I Fought the Law and I Won: construction contracts under SOPA

The New South Wales Supreme Court has delivered a judgment on an issue vital to any construction project: what is a construction contract under the Security of Payment Act (SOP Act)?

The respondent in an adjudication convinced the judge not to follow previous judgments on this point, so it is important that those involved in building stay up to date with this issue.

As the decision was about the unique Security of Payment Act regime, it will not directly apply to situations outside of SOP Act claims.

The ruling targets situations in which there is some understanding between two parties that construction work is to be done in exchange for remuneration, but where there is no clear oral or written contract spelling out the terms.

These cases sit right at the borderline of what the law will enforce and will not enforce. We discuss the case, where it sits among other similar cases, and what we can learn from it.

Case facts

The dispute was between two groups:

  • Timecon Pty Ltd (Timecon) which was the claimant; and
  • The unincorporated joint venture between Lend Lease Engineering Pty Ltd and Bouygues Construction Australia Pty Ltd (LLBJV), which were the respondents.

LLBJV was the principal contractor for the NorthConnex Project, which was constructing two nine kilometre road tunnels linking the M1 to the M2. The project involved excavation and tunnelling, which produces waste known as Virgin Excavated Natural Material (VENM), or “spoil”.

Throughout the project, LLBJV stored 201,700 tonnes of spoil at a site in Somersby, NSW. The site was owned by a company that had the same sole director as Timecon.

Timecon claimed that it entered into a contract or arrangement with LLBJV, for LLBJV to store the waste generated at the NorthConnex project at the Somersby site. Timecon claimed that such an arrangement was for $4.00 per tonne of spoil.

LLBJV claimed that there was no “construction contract”, or else that it had deposited the spoil at the site pursuant to a contract with another party, Laison Earthmoving Pty Ltd (Laison). Laison had been managing the site at the time.

At first instance in adjudication, Timecon had won an adjudication determination in its favour to the tune of $887,532.80 (incl. GST).

In the NSW Supreme Court review of this determination, LLBJV’s main argument was that the adjudicator had no jurisdiction to hear the matter, as there was no “construction contract” between the parties.

Key issues

The key issue was the definition of “construction contract”. The issue is clear cut when there is a written document signed by both parties that are involved in the adjudication, with construction work or goods being the subject matter.

More complicated is the situation in which one party has given to another party some measure of assurance or indication (often only verbal) that it will pay for such goods or services. How do you draw the line between negotiation and a construction contract?

Under the SOP Act in NSW, a construction contract is defined as:

a contract or other arrangement under which one party undertakes to carry out construction work, or to supply related goods and services, for another party.” (emphasis added)

All States and Territories except Western Australia and Northern Territory use this or a very similar definition, so the decision has wide implications.

Ball J found that before any other SOP Act questions can be asked, every claimant must ask themselves: is the arrangement “a legally binding obligation by which the claimant is entitled to be paid by the respondent for the services the claimant undertakes to provide”? (emphasis added)

The key part here was that to be able to use the SOP Act, there had to be a “legally binding obligation” for the respondent to pay for the work.

This did not necessarily have to be a contract. Though there are not many other examples, one is estoppel which if proven prevents businesspeople from going back on their word, even where there is no actual contract.

For Ball J, the rationale was that if Security of Payment regime could be used even where there was no underlying legal obligation to pay, then in all cases the claimant would have to later return the sum awarded by the adjudicator. His Honour considered that this cannot have been the intention of the SOP Act. It would also be difficult for adjudicators to draw the line between what types of non-legally binding arrangements were to be enforced, and which ones were not.

Back to the case

It was up to Timecon to prove that a contract or other legally enforceable arrangement was in place.

LLBJV and Timecon had exchanged some contractual documents, including a document called “Heads of Agreement” and a draft agreement that was sent “for review”. Both had left the price section blank. Later, LLBJV had even sent an execution copy of an agreement, which Timecon had not signed and returned.

Timecon pointed to a meeting at the Somersby site between a few of the interested parties. During this meeting, the director of Timecon gave the LLBJV representative a Heads of Agreement with the rates left blank. Someone proposed trialling the tipping of 50,000 tonnes of spoil at $4 per tonne.

Unfortunately for Timecon, Ball J was not satisfied with the director of Timecon’s presentation as a witness, as he had failed to address important points in his written evidence and gave evasive answers in person. His version of the meeting was disbelieved.

Moreover, the conduct of the parties subsequent to this meeting was not consistent with there being a legally enforceable arrangement. The director of Timecon had later sent emails asking if LLBJV was still interested in tipping spoil to the site, there had been an unexplained time gap between when an unsigned contract was finalised and when the deliveries of spoil took place.

There was also an issue that Timecon should have known that LLBJV had engaged another party, Laison, to perform the work.

As a separate issue, the tipping of spoil at the site was not construction work. Nor was it supply of related services, as it was not integral to construction work at the NorthConnex project. It was also not a “good”, as it was not a component of the relevant building, structure or work, and was not used in connection with carrying out construction work.

The decision of the adjudicator was void. Timecon walked away with nothing.

Conflicting authority

Unfortunately, this issue of what is a “construction contract” is not done and dusted. We may not know definitively how courts treat this issue until a Court of Appeal rules on this question.

This is because there have been three previous judgments that went the opposite direction and found that an arrangement that is not legally enforceable can still be the subject of adjudication.

Ball J acknowledged these cases, but did not consider them to be “binding”. His Honour’s interpretation was that these cases in fact concerned arrangements that were legal obligations. To the extent that they spoke to hypothetical situations, they were persuasive but not binding.

Upshots

One thing is common to all of these cases. They address the difficult situation in which Party A has made assurances or indications of some description to Party B that it will be paid, but there is no contract. This situation is right at the borders of when the SOP Act can be used and when it cannot be used.

The conflict in authority will make it difficult to predict how cases in the near future will end up. However, regardless of how the law is ultimately decided, there are a number of things that developers and builders can learn from Timecon v Lendlease Engineering to avoid being in this grey area.

The first regret of Timecon will be assuming that contractual documents will be “sorted” down the line. It had a chance to sign and return the contractual documents but failed to do so. This was apparently because it still had to test the capacities of the site to take spoil. However, this non-response led LLBJV to look elsewhere and no contract was signed.

Timecon’s failure to seal the deal or at least keep negotiations going was largely why it did not get the result it wanted. Do not let the agreement or understanding lapse and make it binding as soon as possible.

Further, Timecon should have documented everything. Numerous times, Ball J preferred LLBJV’s version of events thanks to other evidence corroborating their account. In other cases, where claimants have written records of their meetings with respondents, or contemporaneous emails that are consistent with their story, they have been able to convince judges that representations had been made to them about payment.

Being scrupulous about these will ensure that builders and contractors avoid the expensive and difficult-to-predict process of litigation.

If you or someone you know wants more information or needs help or advice, please contact us on +61 (2) 9248 3450 or email info@bradburylegal.com.au.

Errors in Security of Payment: does one bad apple spoil the barrel?

The Security of Payment regime is infamously inflexible and technical, demanding that parties and their lawyers adhere rigidly to the rules and procedure set out by the Security of Payment Act (SOP Act). The neglect of seemingly small details has led to entire adjudications being voided for lack of jurisdiction or for denial of procedural fairness.

In Rhomberg Rail Australia Pty Ltd v Concrete Evidence Pty Limited [2019] NSWSC 755, the Supreme Court of NSW was asked at what point will clerical errors lead to a judgment being quashed for want of natural justice and procedural fairness.

This case lends itself to the position that a respondent cannot challenge an adjudicator’s determination for denial of natural justice unless the circumstance in question is substantial enough to effect to the outcome of the determination.

In exercising their discretion as to whether natural justice has been denied, the Court will apply an assessment of reasonableness. In deciding on any relief, the Court may also determine that part of the determination that is affected by error can be severed from the part that is not.

Facts

Rhomberg Rail Australia (Rhomberg) engaged Concrete Evidence (Concrete) under a subcontract to lay reinforced concrete for the track slab in connection with a light rail project in Newcastle. The Contract Sum for the works was $3,146,278.36 (excluding GST). During the term, Concrete lodged and adjudication application for $1,061,800.61 (the balance owing under the subcontract and in respect of 119 variations), in which Concrete referred to a register of variations as being enclosed under Tab 7 of the application.

By way of clerical error, Tab 7 was incomplete, such that every other page was missing, resulting in reference to some variations being omitted. However, Tab 8 housed supporting documents in respect of all variations in the register under Tab 7, including for those variations omitted by clerical error under Tab 7. The submissions in Concrete’s application referred to some variations omitted in Tab 7. Both Rhomberg and the Adjudicator received copies of the application with the same clerical error.

Rhomberg served its adjudication response and stated in its submissions that “given the Claimant’s withdrawal of all variations which do not appear in Tab 7, the Respondent has not addressed those variations in this Adjudication Response.”

The Adjudicator, in providing his determination, said “the Respondent considers that the variations not shown in tab 7 have been withdrawn by the Claimant. I do not agree. The adjudication application is to be read as a whole including the amounts included in the payment claim, those disputed in the payment schedule and the submissions made.”

Rhomberg disputed the determination on the grounds that the Adjudicator denied it procedural fairness because the Adjudicator dealt with variations without giving Rhomberg an opportunity to make submissions in relation to them.

Judgment

Ball J found that there was no substantive denial of procedural fairness in respect of the omitted variations.

His Honour determined that in order to ascertain whether Rhomberg had been denied procedural fairness, the assessment would fall to whether Rhomberg ought reasonably to have concluded that Tab 7 was incomplete and that the adjudicator might deal with all the claims set out in Tab 8.

At [20], Ball J stated:

“In my opinion, a person acting reasonably would at least have appreciated that there was an inconsistency between Tab 7 and Tab 8 and therefore appreciated that there was at least a risk that the Adjudicator would proceed with his adjudication by reference to Tab 8 rather than Tab 7. That conclusion is reinforced by the fact that some of [Concrete’s] submissions specifically included references to variations that were not referred to in the Tab 7 schedule. It follows that [Rhomberg] ought reasonably to have appreciated that the Adjudicator might deal with all the Tab 8 variations. That is what the Adjudicator did. Consequently, [Rhomberg] was not denied procedural fairness.” (emphasis added)

Further, His Honour reasoned that the evidence to which Rhomberg argued it had no knowledge of, were the very variations that had been the subject of previous claims and correspondence between the parties, which “must be understood as referring back to what had previously been said in relation to those variations.”

To the question of whether Concrete was entitled to recover in respect of those variations omitted under Tab 7, Ball J at [25] said, reserving Rhomberg’s rights on appeal:

[T]he adjudication determination should be set aside only to the extent that the Adjudicator determined that [Concrete] was entitled to recover in respect of variations on which [Rhomberg] was not invited to make submissions on and on which it could have made submissions consistently with s 20(2B) of the SOP Act.” (emphasis added)

His Honour found for Concrete, agreeing with their submissions, that Rhomberg was not denied procedural fairness because:

  1. it was evidenced that the Adjudicator might proceed to deal with the claims referred to in Tab 8;
  2. any denial of procedural fairness was not substantial as there were no further submissions of substance that Rhomberg could have made; and
  3. if there was a denial of procedural fairness, it did not affect the whole determination and Concrete should be entitled to recover the unaffected portion of its claim.

Commentary

The New South Wales Courts seem to be moving towards a more practicable position in their application of the SOP Act and in exercising their discretion on denial of natural justice considerations. Though other jurisdictions maintain a far stricter interpretation of the requirements of the SOP Act (see Niclin Constructions Pty Ltd v SHA Premier Constructions Pty Ltd & Anor [2019] QSC 91; Conveyor & General Engineering Pty Ltd v Basetec Services Pty Ltd and Anor [2014] QSC 30), the approach in New South Wales appears to prioritise the merits of a matter over strict statutory compliance.

There are two key takeaways from this decision:

  1. a denial of natural justice, of which a denial of procedural fairness is a species, may give rise to jurisdictional error on the part of an adjudicator to determine a payment claim under the SOP Act, in circumstances where a party could not reasonably have anticipated that either the adjudicator or the other party would rely upon the issue or principle concerned; and
  2. the generally accepted position in Fulton Hogan Construction Pty Ltd v Cockram Construction Ltd [2018] NSWSC 264, that the effect of a jurisdictional error will render a determination void, on the basis that a determination is a single determination of a single payment claim, is no longer the favored position in New South Wales. Following the position in the Court of Appeal in YTO Construction Pty Ltd v Innovative Civil Pty Ltd [2019] NSWCA 110, Ball J found that part of a determination affected by error can be severed from that part that is not so affected.

It would be an interesting exercise to consider what the Court’s position would have been had the clerical error only affected Rhomberg’s copy of the adjudication application and not the adjudicator’s (see section 17(5) SOP Act), and whether such a difference would amount to a denial of natural justice and lend itself to the same conclusions.

If you or someone you know wants more information or needs help or advice, please contact us on +61 (2) 9248 3450 or email info@bradburylegal.com.au.

Security of payment: no work, no pay

Participants in the commercial building industry generally rely on security of payment legislation to resolve payment disputes. As a preliminary means of recovering money under a construction contract, those in the industry are usually keen to hear of developments regarding a court’s interpretation of the legislative provisions.

Shape Australia Pty Ltd v The Nuance Group (Australia) Pty Ltd [2018] VSC 808 (‘Shape’ and ‘Nuance Group’) recently considered two issues under the Building and Construction Industry Security of Payment Act 2002 (Vic) (the ‘Act’), namely:

  • whether a reference date can be ‘refreshed’ for a payment claim when there has been no further work carried out since the previous reference date; and
  • whether an amount in a payment claim which attempts to recoup liquidated damages (previously offset in a payment schedule) constitutes an ‘excluded amount’ under the Act.

Background

In July 2016, Shape and Nuance Group entered a contract for the demolition and associated works at Melbourne International Airport.

On 2 March 2018, Shape issued payment claim #13 for $3,533,233.84. Nuance Group responded with a payment schedule stating the amount payable as nil. Shape applied for adjudication for a reduced sum of $2,243,105.55.

On 13 April 2018, a First Adjudication Determination for the sum of $1,400,007.12 issued, which after review instigated by Nuance Group, was reduced to $1,216,715.72.

Nuance Group challenged the validity of the original and reviewed determinations and, on 2 June 2018, in Nuance Group (Australia) Pty Limited v Shape Australia Pty Limited [2018] VSC 362 the Court quashed the determination on the basis that the adjudicator had “failed to perform his basic and essential function” under the Act.

Subsequently:

  • On 10 July 2018, Shape issued payment claim #14 for $1,285,579.62 which included “uncontested individual line items claimed in payment claim #13”. Nuance Group responded with a payment schedule stating the amount payable as nil.
  • Shape applied for adjudication, and on 23 August 2018, a Second Adjudication Determination issued which essentially declared the claim invalid for want of a valid reference date and that (in any event) the amount payable was nil on the basis that the claim was for an excluded amount.
  • Shape applied for orders remitting the first or second adjudication determination for review.

Decision

Was the payment claim invalid for want of a reference date?

Section 9(1) of the Act provides that there must be a valid reference date to avail rights for a person to a progress payment. A payment claim must be supported by a valid reference date, which is a precondition to an adjudicator making a determination under the Act.

Clause 42.1 of the construction contract entitled Shape to make payment claims on the 28th day of each month, and that such claims should include “the value of work carried out by the contractor in the performance of the contract to that time …”. On that basis, the Court considered that the requirement for work to be carried out “to that time” established a threshold for making a claim.

Payment claim 14, which had a reference date of 28 June 2018, was identical to payment claim 13, which carried a reference date of 28 February 2018. No further work had been carried out since issuing payment claim 13 and accordingly, 28 February was the last available reference date under the contract.

It followed that payment claim 14 was invalid for “want of a reference date”. The claim was either made in respect of the (same) 28 February reference date and therefore in breach of the Act, or a claim served out of time, namely, outside of the three-month period prescribed by the Act.

Shape’s application was dismissed, the Court agreeing with the adjudicator’s determination and finding nothing further to conclude otherwise.

Are liquidated damages an excluded amount?

The Act sets out certain classes of amounts that are “excluded” and must not be taken into account when calculating an amount of a progress payment. Essentially, excluded amounts include certain variations of the construction contract, amounts claimed for compensation due to the “happening of an event” (latent conditions, time-related costs and changes in regulations), amounts claimed for damages in relation, or incidental to, a breach under the construction contract or other claims arising at law.

The concept of an excluded amount in the Victorian Act underpins a key objective, namely, to facilitate cashflow within the industry by dealing with payment disputes promptly, whilst maintaining the parties’ legal rights to argue more complex issues later.

The Second Adjudication Determination declared the amount payable in the claim as nil on the basis that “…the entirety of the purported claim was for an excluded amount, being an attempt to recoup the first defendant’s asserted entitlement to liquidated damages”.

The Court confirmed this decision, reiterating the adjudicator’s findings that:

  • when the individual items listed in payment claim 14 were “adjusted and reconciled” the total equated “to the amount of Nuance Group’s asserted entitlement to liquidated damages”; and
  • the amount claimed could be “explained on no other basis, given no new work had been performed and the other claims in payment claim 14 [had] been satisfied”.

Takeaways

Seabay Properties Pty Ltd v Galvin Construction Pty Ltd [2011] VSC 183 determined that a set-off claimed in a payment schedule (by way of a deduction in response to a payment claim) constitutes liquidated damages and is therefore, an excluded amount for the purposes of the Act.

The present case however confirmed that an attempt to recoup liquidated damages through a payment claim will also constitute an excluded amount.

Industry participants should take note that:

  • Liquidated damages claimed as an offset in a payment schedule as well as amounts claimed in a payment claim to recoup liquidated damages are excluded amounts for the purposes of the Victorian security of payment legislation.
  • Claimants wishing to dispute liquidated damages should do so at the time they are levied. Where offsets have previously been raised in a payment schedule and the corresponding payment claim settled, a challenge to these levies in a subsequent payment claim will likely be considered an excluded amount.
  • If the right to make a payment claim under a construction contract is subject to the carrying out of work ‘up to the time’ for making the claim, there will be no available reference date unless work has been carried out since the last reference date.

If you or someone you know wants more information or needs help or advice, please contact us on +612 9248 3450 or email info@bradburylegal.com.au.

Does a payment claim survive the termination of a contract for convenience?

Security of payment legislation continues to receive significant attention across Australia’s building and construction landscape, with many cases being deconstructed to shed light on a court’s interpretation of various provisions.

Impero Pacific Group Pty Ltd v Bonheur Holdings Pty Ltd [2019] NSWSC 286 recently established that, despite a construction contract being terminated for convenience, a contractor may still claim for work carried out between the last accrued reference date and the termination date. Much will depend on the wording of the contract.

The decision diverges from previous case law which holds that a contract terminated for convenience does not provide ongoing reference dates, and consequently no entitlement for a contractor to claim for work carried out between the last reference date and termination.

Background

The contractor, Impero Pacific Group Pty Ltd (Impero) entered into a contract with Bonheur Holdings Pty Ltd (Bonheur), as principal, for construction of a residential strata complex, with a completion date of 1 March 2019.

The reference date, for the purposes of making payment claims was the 25th day of the month.

Crucially, the contract contained a termination for convenience clause (clause 39A), allowing the principal at its discretion to terminate the contract and complete any part of the works either itself or through another party. If invoked, the contractor would be entitled to payment for certain works carried out to the date of termination that would otherwise have been payable if the contract had not been terminated.

The contract was terminated for convenience by Bonheur on 29 or 30 October 2018.

Impero served a payment claim on 27 November 2018 for approximately $1.4 million relating to work undertaken between the last reference date being 25 October 2018 and the termination date, namely 29 or 30 October 2018.

Bonheur failed to respond to the claim as required under the Act and Impero sought judgement from the Supreme Court.

Bonheur argued that the payment claim was invalid as it was not supported by an available reference date pursuant to clause 8 of the Building and Construction Industry Security of Payment Act 1999 (NSW) (the ‘Act’).  It contended that if the contract was terminated for convenience, “the Act cannot be used to obtain a progress payment for work done between the last contractual progress payment date and the date of termination.”

It was also submitted that, if Impero did have a right to a progress payment, it was “limited to part only” on the basis that it had claimed for items not within the scope of the Act and therefore no judgement could be obtained.

Impero argued that on construction of clause 39A, termination resulted in the creation of a new reference date and a consequential entitlement to claim and receive payment.

Decision

Justice Parker was not persuaded by the principal’s submissions and ordered the judgement sought by Impero.

The Act provides that on and from each reference date under a construction contract a person is entitled to a progress payment for work carried out under the contract.

Justice Parker acknowledged that under the current Act “there is no entitlement to a progress payment, and there can be no valid progress claim, unless there is an available reference date”. A reference date is defined as:

“(a)    a date determined by or in accordance with the terms of the contract as the date on which a claim for a progress payment may be made in relation to work carried out…under the contract, or

(b)     if the contract makes no express provision with respect to the matter – the last day of the named month in which the construction work was first carried out…and the last day of each subsequent named month.

The last reference date prior to termination (on 29 or 30 October) was 25 October, which would have been available to claim for work carried out up to that date, but not beyond. Had the contract not been terminated, the next available reference date would have been 25 November.

Justice Parker considered the present matter in the context of previous cases and clause 39A of the construction contract. Clause 39A provided an entitlement for Impero to claim for work carried out under the contract up to the date of termination, and crucially this clause expressly stated that it would survive termination.

In the circumstances it was determined that “termination of the contract gave rise to a fresh reference date for the purposes of the Act and the entitlement for Impero to claim up to termination.

As to the contention that Impero’s right to a progress payment, if awarded, should be limited to part only, Justice Parker confirmed that “the Act does not permit the Court to make its own assessment of the extent to which the claimed amount represents payment for construction work or the supply of related goods or services. In that sense, it is an all-or-nothing provision.” The opportunity for a principal to argue that items fall beyond the scope of the Act arises by serving a payment schedule in response to a contractor’s payment claim. In the present case, the principal failed to do this.

Key takeaways

  • The exercise of a right to terminate a construction contract for convenience will not prevent a contractor from claiming for work carried out up to the termination date;
  • Progress claims should specify the works carried out between the last accrued reference date and the date of termination and relate only to works defined within the scope of the Act; and
  • Principals who terminate a contract for convenience should anticipate that a contractor may make a claim up to the date of termination. Items considered to be claims beyond the scope of the Act should be identified in the payment schedule.

Readers should be aware that Justice Parker makes it clear that termination for convenience is not the same as termination for breach nor is it similar to accepting the repudiation of the other party. The situation may be different in these cases. The High Court of Australia has previously ruled that in these cases, unless the contract expressly provides so, reference dates do not accrue after termination or accepted repudiation.

Where to next?

Determinations such as this are frequently analysed, particularly as participants in the building and construction industry await reforms yet to commence under the Building and Construction Industry Security of Payment Amendment Act 2018 (NSW). For more details on these amendments, click here.

Upon commencement of the current reforms proposed, the reference date system will be abolished, and a contractor will be able to make a progress claim for work carried out up to the date of a terminated contract, whether the contract is terminated for convenience or otherwise.

The policy behind these amendments is to discourage principals from strategically terminating a contract primarily to avoid a final payment claim being made under the Act.

If you or someone you know wants more information or needs help or advice, please contact us on +61 2 9248 3450 or email info@bradburylegal.com.au.

The Fantastic Fourth: another NSW Security of Payment amendment

On 21 November 2018, the NSW Houses of Parliament passed the Building and Construction Industry Security of Payment Amendment Act 2018 (Amendment Act). This will amend some provisions of the Building and Construction Industry Security of Payment Act 1999 (Security of Payment Act).

Some of these changes are reversions to old systems, while others introduce completely new regimes. Readers will be forgiven for being irritated at yet another shock to the system, but it is vital to become familiar with all of these so that when they come into effect, businesses are ready for them. Directors and managers should take particular note as they will soon be open to criminal proceedings.

We wrote a pocket summary of these changes in December (see here).

Here we expand on the details, and we can now give some indication of when these changes will be activated.

Before going into the detail, readers should take note that as of 5 March 2019, none of these changes have come into effect.

When the changes will come in

This is the most important detail and so far, we don’t know. We will only know for sure after the fact, when the government makes the official announcement in the NSW Government Gazette.

However, a paper released by Fair Trading NSW in December 2018 has given some hints about when to expect these changes. It looks like there will be three main phases of changes throughout 2019 for principals and contractors to weather:

  • Phase 1 changes were proposed to come in during February 2019. This has not yet happened, so we can expect that any day now the changes will come;
  • Phase 2 changes were proposed for June 2019;
  • Phase 3 changes were schedule for December 2019.

When they do come into effect, they will not affect contracts already entered into. The old Security of Payment Act will still apply to these contracts.

Phase 1: February 2019

Investigation and enforcement powers for the Department

The most wide-reaching changes concern new powers of officers of the Department of Finance, Services and Innovation that can be used for the purposes of investigating, monitoring and enforcing compliance with the Security of Payment Act.

Authorised officers may now:

  • Require a person to provide them with information or records that they can obtain;
  • Require a person to answer questions on topics about which they are suspected of having knowledge, or to attend at a specified time and place to answer such questions;
  • Enter premises (including commercial premises without a search warrant);
  • When entering premises, make examinations, direct persons to produce records for examination, copy records, and seize anything suspected on reasonable grounds of being connected with an offence under the Security of Payment Act.

The Amendment Act also introduces offences for failing to comply with the above without reasonable excuse, or obstructing or delaying an authorised officer. The maximum penalty is $4,400 for a corporation and $2,200 for an individual.

There are even greater maximum penalties for providing information, answers or records that are false or misleading: $55,000 for a corporation and $11,000 for an individual.

Authorised officers will also be able to issue quick penalty notices for more minor infringements to the Security of Payment Act.

Liability of directors and managers

The Security of Payment Act already provides for offences of a corporation. See the next section for examples.

The Amendment Act now extends this liability to its directors, or for those involved in the management of the corporation (managers).

Where

  1. A corporation commits an offence against the Security of Payment Act, and
  2. A director or manager aids, abets, induces, conspires, is knowingly concerned in, or is a party to this offence,

then the director or manager will have committed an offence, which is subject to the same maximum penalty as applies to the corporation.

The Security of Payment Act also creates an “executive liability offence”. This is an offence involving specifically the supporting statement to a payment claim. These statements are required to be put forward by head contractors to certify that subcontractors have been paid.

Where:

  1. A corporation fails to attach a supporting statement to a payment claim, or the statement provided is false or misleading, and
  2. The director or manager knows this or is recklessly indifferent about it, and
  3. The director or manager has failed to take reasonable steps to prevent the offence.

the director or manager will have committed an executive liability offence. The maximum penalty is $22,000.

One example of failing to take reasonable steps under (3) is failing to ensure that a corporation’s employees, agents and contractors have supervision, and information and training about complying with the Security of Payment Act.

Higher penalties

Head contractors should take note that failure to include a supporting statement not only risks the payment claim to a principal being rendered invalid (which is the current law). Failure to include this is also now subject to tougher maximum penalties: $110,000 for corporations and $22,000 for individuals.

The same maximum penalties now apply where the supporting statement is provided by someone who knows that it contains false or misleading information. As mentioned, directors and managers may also be liable.

There are also offences relating to payment withholding requests. Currently a claimant in an adjudication application can issue a payment withholding request to the principal contractor, requiring them to hold back any money due to the respondent to cover a successful adjudication application. If a person receives this payment withholding request but is not, or is no longer, the principal contract, they must notify the claimant of this fact within 10 business days. The Amendment Act makes the penalties harsher: the maximum penalty for failing to do this is $5,500 for a corporation, and $1,100 for an individual.

There are similar increases in penalties where a claimant withdraws an adjudication application but fails to tell a principal who has received a payment withholding request, and where a respondent fails to comply with the direction by an adjudicator to give the identity and contact details of a principal contractor.

Adjudications reviewable for error

The Amendment Act now puts into writing what the courts have already decided. This is that an adjudicator’s determination, or any part of it, that is affected by jurisdictional error may be set aside by the Supreme Court. A jurisdictional error is where an adjudicator wrongfully decides a case that it has no authority to decide under the Security of Payment Act, such as where a payment claim is not properly served on the respondent or it is served without a supporting statement.

However, non-jurisdictional error, such as where an adjudicator makes a mistake about what the law is, is not reviewable.

No ball for companies in liquidation

A new change is that if a corporation claiming progress payments enters liquidation at any stage up until the final determination by an adjudicator, it will be prevented from claiming.

The NSW government is now denying the right of a corporation which is in liquidation to serve a payment claim, and is not allowing them to enforce a payment claim such as through applying for adjudication under the Security of Payment Act. This overrides some of a recent NSW Court of Appeal judgement.

A corporation that goes into liquidation while a determination is being considered is taken to have withdrawn the application.

There are uncertainties that NSW courts may need to resolve. Firstly, it appears that notwithstanding these changes, claimants in liquidation may still use the alternative to adjudication, which is enforcing a statutory debt that arises from unpaid payment schedules. Secondly, the Amendment Act does not appear to affect companies in voluntary administration. However, we may know for sure when the courts address these questions.

Phase 2: June 2019

Reference dates are no more

The Amendment Act removes the reference date system that has been the bane of many a claim.

It appears that the entitlement to a progress claim is no longer triggered by a reference date, but is merely triggered by that party undertaking to carry out construction work.

Under the new changes, contractors may serve a payment claim “on and from the last day” of the month in which work was carried out. If the contract provides for an earlier date of any month, the contractor may serve the payment claim from that date.

Only one payment claim per month

Unless the contract says otherwise, a claimant can only serve one payment claim in any particular month for work carried out in that month (previously one claim per reference date).

Parties can still include in a payment claim amounts that were the subject of previous payment claims, or include claims for work completed in previous months.

Payment claims after termination

Where a contract has been terminated, a contractor may serve a payment claim on or after the date of termination. This is a change from the existing law.

Endorsement of payment claims

In a return to the previous law, payment claims to be valid must state that they are “made under the Building and Construction Industry Security of Payment Act 1999”.

Shorter deadline for subcontractor payments

Where a party receives a payment claim from a subcontractor, the payment is due 20 business days after the payment claim is made (previously: 30 business days). If the contract provides for a shorter deadline, this shorter deadline will apply.

Withdrawal of an adjudication application

A claimant may now withdraw its adjudication application at any time before the application is determined. It can do this by serving written notice on both the respondent and the adjudicating body (and on the adjudicator, if one has been appointed).

Extended time for adjudicator’s decision

Under the original Security of Payment Act, the adjudicator must decide the application within 10 business days after notifying both parties that it has accepted the application.

The Amendment Act changes this where the respondent is entitled to lodge a response (e.g. where it had issued a payment schedule). The deadline for deciding the application is 10 business days after the respondent has lodged the response. If no response is lodged, the 10 business days start ticking at the end of the period that the respondent could have issued a response.

The adjudicator must now serve the determination on the claimant and the respondent.

Phase 3: December 2019

Owner-occupier exceptions removed

The Amendment Act makes changes so that the Security of Payment Act will apply to residential construction contracts between a builder and an owner-occupier of the building (that is, someone who resides or proposes to reside in the building).  Currently the Security of Payment Act does not apply to these contracts.

Codes of practice

The Minister for Innovation and Better Regulation may now prescribe a code of practice for adjudication bodies to follow. They will publish this on the NSW legislation website.

Bonus phase: May 2019

Lastly, Fair Trading NSW is also proposing changes to the Building and Construction Industry Security of Payment Regulation 2008 (Regulations).

These changes are scheduled to be drafted by May 2019, at which point stakeholders will be able to submit comments on these proposed changes.

  • Retention moneys for projects valued at over $20 million must currently be held in a trust account. It is proposed to reduce this threshold to $10 million, and to reduce annual reporting obligations on this trust account.
  • Fair Trading NSW proposes to amend the Regulations to require the keeping of trust account records by a head contractor, and to allow subcontractors to inspect these records if they have their retention held.
  • Liability of directors and managers of companies is proposed, for offences under the Regulations. These mainly relate to head contractors and trust accounts.

Conclusion

Fair Trading NSW has recommended that these changes be staggered over the course of a year to allow people in the industry to prepare for them. It is vital that everyone involved in construction and building business familiarise themselves with them. Even tiny non-compliances may have big consequences for adjudications. They can also give rise to criminal liability and severe penalties.

Businesses also need to be aware that authorised government officers will soon be perfectly within their rights to demand access to their documents and premises, and to demand answers to questions in relation to Security of Payment Act issues.

If you or someone you know wants more information or needs help or advice, please contact us on +61 (0)2 9248 3450 or email info@bradburylegal.com.au.

Security of Payment – More Changes

On 21 November 2018, the NSW government passed the Building and Construction Industry Security of Payment Amendment Act 2018.

This will make changes to the security of payment regime, and will take effect when the government announces so in the NSW Government Gazette.

So what are the main changes that builders and developers need to be aware of?

  • A payment claim must once again state that it is made under the Building and Construction Industry Security of Payment Act 1999 (“endorsement”);
  • Progress payments to a subcontractor are now due and payable 20 business days after a payment claim is issued (previously: 30 business days);
  • The ‘reference date’ system for payment claims is abolished. Now, where the contract is silent on dates for serving payment claims, a payment claim may be served on the last day of the month that construction work was first carried out under the contract, and then for the last day of each month of work afterwards;
  • Where a contract is terminated, a payment claim may be made from the date of termination;
  • If a head contractor company issues a payment claim to a principal and provides a supporting statement that is known to be false or misleading, then any company director who knows about this false or misleading statement can be convicted of an offence;
  • The Minister for Innovation and Better Regulation may make codes of practice to be observed by adjudicating organisations, and may cancel an adjudicating organisation’s authority for non-compliance with these;
  • Once a corporation is in liquidation, it cannot serve payment claims or enforce them;
  • Authorised officers from the Department of Finance, Services and Innovation now have extensive powers for the purposes of investigating, monitoring and enforcing compliance with the Act; and
  • Maximum penalties for various provisions have been increased.

The amendments also confirm what the High Court has already decided: that there are very limited grounds for appealing the decision of an adjudicator once it is made.

Other changes have also been made. These changes do not apply to any contract entered into before the amendments take effect. If you’d like to know more, please contact us on +612 9248 3450 or email info@bradburylegal.com.au.

Challenging Adjudication Determinations – some recent guidance

Parties to a commercial building dispute may utilise Security of Payment (SOP) legislation in their jurisdiction to resolve payment claims and recover money owing under a construction contract.

Disputes are resolved quickly by an adjudicator and any amount determined as owing must be paid within the statutory timeframe. The determination is enforceable but without prejudice to the common law rights of either party. Due to the limited time in which an adjudicator must determine a payment dispute, it is not surprising that a determination may come before the Court for judicial review.

The grounds for review have been visited by various Courts with the following cases providing insight as to what might (and might not) justify having an adjudication determination quashed.

No review avenues for non-jurisdictional error

The High Court in Probuild Constructions (Aust) Pty Ltd v Shade Systems Pty Ltd [2018] HCA 4 confirmed that parties to an adjudication determination under the Building and Construction Security of Payment Act 1999 (NSW) may not seek judicial review for non-jurisdictional error of law.

The Court reiterated the nature of the (NSW) Act which, amongst other things, was intended to ‘reform payment behaviour in the construction industry’ by ensuring prompt recovery of payment for work carried out under a construction contract. The legislation is ‘coherent, expeditious and self-contained’ and ‘not concerned with finally and conclusively determining the entitlements of parties to a construction contract’.

Accordingly, an adjudicator is sanctioned to make a determination and a Court is not empowered to quash that decision for non-jurisdictional error, even if based on an incorrect interpretation of the subject contract.

An adjudication determination may only be set aside on grounds of jurisdictional error – an error going to the authority or power of the adjudicator, such as non-compliance with procedural requirements under SOP legislation.

Minimum standards required when assessing an adjudication determination

Nuance Group (Australia) Pty Limited (Nuance) v Shape Australia Pty Limited (Shape)[2018] VSC 362 provides guidance as to when a Court might quash an adjudication determination.

Shape served a payment claim on Nuance for over $3.5 million for demolition and associated works at Melbourne International Airport. Nuance responded with a payment schedule stating the amount payable as nil. Shape applied for adjudication for the sum of $2,243,105.55. An amount of $1,400,007.12 was determined payable, which after an adjudication review instigated by Nuance, was reduced to $1,216,715.72.

Nuance challenged the validity of both the original and reviewed determination in the Supreme Court of Victoria.

Nuance submitted that the adjudicator had not determined the amount of the progress claim as required by SOP legislation, which as a minimum necessitated a finding of whether the work identified in the relevant claim had in fact been performed and the value of that work. Rather, the adjudicator had deducted what he considered were excluded amounts from Shape’s claim to arrive at the revised figure and, in doing so, failed to comply with ‘basic and essential requirements’ of the Act.

Nuance was successful, and the adjudication determination was quashed.

Whilst acknowledging the tight timeframes under which adjudicators are required to operate, Justice Digby nonetheless conceded that the adjudicator had:

‘…failed to undertake the required task of addressing the payment claim and payment schedule and, consider those parameters of the dispute between the claimant and the respondent as to what claimed work … had been carried out under the Contract and what the value of that work … was.’

The adjudicator had merely worked back from the original claim in a manner that did not constitute a ‘fair and reasonable consideration’ of the determination providing ‘no sufficiently comprehensible reasons and basis for the amount determined’.

An adjudicator’s reasons must be considered in context

Southern Cross Electrical Engineering (Southern Cross) v Steve Magill Earthmoving (Magill) [2018] NSWSC 1027 considered another appeal of an adjudication decision.

Essentially, Southern Cross disputed Magill’s payment claim, which comprised additional amounts for excavation work based on trenching some areas of the subject site that were wider than stipulated in the contract. Southern Cross submitted that the adjudicator had erred by requiring it to prove that there had been no variation to the contract and that the earthmoving works had been over-claimed.

Relying on Justice Vickery’s lengthy series of matters to consider in Plenty Road Pty Ltd v Construction Engineering (Aust) Pty Ltd [2015] VSC 631, Southern Cross claimed that the adjudicator was required to ‘examine all the material for himself, and to come to a conclusion, based on that material as to what amount (if any) is payable.’

Justice McDougall acknowledged the processes set out by Justice Vickery were applicableto a determination however rejected any requirement for them to be ‘applied serially and mechanically in every case.’ Rather, the adjudicator’s reasons must be considered in context which included ‘the content of the dispute as established by the payment claim and the payment schedule, and the parties’ elaboration of that dispute.’

Further, the reasoning must be assessed considering the interim nature of an adjudicator’s determination under SOP legislation, the voluminous material to be dealt with, the strict timeframe and the fact that adjudicators are not usually lawyers.

Cross Engineering’s appeal was dismissed, Justice McDougall concluding that:

‘Factually, the adjudicator’s approach may have been (and probably was) incorrect. It is no doubt something that could have been improved upon if the adjudicator had “world enough and time”. But looking at his approach … I am far from persuaded that it was unreasonable to the extent that it must be taken to invalidate his determination’.

Conclusion

An adjudication determination is not subject to judicial review for non-jurisdictional error.

An adjudicator must apply certain minimum standards when assessing an adjudication application, however his or her reasoning will be considered in the context of the purpose and intent of the legislation, that being for the timely resolution of payment disputes under a construction contract. A decision that emanates from an error of law not associated with a jurisdictional error, will generally not entitle the Court to intervene.

Security of Payments legislation across Australia has been the subject of review and proposed reform. The recent release of the Murray Report recommends the national harmonisation of SOP laws and the implementation of review rights for parties (by a review adjudicator) for determinations concerning amounts of $100,000 or more.

If implemented, construction industry participants should have greater clarity regarding the circumstances under which an aggrieved party can challenge an adjudication determination.

If you or someone you know wants more information or needs help or advice, please contact us on +612 9248 3450 or email info@bradburylegal.com.au.

When adjudication certificates meet statutory demands

Parties to a payment dispute in the commercial building industry may utilise the Building and Construction Industry Security of Payment Act 1999 (NSW) (the ‘SOPA’) to resolve the matter.

The Act provides an efficient means of recovering money owed for construction work by invoking a statutory right for a contractor to receive progress payments under a contract.

Disputes are usually resolved quickly by an adjudicator. A determination is made which, in most cases, requires a respondent to pay the claimant a specified amount within the statutory timeframe. The determination is enforceable but without prejudice to the common law rights of either party. If the respondent fails to pay, the claimant may apply for an adjudication certificate which can be filed in Court to obtain judgement against the respondent.

When additional attempts are made under other legislation to enforce payment of the debt the matter can become complex.

Powerpark Systems Pty Ltd [2018] NSWSC 793 considers the interplay between the state-based SOPA and the issue of a statutory demand under the Commonwealth’s Corporations Act 2001. The case recognises the policy supporting the adjudication process and emphasises the need for parties to act quickly if they wish to challenge a determination.

The case and the decision

Powerpark Pty Ltd (Powerpark) retained Shoemark Electrical Pty Ltd (Shoemark) to install solar panels at various sites. Shoemark invoiced Powerpark for $44,811.11 for services carried out in New South Wales and Queensland and subsequently issued a payment claim under the SOPA.

Powerpark responded to the claim by issuing a payment schedule complaining of Shoemark’s defective work at building sites, agreeing to pay $24,956.97, and threatening to pursue Shoemark for rectification costs if the defective work was not resolved.

Shoemark proceeded to have the claim adjudicated which was determined in its favour for $44,811.11. Relying on the adjudication certificate, Shoemark served a statutory demand on Powerpark under the Corporations Act 2001. (The effect of serving a statutory demand is that a company will be presumed insolvent if, after 21 days it fails to pay the debt or is unsuccessful in having the demand set aside by a Court.)

Subsequently, and pursuant to the SOPA, Shoemark obtained judgment against Powerpark from the Local Court for $48,230.74 being the amount determined under adjudication plus fees and interest.

Powerpark applied to the Supreme Court to have the statutory demand set aside on the following grounds:

  • There was a genuine dispute about the existence or amount of the debt due to a purported jurisdictional error affecting the adjudication certificate and judgment.

One of the contracts for which the adjudication was determined related to work performed in Queensland. Powerpark claimed that as the SOPA expressly excluded work performed outside of New South Wales, the adjudication was ‘beyond the jurisdiction of the adjudicator’. It followed that the judgement issued by the Local Court in reliance of the adjudication certificate should be void.

The Court rejected this argument. Although the SOPA does not apply to work performed outside of New South Wales that in itself, was insufficient to invalidate the judgement. Whilst a potentially erroneous decision is reviewable, once the adjudication certificate is filed the debt is nevertheless payable.

Although Powerpark may have applied for judicial review to stay the judgement for jurisdictional error, its’ time for commencing proceedings had expired and it failed to explain any reason for not commencing or delaying proceedings.

  • The jurisdictional error constituted ‘some other reason’ as to why the demand should be set aside in accordance with s 459(1)(b) of the Corporations Act 2001.

Powerpark was again unsuccessful on this argument. The Court has discretion regarding what may constitute ‘some other reason’ to have a statutory demand set aside however, ‘the pendency of curial proceedings’ was, without more, insufficient to establish ‘some other reason.’

  • Powerpark had an offsetting claim against Shoemark comprising the losses claimed due to defective work.

On this point Powerpark was again unsuccessful in having the statutory demand set aside. It did however convince the Court of its offsetting claim resulting in the amount of the statutory demand being reduced to $21,483.14 which took into account the defective works.

Key takeaways

  • A judgment arising from the filing of an adjudication certificate determines that the judgment debt is indisputably due and payable. The legislative policy supporting the SOPA is to facilitate payment of an adjudicated amount notwithstanding the potential of a ‘curial dispute’ which, if later established could be cured by restitution.
  • An offsetting claim (in respect of a statutory demand) may be ordered by a Court without disturbing the validity of an adjudication certificate or the statutory demand.
  • Once a judgment debt issues, the subject of an adjudication certificate, a respondent will face difficulties in challenging its validity. Obtaining early advice during any construction payment dispute is important to ensure the merits of the proceedings and relevant timeframes are considered.

If you or someone you know wants more information or needs help or advice, please contact us on +612 9248 3450 or email info@bradburylegal.com.au.

National review of security of payment legislation by John Murray AM

The long-awaited national review of security of payment legislation by John Murray AM has been released.

The ‘Murray Report’ recommends harmonised security of payment laws across Australia by selecting various provisions of each state’s and territory’s model and emphasises the importance of the Commonwealth, states and territories working together to implement those recommendations.

Some of the key recommendations of the Murray Report:

  1. Reference dates to be replaced with an entitlement to make a payment claim every named month, or more frequently if so provided under the contract;
  1. Payment claims to identify a detailed breakdown of the amount claimed; the time period within which the respondent is to provide a payment schedule; and should be endorsed as a claim made under the legislation (among other related requirements);
  1. Supporting statements to accompany payment claims submitted to a head contractor to the principal (requiring a statement that subcontractors and suppliers have been paid);
  1. All adjudicators are to be trained, registered, graded and appointed to disputes by a new regulator;
  1. The introduction of statutory trusts for subcontractor payment and the adoption of an extended Christmas shutdown period; and
  1. Any parts of an adjudicator’s decision that falls into jurisdictional error, but does not affect the whole of the decision, can be severed;
  1. Claimants to be entitled to withdraw and make a new application if an adjudicator has not accepted its application within 4 business days, an adjudicator fails to determine an application within the prescribed timeframe or an adjudicator has given notice of their withdrawal from the adjudication;
  1. Parties entitled to make an application for a review of an adjudication determination if the adjudicated amount is equal to or greater than $100,000 of the scheduled amount, or $100,000 (or more) lower than the claimed amount.

The Australian Government is working with the states and territories through the Building Ministers’ Forum (BMF) to consider and respond to the findings and recommendations of the Murray Report.  Responsibility for this project has now transferred to the Department of Industry, Innovation and Science which provides secretariat support to the BMF.

We will keep you posted on developments and look forward to the proposed harmonisation of security of payment legislation.

Regards Brendan and Scott