Australian construction dispute underscores potential flaws in courts’ referral process

The dispute over the cost of work carried out on a major liquified natural gas project at Gladstone, between Australian oil and gas producer Santos and American engineering and construction firm Fluor, centres around the payment of AU$5.43 billion (US$3.55 billion) under a reimbursable contract, AU$1.4 billion of which Santos is seeking to claw back.

As well as taking up valuable court time and costing each side at least AU$120 million in legal fees to date, the case has the potential to undermine Australia’s reputation as a good place to do business.

The concern stems from a decision in February 2021 by the Supreme Court of Queensland to refer the bulk of the substantive dispute to three referees.

The referral included major issues in dispute, such as the interpretation of the contract, alleged critical delay, and quantum.

There is no doubt that litigation which involves substantial disputes between well-resourced combatants places a strain on a system which exists to serve the whole of society and referring out is designed to free up the court’s limited resources.

However, referring out a matter also challenges the parties’ assumptions that their disputes will be heard by the court.

Fluor and Santos did not include an arbitration agreement in their contract, meaning they agreed any disputes would be determined by a court, with all of the associated substantive and procedural rules and safeguards applicable to court proceedings. But in Queensland, the normal rules, including of evidence, do not apply to matters referred out.

Fluor found itself, over its objection to the referral out, in a different legal paradigm for a hearing from that of a conventional Supreme Court trial.

The referees’ report has now been finalised and delivered. Santos has applied for orders that the report be adopted by the court. Fluor has applied for orders that the referral order be set aside or that the report be rejected. Fluor alleges that the reference process is affected by apparent bias and a lack of procedural fairness, and that the referral process has become a miscarriage of justice. 

During an adoption hearing, there are specific rules that have been developed by the courts as to when a report should or should not be adopted. It is not enough, for example, for the party resisting adoption to demonstrate mere error.

In this case, the hearing in the referral process took about 14 weeks while the hearing to decide whether the referees’ report should be adopted has taken another seven. In Queensland, the court may accept, vary or reject all or part of the referees’ report. If Fluor is wholly successful in having the referral order set aside or the report rejected in its entirety, the parties will effectively again be back at the start of the court case, having wasted hundreds of millions of dollars and a vast amount of valuable court time.

The Australian legal system generally has a good reputation. Our judges are of a high quality, the courts are open and public and there are broad rights of appeal.  And the power of Australian courts to refer out matters is being increasingly exercised across the country.

The referral process has much to recommend it - if it works. If it fails, it undermines the outcome it seeks to achieve and has the potential to erode confidence in the legal system.

Australian courts are no strangers to failed references out and as courts increasingly come under pressure to introduce efficiencies, it is likely the number of failed references will increase too. An example of such failure occurred in a 2012 South Australian case, Built Environs Pty Ltd v Saunders International Ltd. There the parties consented to the dispute between them being referred to arbitration under a power in the Supreme Court Act. A relatively modest amount was in dispute, but the hearing before the arbitrator ran for a staggering 53 days. The arbitrator published his award in which Saunders was substantially successful and applied to the court for the adoption of the award as the judgment. Built Environs objected on the basis that the findings and reasoning of the arbitrator were flawed. After a 5-day hearing in the Supreme Court, despite there being a strong presumption in favour of adoption, judgment was delivered refusing to adopt the award on the basis that the deficiencies in the arbitrator’s reasoning were so numerous. The parties found themselves back at the start of the process, having invested considerable time and sums in what was, ultimately, a futile process.

The legal and business community will be watching developments in this current matter closely. Our international reputation as a good place to do business depends in part on the business community’s confidence that the court system determines disputes justly and fairly.  Australia’s reputation as a good place to do business is under the microscope.