1 Waiver, Estoppel and Election in the context of adjudication applications Adjudication Forum 13 November 2012 Max Tonkin The Pareto Principal Italian economist Vilfredo Pareto observed in 1906 that 80% of the land in Italy was owned by 20% of the population. He also observed that 20% of the pea pods in his garden contained 80% of the peas. Many others observed similar phenomena in their own areas of expertise. Quality Management pioneer, Dr Joseph Juran, working in the US in the 1930s and 40s recognised a universal principle he called the "vital few and trivial many". In Juran's initial work he observed that 20% of the defects cause 80% of the problems. Apparently a lack of precision on Dr Juran's part in writing up his work, made it appear that he was applying Pareto's observations about economics to a broader body of work. The name Pareto Principle stuck. The Pareto Principle means that in any undertaking a few things (20 percent) are vital and many (80 percent) are trivial. Another way of saying the same thing is that 80% of the effects come from 20% of the causes, and 20% of the effects come from the remaining 80% of causes. A good example is that Microsoft has reportedly discovered that by fixing the top 20% of the most reported bugs, 80% of the errors and crashes are eliminated. Adjudication applications and responses The Pareto Principle is relevant for those who prepare adjudication applications and responses. It reminds the preparer to focus on the vital few points, the 20% that are important. My experience is that this does not happen. Waiver, Estoppel and Election In my experience, waiver, estoppel and election will often fall within the vital few points in adjudication applications and responses. Curiously, in my experience, they often not considered by preparers. Of course, the 80/20 percentages are not precise. However the 80/20 rule, or the Pareto Principle, can serve as a reminder that waiver, estoppel and election are often important. What are these doctrines? Brennan J provided a neat overview 1 : Election, estoppel and waiver are cognate concepts: each relates to the sterilization of a legal right otherwise than by contract. 1 Commonwealth v Verwayen [1990] 170 CLR 394, 6 (Brennan J) ( Voyager ).
2 Waiver is the voluntary relinquishment of a legal right. However, as indicated by Brennan J s comments above, it is closely related to estoppel and election. Dawson J 2 said: "Waiver" is an imprecise term and is used to describe what is done in a variety of circumstances rather than to assert any particular legal process. However, where it is not used in the sense of election between mutually exclusive alternatives, if it has any identifiable legal consequence, it is generally indistinguishable from estoppel. Election consists in a choice between rights which the person making the election knows he possesses and which are alternative and inconsistent rights 3. Estoppel operates when a person who is entitled at law to the benefit of some right or rights is prevented by law, estopped, from insisting on that right or those rights 4. The text books devote much more space to estoppel than to waiver and election. This is due to the variety of sources of estoppels and the circumstances in which they can operate. There are two broad categories of estoppel. Estoppel by record, eg, by deed and issue estoppel, and estoppel in pais. Estoppel by deed Parties to a deed are estopped or prevented from denying to one another an allegation of fact made in the deed 5. Res judicata and issue estoppel A party will be estopped by res judicata, or cause of action estoppel, from taking proceedings in a court against another party on a cause of action for which a final judgement has been given. A party will also be estopped by issue estoppel from taking proceedings on a cause of action, which, although not previously decided, could reasonably have been raised on the facts that were the subject of an earlier case 6. Issue estoppel applies in adjudication so that a party who is dissatisfied by the decision of an adjudicator, cannot seek determination of a subsequent adjudication of the issues previously determined 7. Estoppel in pais There are many varieties of estoppel within this broad category. This much was made clear by Mason CJ 8 28. That brings me to estoppel, a label which covers a complex array of rules spanning various categories. There are the divisions between common law 2 Voyager [1990] 170 CLR 394, 2 (Dawson J). 3 Voyager [1990] 170 CLR 394, 6 (Brennan J). 4 Michael Evans, Equity and Trusts (LexisNexis Butterworths, 3 rd ed, 2012) 273. 5 Ibid 276. 6 Port of Melbourne Authority v Anshun Pty Ltd [1981] 147 CLR 589. 7 Dualcorp Pty Ltd v Remo Constructions Pty Ltd [2009] NSWCA 69. 8 Voyager [1990] 170 CLR 394, 28 (Mason CJ).
3 and equitable estoppel, between estoppel by conduct and estoppel by representation, and the distinction between present and future fact. There are titles such as promissory estoppel, proprietary estoppel and estoppel by acquiescence. Yet all of these categories and distinctions are intended to serve the same fundamental purpose, namely "protection against the detriment which would flow from a party's change of position if the assumption (or expectation) that led to it were deserted": Waltons Stores, per Brennan J. at p 419. See also per Mason C.J. and Wilson J. at p 404; Grundt, at pp 674-675. Dixon J 9 had previously stated the basis of the rules of estoppel in pais as follows: The principle upon which estoppel in pais is founded is that the law should not permit an unjust departure by a party from an assumption of fact which he has caused another party to adopt or accept for the purpose of their legal relations. This basis is widely accepted. Brennan J 10 referred to it in Waltons Stores (Interstate) v Maher. Deane J 11 did as well in Commonwealth v Verwayen ( Voyager case ), although indirectly by providing the following passage from a decision of Lord Denning MR 12 : "Estoppel is not a rule of evidence. It is not a cause of action. It is a principle of justice and of equity. It comes to this: when a man, by his words or conduct, has led another to believe in a particular state of affairs, he will not be allowed to go back on it when it would be unjust or inequitable for him to do so. Dixon J. put it in these words: 'The principle upon which estoppel in pais is founded is that the law should not permit an unjust departure by a party from an assumption of fact which he has caused another party to adopt or accept for the purpose of their legal relations.' Sir Owen said so in 1937 in Grundt v. Great Boulder Proprietary Gold Mines Ltd. In 1947 after the High Trees case (Central London Property Trust Ltd. v. High Trees House Ltd). Estoppel in pais may give rise to a remedy in common law or may give rise to equitable rights. McHugh J 13 distinguished between common law estoppel and equitable estoppel in terms of remedies. A further distinction is that common law estoppel is based on a representation or an assumption of an existing fact 14, whereas equitable estoppel can arise on the basis of representations or promises or assumptions as to future conduct Promissory estoppel.extends to representations (or promises) as to future conduct. 15. The High Court decision in Waltons Stores (Interstate) v Maher, was an appeal from a decision in the NSW Court of Appeal. In that case Priestly JA 16 set out in that decision what he considered to be the four elements of the test for the application of the particular estoppel in pais. 9 Grundt v Great Boulder Gold Mines Ltd [1937] 58 CLR 641. 10 Waltons Stores (Interstate) v Maher [1988] 164 CLR 387, 12 (Brennan J). 11 Voyager [1990] 170 CLR 394,12 (Deane J). 12 Moorgate v Twitchings [1976] 1 QB 225, 241-242. 13 Voyager [1990] 170 CLR 394,30 (McHugh J). 14 Voyager [1990] 170 CLR 394,29 (Mason CJ). 15 Waltons Stores (Interstate) v Maher [1988] 164 CLR 387, 20 (Mason CJ and Wilson J). 16 Evans, above n 4, 249.
4 1. Did the plaintiff adopt a mistaken assumption of fact which the defendant had caused them both to adopt or accept for the purpose of their legal relations? 2. Would departure by the defendant from that assumption operate to the plaintiff s detriment? 3. Did the defendant know of the mistake laboured under by the plaintiff? 4. Did the defendant refrain from correcting the plaintiff when it was the defendant s duty to do so? Although Priestley JA was referring to the particular case at hand, these elements form a useful guide in deciding whether estoppel is applicable. Why are Waiver, Estoppel and Election important in the context of adjudication applications? The short answer is that construction contracts are not administered in accordance with their terms. Written construction contracts are often based on standard form general conditions of contract such as those published by Standards Australia, Master Builders Australia, Australian Institute of Architects, NSW Government and many other organisations. Standard form contracts set out the contracting parties rights and obligations in a structured manner. Many of the obligations consist of implementing administrative procedures. Many of the rights are contingent on implementing the procedures. For example, a common provision in standard form contracts is that the Superintendent may direct the contractor to vary the work, and the contractor must not vary the work unless directed in writing. Another common provision is that a contractor must give notice of a delay and is entitled to an extension of time if the delay is caused by an event that is beyond the contractor s control, if he makes a claim within a certain period. In the first example, if a principal orally requests the contractor to vary the work, it could be argued that the principal has waived its right to say the claimant cannot vary the work without a written instruction. In the second example, if a principal grants a number of extensions of time based on claims made outside the specified period for making claims, it may be argued that the principal has waived its right to bar claims made out of time. The principal may be estopped from rejecting further claims that are made out of time. In this case it may be that the principal can reinstate the original time bar by an appropriate notice to the contractor. In general, standard form contracts are well drafted. However, it is common to find that a principal has modified the standard form. As a general rule, this is done to give the principal as much control as possible. For example, a common added provision is that the contractor is not entitled to claim extra for a variation that is not directed in writing. Another common added provision is that the contractor is not entitled to claim extra for a variation if the claimant does not lodge the claim within a short period after being directed to undertake the variation.
5 My experience is that modifications to standard form contracts are not well drafted. They are often ambiguous. Even if they are well drafted, they require the parties to implement more complex and onerous procedures than required under the original standard form. In addition, they often make a contractor s rights to claim extra costs or time contingent on following these complex and onerous procedures. Time Cost Quality Most of the procedures in standard form and modified contracts have been developed so the principal can control time, cost and quality associated with variations, delays and defective work. Four examples from a modified standard form contract I have attached four clauses from a modified version of AS 4000-1997 that was recently provided to me with an adjudication application. Example A : The procedures in this clause aim to give the principal control over cost and quality associated with variations. Example B : The procedures in this clause aim to give the principal control over cost and quality associated with defective work. Example C : The procedures in this clause aim to give the principal control over cost and time associated with delays. Example D : This clause aims to protect the principal from waiver and estoppel, where the principal does not follow the specified procedures. What really happens What really happens is that the procedures in construction contracts are not implemented. It can be said that the probability of procedures being implemented is inversely proportional to their complexity. Instead of diverting scarce resources to implementing complex and onerous administrative procedures, contractors get on with ordering materials, letting subcontracts and building things. Often there is an intention to catch up with the paperwork at the end of the project. However, at the end of the project, when it comes time to work out the final contract price, contractors submit claims they believe they are entitled to make but haven t yet made and principals seek to limit their liability by applying time bars and other exclusion clauses. In the contract from which the four examples were taken there were at least two hundred variations listed in the payment claim with a small number of these still in dispute. The submissions indicated the following. Variations were instructed orally in some cases by the Superintendent as well as representatives of the principal and not followed up in writing. In other cases variations arose by way of amended drawings, and by way of written site instructions. There was nothing to indicate that the parties had ever agreed on the contract price before any of the variations were carried out.
6 The Superintendent did not direct any variations to be valued under clause 36.4. The contractor did not give any notices where the Superintendent directed a variation but did not specify the direction was a variation. The Superintendent did not follow the procedures in clause 29.3 or make an election between the options in clauses 29.3 and 29.4. The Superintendent did not reply to all claims for extensions of time. He issued a notice under clause 34.7 certifying liquidated damages on the same date that the payment schedule was issued. The payment claim included a number of variations which had not been claimed previously. In the payment schedule the principal said these were not variations and were barred under clause 36.1 in any case. The payment claim also claimed new variation prices for a number of variations that had been previously claimed and for which the claimed prices had been allowed under previous progress payments. The increased price was for delay damages. Delay costs The principal said the claimant is estopped from claiming delay damages on top of variation prices previously claimed and approved, as it would suffer detriment having assumed that the prices previously claimed were final prices. The claimant argued that there was no detriment. New variations In respect of variations claimed for the first time, the principal submitted that these were barred by clause 36.1. The respondent also submitted that the Superintendent had not waived the principal s rights under this clause, relying on clause 43 (Example D ). In the adjudication application, the claimant included a list of variations, which indicated that the parties followed the procedures in clause 36.1 (Example A ) in only a few variations. The list indicated the procedures in clause 36.1 had not been followed in most instances. Curiously the claimant did not refer to the doctrines of waiver, estoppel or election in its submissions, even though the list of variations indicated the doctrines were very relevant. The claimant did not contend that the principal had waived its rights under clause 36.1 (Example A ) and clause 43 (Example D ) by consistently approving variations where clause 36.1 had not been followed. Defective work The respondent claimed deductions associated with defective work, but failed to provide any evidence that the Superintendent followed the procedures in clause 29.3 or issued an instruction under clause 29.4. The claimant, however, did not refer to the doctrines of waiver, estoppel or election in its submissions. Instead the claimant accepted a number of the claimed deductions.
7 Liquidated damages The respondent claimed liquidated damages in the payment schedule for the first time. The parties were in dispute about the date for practical completion. The claimant s submissions established that during the course of the contract, the claimant had claimed extensions of time but had not followed the procedures in clause 34.3. The Superintendent had granted extensions of time in response to some of the claims, but not all. The Superintendent did not certify liquidated damages as due and payable under clause 34.7 until the date of the payment schedule. Yet, given these circumstances, the claimant did not refer to the doctrines of waiver, estoppel and election in its responses to the claims for liquidated damages. Summary In the contract from which the four examples have been extracted, it seems that the principal s preparers were alive to the doctrines of waiver and estoppel at least. The claimant, it seems was less so. This situation is not unusual even though it is so common to find that the procedures in construction contracts are not followed and the principal is arguably estopped from relying on the barring provisions. The Pareto Principal suggests that preparers should focus on the vital few points. They should determine whether the parties have followed the specified procedures, and if the answer is no, the preparer should consider including submissions based on the doctrines of waiver, estoppel and election. * * *
EXAMPLE A - Variations 8
EXAMPLE B Defective work 9
EXAMPLE C Extensions of time 10
EXAMPLE D - Waiver 11