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What’s in a name?: The Supreme Court Reviews ambiguity in SoPA Payment Claims

Those who are familiar with the Building and Construction Industry Security of Payment Act 1999 (‘the Act’) will likely be aware that the provisions it contains are quite strict, and can leave parties out in the cold when they fail to comply with what are seemingly administrative oversights.

However, the overarching purpose of the Act is ultimately to keep money flowing through the construction system, aimed at ensuring those who perform building and construction works, or supply goods and services to construction projects are able to be paid.

The Supreme Court of New South Wales, in the recent decision of decision Modog Pty Ltd v ZS Constructions (Queenscliff) Pty Ltd [2019] NSWSC 1743 reminded parties of this fact when asked to turn its mind to issues of ambiguity in payment claims and whether a party could be allowed to have an adjudication determination quashed on the basis of technicalities.

The Facts

The facts of the case were reasonably clear and did not form a substantial component of the dispute between the parties. In September 2016, Modog Pty Ltd (‘Modog’) entered into a design and construct head contract with Wyndora 36 Pty Ltd (‘Wyndora’) for the development of senior living apartments at a property located along Wyndora Avenue in Freshwater. Modog then entered a sub-contract with ZS Constructions (Queenscliff) Pty Limited (ZS Queenscliff) for the demolition of the existing structure and the construction of the new seniors living complex, including apartments, basement parking and associated site works (‘the Sub-Contract’).

In March 2018, the Sub-contract was varied to engage ZS Queenscliff to provide Construction Management and procurement services, for which ZS Queenscliff would receive a project manager’s allowance, a contract administrator’s allowance and payments for subcontractors and suppliers to be made at the end of each month.

ZS Queenscliff was part of a wider group of entities, which also included ZS Constructions (Australia) Pty Ltd (‘ZS Australia’) and Zaarour Investments Pty Ltd had been engaged as the project manager for the project. Mr Christopher Zaarour was employed by ZS Queenscliff, was the director of ZS Constructions Pty Ltd and was the primary contact with Modog for the duration of the project.

The further sub-contracts on the project were administered by ZS Queenscliff, however invoices from sub-contractors had historically been issued to a mixture of Modog, Wyndora and ZS Australia, as opposed to ZS Queenscliff. During the course of the project, ZS Queenscliff and Modog adopted a progress payments process in which Mr Zaarour would, on behalf of ZS Queenscliff, prepare and email a payment summary sheet listing all amounts due for procurement and management services, as well as materials acquired, and work completed by trade contractors.

On 29 August 2019, Modog issued a Show Cause Notice to ZS Queenscliff and terminated the Sub-contract on 13 September 2019.

The Payment Claim and Adjudication

On 11 September 2019, ZS Queenscliff served a payment claim on Modog which was comprised of seven emails, from Mr Zaarour using an email signature from Zaarour Sleiman and containing a reference to ZS Australia in fine print at the bottom of the email.

The emails attached supporting invoices from suppliers, and followed the process adopted in earlier progress payments, where sub-contractors and suppliers had addressed their invoices to a mixture of the entities involved with the project, and not to ZS Queenscliff, who were issuing the payment claim.

The payment claim served on Modog was, as highlighted by the Court, unclear in the following respects:

  • It did not specifically assert that it was a progress payment claim under the Act;
  • It did not specify the reference date or refer to the clause within the contract upon which the progress payment was based;
  • It failed to ask Modog to pay ZS Queenscliff;
  • It did not include a total for the sum claimed, only determinable by a thorough review of the claims

Modog, in turn responded to the payment claim with payment schedules which certified the amount payable in respect of the Claim was nil.

The matter proceeded to an adjudication, where, on 23 October 2019, the adjudicator found in favour of ZS Queenscliff in the sum of $89,111.89 (GST incl.).

Modog challenged the decision of the adjudicator before the Supreme Court of Sydney, seeking orders that the Adjudication Determination of be deemed void, that the determination be quashed, and ancillary relief.

The Disputed Issues

At the hearing, Modog challenged the decision of the adjudicator on 3 primary grounds:

  • Whether the 11 September 2019 emails constituted a payment claim within the meaning of s13(1) of the Act;
  • If the emails did constitute a payment claim, whether the claim was sent by ZS Queenscliff as a person who was entitled to seek a determination for the purposes of s17 of the Act; and
  • Whether the Adjudicator has committed a jurisdictional error by allowing multiple payment claims in respect of a single reference date?

The Arguments, Decision and Reasoning

Issue 1: Was there a Payment Claim:

The argument advanced by Modog was effectively, ZS Queenscliff had not submitted a valid payment claim as they did not specifically demand payment from Modog (i.e.: did not say, Modog must pay ZS Queenscliff the sum of $X.). Modog relied on the fact that the invoices provided in support of the payment claim, were addressed to various entities, not ZS Queenscliff, and that ZS Queenscliff could not establish they were actually entitled to the money claimed for.

Modog argued that ZS Queenscliff had indicated invoices would be sent at a later time, which Modog was to pay as directed and that, pursuant to the Court’s decision in Quickway Constructions Pty Ltd v Electrical Energy Pty Ltd, ZS Queenscliff had not served a payment claim pursuant to clause 13(1) of the Act.

The counter argument raised by ZS Queenscliff relied upon the case of Icon Co NSW Pty Ltd v Australia Avenue Developments Pty Ltd [2018] to support their position that Modog had simply misunderstood the payment claim, and that this could not be a basis for quashing the adjudicator’s decision. ZS Queenscliff argued the fact that the invoices were addressed to other parties did not invalidate the payment claim as they were simply disbursements to be paid to suppliers.

Ultimately, the Court favoured the position raised by ZS Queenscliff, noting there is nothing within the Act that requires a payment claim to state the total of the sum claimed. The Court stated and that even if the invoices in support of the payment did require Modog to direct payment elsewhere, as long as ZS Queenscliff had an entitlement to the sum under the contract, this did not invalidate the payment claim itself.

Issue 2: Was the Payment Claim Sent by ZS Queenscliff?

Modog then raised the issue that, as the 11 September 2019 email enclosing the payment claim was sent by Mr. Zaarour, using an email signature that did not belong to ZS Queenscliff, and the only legal entity named in the email was ZS Australia, the payment claim had not been served by the appropriate entity for the purposes of s17 of the Act.

The counter argument raised by ZS Queenscliff was that these errors were irrelevant in light of the fact that the previous correspondence between the parties had been exchanged in much the same way, including when detailing the terms of the caries contract agreements, and the point was not taken at the contract negotiation stage.

The Court ultimately agreed again with ZS Queenscliff, making the point that not was not actually disputed that ZS Queenscliff was entitled to make the payment claim and made the determination that the email payment claim had simply been sent by Mr Zaarrour in his capacity as the project manager, on behalf of ZS Queenscliff.

Issue 3: Was there an issue with multiple emails being used to comprise the payment claim?

Finally, Modog sought to raise the point that multiple invoices had been served on them in the emails from ZS Queenscliff and that it was not open for ZS Queenscliff to seek to have all invoices adjudicated.

Relying on the decision of the court in Rail Corporations of NSW v Nebax Constructions [2012] NSWSC6, this point ultimately failed as well, on the basis that, when viewed in the context of the previous conduct between the parties, and the nature of the invoices supplied, Modog had been more accurately provided with one payment claim, and a number of invoices in support of the claim.

What does this decision mean?

This decision serves as a timely reminder to parties that the Building and Construction Industry Security of Payment Act 1999 (‘the Act’) is intended to allow money to flow through to sub-contractors. Parties should be mindful of this purpose when considering whether to attempt to argue a payment claim on the basis of a minor technicality or ambiguity.

If you or someone you know wants more information or needs help or advice in relation to NSW’s security of payment legislation (or any other state’s or territory’s equivalent), please contact us on (02) 9248 3450 or email info@bradburylegal.com.au.

What’s in a name?: The Supreme Court Reviews ambiguity in SoPA Payment Claims

Those who are familiar with the Building and Construction Industry Security of Payment Act 1999 (‘the Act’) will likely be aware that the provisions it contains are quite strict, and can leave parties out in the cold when they fail to comply with what are seemingly administrative oversights.

However, the overarching purpose of the Act is ultimately to keep money flowing through the construction system, aimed at ensuring those who perform building and construction works, or supply goods and services to construction projects are able to be paid.

The Supreme Court of New South Wales, in the recent decision of decision Modog Pty Ltd v ZS Constructions (Queenscliff) Pty Ltd [2019] NSWSC 1743 reminded parties of this fact when asked to turn its mind to issues of ambiguity in payment claims and whether a party could be allowed to have an adjudication determination quashed on the basis of technicalities.

The Facts

The facts of the case were reasonably clear and did not form a substantial component of the dispute between the parties. In September 2016, Modog Pty Ltd (‘Modog’) entered into a design and construct head contract with Wyndora 36 Pty Ltd (‘Wyndora’) for the development of senior living apartments at a property located along Wyndora Avenue in Freshwater. Modog then entered a sub-contract with ZS Constructions (Queenscliff) Pty Limited (ZS Queenscliff) for the demolition of the existing structure and the construction of the new seniors living complex, including apartments, basement parking and associated site works (‘the Sub-Contract’).

In March 2018, the Sub-contract was varied to engage ZS Queenscliff to provide Construction Management and procurement services, for which ZS Queenscliff would receive a project manager’s allowance, a contract administrator’s allowance and payments for subcontractors and suppliers to be made at the end of each month.

ZS Queenscliff was part of a wider group of entities, which also included ZS Constructions (Australia) Pty Ltd (‘ZS Australia’) and Zaarour Investments Pty Ltd had been engaged as the project manager for the project. Mr Christopher Zaarour was employed by ZS Queenscliff, was the director of ZS Constructions Pty Ltd and was the primary contact with Modog for the duration of the project.

The further sub-contracts on the project were administered by ZS Queenscliff, however invoices from sub-contractors had historically been issued to a mixture of Modog, Wyndora and ZS Australia, as opposed to ZS Queenscliff. During the course of the project, ZS Queenscliff and Modog adopted a progress payments process in which Mr Zaarour would, on behalf of ZS Queenscliff, prepare and email a payment summary sheet listing all amounts due for procurement and management services, as well as materials acquired, and work completed by trade contractors.

On 29 August 2019, Modog issued a Show Cause Notice to ZS Queenscliff and terminated the Sub-contract on 13 September 2019.

The Payment Claim and Adjudication

On 11 September 2019, ZS Queenscliff served a payment claim on Modog which was comprised of seven emails, from Mr Zaarour using an email signature from Zaarour Sleiman and containing a reference to ZS Australia in fine print at the bottom of the email.

The emails attached supporting invoices from suppliers, and followed the process adopted in earlier progress payments, where sub-contractors and suppliers had addressed their invoices to a mixture of the entities involved with the project, and not to ZS Queenscliff, who were issuing the payment claim.

The payment claim served on Modog was, as highlighted by the Court, unclear in the following respects:

  • It did not specifically assert that it was a progress payment claim under the Act;
  • It did not specify the reference date or refer to the clause within the contract upon which the progress payment was based;
  • It failed to ask Modog to pay ZS Queenscliff;
  • It did not include a total for the sum claimed, only determinable by a thorough review of the claims

Modog, in turn responded to the payment claim with payment schedules which certified the amount payable in respect of the Claim was nil.

The matter proceeded to an adjudication, where, on 23 October 2019, the adjudicator found in favour of ZS Queenscliff in the sum of $89,111.89 (GST incl.).

Modog challenged the decision of the adjudicator before the Supreme Court of Sydney, seeking orders that the Adjudication Determination of be deemed void, that the determination be quashed, and ancillary relief.

The Disputed Issues

At the hearing, Modog challenged the decision of the adjudicator on 3 primary grounds:

  • Whether the 11 September 2019 emails constituted a payment claim within the meaning of s13(1) of the Act;
  • If the emails did constitute a payment claim, whether the claim was sent by ZS Queenscliff as a person who was entitled to seek a determination for the purposes of s17 of the Act; and
  • Whether the Adjudicator has committed a jurisdictional error by allowing multiple payment claims in respect of a single reference date?

The Arguments, Decision and Reasoning

Issue 1: Was there a Payment Claim:

The argument advanced by Modog was effectively, ZS Queenscliff had not submitted a valid payment claim as they did not specifically demand payment from Modog (i.e.: did not say, Modog must pay ZS Queenscliff the sum of $X.). Modog relied on the fact that the invoices provided in support of the payment claim, were addressed to various entities, not ZS Queenscliff, and that ZS Queenscliff could not establish they were actually entitled to the money claimed for.

Modog argued that ZS Queenscliff had indicated invoices would be sent at a later time, which Modog was to pay as directed and that, pursuant to the Court’s decision in Quickway Constructions Pty Ltd v Electrical Energy Pty Ltd, ZS Queenscliff had not served a payment claim pursuant to clause 13(1) of the Act.

The counter argument raised by ZS Queenscliff relied upon the case of Icon Co NSW Pty Ltd v Australia Avenue Developments Pty Ltd [2018] to support their position that Modog had simply misunderstood the payment claim, and that this could not be a basis for quashing the adjudicator’s decision. ZS Queenscliff argued the fact that the invoices were addressed to other parties did not invalidate the payment claim as they were simply disbursements to be paid to suppliers.

Ultimately, the Court favoured the position raised by ZS Queenscliff, noting there is nothing within the Act that requires a payment claim to state the total of the sum claimed. The Court stated and that even if the invoices in support of the payment did require Modog to direct payment elsewhere, as long as ZS Queenscliff had an entitlement to the sum under the contract, this did not invalidate the payment claim itself.

Issue 2: Was the Payment Claim Sent by ZS Queenscliff?

Modog then raised the issue that, as the 11 September 2019 email enclosing the payment claim was sent by Mr. Zaarour, using an email signature that did not belong to ZS Queenscliff, and the only legal entity named in the email was ZS Australia, the payment claim had not been served by the appropriate entity for the purposes of s17 of the Act.

The counter argument raised by ZS Queenscliff was that these errors were irrelevant in light of the fact that the previous correspondence between the parties had been exchanged in much the same way, including when detailing the terms of the caries contract agreements, and the point was not taken at the contract negotiation stage.

The Court ultimately agreed again with ZS Queenscliff, making the point that not was not actually disputed that ZS Queenscliff was entitled to make the payment claim and made the determination that the email payment claim had simply been sent by Mr Zaarrour in his capacity as the project manager, on behalf of ZS Queenscliff.

Issue 3: Was there an issue with multiple emails being used to comprise the payment claim?

Finally, Modog sought to raise the point that multiple invoices had been served on them in the emails from ZS Queenscliff and that it was not open for ZS Queenscliff to seek to have all invoices adjudicated.

Relying on the decision of the court in Rail Corporations of NSW v Nebax Constructions [2012] NSWSC6, this point ultimately failed as well, on the basis that, when viewed in the context of the previous conduct between the parties, and the nature of the invoices supplied, Modog had been more accurately provided with one payment claim, and a number of invoices in support of the claim.

What does this decision mean?

This decision serves as a timely reminder to parties that the Building and Construction Industry Security of Payment Act 1999 (‘the Act’) is intended to allow money to flow through to sub-contractors. Parties should be mindful of this purpose when considering whether to attempt to argue a payment claim on the basis of a minor technicality or ambiguity.

If you or someone you know wants more information or needs help or advice in relation to NSW’s security of payment legislation (or any other state’s or territory’s equivalent), please contact us on (02) 9248 3450 or email info@bradburylegal.com.au.

The Fantastic Fourth: another NSW Security of Payment amendment

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

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

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

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

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

When the changes will come in

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

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

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

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

Phase 1: February 2019

Investigation and enforcement powers for the Department

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

Authorised officers may now:

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

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

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

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

Liability of directors and managers

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

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

Where

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

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

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

Where:

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

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

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

Higher penalties

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

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

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

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

Adjudications reviewable for error

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

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

No ball for companies in liquidation

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

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

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

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

Phase 2: June 2019

Reference dates are no more

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

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

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

Only one payment claim per month

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

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

Payment claims after termination

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

Endorsement of payment claims

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

Shorter deadline for subcontractor payments

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

Withdrawal of an adjudication application

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

Extended time for adjudicator’s decision

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

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

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

Phase 3: December 2019

Owner-occupier exceptions removed

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

Codes of practice

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

Bonus phase: May 2019

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

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

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

Conclusion

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

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

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