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

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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

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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

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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

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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 …

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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

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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

Half-time, change sides! – invalid payment claims and the ‘net’ damage to respondents

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The recent Supreme Court of New South Wales decision in The New South Wales Netball Association Ltd v Probuild Construction (Aust) Pty Ltd [2015] NSWSC 1339 highlights the often fickle strategies adopted by parties to jurisdictional disputes under the Building and Construction Industry Security of Payment Act 1999 (NSW) (SOP Act). The dispute concerned the construction of the “Netball Centre of Excellence” at Sydney Olympic Park.

Most jurisdictional arguments take place after an adjudication determination has been made. In those cases, the respondent asserts that an adjudicator did not have jurisdiction to make a determination and the claimant argues that the adjudicator did have jurisdiction. The respondent usually awaits the adjudication determination to assess the commercial merits of applying to the Court for relief.

The NSW Netball case was slightly different because NSW Netball (the respondent) applied to the Court before the amount determined was known (in an effort to avoid the unrecoverable costs of preparing an adjudication response).

Before the determination

Probuild (the claimant) issued payment claim #23 on 5 January 2015, which was made under cover of a document describing it as a “draft claim” (Claim 23), and payment claim # 24 on 2 March 2015 (Claim 24), both in respect of the same reference date.

NSW Netball issued a payment schedule to Probuild in response to each payment claim, on each occasion scheduling an amount payable of $Nil, stating that each claim was invalid.

Probuild lodged an adjudication application in respect of Claim 24 only. Shortly thereafter, NSW Netball commenced the proceedings seeking to restrain the adjudicator from determining the adjudication application. In that hearing before the Court:

  • despite asserting in the payment schedule to Claim 23 that Claim 23 was not a valid payment claim, NSW Netball argued, as it had thereafter done in its adjudication response, that Claim 24 was the second payment claim in respect of the same reference date and, therefore, not a valid payment claim under the Act; and
  • Probuild argued that Claim 24 was not the second payment claim in respect of the same reference date and was a valid payment claim under the Act. Probuild described NSW Netball’s case that Claim 24 was the second payment claim in respect of the same reference date as “very weak”.

The Court restrained Probuild from enforcing any adjudication certificate until further order of the Court, but allowed the adjudicator to determine the application. The Court considered that the balance of convenience favoured not restraining the adjudicator from making a determination because, notwithstanding that NSW Netball may incur significant costs in preparing the adjudication response, the Court is not empowered to amend the strict timetable under the SOP Act and so Probuild would be deprived of its rights under the SOP Act if a determination was not made. Probuild also provided an undertaking that it would pay all of the adjudicator’s fees if NSW Netball was successful in the proceedings.

NSW Netball amended its List Statement to take into account the interim orders made by the Court. Probuild’s defence to NSW Netball’s Amended List Statement was due the day after the adjudicator made her determination.

The effect of the determination

Crucially, the adjudicator determined that Probuild was entitled to only $124,599.23 (less than 2% of the $10,380,083.42 claimed). Suddenly, the commercial interests of both parties were reversed and the parties unashamedly altered their positions accordingly.

  • In stark contrast to the adjudication application and submissions previously made to the Court, Probuild amended its List Response to ‘admit’ that Claim 24 was invalid and the adjudicator had no jurisdiction. Probuild sought orders quashing the determination.
  • NSW Netball was granted leave to discontinue its claim that the determination should be quashed. By way of defence to Probuild’s claim, NSW Netball asserted that Probuild’s claim should be refused because of its approbation and reprobation, ie adoption of contradictory positions, and relief should be withheld because of Probuild’s bad faith and want of clean hands. NSW Netball also claimed damages to the extent that Probuild obtained the relief it sought.

Decision

His Honour Justice Stevenson accepted that Probuild had “certainly been opportunist” and acknowledged the principle at law that a party to litigation “cannot have it both ways”.

The Court found (and both parties agreed) that Claim 23 was a valid payment claim for the purposes of the SOP Act. As such, Claim 24 arose in respect of the same reference date and was served in contravention of s 13(5) of the SOP Act. Consequently, the Court found that the adjudicator did not have jurisdiction to make the determination, so the decision was a nullity, irrespective of whether the Court refused to grant the relief sought by NSW Netball. A relevant factor was that one further reference date under the contract was due to accrue and, the failure to grant the relief sought by Probuild would not affect the invalidity of the adjudication determination, it would only muddy the waters for the next adjudicator.

The Court quashed the adjudicator’s determination.

Damages for adjudication costs

NSW Netball sought damages for the costs that it had incurred to prepare the adjudication response in the amount of approximately $100,000. The claim was made under the Australian Consumer Law for misleading and deceptive conduct, as a result of alleged representations that Probuild’s payment claim was validly made and that NSW Netball was forced to respond to the claim or Probuild would enforce an adjudication determination as a judgment.

The Court rejected this claim, finding that Probuild had merely claimed to be entitled to the amount claimed in the payment claim and did not make representations to that effect. The Court noted established Court of Appeal authority that a bona fide belief was not required to serve a payment claim. Further, the Court did not accept that NSW Netball had incurred the damages ‘because of’ what was stated in the adjudication application, but because it did not agree with what was stated in the adjudication application and because of the requirements of the SOP Act.

Notes from this decision

  1. Jurisdiction under the SOP Act is a matter of law. Parties cannot consent to jurisdiction conferred by statute. Notwithstanding, the position adopted by parties to such disputes is, naturally, determined by the commercial upside to that party of a determination being upheld or quashed. That is made crystal clear by this case.
  2. The Court will not look favourably on parties that flip flop on their positions, but the paramount considerations by the Court will be whether or not the adjudicator had jurisdiction at law and the effect of relief in circumstances where a decision is made without jurisdiction and therefore a nullity.
  3. It would seem unfair that a respondent can be put to significant unrecoverable cost in responding to an adjudication application that is based on an invalid payment claim or some other jurisdictional defect. That is often down to an error by the claimant, as in this case. Although Probuild agreed to pay the adjudicator’s fees, NSW Netball has still incurred $100,000 in preparing the adjudication response that it will never recover.
  4. The SOP Act is a no costs jurisdiction. As the Court found in this case, a respondent is not required by an adjudication application to prepare an adjudication response. However, irrespective of the strength of a respondent’s jurisdictional arguments, it would be folly for respondents to elect not to rely on a fulsome adjudication response on the basis that they consider the application to be jurisdictionally flawed. It is inevitable that parties will expend significant sums on consultant and legal fees to prepare an adjudication response when the alternative is being liable for millions of dollars.

Invalid payment claims – respondents between a rock and a hard place

It is undeniable that a respondent who is served with, what it perceives to be, an invalid payment claim is placed in a no-win situation. The respondent must go to the expense of preparing a proper payment schedule and adjudication response to protect its position, with much of that work ultimately rendered irrelevant by the invalidity of a payment claim.

A respondent that is served with a payment claim that it considers is jurisdictionally flawed should carefully consider whether to seek injunctive relief upon receipt of the payment claim and seek an expedited hearing before the timetable for adjudication under the SOP Act advances.

While the Court may be reluctant to expedite the matter, the alternative is that the respondent is unfairly punished by incurring significant costs in preparing an adjudication response in respect of a payment claim that was never valid in the first place.

‘Accrual’ reminder for developers

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The recent Supreme Court decision of Broadview Windows Pty Ltd v Architectural Project Specialists Pty Ltd [2015] NSWSC 955 again demonstrates the contrast between the security of payment statutory regime for the accrual of reference dates and the corresponding rights under a typical contract, and the consequences for builders and developers alike.

Broadview Windows concerned whether the claimant had made more than one payment claim in respect of the same reference date, which is prohibited under section 13(5) of the Building and Construction Industry Security of Payment Act 1999 (NSW) (Act).

Reference dates

Section 8 of the Act states that a person who has carried out construction work or supplied related goods and services is entitled to a progress payment “on and from each reference date”.

A reference date is to be determined in accordance with the contract as the date on which a progress claim can be made for work carried out or undertaken to be carried out. If the contract does not “make express provision” for a reference date, section 8 of the Act provides that the reference date is the last day of the named month in which construction work was first carried out and the last day of each subsequent month.

Typical contractual regime v statutory regime

In Broadview Windows, the contract was formed by an acceptance of a quote and, unsurprisingly, the contract did not make express provision for a reference date. The reference date was therefore, in accordance with the Act, the last day of each month.

The work under the contract was completed by the end of August 2014. The claimant made two subsequent payment claims on 24 November 2014 and 23 February 2015 and proceeded to adjudication on the second payment claim. The respondent applied to the Court for an order quashing the adjudication determination because it claimed that the second payment claim was in respect of the same reference date (as the first payment claim).

The Court dismissed the respondent’s claim and affirmed the position that, under the statutory regime, reference dates continue to accrue on a monthly basis until 12 months after the construction work to which the claim relates was last carried out (as per section 13(4) of the Act).

Unintended benefits for builders

As we have noted in recent updates, the absence of express reference dates in a construction contract can (and often unintentionally does) have benefits for builders.

  1. If a contract is terminated, reference dates continue to accrue under the statutory regime, thereby entitling a builder to make a payment claim after termination and enabling a builder to apply for adjudication if unsatisfied by the principal’s payment schedule. In contrast, contracts rarely expressly state that the accrual of reference dates survives termination and therefore the builder’s right to make further payment claims in accordance with the Act is terminated with the contract.
  2. As can be seen in Broadview Windows, the statutory regime entitles the making of a payment claim each month, even where no work has been carried out. The only limitation on this period is the 12 month period after completion of the construction work. Accordingly, a builder can continue to make payment claims (including for the same work) each month, up to a year after work has been completed. Conversely, typically a contract will limit an entitlement to make a payment claim to the months in which work under the contract is being undertaken and a final payment claim (usually at the expiration of any defects liability period).

The recent decisions of the Supreme Court exemplify the need for principals and head contractors to make express provision for reference dates in contracts. Although this usually occurs, Broadview Windows, where the contract was formed by the acceptance of a quote, demonstrates the potential adverse consequences for a principal or head contractor of lax contract documentation.

The importance of unequivocal termination of construction contracts in the eyes of Security of Payment legislation

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A series of recent NSW Supreme Court decisions have highlighted just how important timing can be when it comes to constructions contracts and their termination.  The court has confirmed that where the relevant construction contract includes a reference date (as contemplated by section 8(2) of the Building and Construction Industry Security of Payment Act 1999 (NSW) (Act), reference dates do not continue to accrue under the Act after termination.

The recent Supreme Court decision in Illawarra Retirement Trust v Denham Constructions Pty Ltd [2015] NSWSC 823 is a stark reminder of the importance of unequivocally communicating the time for termination of construction contracts and the adverse consequences of failing to do so.

In Illawarra Retirement Trust, the principal sought to terminate the contract at its convenience by the issue of a notice of termination, in accordance with the contract.  There was no dispute that the principal was entitled to terminate for its convenience, however the principal’s notice of termination did not specify a time for termination, only that the notice was “with effect from Friday, 29 May 2015”.

A dispute arose as to the date that the contract was, in fact, terminated.  The date that the contract was terminated was important because the contractor had made a payment claim on 29 May 2015.  The principal asserted that the contract had been terminated on 28 May 2015 and so there was no reference date to make the payment claim on 29 May 2015.  Conversely, the contractor asserted that the contract had been terminated on 29 May 2015 and so there was a reference date to make the payment claim.

His Honour Justice Darke determined that the date of termination, objectively understood by the notice of termination, was at the conclusion of 28 May 2015.  However, his Honour also reviewed correspondence between the principal and the contractor after the issue of the notice of termination.  That correspondence concerned, amongst other things, the last of the contractor’s contract works, the contractor’s insurances and obligations as principal contractor for the site, all of which were stated to be concluded on 29 May 2015.  By this correspondence, his Honour found that there had been a subsequent agreement that the termination would occur at the conclusion of 29 May 2015.

As a result, there was a reference date to enable the contractor to make a payment claim on 29 May 2015.  The principal’s application for an injunction preventing the contractor from proceeding to adjudication on the payment claims was dismissed.

Ensuring a clear termination date

Principals can ensure that they clearly and unequivocally terminate their construction contract by:

  1. strictly following the procedure set out in the contract, including compliance with the regime for the form and service of required notices;
  2. in notices, stating a time and date that termination of the contract will take effect; and
  3. so as to avoid any inference to the contrary, adhering to the date of termination in any subsequent correspondence and requiring the contractor to act in accordance with the date of termination.

No reference dates after termination

As discussed in our previous article entitled “Contractors beware: risk of no reference dates after termination”, the Supreme Court has confirmed that, where a contract provides for reference dates, unless the clause providing for reference dates is expressed to survive termination of the contract, no reference dates will arise after termination of the contract.

This position has been reinforced in the subsequent Supreme Court decisions of Southern Han Breakfast Point Pty Limited v Lewence Constructions Pty Limited [2015] NSWSC 502 and Veer Build Pty Limited v TCA Electrical and Communication Pty Ltd [2015] NSWSC 864.  Further, in Illawarra, his Honour said: “The defendant advanced an alternative argument that, even if the contract had terminated immediately prior to 29 May 2015, s 8(2)(b) of the Act would operate to provide a further reference date on the last day of May. I think that argument faces considerable difficulties, but in view of my conclusion about the time of termination, it is not necessary to deal with it.”

Accordingly, it is important for contractors, particularly in contracts with termination for convenience clauses, to include either a clause providing for reference dates to survive termination of the contract or a clause requiring the principal to give notice of its intention to terminate the contract for its convenience.

A failure to include either of these clauses may result in a contractor losing its entitlement to make a further payment claim under the Act.

The end of the road for retention moneys on large projects?

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Head contractors who enter into construction contracts with subcontractors after 1 May 2015 on projects with a value of more than $20 million must hold retention money retained as security in a retention money trust account.

The introduction of retention money trust accounts arises out of the Building and Construction Industry Security of Payment Amendment (Retention Money Trust Account) Regulation 2015 (“Amending Regulation”) published in March 2015.

The Amending Regulation imposes burdensome and costly administrative obligations and reporting requirements on head contractors, which will almost certainly result in the increased use of insurance bonds and bank guarantees as security under construction contracts. Typically, insurance bonds and bank guarantees are the favoured form of security for head contractors, however the introduction of the Amending Regulation is likely to signal the death knell for retention money being used as security under contracts between head contractors and subcontractors.

Scope of the Amending Regulation

The Amending Regulation applies to retention moneys held by a head contractor under its contracts with subcontractors where the value of the contract between the principal and the head contractor exceeds $20 million, ie the “project value”.

If the project value exceeds $20 million during the course of the project, most likely pursuant to variations of the head contract, the Amending Regulation applies to contracts entered into by the head contractor after the date that the project value exceeded $20 million.

Interestingly, notwithstanding the definition of ‘head contractor’ under the Security of Payment Act, the Amending Regulation appears to contemplate that there will only be one head contractor on a construction project.

Retention Money Trust Accounts

The Amending Regulation provides that retention money must be held by the head contractor in a trust account established with an approved deposit-taking institution.

A head contractor is only entitled to withdraw from a trust account if:

  1. it is to pay money in accordance with the terms of the construction contract under which the money was retained by the head contractor;
  2. as agreed in writing by the head contractor and the subcontractor concerned; or
  3. in accordance with an order of a court or tribunal.

Importantly, from the subcontractor’s point of view, the money held in the retention trust account cannot be used to pay any debts of the head contractor and is not liable to be taken as satisfying a judgment debt owed by a head contractor, eg a garnishee order against the trust account.

Administration

The Amending Regulation requires compliance with a number of administrative obligations, by head contractors in particular, including:

  1. notifying the Chief Executive of the Office of Finance and Services (“Chief Executive”) when a trust account is opened, becomes overdrawn or is closed;
  2. retaining records in relation to a trust money account for three years after the closure of the trust money account;
  3. preparing annual account review reports and retention account statements in respect of the trust account; and
  4. paying an annual fee of $1,500 to the Chief Executive to review the account review reports and retention account statements.

A failure to comply with the administrative obligations in respect of a retention money trust account, typically, results in a maximum penalty of $22,000.

Implications and Public Policy

The introduction of the Amending Regulation is a response to the inquiry conducted by Bruce Collins QC into contractor insolvencies, which was commissioned by the NSW Government. One of the findings of the Collins Report was that some head contractors were misappropriating retention money and using the retention money, supposedly provided as security by subcontractors, to boost their cash flow.

Inevitably, this had adverse consequences for subcontractors whenever a head contractor encountered financial difficulties and subcontractors were often out of pocket in head contractor insolvencies.

Undoubtedly, with respect to larger projects, the Amending Regulation should achieve the public policy aim of preventing head contractors from misappropriating retention moneys, primarily because very few head contractors will elect to use retention moneys. The Amending Regulation will drive most head contractors to require their subcontractors to use insurance bonds or bank guarantees, thus avoiding the scope of the Amending Regulation.

To the extent that head contractors intend to use retention moneys as security, they should consider whether the Amending Regulation may apply and, if so, they should remain mindful of their obligations to avoid incurring penalties.