A recent decision of the NSW Supreme Court of Appeal has considered, amongst other things, whether a ‘show cause’ notice and a ‘take out’ notice were validly issued, in circumstances where the degree of independence exercised by the Principal’s Representative (PR) was at issue.

In Duffy Kennedy Pty Ltd v Galileo Miranda Nominee Pty Ltd [2020] NSWCA 25 the Principal engaged the Builder to design and construct the Palisade, a residential development in Miranda, Sydney, for the sum of $65.7 million.

A dispute arose in relation to a progress payment that the Principal made three days after it fell due, pursuant to the payment schedule issued by the PR in March 2019. The Builder notified the Principal that it would suspend works because the Principal’s late payment had failed to account for $177.20 of additional interest payable to the Builder under the contract. In response, the Principal issued a default notice stating that the Builder lacked reasonable cause to suspend the works.

The PR served a ‘show cause’ notice on the Builder, in response to which the Builder issued a reply. The PR then issued a ‘take out’ notice, effectively taking the remaining works out of the Builder’s hands. The Principal commenced proceedings against the Builder and argued the ‘show cause’ and ‘take out’ notices were validly issued.

At first instance in the Supreme Court of NSW, Parker J found the Builder was entitled to the interest claimed, but held that the ‘show cause’ and ‘take out’ notices were valid.

On appeal, the Builder argued that Parker J was incorrect in finding the notices to be valid, arguing that:

•   The PR did not act independently from the Principal in deciding to issue the ‘show cause’ notice, in part demonstrated by the fact that the notice had been issued on the Principal’s letterhead;
•   The ‘take out’ notice was invalid, because, amongst other things, the PR had not properly considered the Builder’s response to the ‘show cause’ notice. The Builder relied on an email that allegedly demonstrated that the Principal had determined that the Builder’s response to the ‘show cause’ notice was ‘unsatisfactory’ before actually reviewing it.

Barrett AJA, White and Brereton JA dismissed the Builder’s appeal and upheld the validity of the ‘show cause’ and ‘take out’ notices, finding that:

•   The contract did not require the PR to exercise its judgement entirely independently of the Principal in issuing the ‘show cause’ notice;
•   It would be an ‘unbusiness-like’ construction to say the Principal could not be involved in the PR’s decision to issue a ‘show cause’ notice, given that the contract required the Principal to exercise a degree of supervision over the PR; and
•   Even though the PR and Principal had taken steps to prepare to issue the ‘take out’ notice before receiving the Builder’s response, there was evidence that the PR did properly consider the Builder’s show cause response and concluded it was insufficient.

This case highlights that, when determining the validity of a notice issued by the PR, the court may consider the degree of independence of the PR from the Principal, but will do so in reference to what is required by the contractual framework.

The full decision can be found here