interactions and communications between principal and superintendent should be carefully managed to avoid challenges to the superintendent's determinations and potential breach of contract claims against the principal arising from a failure to ensure that the superintendent performs his or her functions in an independent and reasonable manner.
This alert begins by briefly discussing the sources of the superintendent's duties and the background legal context which includes the recent Vestas case. It then presents a series of questions and answers which address some practical considerations and associated risks and provide some general guidance.
Sources of the superintendent's duties
Contract
The superintendent plays a central role in administering the building contract between the principal and builder, but is not a party to it. The usual position is that the building contract requires the principal to appoint a person of its choice as superintendent to perform contract administration functions as stated in the contract. The superintendent's obligations to the principal are generally found in a consultancy agreement which scope of services should (hopefully) refer to performance of the role as superintendent under the construction contract.
The superintendent usually has a dual role as both agent of the principal and certifier (e.g. of the value of completed work, extensions of time, variations, achievement of practical completion etc.) When acting as agent, the superintendent must act in the best interests of the principal.2 However, when acting in a certifying role, the contract usually specifies that the superintendent must act "honestly", "fairly", "impartially" or "independently" and sometimes "reasonably and in good faith". Each of these qualifiers indicate, to different degrees, that the superintendent must use his or her skill and best endeavours to use objectivity and independence to reach a decision in accordance with the provisions of the contract, rather than one favouring the principal only.3 The exact nature and duties of the superintendent's role will be defined by the relevant contract and will differ from project to project.
Common law
The superintendent owes a common law duty of care to the principal and may be liable in tort for negligent acts or omissions. This obligation can be supplanted by the terms of the consultancy agreement which may exclude the default common law obligations. Conversely, case law suggests that there is generally no duty of care between the superintendent and the builder.4 This creates a difficult situation for the builder since the builder usually has no direct contractual relationship with the superintendent and an action in tort may be its only basis for a claim (particularly in circumstances where insolvency of the principal leaves the builder with no effective recourse against the principal). Only in rare cases has a duty of care owed by the superintendent been established, particularly where the superintendent has given advice to the builder outside the scope of its duties. This duty of care has been based on the superintendent's assumption of responsibility by giving the advice and reliance on that advice by the builder.5
Background legal context
The below cases of Kane, Walton and Vestas provide important judicial commentary regarding the role of the superintendent.
Kane Constructions Pty Ltd v Sopov6
In Kane, Warren CJ extracted a helpful set of indicia of interference with a superintendent's exercise of independent certification functions from the relevant precedent:
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"when the superintendent allows judgment to be influenced, or where judgment and conduct are controlled by the principal
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when the superintendent acts in the interest of one of the parties and by their directions
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when there is not sufficient firmness in order to decide questions based on his or her own opinion
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where the superintendent considers the assent of the principal to be necessary, has ceased to be a free agent, and (critically to the present case) ‘does not give full disclosure of every communication between the superintendent and the principal’"
Walton v Illawarra7
More recently in Walton, McDougall J of the Supreme Court of New South Wales discussed the role of the project architect (superintendent) in the context of the NSW security of payment regime. Illawara (as principal) engaged Walton (as builder) for the refurbishment of the Illawarra Hotel in Wollongong, NSW. Illawara appointed Ms Indyk as the project architect and, in her capacity as architect, she assisted Illawara to respond to at least one Security of Payment Act payment claim made by Walton. McDougall J stated that "her dual roles as project architect and Superintendent put her in a very difficult situation. … Ms Indyk was required to support, for the benefit of Illawarra, a determination of the amount due to Walton that she had made in her capacity as Superintendent."
McDougall J went on to say that the communications suggested that "Ms Indyk was aligning herself entirely with the interests of Illawarra, and that she had abandoned the neutral or indifferent position required of her as Superintendent. … the possibility of conflict was real, and the appearance of bias was likely to result." These judicial comments reinforce the need to manage carefully the relationship between the principal and superintendent to not only avoid a builder challenge to the superintendent's decisions, but to also avoid a superintendent's decision being overturned by a referee or court (as occurred in this case).
Vestas – Australian Wind Technology Pty Ltd v Lal Lal Wind Farm Nom Co Pty Ltd8
Recently in Vestas, Delany J provided helpful guidance regarding communications between the principal and superintendent in its role as certifier in the context of an application for preliminary discovery and injunction.
Lal Lal contracted with Vestas to engineer, procure and construct a wind farm. The Contract provided that "[w]hen performing a Certification Role, the Principal’s Representative must act honestly, reasonably and make fair determinations in accordance with the agreement." After a number of unfavourable decisions by the Principal's Representative (PR) and suspicions of the existence of undisclosed private communications, Vestas sought an order for preliminary discovery and an injunction to restrain Lal Lal from communicating privately with the PR. The Supreme Court of Victoria dismissed the application on the basis that Vestas already had sufficient information upon which to decide whether to commence litigation and, further, prior to the decision, Lal Lal gave an undertaking to the court to not communicate privately with the PR going forward.
The decision itself is unsurprising, but Delany J provided useful commentary highlighting the risks associated with a principal (or its advisers) engaging in conduct which might compromise or appear to compromise the superintendent's duty of independence. He extracted key passages from precedent, including Kane discussed above and without arriving at a settled position, suggested that the case law provides "support for the proposition that any private communication is sufficient to undermine the independence of the Principal’s Representative when acting in the Certification Role so as to amount to actionable breach." This statement reinforces the importance of open communications with the superintendent when he or she is acting in their role as certifier.
Practical guidance
Who should fill the superintendent role?
Generally, the building contract gives the principal the right to appoint the superintendent. The principal should appoint an independent third party to fill this role and not one of its own employees. While technically not a requirement for all contracts, engaging a third party reduces the risk of actual or apparent conflict between the employee's duties to their employer and the requirements of the superintendent to carry out certification functions in an independent manner. In addition, case law suggests that under certain contractual arrangements the principal acting as superintendent is prohibited.9
For low value projects, engaging a third party may not always be practical since it is more costly to involve another person who may be duplicating roles. Keeping in mind the value and nature of the particular project, principals should carefully consider the superintendent's scope and which entity is best positioned to fill the role. Then, since the superintendent's role is defined by the contract and the courts have historically placed substantial weight on it, draft a regime that reflects this intended arrangement and the particular needs of the project.
How should principals communicate with superintendents?
Generally, the principal should gauge the content and the formality with which to communicate with the superintendent based on the nature of the communication and whether it relates to the superintendent's role as agent or as certifier. When acting as certifier, greater care is required so as to not actually or appear to undermine the superintendent's independence. These communications should have a higher level of formality similar to that used with an arbitrator (assuming all documents will be viewed by a third party such as a court). In addition, all communications related to certification should be on an open basis and copied to the builder. While it is recommended that all communications with the superintendent be on a more formal and objective basis, this is not always practical and not necessarily required when related to the superintendent's role as agent. However, principals should be mindful that all communications with the superintendent may end up being viewed in court and take the appropriate precautions.
Which actions by the principal's lawyers are appropriate?
Principals may wish to pass on to the superintendent their lawyer's advice related to contract interpretation and entitlement issues. Superintendents may find the advice helpful when construing their obligations and reaching difficult decisions. Despite this, it is recommended that principals do not pass on advice from their lawyers both in order to maintain privilege and maintain the actual and perceived independence of the superintendent. Especially with respect to its role as certifier, principals should encourage the superintendent to seek independent legal advice when required.
Since this is not practical in all situations, at the very least, principals should word correspondence carefully so as to not apply inappropriate pressure to the superintendent nor undermine his or her independence while at the same time confidently articulating its position in order to persuade the superintendent in an appropriate fashion.
Another common industry practice is for the principal's lawyers to ghost-write correspondence for the superintendent to send to the builder. While not entirely inappropriate in its role as agent, this practice should be avoided when the superintendent is acting in a certification role as it may undermine perceptions of independence. In all situations, the principal should carefully consider this practice since evidence of it will likely be adverse to the principal's position in the event of allegations from the builder that the superintendent has breached their obligations.
What recourse is available?
For principals, since the building contract generally provides the right for the principal to appoint, remove and replace a superintendent, principals can exercise this right in the event that there are issues with the superintendent's performance (i.e. inappropriate delay in making decisions, misapprehension of role etc.). However, care must be taken to not remove the superintendent merely because they have made certifications that are adverse to the principal. In the event that the superintendent has made a determination with which the principal does not agree, the principal can challenge the superintendent's determination under the same contractual dispute mechanisms as are available to the builder and can also potentially make a claim for breach of the consultancy agreement.
For builders who suspect that the principal has communicated inappropriately with the superintendent in breach of the superintendent's obligations of independence when performing the certification role, a preliminary discovery application can be made to the courts for disclosure of the relevant communications. Depending on the content of these communications, the builder may then be able to make a breach of contract claim against the principal for failure to ensure the independence of the superintendent.
For further information, please contact:
Alex Hartmann, Partner, Baker & McKenzie
alex.hartmann@bakermckenzie.com
1 Vestas – Australian Wind Technology Pty Ltd v Lal Lal Wind Farm Nom Co Pty Ltd [2020] VSC 554.
2 See for example Peninsula Balmain Pty Ltd v Abigroup Contractors Pty Limited [2002] NSWCA 211, [50].
3 Scheldebouw v St. James Homes (Grosvenor Dock) Ltd [2006] BLR 113, [34] (Jackson J).
4 John Holland Construction & Engineering Pty Ltd v Majorca Projects Pty Ltd and Bruce Henderson Pty Ltd (1997) 13 BCL 235; Pacific Associates Inc v Baxter [1990] 1 QB 993.
5 Day v Ost [1973] 2 NZLR 385.
6 Kane Constructions Pty Ltd v Sopov [2005] VSC 237.
7 Walton v Illawarra [2011] NSWSC 1188, [72] – [74].
8 Vestas – Australian Wind Technology Pty Ltd v Lal Lal Wind Farm Nom Co Pty Ltd [2020] VSC 554.
9 Scheldebouw v St. James Homes (Grosvenor Dock) Ltd [2006] BLR 113.
