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NSW court provides guidance for hand delivering payment claims and payment schedules on site

In MGW Engineering Pty Ltd t/a Forefront Services v CMOC Mining Pty Ltd[1], the vexed issue of valid service for documents under the Building and Construction Industry Security of Payment Act 1999 (NSW) (Act) has been revisited.

The case cautions against assuming a document (e.g. a payment claim or payment schedule) will be considered “served” under s 31 of the Act by handing it to any employee of the claimant or respondent under the Act (as the case may be) on the project site.

Facts

The claimant and respondent in the case were parties to four construction contracts for the claimant to provide various services at a NSW mine site.

A representative of the claimant handed four payment claims to an employee of the respondent at 5:15pm on 3 February 2021, claiming a total of over $6M in progress payments.  The transaction took place at an “Access Control Room” where the employee of the respondent (who was not the respondent’s representative under the contracts) was on duty.

It was common ground that the respondent’s representative under the contracts was not on site on 3 February 2021 and was not provided the physical payment claims until 4 February 2021.  The payment claims were also served electronically via Aconex on 4 February 2021.

The respondent served its payment schedules on 11 February 2021 (being 11 days after 3 February 2021), with a total scheduled amount of only $180,912.05.

The claimant purported to suspend works under s 15(2)(b) of the Act.  The claimant applied to court for judgment on the full claimed amount of circa $6M arguing the payment schedules were ineffective, being served one day late.  The claimant relied on ss 31(1)(a), (b) and (e) of the Act.

Decision

Stevenson J found that service did not occur on 3 February 2021.  Accordingly, His Honour rejected the claimant’s application for summary judgment and declared the claimant’s suspension of works invalid.

His Honour held that s 31(1)(a) of the Act, permitting delivery of a document ‘to the person personally’, does not mean that a document will be taken to be served by handing it to any employee of the claimant/respondent[1].  In relation to service on a corporation, some step must be taken to bring the document to the attention of a relevantly responsible person within the company[2].

Section 31(1)(b) of the Act, permitting service by ‘lodging’ ‘during normal office hours’ to the claimant/respondent’s ‘ordinary place of business’:

  • like s 31(1)(a), requires more than giving the document to any employee of the claimant/respondent[3]; and
  • requires consideration of the normal office hours of clerical staff at the particular business of the claimant/respondent concerned, not merely when the project site is operational[4]. In this case, though the mine was manned 24/7, the respondent’s normal operating hours at the mine commenced between 7 and 7:30am and concluded around 4 to 4:30pm.  Service at 5:15pm in this case was not within “normal office hours”[5].

Therefore, although the mine site was an “ordinary place of business” under the Act[6], the other criteria for service were not fulfilled on 3 February 2021.

Service had also not occurred ‘in the manner…provided under the construction contract[s]’ pursuant to s 31(1)(e) of the Act because the contracts in this case provided that documents served after 4:00pm on a day (e.g. at 5:15pm on 3 February 2021) would be taken to be served on the next business day (e.g. on 4 February 2021).

Stevenson J held that the relevant contractual provision was not void by reason of s 34 of the Act because the effect of the provision was “facultative”[7].  If service had been effected on 3 February 2021 via ‘one or other of ss 31(1)(a), (b), (c) or (d), such service would have been effective[8] notwithstanding the clause.  The clause gave effect to s 31(1)(e) and did not modify the operation of s31(1) generally.

Take home tips

If you intend to serve a payment claim or payment schedule by hand delivery on site, you should consider the following:

  • If relying on s 31(1)(a) or (b) of the Act, is the person who you are handing the document to a relevantly responsible person within the corporation? The person the named representative in the contract or a director of the company needs to receive it.

 

  • If relying on s 31(1)(b) of the Act, what are the normal office hours on site? If clerical staff usual work from 7:00am to 4:00pm (for example), service at 4:45pm may not be effective.

 

  • If relying on s 31(1)(e) of the Act, is there a provision in the contract which deems notices given after a particular time on a day served only on the following business day? If so, you must ensure the notice is given prior to the cut off.

We can assist with your queries on validity of your usual service practices and methods to ensure compliance with the Act.

[1] At [23].

[2] At [24].

[3] At [43].

[4] At [51] to [53].

[5] At [68].

[6] At [74].

[7] At [80].

[8] At [81].

CONTRACTOR STRIKES SECURITY OF PAYMENT GOLD BY SKIRTING THE MINING EXCEPTION

Mining owners and operators in most Australian States[1] will be aware of the “mining exception” in security of payment legislation.  The mining exception excludes ‘the extraction (whether by underground or surface working) of minerals, including tunnelling or boring, or constructing underground works for that purpose[2] (Mining Exception) from the definition of the term “construction work” and, consequently, the ambit of statutory interim progress payment mechanisms.

However, in a decision handed down on 11 November 2020, the NSW Supreme Court[3] followed the approach of the Queensland courts[4] by construing the Mining Exception narrowly in favour of contractors and subcontractors.  In short, the Mining Exception does not  extend generally to some broad category of mining industry operations.[5]

Facts

Downer EDI Mining Pty Ltd (Downer) was engaged by Cadia Holdings Pty Ltd (Cadia) the operator of the Cadia East underground panel cave mine south-west of Orange, under a “Works Contract” dated 16 November 2018 (Contract), to perform “development phase” works, being (for the most part) underground works to provide access to the proposed undercut and extraction levels for future extraction of minerals in the “production phase”[6]

Downer proceeded to adjudication on a payment claim served on Cadia.  An adjudicator appointed under the Building and Construction Industry Security of Payment Act 1999 (NSW) (SOPA) determined that Cadia pay Downer $1,017,741.72.[7]

Cadia challenged the determination on two grounds:

  1. the Mining Exception applied so the Contract was not a “construction contract” within the meaning of the SOPA; and
  2. there was no available reference date to support Downer’s payment claim.

Decision

Cadia’s challenge to the adjudication determination was unsuccessful on both grounds.

Stevenson J framed the effect of the Mining Exception as excluding ‘from the definition of “construction work”, the following works:

  • extraction (whether by underground or surface working) of minerals;
  • tunnelling or boring for the purpose of extraction (whether by underground or surface working of minerals; and
  • constructing underground works for the purpose of extraction (whether by underground or surface working) of minerals.[8]

His Honour held that the heart of the question of the application of the Mining Exception to a contract is what a contractor undertakes to do under the contract in question, not what work that contractor actually does[9] (which comes to be answered later).

The works under the Contract did include “tunnelling or boring” as well as “constructing underground works”.  However:

  1. these activities were not for the “purpose of” extraction of minerals; and
  2. the Contract required Downer to undertake work beyond these activities which fell within the meaning of “construction work” or the supply of “related goods and services”.

On considering generally whether activities performed by a contractor are for the “purpose of” extraction of minerals, His Honour:

  1. agreed with Fryberg J in Thiess that the relevant purpose should be decided ‘by reference to what a reasonable person in the position of the parties would conclude as to the object of what purpose of the contract[10];
  2. held that the Mining Exception is to be construed narrowly to benefit the subcontractor[11];
  3. held that a close “proximity” between the act of extraction and the tunnelling and boring or construction of underground works was required (and this was not so in this case, where the extraction phase would not begin until 2022 after subsequent works)[12];
  4. considered that “extraction” does not include work “associated with” or “preparatory to” extraction[13]; and
  5. noted that the SOPA expresses where there is an intention to bring in ancillary activities, which is not the case with the Mining Exception[14].

Further, in this case, His Honour considered that some works under the Contract required of Downer were “construction work” or supply of “related goods and services”, meaning the SOPA applied.  Relevantly, His Honour stated (accepting Downer’s counsel’s submission):

…if there is a contract which contains undertakings to carry out construction work and undertakings to carry out work that it not construction work, the contract remains a construction contract. If a payment claim includes a claim for work that is not construction work, the payment claim is valid, but the adjudicator should not award an amount for work that is not construction work. Thus, the Mining Exception has an important role to play in limiting the amount that the adjudicator should award.[15]

On the reference date point, His Honour determined that there was an available reference date under the Contract for the service of the payment claim.  Most of the points raised were of limited significance for general application.  One point of general interest was that a clause of the Contract required Downer to invoice ‘in respect of the Services performed’ of the proceeding month.[16]  Downer’s works were performed not in the preceding month, but at an earlier time.

His Honour relied on s.13(4) of the SOPA which allows a contractor to serve a payment claim within the period determined under the construction contract or 12 months after construction work to which the claim relates was last carried out.  The payment clause in the Contract attempted to restrict the operation of s.13(4) and was a void provision, by operation of s.34 of the SOPA.

Take Home Tips

Contractors who consider that they are not entitled to have recourse to security of payment legislation simply because they work on a mine site should re-examine closely the terms of their contract.  Can it really be said that the contract works are for the “purpose of” extraction?  Or is there some distance between the works to be performed and the eventual act of extraction?

Perhaps there are portions or stages of works under the contract to which the Mining Exception would apply, but this would not necessarily mean that the entire contract is not a “construction contract” within the meaning of the security of payment legislation.

 

 

[1] Queensland, Victoria, South Australia, Tasmania and the Australian Capital Territory.  However, Western Australia is likely to shortly follow suit once the Building and Construction Industry (Security of Payment) Bill 2020 (WA) passes through Parliament.

[2] Section 5(2) of the Building and Construction Industry (Security of Payment) Act 1999 (NSW).

[3] Cadia Holdings Pty Ltd v Downer EDI Mining Pty Ltd [2020] NSWSC 1588 per Stevenson J.

[4] HM Hire Pty Limited v National Plant and Equipment Pty Ltd [2012] QSC 4 and Thiess Pty Ltd v Warren Brothers Earthmoving Pty Ltd [2012] QCA 276 (Thiess)

[5] At [133].

[6] At [92] and [93].

[7] At [3].

[8] At [34].

[9] At [70].

[10] At [96], quoting Fryberg J in Thiess at [76].

[11] At [102]

[12] At [103] and [91].

[13] At [104].

[14] At [105].

[15] At [134].

[16] At [171].

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).