No notice needed: NSW Court of Appeal rules on enforcement of Security of Payment Act determination

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In the recent unanimous decision of Fitz Jersey Pty Ltd v Atlas Construction Group Pty Ltd [2017] NSWCA 53, the Court of Appeal considered the enforcement of a judgment (pursuant to an adjudication determination under the Building and Construction Industry Security of Payment Act 1999 (NSW) (Act)) by garnishee order and without notice of the judgment being given to the unsuccessful respondent.

The Court of Appeal confirmed:

  • the long-held view that notice of the entry of and enforcement of a judgment (obtained pursuant to an adjudication determination) is not required; and
  • that, when applying for a garnishee order, a party is not required to disclose to the Court that an unsuccessful respondent to an adjudication determination has commenced proceedings challenging the adjudication determination underlying the judgment (unless there are special circumstances, such as a stay or undertaking has been sought).

Background

The background to the Court of Appeal’s decision can be briefly summarised as follows.

1. On 6 January 2017, an adjudicator determined an adjudication application in favour of the builder in the amount of $10,748,466.31 plus interest and the adjudicator’s fees.

2. On 13 January 2017, the developer was required to pay to the builder the adjudicated amount plus interest and the adjudicator’s fees in accordance with section 23 of the Act.

3. On 13 January 2017, the developer did not pay the adjudicated amount to the builder.  Instead, the developer filed and served a Summons and List Statement in the Technology and Construction List of the Supreme Court of NSW seeking an order that the adjudication determination be quashed.  The letter to the builder’s solicitor serving the Summons and List Statement relevantly said:

“We are instructed that if your client seeks an order at that directions hearing that our client lodge the amount of the adjudication determination with the Supreme Court until a judgment is issued on our client’s summons, our client will not object to that order being made.” 

4. On 16 January 2017, the builder requested an adjudication certificate for the adjudicated amount and the amounts for interest and the adjudicator’s fees.

5. On 17 January 2017, the builder received the adjudication certificate in the amount of $11,023,619.76 and filed the certificate as a judgment of the Supreme Court.  Later, on 17 January 2017, the builder applied for a garnishee order against NAB in respect of the judgment amount.

6. On 27 January 2017, the Supreme Court issued the garnishee order against NAB for the amount of the judgment debt.  Later, on 27 January 2017, the garnishee order was served on NAB.

7. On 2 February 2017, NAB paid the full amount of the judgment debt to the builder.

8. On 3 February 2017, the developer became aware of the judgment, the garnishee order and the payment by NAB.

Supreme Court application

On 6 February 2017, the developer made an application to the Supreme Court seeking orders that the amount paid pursuant to the garnishee order be repaid into Court.  The developer’s application was based on two grounds.

  1. The developer primarily submitted that, because the developer did not have notice of the builder’s application for an adjudication certificate or the entry of judgment, the developer had been deprived of an alleged entitlement or right under section 25 of the Act to pay the money into Court pending the determination of the validity of the determination.
  2. The developer also relied on a secondary argument that the proceedings commenced by the developer to have the adjudication determination quashed should have been disclosed in the builder’s application for a garnishee order.

The Supreme Court dismissed the application.  The Court did not consider it appropriate to deal with the developer’s argument under section 25 of the Act on an urgent application and said that it did not consider that an applicant for a garnishee order needed to put any additional material before the Court (other than as required by the Uniform Civil Procedure Rules 2005 (NSW) (Rules), which prescribes the form and requirements for an application for a garnishee order).

In any event, at a more fundamental level, the Court cited the developer’s failure to obtain an injunction or seek an undertaking restraining the enforcement of the adjudication determination as reasons why the Court would not exercise its discretion to grant the equitable relief sought by the developer.

Court of Appeal decision

The developer appealed the Supreme Court’s decision on three grounds, the first of which was essential for the other grounds to succeed.

  1. The Supreme Court incorrectly exercised its discretion in refusing equitable relief.
  2. The builder was required to notify the developer that a judgment had been obtained before taking steps to enforce it.
  3. When applying for a garnishee order, the builder was required to notify the Court that the developer had commenced proceedings to review the underlying adjudication determination.

Is there an obligation to notify of a judgment pursuant to an adjudication determination before enforcement?

In short, no.  The Court of Appeal considered section 25 of the Act, in conjunction with the Rules in respect of the entry and enforcement of judgments.

Relevantly, section 25 of the Act provides as follows.

“25   Filing of adjudication certificate as judgment debt

(1)       An adjudication certificate may be filed as a judgment for a debt in any court of competent jurisdiction and is enforceable accordingly.

(2)       An adjudication certificate cannot be filed under this section unless it is accompanied by an affidavit by the claimant stating that the whole or any part of the adjudicated amount has not been paid at the time the certificate is filed.

(3)       If the affidavit indicates that part of the adjudicated amount has been paid, the judgment is for the unpaid part of that amount only.

(4)       If the respondent commences proceedings to have the judgment set aside, the respondent:

(a)       is not, in those proceedings, entitled:

(i)        to bring any cross-claim against the claimant, or

(ii)       to raise any defence in relation to matters arising under the construction contract, or

(iii)      to challenge the adjudicator’s determination, and

(b)       is required to pay into the court as security the unpaid portion of the adjudicated amount pending the final determination of those proceedings.”

For various reasons, including those noted below, the Court found that there is no obligation on a party that registers an adjudication certificate as a judgment to notify the other party that a judgment has been entered.

  • Rule 36.14 of the Rules provides that a judgment need not be served unless expressly required by the Rules.  The Rules were introduced after the operation of the Act.  There is no express requirement in the Act or the Rules that a judgment must be served or notified to the other party.
  • The proposition that a judgment cannot be enforced without service on the other party “has no support in authority, or as a matter of general principle.  It would, on its face, be inconsistent with the proposition that service is not required”, as per Rule 36.14 (as noted above).
  • Section 25(4) of the Act does not put the unsuccessful party in a better position than any other judgment debtor (upon which service of a judgment is not required before enforcement).  The effect of section 25(4) on an unsuccessful respondent to an adjudication determination is restrictive.
  • Section 25(4)(b) of the Act operates to require payment into Court of the unpaid portion of the adjudicated amount, if any (pending the determination by the Court of whether or not the judgment should be set aside).  It does not require there to be an unpaid portion.
  • To require notice of the existence of a judgment would deny the effect of the words “enforceable accordingly” in section 25(1) of the Act: “There is no authority which seeks to adopt such a construction, nor does it fit with either the context in which s 25(1) appears, the objects of the Act, or anything in the legislative history.”

Interestingly, the Court of Appeal was at pains to clarify that section 25(4) of the Act does not confer any right to have a judgment set aside.  The Court’s power to set aside a judgment is founded in the Rules and in the inherent jurisdiction of the Court.

Further, the Court said that section 25(4)(b) of the Act, which requires the adjudicated amount to be paid into Court pending the Court’s determination of an application to set aside a judgment based on an adjudication determination, would not apply to an application to quash a determination before judgment has been entered (although, in practice, the Courts have required payment into Court of the adjudicated amount pending the determination of the challenge to the validity of the determination, by analogy to section 25(4)(b) of the Act).

Is there an obligation to disclose a challenge to an adjudication determination when applying for a garnishee order?

In short, no.  However, there may be circumstances where additional disclosure is required in an application for a garnishee order (or other ex parte application).  The extent of such disclosure will depend on the facts of the case and may include, for example, if an undertaking not to enforce has been sought and an application to seek a stay has been foreshadowed.

The Court of Appeal found, amongst other things.

  • The statutory context of an application for a garnishee order to enforce an adjudication under the Act is critical.  The payments under the Act are interim in nature (subject to final determination as contemplated by section 32 of the Act) and any reduction in the entitlement of a builder to enforce an adjudication determination would undermine the statutory purpose of the Act.  The fact that the judgment is interim and subject to a further final determination (as contemplated by section 32 of the Act) lessens the obligation of disclosure.
  • As per the Rules, an application for a garnishee order may be dealt with in the absence of the parties and need not be served on the judgment debtor or the proposed garnishee.  That accords with public policy reasons that judgment debtors should not be notified so that they do not take steps to avoid payment, e.g. transferring assets.
  • The question which must ultimately be determined is whether any fact disclosed would have been likely to affect the outcome of the application – otherwise setting an order aside is “an entirely penal exercise, which must be proportionate to the consequences for the party in breach”.
  • Therefore, the onus was on the developer to establish that the builder should be deprived of an entitlement to immediate payment of the determined amount on an interim basis, i.e. the developer needed to demonstrate reasonable prospects of success on its application for judicial review and that it may not be possible to recover the money from the builder, neither of which had been established by the developer in this case.

What does this mean for me?

1. If you are successful in an adjudication determination:

(a) judgment can be obtained by registering an adjudication certificate and there is no need to notify the respondent to the adjudication determination, even if the respondent has commenced proceedings to challenge the validity of the adjudication determination; and

(b) the judgment may be enforced by garnishee order and the extent to which an application for a garnishee order must disclose a challenge to the validity of the determination will depend on the steps taken by the unsuccessful respondent.  If the respondent has merely commenced proceedings challenging the determination (and not sought an undertaking or an injunction), no disclosure is required.

2. If you are unsuccessful in an adjudication determination and do not intend to pay the adjudicated amount by the time prescribed in the Act, you should seek an undertaking from the successful party that it will not enforce the determination until the Court rules on the validity of the determination.  If no undertaking is provided, an urgent injunction should be sought.

Taking the Universal Serial Bus (USB) may result in a delayed service under the Security of Payment Act

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In 1999, the New South Wales parliament legislated to create the Building and Construction Industry Security of Payment Act 1999 (NSW) (Act).

In 2000, IBM began selling the first USB flash drives commercially.  Other methods and mediums to quickly and conveniently communicate significant amounts of information have come and gone since 1999.

It is therefore unsurprising that the Act does not specifically address service of documents by different technological methods and mediums.  Whether communication by a method or medium of technology is effective service under the Act has been left to the courts to determine.  This can often be a critical issue because of the strict timeframes under the Act for the service of payment schedules, adjudication applications and adjudication responses.

In the Supreme Court of NSW case of Parkview Constructions Pty Ltd (Parkview) v Total Lifestyle Windows Pty Ltd t/as Total Concept Group (Total) [2017] NSWSC 194, the Court considered whether the mere delivery of a Universal Serial Bus (USB) drive, which contained adjudication application documents, was valid service of an adjudication application under the Act.

Relevant issues

On 12 December 2016, the adjudicator made an adjudication determination in favour of Total in the amount of $539,634.24 (including GST).  On 14 December 2016, Parkview commenced proceedings to have the adjudication determination quashed or set aside.

The lodgement and service of the adjudication application that led to the determination was, as the Court said, a “litany of errors”.  In short, Parkview made the following complaints about the adjudication, which were upheld by the Court and had the effect of invalidating the determination.

  1. The version of the adjudication application referred by the adjudication nominating authority to the adjudicator differed from the version lodged under the Act by Total.
  2. The adjudication application served on Parkview was not a copy of the adjudication application referred to the adjudicator.
  3. Parkview’s adjudication response was wrongly disregarded by the adjudicator (because the adjudicator accepted that delivery of a USB stick amounted to valid service of an adjudication application under the Act and therefore determined that the adjudication response was out of time).
  4. The adjudicator took into account material that was not properly part of the adjudication application.

Is the delivery of a USB effective service under the Act?

Section 17(3)(a) of the Act provides that an adjudication application must be in writing.  Section 17(5) of the Act provides that a copy of an adjudication application must be served on the respondent.

Section 21(1) of the Interpretations Act 1987 (NSW) defines “writing” as:

“includes printing, photography, photocopying, lithography, typewriting and any other mode of representing or reproducing words in visible form.”

In construing sections 17(3)(a) and 17(5) of the Act with section 21 of the Interpretation Act 1987 (NSW), the Court held that service of the USB stick could not be equated with service of writing stored on it, and that the USB stick was not “writing” within the meaning of section 17(3)(a) of the Act.

Ultimately, the Court determined that mere delivery of an adjudication application on a USB drive does not amount to service of an adjudication application in accordance with the Act.

Accordingly, the Court found that Parkview was served with the adjudication application on 10 November 2016 when an employee of Parkview first opened the documents on the USB stick.  The effect of this decision was that Parkview’s adjudication response was within time and incorrectly disregarded by the adjudicator (a denial of procedural fairness and jurisdictional error).

Lodgement and service of the adjudication application

Section 17(5) of the Act provides that a “copy” of an adjudication application must be served on the respondent.  Section 19(1) of the Act provides that the adjudication application must be referred to the adjudicator by the nominating authority.  There were substantial and material (not trivial) differences in the versions of the adjudication application that were:

  • lodged with the nominating authority;
  • provided to the adjudicator by the adjudication nominating authority; and
  • served on Parkview.

The effect of the above was that there was a failure to comply with the essential prerequisites for a valid adjudication determination because:

  1. a copy of the adjudication application was not provided to Parkview in accordance with section 17(5) of the Act; and
  2. the adjudication was not properly referred to the adjudicator in accordance with section 19(1) of the Act.

The Court did not conclusively find that an identical copy of the adjudication application must be served on the respondent.  The Court expressly acknowledged that there may be scope to allow for “trivial” differences in certain circumstances.  In this case, the differences could not be labelled “trivial”.

What does this mean for me?

The issues that infected this adjudication arose from a failure to properly and carefully lodge and serve the adjudication application and a failure to ensure that a hard copy of the adjudication application was identical to the electronic version.  The timeframes under the Act are short and there are time pressures to lodge and serve documents, which can lead to irretrievable errors.

Some practical tips for avoiding the pitfalls evidenced in the Parkview case are set out below.

1. The Act expressly allows service by: (1) delivering it to the person personally; (2) lodging it during normal business hours at the person’s ordinary place of business; (3) sending it by post or facsimile addressed to the person’s ordinary place of business; or (4) as prescribed by the construction contract.

If possible, service of documents under the Act should be by courier to the person’s ordinary place of business during normal business hours to avoid any uncertainty or argument about whether the documents have been served.  A report from the courier confirming delivery should be obtained for evidentiary purposes.

2. Parties should note that service by USB stick is not effective service under the Act – the documents provided on the USB stick will only be served when opened and that would be difficult to evidence if contested by a respondent.  In short, documents should not be served by USB stick.

3. Service by email will only be effected once the documents have been accessed by the recipient.  This is difficult to evidence if contested.  For this reason, absent a contractual entitlement to serve documents by sending an email, service by email should be avoided.  Despite this, if email is used, ‘read receipts’ should be requested for evidentiary purposes.

4. If providing a hard copy of documents that have already been served electronically, ensure the hard copy is identical to the electronic version to avoid confusion and ambiguity, which could invalidate an adjudicator’s determination.