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When are settlement agreements concerning payment claims void under SOPA?

If a respondent fails to issue a payment schedule in time, but the parties then reach a settlement agreement in relation to the payment claim and construction contract, can the claimant still pursue summary judgment for the full claimed amount due to s.34 of the Building and Construction Industry Security of Payment Act 1999 (NSW) (SOPA)?

Facts

In Reward Interiors Pty Ltd v Master Fabrication (NSW AU) Pty Ltd [2020] NSWSC 1251, the claimant served a payment claim and the respondent did not respond within 10 business days as required by the SOPA.  The parties attended a meeting three weeks after the payment claim was issued and agreed to a reduced amount to be paid on the payment claim.[1]  The respondent paid the settlement amount the following day.[2]

The respondent then commenced proceedings against the claimant for damages arising from work performed by the claimant.

The claimant cross-claimed and sought summary judgment on the full payment claim amount. The claimant argued that s.34, which prohibits parties from contracting out of the SOPA, rendered the settlement agreement void.[3]

Decision

The claimant offered no authority for the argument that s.34 of the SOPA renders void settlement agreements which compromise a dispute concerning an amount claimed in a payment claim or the construction contract between the parties generally.[4]  The claimant had agreed not to move for summary judgment on the full claimed amount by accepting the reduced settlement amount.[5]

Stevenson J held that it was at least arguable that the settlement agreement was not rendered void because it acknowledged the operation of the SOPA, yet recorded the parties’ intention that in the particular circumstances their rights would instead be governed by their agreement.[6]  This did not constitute an ‘attempt to deter a person from taking action under’ the SOPA.[7]

Tips for binding settlement agreements on payment claims

The answer to the question posed in the introduction is no.  Assuming the settlement agreement seeks to properly compromise existing entitlements, it will not be voided by s.34 of the SOPA.

The terms should be clearly expressed and specific.  It should state that the claimant has agreed to accept the settlement amount in “full and final satisfaction” of the payment claim and claims made in the payment claim. The terms should provide that once the respondent pays the settlement amount, the claimant “releases” the respondent from any claims or proceedings in respect of the payment claim and claims made in the payment claim.

Where settlement agreement may be rendered void under s 34 is where it seeks to exclude or restrict rights or entitlements arising in the future.  For example, where the parties simply agree (without more) that the claimant will have no entitlement to submit further payment claims.

Of course, the respondent should always serve a proper payment schedule (scheduling nil or a reduced amount and giving reasons) in response to a payment claim, even if confident in securing a settlement, in order to avoid the type of argument raised in Reward Interiors.

[1] At [11].

[2] At [14].

[3] At [15].

[4] At [19].

[5] At [23].

[6] At [24] and [26].

[7] At [25], re s.34(2)(b).

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.