The NSW Court of Appeal in Lahey Constructions Pty Ltd v The State of New South Wales [2021] NSWCA 69 considered the construction of the expert determination clause contained in the NSW Government GC21 General Conditions of Contract (Ed 2) (the GC21).

The NSW Minister for Education (the State) contracted with Lahey to perform works to upgrade two public schools which incorporated the GC21. Pursuant to cl 71.8 of the GC21, expert determinations will be final and binding, subject to certain exceptions, including where the value of the determination exceeds $500,000, in which case the matter can be referred to litigation.

Importantly, cl 71.8.2 requires that the value of the expert determination is to be calculated without having regard to any amount that had been paid pursuant to the Building and Construction Industry Security of Payment Act 1999 (NSW) (the SoP Act).

The parties referred various variation disputes to expert determination. During the course of the expert determination process, Lahey separately served payment claims under the SoP Act on the State which, in part, concerned claims that were the subject of the expert determination process that was on foot. Following adjudication of the payment claims, but prior to the conclusion of the expert determination process, the State made payments to Lahey in relation to these SoP Act claims.

Following this, the expert’s determination found that Lahey was entitled to payment of $3.77 million under one contract, and $5.15 million under the other contract. The expert found that the State was entitled to either “set-off” or to the “repayment” of the amounts it had paid Lahey pursuant to the adjudications under the SoP Act that were subject to the expert determination. This resulted in Lahey being indebted to the State in the amount of $1.6 million and $2.2 million respectively.

Lahey commenced proceedings in the New South Wales Supreme Court in relation to the issues that had been referred to expert determination. The State successfully sought an order for summary dismissal of the proceedings. The primary judge held that the expert determinations were final and binding because, once the amounts previously paid by the State to Lahey under the SoP Act were “set off” from the value of each determination, the value of each determination did not exceed the $500,000 threshold amount under cl 71.8.

Lahey sought leave of the New South Wales Court of Appeal to appeal the decision. In granting leave, Gleeson JA noted that the matter raised “a question of general importance concerning the construction of a standard form contract which is utilised widely in the building and construction industry, especially in public works.”

Having considered the issues, the Court of Appeal held that:

•    on its proper construction, cl 71.8.2 requires that the value of expert determinations should be calculated by disregarding all payments made pursuant to the SoP Act; and
•    as a result, the value of each of the relevant expert determinations exceeded the threshold amount in clause 71.8, such that Lahey was not precluded from litigating the disputes.

Relevantly, in making its finding, the Court agreed with Lahey’s submission that the primary judge’s construction of cl 71.8.2 would create a “perverse incentive” for builders not to resort to making progress claims under the SoP Act, for fear they might lose the possible right to litigate disputes of monetary significance.

The full decision can be found here.