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

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

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

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

The facts

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

“the Principal may by written notice to the Contractor:

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

(b) terminate the Contract.”

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

Then:

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

In response, the principal scheduled “$Nil”.

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

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

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

Suspension and payment claims

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

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

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

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

Second Adjudication

Jurisdictional error

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

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

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

Making a second application

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

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

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

Conclusion

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

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

 

 

CHANGE HAS ARRIVED

Amendments to the Building and Construction Industry Security of Payment Act are finally in force

Late last month changes to the Building and Construction Industry Security of Payment Act 1999 (Act)’ (‘the Act’) came into effect under the Building and Construction Industry Security of Payment Amendment Act 2018 (‘the amendments’), passed in November 2018.
The overarching purpose of the amendments is to address issues of insolvency and late-payments within the industry. They aim to alleviate the impact of these issues on small businesses and subcontractors by promoting cash flow and greater transparency in the contracting chain.
Our regular readers may recall, we have been discussing these changes and their potential consequences over the course of the year, but here is a refresher now that the amendments are in force.

What do the changes mean again?
As of 21 October 2019 the amendments are effective and apply prospectively to all building and construction as contracts covered by the Act, entered into on or after this date.
The changes are extensive and place significant new responsibilities on parties within the NSW building and construction industry. In broad terms, the legislative changes cover the following points:

Investigation, Enforcement and Penalties

Officers of the Department of Finance Services and Innovation have been given a suite of new powers to investigate monitor and enforce compliance with the Act, including but not limited to powers of entry to premises to gather information.
Directors and managers may now be personally prosecuted in circumstances where a corporation has committed an offence, under new provisions introducing the concept of executive liability.
Tougher maximum penalties have been applied, particularly when supporting statements are not supplied.

Adjudication

Confirming previous decisions of the Court, the amendments confirm jurisdictional errors made by adjudicators are now reviewable by the Supreme Court, with the power to effectively ‘carve’ out the invalid sections of adjudicator’s decisions.
The amendments also provide parties with an option to withdraw their application for adjudication in circumstances where the adjudicator is not yet appointed. In circumstances where the adjudicator has been appointed, parties are still able to object to the adjudication application being determined.

Progress Claims and Progress Payments

The amendments have removed the concept of the reference date in making a progress claim, and the due date for payments to subcontractors has been reduced from 30 business days to 20 business days.
The amendments again require payment claims to state that they are in fact payment claims made under the Act.

Conclusion

The changes have far reaching consequences for parties operating within the building and construction industry. It is important for all parties operating within the industry to be aware of the changes and the way in which the amendments may affect their rights and obligations under building and construction contracts.
For an in-depth review of each amendment please see our detailed review on the changes here.
If you or someone you know wants more information or needs help or advice in relation to NSW’s security of payments legislation, please contact us( 02) 9248 3450 or email info@bradburylegal.com.au.