When adjudication certificates meet statutory demands

/0 Comments/in /by

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

/0 Comments/in /by

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

No notice needed: NSW Court of Appeal rules on enforcement of Security of Payment Act determination

/in /by

In the recent unanimous decision of Fitz Jersey Pty Ltd v Atlas Construction Group Pty Ltd [2017] NSWCA 53, the Court of Appeal considered the enforcement of a judgment (pursuant to an adjudication determination under the Building and Construction Industry Security of Payment Act 1999 (NSW) (Act)) by garnishee order and without notice of the judgment being given to the unsuccessful respondent.

The Court of Appeal confirmed:

  • the long-held view that notice of the entry of and enforcement of a judgment (obtained pursuant to an adjudication determination) is not required; and
  • that, when applying for a garnishee order, a party is not required to disclose to the Court that an unsuccessful respondent to an adjudication determination has commenced proceedings challenging the adjudication determination underlying the judgment (unless there are special circumstances, such as a stay or undertaking has been sought).

Background

The background to the Court of Appeal’s decision can be briefly summarised as follows.

1. On 6 January 2017, an adjudicator determined an adjudication application in favour of the builder in the amount of $10,748,466.31 plus interest and the adjudicator’s fees.

2. On 13 January 2017, the developer was required to pay to the builder the adjudicated amount plus interest and the adjudicator’s fees in accordance with section 23 of the Act.

3. On 13 January 2017, the developer did not pay the adjudicated amount to the builder.  Instead, the developer filed and served a Summons and List Statement in the Technology and Construction List of the Supreme Court of NSW seeking an order that the adjudication determination be quashed.  The letter to the builder’s solicitor serving the Summons and List Statement relevantly said:

“We are instructed that if your client seeks an order at that directions hearing that our client lodge the amount of the adjudication determination with the Supreme Court until a judgment is issued on our client’s summons, our client will not object to that order being made.” 

4. On 16 January 2017, the builder requested an adjudication certificate for the adjudicated amount and the amounts for interest and the adjudicator’s fees.

5. On 17 January 2017, the builder received the adjudication certificate in the amount of $11,023,619.76 and filed the certificate as a judgment of the Supreme Court.  Later, on 17 January 2017, the builder applied for a garnishee order against NAB in respect of the judgment amount.

6. On 27 January 2017, the Supreme Court issued the garnishee order against NAB for the amount of the judgment debt.  Later, on 27 January 2017, the garnishee order was served on NAB.

7. On 2 February 2017, NAB paid the full amount of the judgment debt to the builder.

8. On 3 February 2017, the developer became aware of the judgment, the garnishee order and the payment by NAB.

Supreme Court application

On 6 February 2017, the developer made an application to the Supreme Court seeking orders that the amount paid pursuant to the garnishee order be repaid into Court.  The developer’s application was based on two grounds.

  1. The developer primarily submitted that, because the developer did not have notice of the builder’s application for an adjudication certificate or the entry of judgment, the developer had been deprived of an alleged entitlement or right under section 25 of the Act to pay the money into Court pending the determination of the validity of the determination.
  2. The developer also relied on a secondary argument that the proceedings commenced by the developer to have the adjudication determination quashed should have been disclosed in the builder’s application for a garnishee order.

The Supreme Court dismissed the application.  The Court did not consider it appropriate to deal with the developer’s argument under section 25 of the Act on an urgent application and said that it did not consider that an applicant for a garnishee order needed to put any additional material before the Court (other than as required by the Uniform Civil Procedure Rules 2005 (NSW) (Rules), which prescribes the form and requirements for an application for a garnishee order).

In any event, at a more fundamental level, the Court cited the developer’s failure to obtain an injunction or seek an undertaking restraining the enforcement of the adjudication determination as reasons why the Court would not exercise its discretion to grant the equitable relief sought by the developer.

Court of Appeal decision

The developer appealed the Supreme Court’s decision on three grounds, the first of which was essential for the other grounds to succeed.

  1. The Supreme Court incorrectly exercised its discretion in refusing equitable relief.
  2. The builder was required to notify the developer that a judgment had been obtained before taking steps to enforce it.
  3. When applying for a garnishee order, the builder was required to notify the Court that the developer had commenced proceedings to review the underlying adjudication determination.

Is there an obligation to notify of a judgment pursuant to an adjudication determination before enforcement?

In short, no.  The Court of Appeal considered section 25 of the Act, in conjunction with the Rules in respect of the entry and enforcement of judgments.

Relevantly, section 25 of the Act provides as follows.

“25   Filing of adjudication certificate as judgment debt

(1)       An adjudication certificate may be filed as a judgment for a debt in any court of competent jurisdiction and is enforceable accordingly.

(2)       An adjudication certificate cannot be filed under this section unless it is accompanied by an affidavit by the claimant stating that the whole or any part of the adjudicated amount has not been paid at the time the certificate is filed.

(3)       If the affidavit indicates that part of the adjudicated amount has been paid, the judgment is for the unpaid part of that amount only.

(4)       If the respondent commences proceedings to have the judgment set aside, the respondent:

(a)       is not, in those proceedings, entitled:

(i)        to bring any cross-claim against the claimant, or

(ii)       to raise any defence in relation to matters arising under the construction contract, or

(iii)      to challenge the adjudicator’s determination, and

(b)       is required to pay into the court as security the unpaid portion of the adjudicated amount pending the final determination of those proceedings.”

For various reasons, including those noted below, the Court found that there is no obligation on a party that registers an adjudication certificate as a judgment to notify the other party that a judgment has been entered.

  • Rule 36.14 of the Rules provides that a judgment need not be served unless expressly required by the Rules.  The Rules were introduced after the operation of the Act.  There is no express requirement in the Act or the Rules that a judgment must be served or notified to the other party.
  • The proposition that a judgment cannot be enforced without service on the other party “has no support in authority, or as a matter of general principle.  It would, on its face, be inconsistent with the proposition that service is not required”, as per Rule 36.14 (as noted above).
  • Section 25(4) of the Act does not put the unsuccessful party in a better position than any other judgment debtor (upon which service of a judgment is not required before enforcement).  The effect of section 25(4) on an unsuccessful respondent to an adjudication determination is restrictive.
  • Section 25(4)(b) of the Act operates to require payment into Court of the unpaid portion of the adjudicated amount, if any (pending the determination by the Court of whether or not the judgment should be set aside).  It does not require there to be an unpaid portion.
  • To require notice of the existence of a judgment would deny the effect of the words “enforceable accordingly” in section 25(1) of the Act: “There is no authority which seeks to adopt such a construction, nor does it fit with either the context in which s 25(1) appears, the objects of the Act, or anything in the legislative history.”

Interestingly, the Court of Appeal was at pains to clarify that section 25(4) of the Act does not confer any right to have a judgment set aside.  The Court’s power to set aside a judgment is founded in the Rules and in the inherent jurisdiction of the Court.

Further, the Court said that section 25(4)(b) of the Act, which requires the adjudicated amount to be paid into Court pending the Court’s determination of an application to set aside a judgment based on an adjudication determination, would not apply to an application to quash a determination before judgment has been entered (although, in practice, the Courts have required payment into Court of the adjudicated amount pending the determination of the challenge to the validity of the determination, by analogy to section 25(4)(b) of the Act).

Is there an obligation to disclose a challenge to an adjudication determination when applying for a garnishee order?

In short, no.  However, there may be circumstances where additional disclosure is required in an application for a garnishee order (or other ex parte application).  The extent of such disclosure will depend on the facts of the case and may include, for example, if an undertaking not to enforce has been sought and an application to seek a stay has been foreshadowed.

The Court of Appeal found, amongst other things.

  • The statutory context of an application for a garnishee order to enforce an adjudication under the Act is critical.  The payments under the Act are interim in nature (subject to final determination as contemplated by section 32 of the Act) and any reduction in the entitlement of a builder to enforce an adjudication determination would undermine the statutory purpose of the Act.  The fact that the judgment is interim and subject to a further final determination (as contemplated by section 32 of the Act) lessens the obligation of disclosure.
  • As per the Rules, an application for a garnishee order may be dealt with in the absence of the parties and need not be served on the judgment debtor or the proposed garnishee.  That accords with public policy reasons that judgment debtors should not be notified so that they do not take steps to avoid payment, e.g. transferring assets.
  • The question which must ultimately be determined is whether any fact disclosed would have been likely to affect the outcome of the application – otherwise setting an order aside is “an entirely penal exercise, which must be proportionate to the consequences for the party in breach”.
  • Therefore, the onus was on the developer to establish that the builder should be deprived of an entitlement to immediate payment of the determined amount on an interim basis, i.e. the developer needed to demonstrate reasonable prospects of success on its application for judicial review and that it may not be possible to recover the money from the builder, neither of which had been established by the developer in this case.

What does this mean for me?

1. If you are successful in an adjudication determination:

(a) judgment can be obtained by registering an adjudication certificate and there is no need to notify the respondent to the adjudication determination, even if the respondent has commenced proceedings to challenge the validity of the adjudication determination; and

(b) the judgment may be enforced by garnishee order and the extent to which an application for a garnishee order must disclose a challenge to the validity of the determination will depend on the steps taken by the unsuccessful respondent.  If the respondent has merely commenced proceedings challenging the determination (and not sought an undertaking or an injunction), no disclosure is required.

2. If you are unsuccessful in an adjudication determination and do not intend to pay the adjudicated amount by the time prescribed in the Act, you should seek an undertaking from the successful party that it will not enforce the determination until the Court rules on the validity of the determination.  If no undertaking is provided, an urgent injunction should be sought.

Taking the Universal Serial Bus (USB) may result in a delayed service under the Security of Payment Act

/in /by

In 1999, the New South Wales parliament legislated to create the Building and Construction Industry Security of Payment Act 1999 (NSW) (Act).

In 2000, IBM began selling the first USB flash drives commercially.  Other methods and mediums to quickly and conveniently communicate significant amounts of information have come and gone since 1999.

It is therefore unsurprising that the Act does not specifically address service of documents by different technological methods and mediums.  Whether communication by a method or medium of technology is effective service under the Act has been left to the courts to determine.  This can often be a critical issue because of the strict timeframes under the Act for the service of payment schedules, adjudication applications and adjudication responses.

In the Supreme Court of NSW case of Parkview Constructions Pty Ltd (Parkview) v Total Lifestyle Windows Pty Ltd t/as Total Concept Group (Total) [2017] NSWSC 194, the Court considered whether the mere delivery of a Universal Serial Bus (USB) drive, which contained adjudication application documents, was valid service of an adjudication application under the Act.

Relevant issues

On 12 December 2016, the adjudicator made an adjudication determination in favour of Total in the amount of $539,634.24 (including GST).  On 14 December 2016, Parkview commenced proceedings to have the adjudication determination quashed or set aside.

The lodgement and service of the adjudication application that led to the determination was, as the Court said, a “litany of errors”.  In short, Parkview made the following complaints about the adjudication, which were upheld by the Court and had the effect of invalidating the determination.

  1. The version of the adjudication application referred by the adjudication nominating authority to the adjudicator differed from the version lodged under the Act by Total.
  2. The adjudication application served on Parkview was not a copy of the adjudication application referred to the adjudicator.
  3. Parkview’s adjudication response was wrongly disregarded by the adjudicator (because the adjudicator accepted that delivery of a USB stick amounted to valid service of an adjudication application under the Act and therefore determined that the adjudication response was out of time).
  4. The adjudicator took into account material that was not properly part of the adjudication application.

Is the delivery of a USB effective service under the Act?

Section 17(3)(a) of the Act provides that an adjudication application must be in writing.  Section 17(5) of the Act provides that a copy of an adjudication application must be served on the respondent.

Section 21(1) of the Interpretations Act 1987 (NSW) defines “writing” as:

“includes printing, photography, photocopying, lithography, typewriting and any other mode of representing or reproducing words in visible form.”

In construing sections 17(3)(a) and 17(5) of the Act with section 21 of the Interpretation Act 1987 (NSW), the Court held that service of the USB stick could not be equated with service of writing stored on it, and that the USB stick was not “writing” within the meaning of section 17(3)(a) of the Act.

Ultimately, the Court determined that mere delivery of an adjudication application on a USB drive does not amount to service of an adjudication application in accordance with the Act.

Accordingly, the Court found that Parkview was served with the adjudication application on 10 November 2016 when an employee of Parkview first opened the documents on the USB stick.  The effect of this decision was that Parkview’s adjudication response was within time and incorrectly disregarded by the adjudicator (a denial of procedural fairness and jurisdictional error).

Lodgement and service of the adjudication application

Section 17(5) of the Act provides that a “copy” of an adjudication application must be served on the respondent.  Section 19(1) of the Act provides that the adjudication application must be referred to the adjudicator by the nominating authority.  There were substantial and material (not trivial) differences in the versions of the adjudication application that were:

  • lodged with the nominating authority;
  • provided to the adjudicator by the adjudication nominating authority; and
  • served on Parkview.

The effect of the above was that there was a failure to comply with the essential prerequisites for a valid adjudication determination because:

  1. a copy of the adjudication application was not provided to Parkview in accordance with section 17(5) of the Act; and
  2. the adjudication was not properly referred to the adjudicator in accordance with section 19(1) of the Act.

The Court did not conclusively find that an identical copy of the adjudication application must be served on the respondent.  The Court expressly acknowledged that there may be scope to allow for “trivial” differences in certain circumstances.  In this case, the differences could not be labelled “trivial”.

What does this mean for me?

The issues that infected this adjudication arose from a failure to properly and carefully lodge and serve the adjudication application and a failure to ensure that a hard copy of the adjudication application was identical to the electronic version.  The timeframes under the Act are short and there are time pressures to lodge and serve documents, which can lead to irretrievable errors.

Some practical tips for avoiding the pitfalls evidenced in the Parkview case are set out below.

1. The Act expressly allows service by: (1) delivering it to the person personally; (2) lodging it during normal business hours at the person’s ordinary place of business; (3) sending it by post or facsimile addressed to the person’s ordinary place of business; or (4) as prescribed by the construction contract.

If possible, service of documents under the Act should be by courier to the person’s ordinary place of business during normal business hours to avoid any uncertainty or argument about whether the documents have been served.  A report from the courier confirming delivery should be obtained for evidentiary purposes.

2. Parties should note that service by USB stick is not effective service under the Act – the documents provided on the USB stick will only be served when opened and that would be difficult to evidence if contested by a respondent.  In short, documents should not be served by USB stick.

3. Service by email will only be effected once the documents have been accessed by the recipient.  This is difficult to evidence if contested.  For this reason, absent a contractual entitlement to serve documents by sending an email, service by email should be avoided.  Despite this, if email is used, ‘read receipts’ should be requested for evidentiary purposes.

4. If providing a hard copy of documents that have already been served electronically, ensure the hard copy is identical to the electronic version to avoid confusion and ambiguity, which could invalidate an adjudicator’s determination.

‘The suspense is killing me’ – when do reference dates continue to accrue under the Security of Payment Act?

/in /by

The High Court has determined that a reference date is a precondition to a valid payment claim under the Building and Construction Industry Security of Payment Act 1999 (NSW) (Act) with its landmark judgment in Southern Han Breakfast Point Pty Ltd (in Liquidation) v Lewence Construction Pty Ltd [2016] HCA 52.  Whether or not a reference date exists will continue to be contentious in security of payment disputes and the High Court decision is likely to lead to an increase in security of payment disputes coming before courts.

The decision also creates uncertainty around when a reference date will accrue and raises doubts about a number of Supreme Court decisions in respect of the accrual of reference dates and contracting out of the Act.  The High Court has adopted a much more literal interpretation of the wording of the Act than lower courts, which have regarded the objects and purposes of the Act as paramount.  In our opinion, the decision may ultimately result in an amendment to the wording of section 8 of the Act.

It is the first time the High Court has considered security of payment legislation in Australia and the decision will affect similar security of payment regimes to New South Wales, being all states and territories except Western Australia and the Northern Territory.

Facts

Southern Han Breakfast Point Pty Ltd (Southern Han) engaged Lewence Construction Pty Ltd (Lewence) to construct an apartment block for a contract sum of approximately $15.6 million (Contract).  On 27 October 2014, Southern Han gave Lewence notice to show cause in relation to alleged breaches of contract.  Despite alleged compliance with this request, the work was subsequently taken out of the hands of Lewence.  Lewence characterised the allegedly invalid taking of the work out of its hands as a repudiatory act and purported to accept that repudiation, with the effect that the Contract was terminated.

Under the Contract, reference dates accrued on the “8th day of each calendar month for work under the contract done to the 7th day of that month.”  A payment claim had previously been served on 8 October 2014 for work carried out to 7 October 2014, and on 4 December 2014 Lewence served what purported to be another payment claim.  This later claim failed to identify the reference date to which it related and concerned works carried out prior to 27 October 2014, including prior to 7 October 2014.

Decision and its effect

The High Court decision includes the following important points.

1. Reference date is precondition to a valid payment claim

The first issue before the court was whether a reference date is a precondition to a valid payment claim. This turned on the meaning and interpretation of section 13(1) of the Act, which defines those who are entitled to make a payment claim.  Lewence argued that the phrase “who is or who claims to be entitled to a progress payment” was purposefully expansive so as to apply to circumstances where a reference date had not arisen.  The court rejected this argument finding rather that the two-part description of those who may make a payment claim illustrates the distinction the Act makes between “present entitlement to progress payment and future ascertainment of the amount of the progress payment.”

From this the court held that all those making a payment claim must fall within the scope of section 8(1) of the Act, which grants such entitlement only “on and from each reference date under the construction contract” and as such concluded that a reference date under the contract is a precondition to the making of a valid payment claim.

2. Affirmation of one payment claim per reference date

The court provided further clarification as to the mechanics of section 13 generally, making it clear that not only must each payment claim be made in relation to a reference date, but that only one payment claim may be made in relation to a reference date.  A payment claim purportedly made that contravenes either of these requirements is not a payment claim under the Act, and is therefore incapable of ‘triggering’ the operation of Part 3 of the Act.  This affirms existing authority (see Dualcorp Pty Ltd v Remo Constructions Pty Ltd [2009] NSWCA 69 and Kitchen Xchange v Formacon Building Servics [2014] NSWSC 1602).

3. No reference dates accrue after termination (unless clear contractual intention)

A further issue before the court was the process by which a reference date is determined and ancillary to this, whether reference dates continue to arise after the termination of the Contract.  The court found that reference dates do not accrue after termination of the contract, unless there is a clearly expressed intention otherwise.

4. Accrual of reference dates can be suspended by operation of contract

The High Court found that there was no prohibition on Southern Han suspending payment and suspending the accrual of reference dates in reliance on clauses in the Contract.  The Court found that taking work out of Lewence’s hands had the effect of suspending the entirety of clause 37 of the Contract, including the accrual of reference dates.

5. When a reference date accrues depends on contract

The Court considered section 8(2) of the Act (set out below).

“(2)  In this section, reference date, in relation to a construction contract, means:

(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 or undertaken to be carried out (or related goods and services supplied or undertaken to be supplied) 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 (or the related goods and services were first supplied) under the contract and the last day of each subsequent named month.”

The Court confirmed that, if the Contract makes express provision for the accrual of reference dates, only section 8(2)(a) of the Act has work to do (i.e. the default reference date on the last day of each month only applies if a contract does not deal with reference dates).  Therefore, it is open to parties to agree on when reference dates will accrue and the circumstances around the accrual of reference dates.

It appears that the High Court was not required (or asked to) consider in what circumstances the no contracting out provision in section 34 of the Security of Payment Act may render such a clause void.

What does this mean for me?

The High Court decision is very important for construction industry stakeholders and the decision will affect principals and contractors in different ways.  All stakeholders should review and tailor construction contracts in light of the High Court’s decision.  Particular issues for principals and contractors to consider are set out below.

For principals

  • A reference date must exist for a contractor to make a valid payment claim.  A payment claim that is not in respect of a reference date will not be a valid payment claim under the Act.  Notwithstanding, principals should still always issue a payment schedule within 10 business days of receipt of a payment claim or a purported payment claim.  The payment schedule can still state that a reference date does not exist to validate the purported payment claim.
  • The High Court’s view is that the contract is king when it comes to determining when a reference date accrues.  Therefore, it is open to parties to agree on the circumstances when a reference date will arise.  Principals have previously attempted to impose conditions on the accrual of reference dates or provided that reference dates accrue after the occurrence of a specified event, but these conditions have generally been declared void for contracting out of the Act.  The High Court decision, which approves parties contracting to suspend the accrual of reference dates, provides some hope to principals that agreed conditions on the accrual of reference dates may be upheld.
  • To avoid doubt, construction contracts should state that reference dates do not accrue after termination of a contract.  Principals can take some comfort from the High Court’s decision in this regard.
  • Principals may wish to include other circumstances that result in suspension of payment and therefore also seek to suspend the accrual of reference dates.

For contractors

  • Contractors should ensure that there is a clear, unconditional and simple provision in their construction contracts for reference dates to accrue (on a monthly or milestone basis).
  • Contractors should also require an additional clause providing for reference dates to continue to accrue after termination of the contract, particularly if termination arises out of the principal’s breach of contract.  Alternatively, contractors should carefully consider their position before terminating a contract because reference dates will not accrue after termination and contractors will lose their rights to apply for adjudication.
  • Contractors should minimise the circumstances in which the accrual of reference dates and payment can be suspended to avoid being prevented from making a valid payment claim under the Act.

Summer of section 69: non-jurisdictional errors of law under the Security of Payment Act have had the best days of their lives

/in /by

The New South Wales Court of Appeal has confirmed that an adjudication determination under the Building and Construction Industry Security of Payment Act 1999 (NSW) (Security of Payment Act) can only be quashed if there is a jurisdictional error of law.

The decision of the unanimous five-judge bench in Shade Systems Pty Ltd v Probuild Constructions (Aust) Pty Ltd (No 2) [2016] NSWCA 379 overturns the Supreme Court’s decision to quash an adjudication determination for non-jurisdictional errors of law on the face of the record.

The Court of Appeal decision also affirms its earlier decision in Brodyn Pty Ltd v Davenport (2004) 61 NSWLR 421, which has been followed in numerous decisions of the Supreme Court of NSW (and in courts of other states and territories).

Court of Appeal’s decision

The question in this case was whether the Supreme Court can exercise its supervisory jurisdiction to quash an adjudicator’s determination for errors of law on the face of the record.  There was no dispute between the parties that:

  1. the adjudicator had made errors of law in his adjudication determination; and
  2. the errors of law were not jurisdictional errors.

Under section 69(3) of the Supreme Court Act 1970 (NSW) (SC Act), the Supreme Court has a supervisory jurisdiction empowering it to quash determinations of courts and tribunals that include errors of law on the face of the record.

Section 69(5) of the SC Act provides that section 69(3) of the SC Act (power to quash determinations for error of law on the face of the record) does not “affect the operation of any legislative provision to the extent to which the provision is…effective to prevent the Court from exercising its powers to quash or otherwise review a decision.”

In essence, the Supreme Court can quash a determination of a court or tribunal (including an adjudication determination) unless there is a legislative provision that prevents the Court from doing so.

Ultimately, the Court of Appeal found that the Supreme Court cannot exercise that jurisdiction to quash adjudication determinations if there are only errors of law on the face of the record and that there must be jurisdictional error for the Court to intervene.

The Court of Appeal’s decision considered the tension between section 69(3) of the SC Act and the Security of Payment Act.  In arriving at its decision, the Court of Appeal observed the following.

  1. The Security of Payment Act does not provide for an appeal mechanism, which supports the view that errors of law (other than jurisdictional errors of law) should not be subject of review by Courts.  On the other hand, there is no section of the Security of Payment Act that expressly precludes the Supreme Court from reviewing adjudication determinations for errors of law on the face of the record (as apparently contemplated by section 69(5) of the SC Act).  To resolve this tension, the Court of Appeal considered the content, structure and practical operation of the Security of Payment Act.
  2. The procedure provided for by the Security of Payment Act would be undermined if the Supreme Court could review adjudication determinations for errors of law on the face of the record.  The effect of such reviews would be to stifle the objects and purpose of the Security of Payment Act, which is to provide a quick mechanism for payment disputes and maintain cashflow in the construction industry.
  3. Section 25(4) of the Security of Payment Act provides that an adjudication determination cannot be challenged and allowing an appeal under section 69(3) of the SC Act would be inconsistent with the Security of Payment Act, but the Court concluded that this was a relatively weak factor.
  4. The consistent approach of courts in New South Wales (and other states) has been to follow the decision in Brodyn that adjudication determinations cannot be quashed only for errors of law on the face of the record.  The Court of Appeal concluded that no sufficient reason has been put forward to doubt the decision in Brodyn (as to there being any ground other than jurisdictional error to quash an adjudication determination).

The Court of Appeal found that there was a legislative intention by the scheme of the Security of Payment Act that adjudication determinations would not be subject of review for non-jurisdictional errors of law.

Obiter comments in Lewence put to bed

Interestingly, the five-judge bench of the Court of Appeal in Shade Systems was entirely different to the composition of the three-judge bench of the Court of Appeal in Lewence Constructions Pty Ltd v Southern Han Breakfast Point Pty Ltd [2015] NSWCA 288.  The Lewence decision was handed down in September 2015.

The Lewence decision, which was not referred to in Shade Systems, was overturned by the High Court on 21 December 2016, but not for reasons going to the difference between the issue of jurisdictional error and non-jurisdictional error.

In the Lewence Court of Appeal decision, obiter comments were made to the effect that adjudication determinations could be quashed for errors of law on the face of the record.  That decision was made by their Honours Emmett JA (the judge at first instance in Shade Systems), Ward JA and Sackville AJA.

In Lewence:

  • Emmett JA made no reference to quashing the determination for an error of law on the face of the record, however (as noted above) Emmett JA was the judge in first instance in Shade Systems who determined that adjudication determinations could be quashed for errors of law on the face of the record.
  • Ward JA said at [71]:

“This Court was not taken to adjudicator’s reasons to suggest that there was any error of law on the face of the record in relation to the existence of an available reference date.”

It is implicit in the above that her Honour considered such an argument was available to quash an adjudication determination.

  • Sackville AJA said at [126]:

The footnote at [1] referred to section 69 of the SC Act, which sets out the supervisory jurisdiction of the Supreme Court to quash court or tribunal proceedings that include an error of law on the face of the record.  Accordingly, his Honour clearly envisaged that adjudication determinations could be quashed for errors of law on the face of the record.

Having regard to the above, on a purely speculative basis, there may have been a different outcome in Shade Systems if the Court of Appeal bench had been comprised of different judges.

Summary

Unless there is a jurisdictional error of law, an adjudication determination will not be quashed by the Supreme Court.  That is so even despite errors of law by an adjudicator in their determination.  This decision, like Brodyn, is likely to be followed in states and territories with similar legislative regimes (all states and territories except the NT and WA).

There is clearly some divergence of opinion within the Court of Appeal on this issue and the Court of Appeal in Shade Systems has placed great significance on the objects and purposes of the Security of Payment Act evincing an intention for section 69(3) of the SC Act not to apply to adjudication determinations.  There is clear acknowledgement in the Shade Systems decision of the tension between section 69(3) of the SC Act and the purpose of the Security of Payment Act.

The unanimous five-judge verdict in Shade Systems is a clear signal that the Court of Appeal does not want to or see the need to tinker with the precedent established in Brodyn (and the volume of authority that has followed that decision).

It appears that High Court intervention will now be required before errors of law on the face of the record mean that an adjudication determination can be quashed by courts in New South Wales.  The High Court first intervened in security of payment legislation on 21 December 2016.  In that decision, the High Court adopted a literal and plain English interpretation (rather than purposive) interpretation of the Security of Payment Act.  A similar approach to reviewing the Court of Appeal’s decision in Sun Shades may result in adjudication determinations being reviewable for non-jurisdictional errors of law.  However, until the High Court intervenes, non-jurisdictional errors of law under the Security of Payment Act have had the best days of their lives.

NSW Supreme Court confirms ability to quash adjudication determinations for non-jurisdictional errors of law

/in /by

The NSW Supreme Court in Probuild Constructions (Aust) Pty Ltd v Shade Systems Pty Ltd [2016] NSWSC 770 considered whether an adjudication determination under the Building and Construction Industry Security of Payment Act 1999 (NSW) (SoPA) could be subject to judicial review, in circumstances where an adjudicator has made a non-jurisdictional error of law on the face of the record.

Relevantly, the adjudicator had determined that Probuild Constructions (Aust) Pty Ltd (Probuild) was not entitled to liquidated damages claimed, the value of which surpassed the amount claimed by Shade Systems Pty Ltd (Shade Systems). Probuild submitted that the adjudicator’s determination involved a non-jurisdictional error of law, when considering the basis on which the adjudicator rejected Probuild’s claim for liquidated damages, and sought that the determination be quashed pursuant to section 69 of the Supreme Court Act 1970 (NSW).

Prior to this decision, Hodgson JA in Brodyn Pty Ltd t/as Time Cost and Quality v Davenport [2004] NSWCA 394 had held that the legislative intention of the SoPA and its mechanisms which provided for the fast determination of payment claims with minimal court involvement, meant adjudication determinations were not open to review for non-jurisdictional errors of law. In comparison, the High Court in Kirk v Industrial Court of New South Wales (2010) 239 CLR 531 held the NSW Supreme Court is able to grant relief in relation to jurisdictional errors, although did not address whether the same principles apply in respect of non-jurisdictional errors.

The court held that the comments of Hodgson JA were strictly obiter, and found that the SoPA does not implicitly or expressly exclude the operation of section 69 of the Supreme Court Act 1970 (NSW). The court stated at [73]:

The process of reconciliation must take account of the objects of the statute, which are undoubtedly to provide a simple and speedy process to ensure progress payments are made in a timely fashion. However, as a general rule, a constraint on jurisdiction expressly conferred on the court will require express language or at least a clear and unambiguous implication.

The court concluded that in determining Probuild was required to prove a default by Shade Systems before being entitled to liquidated damages, the adjudicator had made an error of law. The court ordered the determination be quashed and the matter be remitted to the adjudicator for further determination.

This decision has significant implications for all parties involved in a SoPA adjudication. Not only does this decision provide a further avenue for parties to challenge unfavourable adjudication determinations, but it undermines the finality and speed of determinations as adjudicators may be required to re-determine applications outside of the timeframes required by the SoPA.

Supreme Court reminder regarding multiple payment claims and supporting statements

/in /by

On 31 March 2016, the NSW Supreme Court handed down its decision in Kyle Bay Removals Pty Ltd v Dynabuild Project Services Pty Ltd [2016] NSWSC 334:

  1. confirming that, if a payment claim is made by a head contractor without attaching a valid supporting statement that all subcontractors have been paid, it will not be deemed to have been served in accordance with the Building and Construction Industry Security of Payment Act 1999 (NSW) (the Act); and
  2. providing interesting comments around section 13(5) of the Act regarding the prohibition on a claimant serving two payment claims in respect of the same reference date.

The case concerned an application by Kyle Bay Removals Pty Ltd (Removals) to set aside a statutory demand that had been served on it by Dynabuild Project Services Pty Ltd (Dynabuild) pursuant to an adjudication in Dynabuild’s favour for the amount of $408,841.56 that had been registered as a judgment in the District Court.  The adjudication stemmed from a payment claim served by Dynabuild on 23 November 2015 (the November Payment Claim).  Relevantly, Removals argued that the November Payment Claim served by Dynabuild was invalid as:

  1. the supporting statement was knowingly false regarding payment to two subcontractors; and
  2. it was served contrary to section 13(5) of the Act because an earlier payment claim (the September Payment Claim) had been served in respect of the same reference date.

Removals argued that the supporting statement accompanying the November Payment Claim was knowingly false in breach of section 13(8) of the Act, as the director of Dynabuild knew that there remained payments owing to two subcontractors.  The court found, on the evidence presented, that no false supporting statement had been served, notwithstanding that payment to one subcontractor was subject to a “payment agreement” under which the subcontractor would be paid periodically as Dynabuild was experiencing cash flow problems.

The contract between Removals and Dynabuild required Dynabuild to claim progressively on the “22 day of each month for the works done on and off site and materials on site to the 22 day of that month” until the final payment claim was made.

Removals argued the September Payment Claim was the ‘final’ payment claim made under the contract as:

  1. Dynabuild made a written request for the issue of a certificate of practical completion and issued the payment claim for works completed in September 2015 describing the works as “100% Complete” (the September Payment Claim), on the same day; and
  2. no work was undertaken after the September Payment Claim was served,

such that there could not have been any reference date after the September Payment Claim and so the November Payment Claim was made with respect to that earlier reference date.

The court held that the contract did not include a requirement that a payment claim could only be made if work had been completed in the preceding month. There was subsequently no issue with Dynabuild serving the November Payment Claim for works completed in earlier months as the contract entitled Dynabuild to make payment claims on the 22nd day of each month for work carried out under the contract to that date. The court was satisfied that the September Payment Claim and November Payment Claim were therefore in respect of different reference dates.

This decision turned on the drafting of the contract.  If the clause entitling Dynabuild to submit payment claims had specified that a payment claim could only be made in respect of work completed in the preceding month, and in fact no work had been completed during that period, the court indicated that its decision would be very different.  This case serves as a reminder to parties to pay particular attention to the clause entitling a contractor/subcontractor to submit:

  1. payment claims to ensure the clause is as wide or narrow as desired; and
  2. a final payment claim to ensure not only the contractor/subcontractor’s ability to claim but also that effective time bars are in place to prevent multiple ‘final’ payment claims being served.

Last chance to tell the NSW Government what you really think …

/in /by

This weekend witnessed thousands of Sydneysiders hitting the streets to protest against lockout laws.  While the Security of Payment Act (SOP) is unlikely to generate mass protests, it can often be the cause of frustration and irritation for all construction industry participants (for different reasons).  In any event, NSW Fair Trading has circumvented the need to hit the streets by the release of its Discussion Paper, calling for submissions in respect of the SOP Act from industry stakeholders.

Recent amendments to the NSW SOP Act

Effective from April 2014, a raft of amendments were made to the NSW SOP Act as a result of the Collins Inquiry into contractor insolvencies in the construction industry.  Those amendments included:

  • the introduction of mandatory payment time frames;
  • the introduction of a requirement for head contractors to provide a supporting statement with payment claims;
  • the removal of the requirement for a payment claim to state that it is a payment claim under the SOP Act; and
  • the introduction of the requirement for head contractors to hold retention money in a retention money trust account on projects with a value greater than $20 million (introduced by the Building and Construction Industry Security of Payment Amendment (Retention Money Trust Account) Regulation 2015 and effective from 1 May 2015).

Discussion paper

Fair Trading’s discussion paper is accessible at: http://www.fairtrading.nsw.gov.au/biz_res/ftweb/pdfs/About_us/Have_your_say/
Building_and_Construction_Industry_Security_of_Payment_Act_1999_Discussion_Paper.pdf), which is the beginning of the NSW Government’s full review of the SOP Act.

The Discussion Paper seeks submissions on a very broad range of issues, including issues such as whether:

  1. claims ought to be possible both up and down the contractor chain;
  2. the requirement for a payment claim to state that it is made under the SOP Act should be re-introduced;
  3. NSW should follow the Queensland legislation and introduce different time frames for the adjudication of high value payment claims;
  4. the current adjudication process and time frames are effective and appropriate;
  5. attempting to resolve a dispute by mediation should be a mandatory condition precedent to making an adjudication applications; and
  6. retention money trust accounts should be extended to all projects, not just those with a value greater than $20 million.

Essentially, it appears that nothing is off-limits in the review of the SOP Act.

Naturally, there will be contrasting experiences for principals, head contractors and subcontractors and each category of stakeholders will have different bugbears with the SOP Act.  The review provides industry stakeholders with a rare opportunity to directly lobby the NSW government, however time is running out.

The deadline for submissions to be lodged with NSW Fair Trading is Friday, 26 February 2016.  If you would like assistance in preparing submissions, please do not hesitate to contact us.

Respondents despondent as the Court of Appeal further narrows scope for judicial review

/in /by

In an important decision for adjudications in New South Wales, the Court of Appeal has determined that the existence of a reference date is not a “jurisdictional fact” that warrants intervention by the Courts.  The decision of Lewence Constructions Pty Ltd v Southern Han Breakfast Point Pty Ltd [2015] NSWCA 288 marks an about turn from previous Supreme Court decisions where adjudication determinations have been quashed for lack of a reference date1.  In a unanimous decision, the Court of Appeal has determined that the existence of a reference date is a matter to be determined by the adjudicator, not the Court.

Relevant sections of the Security of Payment Act

Essentially, the Court considered the effect of sections 8 and 13 of the Act.

The Court of Appeal considered the extent to which “On and from each reference date” in section 8(1) of the Act was an essential pre-condition for making a payment claim.  The Court found that it was not.

The Court placed emphasis on the words “or claims to be” in section 13(1) of the Act to support the finding that a dispute as to a person’s entitlement to a progress payment (including whether or not a reference date existed) does not preclude the making of a valid payment claim.

The role of the adjudicator

It is a matter for the adjudicator to determine when a reference date arises under a contract or the Act.  Unless it can be established that the payment claim is the second payment claim in respect of the same reference date (in which case the second payment claim cannot be validly served), the adjudicator’s determination as to the existence of a reference date cannot be subject of judicial review.

In theory, respondents now have one less reason to apply to the Supreme Court if they are dissatisfied with the adjudicator’s determination.

Having said that, practically speaking, a typical reason for a respondent to assert that there is no reference date for a payment claim is because the payment claim is alleged to be the second payment claim in respect of the same reference date, in breach of section 13(5) of the Act.  The Court of Appeal has confirmed that section 13(5) of the Security of Payment Act prevents more than one payment claim being served in respect of the same reference date and therefore is a jurisdictional fact capable of judicial review.  It is likely that dissatisfied respondents will now alter the approach adopted when applying for judicial review to assert a breach of section 13(5) of the Act, rather than asserting that no reference date existed to make the payment claim.

The construction contract

As previously discussed in our article entitled “Contractors beware: risk of no reference dates after termination”, whether reference dates accrue after termination of a contract depends on the words of the contract.

If the contract makes no provision for reference dates, statutory reference dates under the Security of Payment Act apply and continue to apply after termination of the contract (see our article entitled “The importance of unequivocal termination of construction contracts in the eyes of Security of Payment legislation”).

If the contract makes provision for reference dates, whether reference dates continue to accrue after termination will require an interpretation of the contract by an adjudicator.  To avoid ambiguity, construction contracts should clearly state whether the accrual of reference dates survives termination of the contract.

Far reaching consequences for the validity of payment claims?

The Court of Appeal’s reasoning (at paragraph 93, Ward JA (and similarly at paragraph 120, Emmett JA)) is likely to have even more far reaching consequences than set out above because the Court said:

“The appellant was a person who claimed entitlement under the construction contract to progress payments in the general sense contemplated by the Act.  It satisfied the description in s 8(1)(a) and (b).  Whether that claim was valid (including whether it was valid because it was supported by a reference date) is not a jurisdictional fact.”

On its face, the word “claim” in the above paragraph may be interpreted as a reference to a payment claim and therefore a finding that an invalid payment claim (for whatever reason) does not warrant judicial intervention.  Further, in paragraph 136, Sackville AJA said:

“If s 13(1) of the Act is construed as I think it should be, it permits a claimant to serve a valid payment claim if the following conditions are satisfied:

  • the claimant has undertaken to carry out construction work under a construction contract (or has undertaken to supply goods and services under the contract);
  • the claimant is or claims to be entitled to a progress claim under the construction contract; and
  • the claim is served on the person who, under the construction contract concerned, is or may be liable to make the payment.”

A question remains whether a payment claim must comply with section 13(2) of the Act for it to be a valid payment claim and therefore invoke the jurisdiction of the Act.  For example, a payment claim that does not sufficiently identify the construction work claimed or does not claim a particular amount was previously considered to be invalid and a jurisdictional fact capable of judicial review2.

On the face of the Court of Appeal’s judgment, it appears that compliance with section 13(2) of the Act is not a jurisdictional fact and, therefore, whether or not a payment claim complies with section 13(2) of the Act is a matter for the adjudicator that cannot be subject of judicial review.  It is likely that this issue will be the subject of further litigation before the Supreme Court.

Payment claims

It follows from the Court of Appeal’s judgment that, to avoid falling foul of a jurisdictional fact, a payment claim under the Security of Payment Act must, at a minimum, be:

  1. made by a person who has entered into a construction contract (as that term is broadly defined in the Security of Payment Act);
  2. made by a person who has undertaken to carry out construction work or related goods and services;
  3. made by a person who is or, who claims to be, entitled to a progress payment (irrespective of whether or not there exists a reference date or the person, in fact, has any entitlement); and
  4. validly served on the person who is liable to make payment, which includes that:
    – the payment claim must be served in accordance with the requirements of the construction contract or the Act;
    – the payment claim must not be the second payment claim in respect of the same reference date; and
    – if the payment claim is made by a head contractor to a principal, the payment claim attaches a supporting statement in the form prescribed by the Security of Payment Act and that supporting statement cannot be false or misleading in a material particular.

1 Including the recent decisions in Patrick Stevedores Operations No 2 Pty Ltd v McConnell Dowell Constructors (Aust) Pty Ltd [2014] NSWSC 1413 and Omega House Pty Ltd v Khouzame [2014] NSWSC 1837

2 As summarised by Palmer J in Brookhollow Pty Ltd v R & R Consultants Pty Ltd [2006] NSWSC 1