A discussion of the decision in Duffy Kennedy Pty Ltd v Galileo Miranda Nominee Pty Ltd  NSWCA 25
“Without prejudice” communications in commercial settings
Often, when disputes arise in commercial matters of all descriptions, including complex construction disputes, the parties to the dispute will exchange correspondence or hold meetings said to be on a “without prejudice basis” as a means of encouraging discussion in an open setting.
However, for all commercial negotiations occurring prior to court proceedings being commenced, it is essential to remember that simply identifying a statement as being made without prejudice will not prevent that statement from being used in a contractual context, such as in the exercise of parties’ rights under the Contract.
What the Court has said
The NSW Court of Appeal in Duffy Kennedy Pty Ltd v Galileo Miranda Nominee Pty Ltd  NSWCA 25 unanimously affirmed the decision of Parker J in Galileo Miranda Nominee Pty Ltd v Duffy Kennedy Pty Ltd  NSWSC 1157.
In those proceedings, it was found that the principal to a construction contract properly issued both a show cause and take out notice on its contractor, after it was suggested that the contractor was in breach for failing to rectify several defects and for suspending the construction works without a reasonable basis.
Further, the Court of Appeal confirmed that the content of discussions held on a without prejudice basis between the parties could be considered when the parties were considering matters in the context of non-curial decision making according to their rights under the construction contract.
The decision has significant commercial implications for parties to all commercial agreements which purport to hold negotiations and other dispute resolution procedures in “without prejudice” settings before a matter has been filed with a court or tribunal.
The subject matter of the dispute concerned a development comprising 97 residential apartments in the Sutherland Shire at Miranda. Galileo Miranda Nominee Pty Ltd (Galileo) was the principal, Duffy Kennedy, the contractor, and the contract price was a lump sum amount of $65,758,576 excluding GST (Contract).
On 19 March 2019, in accordance with a payment schedule submitted in response to a payment claim, the sum of $293,984.42 became payable to Duffy Kennedy. The payment was not made that day, with Galileo making payment via EFT on Friday, 22 March 2019. Duffy Kennedy did not receive the payment until the following Monday, 25 March 2019.
Further, the payment did not comprise interest accrued on the outstanding amount (pursuant to section 11 of the Building and Construction Industry (Security of Payment) Act 1999 (NSW) (Act)), which was in the sum of $177.20.
Following receipt of the payment, Duffy Kennedy issued two notices to Galileo, asserting its right to suspend works under section 16(2)(b) of the Act (along with a contractual right to suspend works, which was not later relied upon), for defaulting on the payment.
Neither notice referenced the failure to pay interest on the overdue amount.
On 28 March 2019, two days after issuing the notices, Duffy Kennedy gave notice that it was immediately suspending the works. This was followed by Galileo, through its Contract representative Resource Co-ordination Partnership Pty Ltd (RCP), issuing a show-cause notice on 29 March 2019.
The show-cause notice asserted that Duffy Kennedy had breached the Contract in several respects, being the failure to provide a fire penetration schedule, the inability to rectify balustrades installed contrary to code in several apartments, and ultimately had wrongfully suspended the works.
Under the Contract, RCP as the principal’s representative was conferred the power to issue any such notice.
In its response to the show-cause notice issued on 12 April 2019, Duffy Kennedy contended (amongst other things) that it had a statutory right to suspend the work until interest on the scheduled amount had been paid. That amount was subsequently paid on 15 April 2019 (though the works were never recommenced).
The parties held a meeting to attempt to resolve the dispute prior to the issuance of the response to the show-cause notice and a further meeting several days afterwards. It was agreed that these meetings were held on a without prejudice basis.
At the meeting following the response to the show-cause notice, Duffy Kennedy advised that it was not going to provide a fire penetration schedule in the form required by the certifying authority. It maintained that the balustrades were compliant with the building code and did not require rectification.
Ultimately, on 29 April 2019, Galileo gave a take out notice to Duffy Kennedy due to its failure to show reasonable cause by the date and time required and began taking steps to assign the remainder of the works to another contractor.
On 1 May 2019, Duffy Kennedy gave notice that it considered the take out notice to be repudiatory conduct, accepting that repudiation and electing to terminate.
Conversely, Galileo sought to affirm the Contract, thereby allowing it to retain the security provided by Duffy Kennedy, which would be used to offset the costs incurred in the take out process and finalisation of the works. Proceedings were ultimately commenced on this basis in order to compel Duffy Kennedy to comply with the Contract.
White JA delivered the head judgment, with Brereton JA and Barrett AJA agreeing. The following issues were considered and dealt with by the Court on appeal:
(a) Was Duffy Kennedy entitled to suspend works?
(i) The pillar of Duffy Kennedy’s suspension notice was the failure of Galileo to pay interest on the overdue scheduled amount. That is notwithstanding that interest was eventually settled, and the works never recommenced.
(ii) The Court held that the definition of “scheduled amount” does not include interest payable under section 11 of the Act unless that amount is included in a scheduled amount itself.
(iii) White JA provided some discussion as to the avenues available to a claimant to recover interest on any unpaid amount, such as in a subsequent payment claim or by way of registering an adjudication determination as a judgment.
(iv) However, the Court held that nothing within the Act (referring toss 15(1), 16(1) or 23(2)) provided for action to be taken pursuant to the non-payment of interest on a scheduled amount.
(v) Accordingly, Duffy Kennedy was shown to have invalidly suspended the works.
(b) Was the show cause notice validly issued?
(i) Duffy Kennedy contended that Galileo’s involvement in the issuance of the show cause notice was a breach of clause 24.1 of the Contract, which conferred such action exclusively on the principal’s representative.
(ii) The notice itself had been issued on Galileo’s letterhead, and Duffy Kennedy posited that RCP had merely signed off on it without proper and reasonable consideration of its content.
(iii) RPC and Galileo had contended that the decision making had been bilateral and that its contents had been adequately reviewed and deliberated.
(iv) The Court deferred to, and agreed with, the primary judge’s reasoning on the issue, who considered that although Galileo’s lawyers had drafted the notice, RCP had properly considered its contents and did consider that Duffy Kennedy was in breach in the resects identified.
(v) Indeed, the primary judge found that it was a reasonably open interpretation of the facts that Duffy Kennedy’s suspension of the works and its failure to comply with the requirements of the certifying authority regarding the fire penetration schedule would constitute a breach of Contract.
(vi) Upon review of the material read at first instance and consideration of the content of cross-examination of RCP’s directors, White JA upheld the primary judge’s conclusion that the relevant directors of RCP had formed the view that Duffy Kennedy was in breach.
(vii) In any event, evidence led in the proceedings confirmed that RCP was involved with the drafting of the notice. Further, the Court at  noted that there was “nothing in clause 24.1 and 24.2 to indicate that the Principal’s Representative cannot have regard to the views of the Principal in deciding whether to issue a notice to show cause under clause 24.1“.
(viii) The Court also considered that this relationship should go both ways and that it would be “an unbusinesslike construction” to say that a principal should have no discretion as to whether its representative issues a contractual notice on its behalf (at ).
(ix) In this regard, the Court’s finding reflects the realities of the commercial dynamics of construction contracts involving multiple parties and a timely reminder that parties to these contracts should be aware of their right to issue certain contractual notices.
(c) Could the parties rely on the content of without prejudice meetings in a commercial context?
(i) Ground 4 of Duffy Kennedy’s notice of appeal raised the question of whether RCP was entitled to consider the content of conversations that took place at meetings held without prejudice in determining whether the issuance of the take-out notice was valid.
(ii) At first instance, Duffy Kennedy alleged that RCP had not made its own judgement after receipt of the response to the show-cause notice but did so based on statements made by Duffy Kennedy’s representative at one or more of the without prejudice meetings held around the time it was received.
(iii) The effect of those meetings was that Duffy Kennedy had made it clear that they did not intend to increase the height of the balustrades or to provide a fire penetration schedule as required by the certifying authority.
(iv) Having considered the evidence of RCP’s representatives at first instance, the primary judge was satisfied that RCP had come to the view that Duffy Kennedy was in breach of the facts available and had failed to show cause.
(v) However, and critically, the Court found at  that “the fact that RCP’s view was informed by statements made by Mr Pratt [of Duffy Kennedy] at a meeting held on a without prejudice basis was irrelevant when it came to considering the validity of action taken in reliance or partial reliance on what was said at that meeting for contractual purposes“.
(vi) Counsel for Duffy Kennedy raised the issue of the use of these without prejudice discussions, not in respect of any evidence adduced in the proceedings, but concerning the parties’ consideration in issuing the take out notice.
(vii) The Court quoted the primary judge at , who stated that [at 250-1]:
“Although reference was made to provisions of the Evidence Act 1995 (NSW), s 131, that provision applies only in curial proceedings: s 4. It does not apply to a non-curial procedure such as that under cI 24.2. Counsel’s argument must therefore be that for RCP to rely upon something said in a without prejudice meeting in some way fell foul of the common law rules concerning privilege over without prejudice communications.
But in my view, the fact that the meeting was conducted on a without prejudice basis is irrelevant when it comes to considering the validity of action taken in reliance, or partial reliance, on what was said at that meeting for contractual purposes. Although without prejudice privilege has been recognised for a long time in the common law but is now enshrined in the Evidence Act, it has not been recognised as a substantive legal right in the same sense.
The rule that without prejudice, communications are privileged is simply a rule of evidence. It applies only in curial proceedings to prevent the admission of evidence, and even in such proceedings, it only applies when an objection is made”.
(viii) Although Duffy Kennedy cited several authorities in support of the proposition that RCP was not entitled to take into account the content of the without prejudice meetings, the Court simply found they did not assist its position whatsoever.
(ix) Discussion briefly turned to the public policy consideration in allowing correspondence marked the full form of the statement, being “without prejudice save as to costs“, following the decision in Calderbank v Calderbank, which protects negotiations from disclosure in an evidentiary sense whilst liability was still in issue.
(x) Citing [at 173] the majority of the High Court in Field v Commissioner for Railways for NSW (1957 99 CLR 285 at , the Court commented that:
The purpose of the evolution of the law in this regard was to enable parties engaged in an attempt to compromise litigation to communicate with one another freely and without the embarrassment which the liability of their communications to be put in evidence might subsequently impose upon them.
(xi) The Court’s view was simply that without prejudice, discussions are not protected by any notion of privilege in commercial settings. White JA commented at  that “it has never been suggested so far as I am aware that the privilege is based upon an implied agreement that if the negotiations do not result in an agreement for settlement of the dispute, the parties will make no use of what has been disclosed by the other party in the negotiations“.
This decision makes it clear that in practical terms, for all commercial negotiations occurring prior to court proceedings having been commenced, it is essential to remember that simply identifying a statement as being made “without prejudice” will not affect that statement being used to enforce contractual remedies.
Some practical examples of where this might happen include:
(a) Where an entitlement to an EOT under a contract is in dispute between the parties; or
(b) In a leasing matter, where a tenant discloses they are not paying their rent for a specific purpose, a landlord using that purpose to exercise their power under the lease (to, for example, evict the tenant).
The decision also highlights the importance of ensuring action under the Security of Payment Act is taken only concerning scheduled amounts – enforcing rights to suspend work purely on unpaid interest that has not been scheduled will not be sufficient and may be a breach of Contract.
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Disputes between parties to a construction contract are often complex and traverse various areas of law. Should you or your business require advice to navigate these complicated issues, don’t hesitate to contact our construction team for a consultation.