How security of payment mistakes can turn the tables in a negotiation

We recently assisted a contractor client on a major infrastructure project in Queensland who was engaged in the early stages of dispute with the principal.  The contractor claimed to be entitled to significant additional time and costs under the contract, yet was facing a principal who:

  1. was generally unwilling to engage and properly consider the contractor’s claims; and
  2. had routinely failed to correctly apply contractual provisions.

Some of our client’s claims had been under consideration or assessment for several months and when decisions were ultimately made, reasons for those decisions were scarce or demonstrated the principal’s failure to properly consider the claims and apply the contract.

Strategy

We developed a without prejudice paper for the contractor to submit to the principal.  This paper set out in detail the contractual and evidentiary basis for the contractor’s claims and included the provision of expert reports where necessary.  The claims were ultimately put to the principal by contractual notices and open letters, which were then being discussed and negotiated between the parties.

One of the strategies we recommended was submitting these claims for assessment as part of a payment claim made under the Building Industry Fairness (Security of Payment) Act 2017 (Qld) (BIFA).  On previous occasions, the principal had failed to state or properly explain why the amount proposed to be paid in relation to certain claims was less, including their reasons for withholding any payment, as required by section 69(c) of the BIFA.

Accordingly, our view was that the principal may again slip-up by giving inadequate reasons in respect of certain claims, meaning that the contractor would be in a good position to run an adjudication.  This is because section 82(4) of the BIFA would operate to prohibit the principal from including reasons for withholding in any adjudication response that were not included in the payment schedule.

We assisted the contractor in formulating and submitting the payment claim, which claimed the significant additional costs that had been put to the principal via the without prejudice paper and contractual notices.

The principal’s mistake

As it transpired, the principal failed to serve a payment schedule within the time required under the BIFA.  The principal was only one business day late.  Nevertheless, this meant that the principal would become liable to pay the full claimed amount on the due date for payment under the BIFA[1].

The scheduled amount given by the principal was markedly less than the claimed amount.  While the principal had given some reasons in respect of some additional costs claims, the payment schedule ultimately served (and the arguments made within it) could not be relied upon by the principal for the purposes of the BIFA.

Our client was free to recover the full claimed amount as a debt due and owing in the Supreme Court of Queensland[2].  The principal would not be entitled to bring any counterclaim in those proceedings, nor raise any contractual defence to the action[3].

Letter of demand and engaging with the principal

We drafted an open letter of demand from the contractor to the principal, highlighting the mistake and advising that if payment of the full claimed amount was not received on or before the due date for payment under the BIFA, the contractor would take necessary steps to recover[4].

The next letter we assisted with was a without prejudice letter which set out why the principal’s position as put in the payment schedule was incorrect and demonstrated a failure to properly apply the contract.  This is important because the principal would be liable to pay the full claimed amount under the BIFA, however the BIFA provides the parties with interim rights only.  It would be open to the principal in future to exercise contractual rights to engage in dispute resolution and ultimately litigation.

Progress of negotiation

The principal’s level of engagement with the contractor increased noticeably once there was recognition that they were now liable to the contractor for the full amount claimed and could soon be the listed defendant in judgment debt proceedings for the full amount.  It was now in the principal’s best interests to try to cut a deal with the contractor to avoid the embarrassment and adverse financial impact of court proceedings.

The contractor was now in a position where it all but literally had the disputed sums in its pocket in the ensuing negotiations and discussions.  It was now up to the principal to work through the various claims and supporting documentation that the contractor had provided and come to the contractor with a reasonable settlement offer to avoid proceedings.

Furthermore, the principal was effectively forced to step into the shoes of a plaintiff should it wish to commence a contractual dispute that the contractor had been overpaid to overturn or circumvent the outcome of the BIFA.  Running this dispute would take a great deal of time and effort for the principal.

The contractor advised that the principal’s engagement on the issues had drastically increased in without prejudice discussions.  The principal had now given indications when it would revert to the contractor with assessments and offers on claims.

We recommended that any agreement reached in discussions be formally documented by a succinctly drafted deed of settlement and release.

We regularly assist construction industry participants Australia-wide in contractual disputes and security of payment processes.  Please feel free to get in touch if you would like assistance with these issues.

[1] Section 77(2) of the BIFA.

[2] Section 78(1) of the BIFA.

[3] Section 100(3) of the BIFA.

[4] The first step would be serving of a “warning notice” as required by section 99 of the BIFA.

Security Of Payment Reminder: Christmas Is Coming, But Adjudicator Shopping Is Not Permitted

The Building and Construction Industry Security of Payment Act (NSW) (‘SOPA’) is touted as establishing a scheme of “pay now, argue later” which promotes the speedy payment of progress claims and resolution of disputes. While these objects do not prevent parties from serving multiple payment claims in respect of the same amount,[1] they do dictate that parties will not be permitted to reagitate the same issues at multiple adjudications. It is necessary to examine the circumstances in which a previous adjudicator’s finding will be binding in a subsequent adjudication.

 

Section 22(4) of SOPA

Section 22(4) of the SOPA provides a helpful starting point for this analysis. This section provides that where one adjudicator has determined the value of any construction work or of any related goods or services under a construction contract, an adjudicator in a subsequent adjudication must give the work (or goods or services) the same value as previously determined, unless satisfied that the value has since changed.

 

Back in 2009, the New South Wales Court of Appeal considered the effect of section 22(4) of the SOPA in the decision of Dualcorp Pty Ltd v Remo Constructions Pty Ltd.[2] Macfarlan JA held that section 22(4) is not an exhaustive statement of the matters determined by an earlier adjudication which are binding on a subsequent adjudicator. His Honour held that the Act as a whole “manifests an intention to preclude reagitation of the same issues”.[3]

 

Objects of SOPA

Section 3 of the SOPA sets out the objects of the Act: promoting the prompt making and payment of progress claims and speedy resolution of disputes. In Dualcorp, the court held that it would be inconsistent with this objective to allow a claimant who was dissatisfied with the outcome of an adjudication to obtain a fresh reconsideration of its claim by simply serving an identical payment claim. If this were possible, there would be no limit to the number of times a claimant could seek to reagitate the same issues at adjudication.[4] Clearly, such abuse would be inconsistent with the object of the legislation.

 

Did the previous adjudicator determine the merits of the issue?

A claimant will only be barred from reagitating an issue addressed in a previous adjudication where the adjudicator decided the merits of the issue. This point was emphasised by the New South Wales Supreme Court in Arconic Australia Rolled Products Pty Ltd v McMahon Services Australia Pty Ltd.[5] In that case, McMahon made three contentious payment claims describing costs for delay and variations. In a fourth adjudication between the parties, Arconic argued that McMahon was not entitled to reagitate its claim since it had been determined by the previous adjudicator.[6]

 

The Court followed the approach in Dualcorp[7] but clarified that the objects of the SOPA would only be frustrated where the first adjudicator had heard and decided the merits of the claim.[8] Here, the adjudicator had rejected the relevant payment claim as it was made prematurely by McMahon. Given that the adjudicator did not consider the merits of the claim, McMahon was entitled to reagitate the issues raised in that payment claim in a subsequent adjudication.[9]

 

Take home tips

Parties should be wary that they are not entitled to raise the same issues at multiple adjudications.

If you are claimant considering whether to proceed with a second adjudication application, you should carefully consider whether the merits of your claim has been determined by a previous adjudicator.

We can assist with advice regarding a previous adjudication determination and the prospects of seeking a further determination.

[1] SOPA s 13(6).

[2] [2009] NSWCA 69 (‘Dualcorp’).

[3] At [67].

[4] At [52].

[5] [2017] NSWSC 1114.

[6] At [3]–[9].

[7] At [13]–[15].

[8] At [29].

[9] At [31]–[32].

Is a progress certificate issued by the Superintendent (or Architect) a payment schedule for the purposes of security of payment?

It is trite that the “East Coast model” security of payment legislation provides that a respondent in receipt of a payment claim may provide a payment schedule in response[1].  If a respondent fails to provide a payment schedule within the relevant statutory timeframe, generally, the respondent becomes liable to pay the claimed amount[2].

What happens in a case where the contract is administered by a third party – e.g. a project manager, superintendent, architect or quantity surveyor – who provides a progress certificate to one or both parties?  E.g. the superintendent’s certificate under clause 37.2 of an AS4902-2000 or the architect’s certificate under clause N5.1 of the ABIC MW 2018?

Is this certification a payment schedule for the purposes of security of payment?

In our view, the answer will generally be yes.  Below is a summary of some case law in support of our view.

RHG Construction Fitout and Maintenance Pty Ltd v Kangaroo Point Developments MP Property Pty Ltd & Ors [2021] QCA 117 (RHG Constructions)

In RHG Construction, the Queensland Court of Appeal considered an amended AS4902-2000 contract and whether or not the provision of a payment certificate by the superintendent was a payment schedule under the Building Industry Fairness (Security of Payment) Act 2017 (BIFA).

Clause 37.2 of that contract was in generally standard form terms, requiring the superintendent to receive payment claims and issue to the principal and contractor:

“a certificate evidencing the Superintendent’s assessment of retention moneys and moneys due from the Contractor to the Principal pursuant to the Contract.”

Clause 37.2 of the contract contained the following paragraphs included by way of amendment to the AS4902-2000 standard drafting (Deeming Clause):

“In so far as necessary to ensure compliance with the Security of Payment Act, the Superintendent is deemed to issue any payment schedule under clause 37.2 or final payment schedule under clause 37.4 as the agent of the Principal and each such schedule shall constitute a payment schedule for the purposes of the Security of Payment Act.

For the purposes of and where permitted by the Security of Payment Act, each of the dates for delivery of a payment claim in subclause 37.1 constitutes a reference date.”

The contractor issued a payment claim and the superintendent issued an assessment within the relevant statutory timeframe[3].  The assessment stated (relevantly):

“This Payment Schedule has been produced pursuant to the Works Contract for the residential flat being constructed at 98 River Terrace, Kangaroo Point, between the Principal ‘Kangaroo Point Developments MP Property Pty Ltd’ and the Contractor ‘RHG Contractors Pty Ltd’. This Payment Schedule confirms that the Superintendent has assessed, calculated and certified the proper value of Work Under the Contract.”[4]

A week later, the principal’s solicitors issued correspondence enclosing a further purported “payment schedule” to the contractor denying the validity of the payment claim and stressing that if it was incorrect on that point, the document under the correspondence was to be taken to be the principal’s payment schedule for the purposes of the BIFA[5].

The contractor proceeded to adjudication citing the superintendent’s assessment as the principal’s payment schedule under the BIFA and the adjudicator agreed[6].  The principal applied to court for an order declaring the adjudicator’s determination void.

At first instance, Dalton J agreed with the principal that (notwithstanding the Deeming Clause) the superintendent’s assessment was not a payment schedule and ordered the adjudicator’s determination void.  Her Honour considered that the assessment did not comply with s 69(b) of the BIFA because it was a recommendation only as to payment and the document failed to state “the amount of the payment, if any, the respondent proposes to make”, as required by the BIFA[7].

The Queensland appellate court (Sofronoff P, wth McMurdo and Mullins JJA agreeing) overturned the trial judge’s order.  Sofronoff P said the following as to the standard form clause 37.2:

“For many years now, those engaged in construction have employed the standard form contracts drafted by a committee of Standards Australia, a not-for-profit company which, among other things, prepares draft general conditions of contract for various kinds of commercial transactions… Clause 37, which deals with progress claims, as been in its current form since 2004 when the Act of that year was passed.  It has been the subject of much academic analysis and has doubtless been relied upon by commercial parties thousands of times since then.  The effectiveness of clause 37.2 to engage the adjudication provisions of the 2004 Act, and now the current Act, has never been called into question.[8] (emphasis added)

The effect of the issue of the certificate by the superintendent was the triggering of the principal’s obligation to pay.  Accordingly, the certificate does meet the requirement of s 69(b) of the BIFA[9].

The Deeming Clause was, therefore, “neither artificial nor contrived” [10].  The court considered it relevant that there was no other contractual mechanism whereby a payment schedule would be provided[11].  It would be commercially unworkable for the principal and the superintendent to each issue payment schedules (i.e. one for the purposes of statute and one for the purposes of the contract) because they may differ materially (e.g. provide a vastly differing scheduled amount) [12].

Bucklands Convalescent Hospital v Taylor Projects Group [2007] NSWSC 1514 (Bucklands)

We are not sure whether Sofronoff P’s comment that the effectiveness of clause 37.2 of the Australian Standard contract had never been called into question considered authorities from other east coast jurisdictions.

For example, in Bucklands, Hammerschlag J considered the effectiveness under the NSW statute of clause 37.2 of the AS4000-1997, which provides for the same mechanism of superintendent assessment as the AS4902-2000.

While His Honour considered that the question of jurisdiction should be determined by the adjudicator at first instance[13], His Honour[14], noted that a principal may clothe an agent with authority to provide a payment schedule on their behalf for the purposes of the Building and Construction Industry Security of Payment Act 1999 (NSW) (NSW Act).  The requirement for the superintendent to act honestly and impartially in performing certain functions under the contract, including assessing payment claims, is not the issue at hand[15].  The question:

“…is whether in the circumstances Simmat was exercising function under the contract. Whether it was or was not is a matter of fact. As a matter of law it does not seem to me that a person who is a Superintendent under a contract and who has certifying functions under it is incapable of being appointed as agent to respond to a payment claim under the Act.”[16]

The question was not answered in Bucklands as this was the job of the adjudicator.

However, His Honour’s comments suggest that the use of the standard-form contractual mechanism by the superintendent when progress certificates is likely to give rise to an implication that the superintendent had authority to issue a statutory payment schedule and that the payment certificate was indeed to be interpreted as such.  We consider it likely that the courts would continue to take positions on these issues which is facilitates the objects of the legislation, rather than unduly technical interpretations which themselves would prejudice a party.

Take away tips

As:

  1. the agent (e.g. superintendent, architect, quantity surveyor, etc) will usually act as agent of the respondent under the contract for the purposes of issuing progress certificates (even if they must assess payment claims honestly, reasonably, fairly or the like); and
  2. judicial interpretation of the interplay between widely-used standard form contractual mechanisms tends to favour and facilitate commercial workability,

we are of the view that additional drafting of the kind of the “Deeming Clause” in the RHG Constructions case may not necessarily be required to ensure compliance with the legislation and ensure that the respondent’s interests will not be prejudiced[17].  However, if it is omitted, ensuring that the agent’s payment certificate:

  1. states that it is a payment schedule under the relevant legislation; or
  2. annexes a further document provided by the respondent confirming that the superintendent’s assessment of the amount payable should be taken to be the scheduled amount under the legislation,

are prudent steps to take.  It would also be beneficial for the contract or terms of engagement between the agent and the respondent to expressly state that part of the agent’s engagement is to issue payment schedules under the legislation on behalf of the respondent, having regard to Bucklands and the classic agency case Baulderstone Hornibrook Pty Ltd v Queensland Investment Corporation [2007] NSWCA 9.

What to do if you are the respondent party (e.g. the principal or owner) and you disagree with your agent’s assessment of the payment claim?  That will be the subject of one of our next articles!

[1] E.g. see s 14(1) of the NSW Act.

[2] E.g. see s 14(4) of the NSW Act (subject to s 17(2)).

[3] Kangaroo Point Developments MP Property Pty Ltd v RHG Construction Fitout and Maintenance Pty Ltd & Ors [2021] QSC 30 at [5].

[4] Ibid at [13].

[5] Ibid at [6].

[6] Ibid at [19].

[7] Ibid at [14].

[8] RHG Construction Fitout and Maintenance Pty Ltd v Kangaroo Point Developments MP Property Pty Ltd & Ors [2021] QCA 117 at [23].

[9] Ibid at [27].

[10] Ibid.

[11] Ibid at [28].

[12] Ibid.

[13] Bucklands Convalescent Hospital v Taylor Projects Group [2007] NSWSC 1514 at [26].

[14] At [33] referring to Baulderstone Hornibrook Pty Ltd v Queensland Investment Corporation [2007] NSWCA 9.

[15] Ibid at [34].

[16] Ibid at [35].

[17] Assuming the respondent agrees with the superintendent’s assessment.

NSW court provides guidance for hand delivering payment claims and payment schedules on site

In MGW Engineering Pty Ltd t/a Forefront Services v CMOC Mining Pty Ltd[1], the vexed issue of valid service for documents under the Building and Construction Industry Security of Payment Act 1999 (NSW) (Act) has been revisited.

The case cautions against assuming a document (e.g. a payment claim or payment schedule) will be considered “served” under s 31 of the Act by handing it to any employee of the claimant or respondent under the Act (as the case may be) on the project site.

Facts

The claimant and respondent in the case were parties to four construction contracts for the claimant to provide various services at a NSW mine site.

A representative of the claimant handed four payment claims to an employee of the respondent at 5:15pm on 3 February 2021, claiming a total of over $6M in progress payments.  The transaction took place at an “Access Control Room” where the employee of the respondent (who was not the respondent’s representative under the contracts) was on duty.

It was common ground that the respondent’s representative under the contracts was not on site on 3 February 2021 and was not provided the physical payment claims until 4 February 2021.  The payment claims were also served electronically via Aconex on 4 February 2021.

The respondent served its payment schedules on 11 February 2021 (being 11 days after 3 February 2021), with a total scheduled amount of only $180,912.05.

The claimant purported to suspend works under s 15(2)(b) of the Act.  The claimant applied to court for judgment on the full claimed amount of circa $6M arguing the payment schedules were ineffective, being served one day late.  The claimant relied on ss 31(1)(a), (b) and (e) of the Act.

Decision

Stevenson J found that service did not occur on 3 February 2021.  Accordingly, His Honour rejected the claimant’s application for summary judgment and declared the claimant’s suspension of works invalid.

His Honour held that s 31(1)(a) of the Act, permitting delivery of a document ‘to the person personally’, does not mean that a document will be taken to be served by handing it to any employee of the claimant/respondent[1].  In relation to service on a corporation, some step must be taken to bring the document to the attention of a relevantly responsible person within the company[2].

Section 31(1)(b) of the Act, permitting service by ‘lodging’ ‘during normal office hours’ to the claimant/respondent’s ‘ordinary place of business’:

  • like s 31(1)(a), requires more than giving the document to any employee of the claimant/respondent[3]; and
  • requires consideration of the normal office hours of clerical staff at the particular business of the claimant/respondent concerned, not merely when the project site is operational[4]. In this case, though the mine was manned 24/7, the respondent’s normal operating hours at the mine commenced between 7 and 7:30am and concluded around 4 to 4:30pm.  Service at 5:15pm in this case was not within “normal office hours”[5].

Therefore, although the mine site was an “ordinary place of business” under the Act[6], the other criteria for service were not fulfilled on 3 February 2021.

Service had also not occurred ‘in the manner…provided under the construction contract[s]’ pursuant to s 31(1)(e) of the Act because the contracts in this case provided that documents served after 4:00pm on a day (e.g. at 5:15pm on 3 February 2021) would be taken to be served on the next business day (e.g. on 4 February 2021).

Stevenson J held that the relevant contractual provision was not void by reason of s 34 of the Act because the effect of the provision was “facultative”[7].  If service had been effected on 3 February 2021 via ‘one or other of ss 31(1)(a), (b), (c) or (d), such service would have been effective[8] notwithstanding the clause.  The clause gave effect to s 31(1)(e) and did not modify the operation of s31(1) generally.

Take home tips

If you intend to serve a payment claim or payment schedule by hand delivery on site, you should consider the following:

  • If relying on s 31(1)(a) or (b) of the Act, is the person who you are handing the document to a relevantly responsible person within the corporation? The person the named representative in the contract or a director of the company needs to receive it.

 

  • If relying on s 31(1)(b) of the Act, what are the normal office hours on site? If clerical staff usual work from 7:00am to 4:00pm (for example), service at 4:45pm may not be effective.

 

  • If relying on s 31(1)(e) of the Act, is there a provision in the contract which deems notices given after a particular time on a day served only on the following business day? If so, you must ensure the notice is given prior to the cut off.

We can assist with your queries on validity of your usual service practices and methods to ensure compliance with the Act.

[1] At [23].

[2] At [24].

[3] At [43].

[4] At [51] to [53].

[5] At [68].

[6] At [74].

[7] At [80].

[8] At [81].

Attention residential builders in NSW – big changes ahead from 1 March 2021 you will be able to use the Building and Construction Industry Security of Payment Act to recover money owed by homeowners

On 1 September 2020, the NSW Government released the Building and Construction Industry Security of Payment Regulation 2020 (2020 Regulation) which radically changes the way residential builders and homeowners resolve disputes in relation to outstanding progress claims after 1 March 2021.

Currently, section 7(5) of the Building and Construction Industry Security of Payment Act 1999 (NSW) (the Act) and section 4(1) of the Act provide that the Act does not apply to owner occupier construction contracts, that is, contracts where the homeowners intend to live in the premises.  In these instances, residential builders cannot use the Act to recover outstanding progress claims due from homeowners.

This will all change on 1 March 2021 when the 2020 Regulation commences which will remove owner occupier construction contracts as a prescribed class to which the Act does not apply.

This means come 1 March 2021, residential builders will have a statutory right to payment and be able to serve payment claims on homeowners under the Act and apply for adjudication in relation to any outstanding progress claims.

This is a big game changer for residential builders as it will improve cash flow and mean that residential builders will be able to claim outstanding progress claims from homeowners without having to get involved in expensive and lengthy Tribunal and Court proceedings in order to get paid.

Whilst homeowners will still be entitled to bring a building claim in the Tribunal or Court for defective work and the like, such a claim will not defeat or delay residential builder’s entitlements under the Act.  This means that homeowners will be required to pay any amount awarded pursuant to an Adjudication Determination prior to the determination of any Tribunal or Court proceedings which will (in most cases) reduce in the issues in dispute in any Tribunal or Court proceedings.

What residential builders need to know now

The NSW Government has given residential builders and homeowners a transition period to adjust to these major reforms.  We suggest during this period residential builders should familiarise themselves with the Act and their contracts in relation to:

  • the requirements of valid payment claims including serving supporting statements with all payment claims where builders contract directly with homeowners;
  • the dates from and methods of service of valid payment claims;
  • identification of a valid payment schedules by homeowners;
  • review of your standard contracts to ensure that they comply with the minimum contracting requirements and minimum variation requirements under the Home Building Act 1989 NSW (HBA), as this may effect how an adjudicator assesses amounts payable under the contract so your paperwork has to be in order;
  • review your practices and procedures to ensure that you have the necessary resources to utilise the adjudication process and respond within the strict time frames. The benefit of this is that it will reduce the time and cost (in most cases) of litigation as an Adjudication Determination will usually be received within 21 days of lodging the Adjudication Application; and
  • get legal advice to set yourself up so you can utilise the Act and put yourself in the best position to get paid.

CONTRACTOR STRIKES SECURITY OF PAYMENT GOLD BY SKIRTING THE MINING EXCEPTION

Mining owners and operators in most Australian States[1] will be aware of the “mining exception” in security of payment legislation.  The mining exception excludes ‘the extraction (whether by underground or surface working) of minerals, including tunnelling or boring, or constructing underground works for that purpose[2] (Mining Exception) from the definition of the term “construction work” and, consequently, the ambit of statutory interim progress payment mechanisms.

However, in a decision handed down on 11 November 2020, the NSW Supreme Court[3] followed the approach of the Queensland courts[4] by construing the Mining Exception narrowly in favour of contractors and subcontractors.  In short, the Mining Exception does not  extend generally to some broad category of mining industry operations.[5]

Facts

Downer EDI Mining Pty Ltd (Downer) was engaged by Cadia Holdings Pty Ltd (Cadia) the operator of the Cadia East underground panel cave mine south-west of Orange, under a “Works Contract” dated 16 November 2018 (Contract), to perform “development phase” works, being (for the most part) underground works to provide access to the proposed undercut and extraction levels for future extraction of minerals in the “production phase”[6]

Downer proceeded to adjudication on a payment claim served on Cadia.  An adjudicator appointed under the Building and Construction Industry Security of Payment Act 1999 (NSW) (SOPA) determined that Cadia pay Downer $1,017,741.72.[7]

Cadia challenged the determination on two grounds:

  1. the Mining Exception applied so the Contract was not a “construction contract” within the meaning of the SOPA; and
  2. there was no available reference date to support Downer’s payment claim.

Decision

Cadia’s challenge to the adjudication determination was unsuccessful on both grounds.

Stevenson J framed the effect of the Mining Exception as excluding ‘from the definition of “construction work”, the following works:

  • extraction (whether by underground or surface working) of minerals;
  • tunnelling or boring for the purpose of extraction (whether by underground or surface working of minerals; and
  • constructing underground works for the purpose of extraction (whether by underground or surface working) of minerals.[8]

His Honour held that the heart of the question of the application of the Mining Exception to a contract is what a contractor undertakes to do under the contract in question, not what work that contractor actually does[9] (which comes to be answered later).

The works under the Contract did include “tunnelling or boring” as well as “constructing underground works”.  However:

  1. these activities were not for the “purpose of” extraction of minerals; and
  2. the Contract required Downer to undertake work beyond these activities which fell within the meaning of “construction work” or the supply of “related goods and services”.

On considering generally whether activities performed by a contractor are for the “purpose of” extraction of minerals, His Honour:

  1. agreed with Fryberg J in Thiess that the relevant purpose should be decided ‘by reference to what a reasonable person in the position of the parties would conclude as to the object of what purpose of the contract[10];
  2. held that the Mining Exception is to be construed narrowly to benefit the subcontractor[11];
  3. held that a close “proximity” between the act of extraction and the tunnelling and boring or construction of underground works was required (and this was not so in this case, where the extraction phase would not begin until 2022 after subsequent works)[12];
  4. considered that “extraction” does not include work “associated with” or “preparatory to” extraction[13]; and
  5. noted that the SOPA expresses where there is an intention to bring in ancillary activities, which is not the case with the Mining Exception[14].

Further, in this case, His Honour considered that some works under the Contract required of Downer were “construction work” or supply of “related goods and services”, meaning the SOPA applied.  Relevantly, His Honour stated (accepting Downer’s counsel’s submission):

…if there is a contract which contains undertakings to carry out construction work and undertakings to carry out work that it not construction work, the contract remains a construction contract. If a payment claim includes a claim for work that is not construction work, the payment claim is valid, but the adjudicator should not award an amount for work that is not construction work. Thus, the Mining Exception has an important role to play in limiting the amount that the adjudicator should award.[15]

On the reference date point, His Honour determined that there was an available reference date under the Contract for the service of the payment claim.  Most of the points raised were of limited significance for general application.  One point of general interest was that a clause of the Contract required Downer to invoice ‘in respect of the Services performed’ of the proceeding month.[16]  Downer’s works were performed not in the preceding month, but at an earlier time.

His Honour relied on s.13(4) of the SOPA which allows a contractor to serve a payment claim within the period determined under the construction contract or 12 months after construction work to which the claim relates was last carried out.  The payment clause in the Contract attempted to restrict the operation of s.13(4) and was a void provision, by operation of s.34 of the SOPA.

Take Home Tips

Contractors who consider that they are not entitled to have recourse to security of payment legislation simply because they work on a mine site should re-examine closely the terms of their contract.  Can it really be said that the contract works are for the “purpose of” extraction?  Or is there some distance between the works to be performed and the eventual act of extraction?

Perhaps there are portions or stages of works under the contract to which the Mining Exception would apply, but this would not necessarily mean that the entire contract is not a “construction contract” within the meaning of the security of payment legislation.

 

 

[1] Queensland, Victoria, South Australia, Tasmania and the Australian Capital Territory.  However, Western Australia is likely to shortly follow suit once the Building and Construction Industry (Security of Payment) Bill 2020 (WA) passes through Parliament.

[2] Section 5(2) of the Building and Construction Industry (Security of Payment) Act 1999 (NSW).

[3] Cadia Holdings Pty Ltd v Downer EDI Mining Pty Ltd [2020] NSWSC 1588 per Stevenson J.

[4] HM Hire Pty Limited v National Plant and Equipment Pty Ltd [2012] QSC 4 and Thiess Pty Ltd v Warren Brothers Earthmoving Pty Ltd [2012] QCA 276 (Thiess)

[5] At [133].

[6] At [92] and [93].

[7] At [3].

[8] At [34].

[9] At [70].

[10] At [96], quoting Fryberg J in Thiess at [76].

[11] At [102]

[12] At [103] and [91].

[13] At [104].

[14] At [105].

[15] At [134].

[16] At [171].

How the new 2020 SOPA Regulation will affect owner occupier construction contracts: the key changes that you need to know

Following our article HERE that summarised the reforms introduced by the Building and Construction Industry Security of Payment Regulation 2020 (NSW) (2020 Regulation), this article explains in detail one of the key reforms.

Reform effecting owner occupier construction contracts

Currently, section 7(5) of the Building and Construction Industry Security of Payment Act 1999 (NSW) (the Act) and clause 4(1) of the provide that the Act does not apply to the prescribed class of owner occupier construction contracts.

An owner occupier construction contract is a construction contract for the carrying out of residential building work (as defined in the Home Building Act 1989 (NSW)) on such part of any premises as the party for whom the work is carried out resides or proposes to reside in. Accordingly, for this type of construction contract, builders are not able to apply for adjudication if there is a payment dispute.

This position will change when Schedule 2 of the 2020 Regulation commences on 1 March 2021. Schedule 2 of the 2020 Regulation will omit the current clause 4(1) of the 2020 Regulation and remove owner occupier construction contracts as a prescribed class to which the Act does not apply. The effect of this is will be that the Act will apply to owner occupier construction contracts so that builders will be able to serve payment claims on owner occupiers under the Act and apply for adjudication.

What residential home builders and owner occupiers need to know

While the 2020 Regulation commenced on 1 September 2020 and currently provides that the Act does not apply to owner occupied construction contracts, it seems that the NSW Government has provided residential home builders and owner occupiers with a transition period to adjust to the reform.

The period from now until 1 March 2021 should be utilised to understand how the changes will effect residential home builders and owner occupiers. Importantly, both parties should be aware that:

  • Residential home builders will be able to serve payment claims pursuant to the Act on owner occupiers.
  • Owner occupiers should familiarise themselves with the Act as it will apply to contracts entered into for residential building work at their residence (or proposed residence). Most significantly, owner occupiers should be aware of the requirement to serve a payment schedule within 10 business days after the payment claims is served by the builder if the amount claimed is disputed and will not be paid in full. The consequences of not serving a payment schedule within the timeframe prescribed in the Act are serious and may compromise an owner occupier’s right to participate in an adjudication.
  • The due date for payments will be effected. In accordance with section 11(1C) of the Act, a progress payment becomes due and payable on the date on which the payment becomes due and payable in accordance with the contract or within 10 business days after a payment claim is made (if the contract has no express provision regarding the due date for payment).
  • As the adjudication process is relatively quick and cheap to recover progress payments compared to litigation (in some circumstances), it is likely that adjudication will become a popular method for resolving payment disputes under owner occupier construction contracts.

If you would like to discuss or would like any more information, please contact us at info@bradburylegal.com.au or (02) 9248 3450.

 

 

Spring is here and so is the Building and Construction Industry Security of Payment Regulation 2020

On 1 September 2020, the Building and Construction Industry Security of Payment Regulation 2020 commenced (2020 Regulation) repealing the 2008 Regulation.

The 2020 Regulation will provide the legislative support and administrative detail for the operation of the Building and Construction Industry Security of Payment Act 1999 (NSW) (Act) as provided by the amendments which commenced on 21 October 2019. These amendments came about to address poor payment practices and the high incidence of insolvencies in the building and construction industry and also, to facilitate prompt payment, preserve cash flow and resolve disputes quickly and efficiently.

The 2020 Regulation is not retrospective and will not apply to contracts entered into prior to its commencement date.

Key reforms of the 2020 Regulation include:

  • removing the annual reporting requirements for trust accounts to NSW Fair Trading,
  • introducing a requirement for head contractors to keep a ledger for retention money held in relation to each subcontractor and provide the subcontractor with a copy of a ledger at least once every 3 months or longer period of 6 months if agreed in writing, and also to provide trust account records to subcontractors if their money is held in trust,
  • supporting statements are only required for subcontractors or suppliers directly engaged by the head contractor,
  • removing owner occupier construction contracts as a prescribed class of construction contract to which the Act does not apply, and
  • introducing qualifications and eligibility requirements for adjudicators to improve the quality of adjudication determinations under the Act.  The eligibility requirements include either a degree or diploma in a relevant specified field with at least 5 years’ experience, or at least 10 years’ experience in a relevant specified field.  The continuing professional development requirements for adjudicators will commence on 1 September 2021.

Of particular note, the project value threshold (value of the head contractor’s contract with the principal) for retention money trust account requirements will not be reduced from $20 million to $10 million as previously foreshadowed. The existing threshold will remain. Perhaps, given the current climate, it was considered too much of an administrative burden on head contractors who are already dealing with the pressures of delivering projects during Covid. A copy of the 2020 Regulation is  here.

If you would like to discuss or would like any more information, please contact us at info@bradburylegal.com.au or (02) 9248 3450.

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When are settlement agreements concerning payment claims void under SOPA?

If a respondent fails to issue a payment schedule in time, but the parties then reach a settlement agreement in relation to the payment claim and construction contract, can the claimant still pursue summary judgment for the full claimed amount due to s.34 of the Building and Construction Industry Security of Payment Act 1999 (NSW) (SOPA)?

Facts

In Reward Interiors Pty Ltd v Master Fabrication (NSW AU) Pty Ltd [2020] NSWSC 1251, the claimant served a payment claim and the respondent did not respond within 10 business days as required by the SOPA.  The parties attended a meeting three weeks after the payment claim was issued and agreed to a reduced amount to be paid on the payment claim.[1]  The respondent paid the settlement amount the following day.[2]

The respondent then commenced proceedings against the claimant for damages arising from work performed by the claimant.

The claimant cross-claimed and sought summary judgment on the full payment claim amount. The claimant argued that s.34, which prohibits parties from contracting out of the SOPA, rendered the settlement agreement void.[3]

Decision

The claimant offered no authority for the argument that s.34 of the SOPA renders void settlement agreements which compromise a dispute concerning an amount claimed in a payment claim or the construction contract between the parties generally.[4]  The claimant had agreed not to move for summary judgment on the full claimed amount by accepting the reduced settlement amount.[5]

Stevenson J held that it was at least arguable that the settlement agreement was not rendered void because it acknowledged the operation of the SOPA, yet recorded the parties’ intention that in the particular circumstances their rights would instead be governed by their agreement.[6]  This did not constitute an ‘attempt to deter a person from taking action under’ the SOPA.[7]

Tips for binding settlement agreements on payment claims

The answer to the question posed in the introduction is no.  Assuming the settlement agreement seeks to properly compromise existing entitlements, it will not be voided by s.34 of the SOPA.

The terms should be clearly expressed and specific.  It should state that the claimant has agreed to accept the settlement amount in “full and final satisfaction” of the payment claim and claims made in the payment claim. The terms should provide that once the respondent pays the settlement amount, the claimant “releases” the respondent from any claims or proceedings in respect of the payment claim and claims made in the payment claim.

Where settlement agreement may be rendered void under s 34 is where it seeks to exclude or restrict rights or entitlements arising in the future.  For example, where the parties simply agree (without more) that the claimant will have no entitlement to submit further payment claims.

Of course, the respondent should always serve a proper payment schedule (scheduling nil or a reduced amount and giving reasons) in response to a payment claim, even if confident in securing a settlement, in order to avoid the type of argument raised in Reward Interiors.

[1] At [11].

[2] At [14].

[3] At [15].

[4] At [19].

[5] At [23].

[6] At [24] and [26].

[7] At [25], re s.34(2)(b).

Suspension of relief: take out notices, jurisdictional error and Security of Payment Act

In Parrwood Pty Ltd v Trinity Constructions (Aust) Pty Ltd, the Court confirmed that, for the purposes of the Building and Construction Industry Security of Payment Act 1999 (NSW) (SOPA), taking the work out of the hands of a contractor will not remove reference dates accrued before the take out notice is served, even if they are not actually used until after the take out notice is issued.

Although the facts were unusual and complicated, in the unique world of the SOPA they are not unheard of. This note is useful for parties considering whether:

  1. to issue a take out notice instead of a termination notice (particularly for NSW construction contracts entered into before 21 October 2019); or
  2. to withdraw an adjudication application in the event of jurisdictional error by an adjudicator on the first determination, to re-lodge before a new adjudicator.

The facts

The contractor was working under the principal in a residential building project. The contractor accrued reference dates on the 25th day of each month. The contract contained an AS standard clause where the contractor fails to show reasonable cause for its default:

“the Principal may by written notice to the Contractor:

(a) take out of the Contractor’s hands the whole or part of the work remaining to be completed and suspend payment until it becomes due and payable pursuant to subclause 39.6; or

(b) terminate the Contract.”

The parties fell into dispute and the principal asked the contractor to show cause.

Then:

  • on 25 August 2019, the monthly reference date for a SOPA claim came about;
  • on 3 September 2019, the principal issued a notice that took out of the contractor’s hands all of the work remaining to be completed, instead of terminating the contract; and
  • on 6 September 2019, the contractor issued a payment claim in the amount of $2,023,645.76. This payment claim was said to use the 25 August 2019 reference date.

In response, the principal scheduled “$Nil”.

The contractor applied for adjudication under the SOPA. The adjudicator declined to determine an amount that the contractor was owed (if any), finding the payment claim was invalid.

After it received the first adjudicator’s decision, the contractor “withdrew” its application, and made a second adjudication application. The contractor argued that the first adjudicator had failed to exercise his statutory function in declining to determine the amount owing. The second adjudicator considered the application and awarded over $400,000 to the contractor. The principal applied to the Supreme Court to set aside the second adjudication determination.

There were two broad issues that the Court was required to consider.

Suspension and payment claims

The first issue was what effect the take out notice had on the ability to issue payment claims.

The Court found that even though the payment claim was served after a take out notice, it was saved by the fact that it was served for a reference date occurring before the take out notice was made.

The outcome would have been different if the take out notice was served before the reference date. In this case, the contractor’s rights are suspended by the take out notice, and it cannot make a payment claim under the fast-track SOPA. It can, however, still make a claim under general law.

A take out notice cannot extinguish a right to make a payment claim that already exists.

Second Adjudication

Jurisdictional error

The second issue concerned the unusual circumstances in which a claimant may effectively redo its application.

The Court found that the first adjudicator had not made a ruling that, for example, the contractor was entitled to “$Nil”. Rather, the adjudicator had decided that, no matter what he thought about the facts, he could not determine any adjudicated amount (“I must decline therefore from determining …”).

The first adjudicator had failed to determine the amount of the progress payment (if any) to be paid, as required under section 22(1) of the SOPA. Therefore, the first purported determination was void.

Making a second application

Section 26(3) of the SOPA allows for a claimant to withdraw an application and make a new adjudication application, if the adjudicator accepts the application but then “fails to determine the application within the time allowed”. The claimant must withdraw and make the new application within five business days after it is entitled to withdraw the previous adjudication application.

This may occur where the adjudicator has made a jurisdictional error in failing to determine the application.

If the original decision is decided by a court to be valid (because there was no jurisdictional error), then the second application is wasted. However, if the original decision is declared void, then the second application may still be valid.

Conclusion

It pays to be aware of when reference dates arise, and when take out notices can and should be served. Principals concerned to issue effective take out notices should be mindful of existing reference dates which have or may accrue before that notice.

Claimants should be keenly aware of the existence of any jurisdictional error on the part of adjudicators. Such error may allow them to re-lodge an adjudication application.