Does a payment claim survive the termination of a contract for convenience?

Security of payment legislation continues to receive significant attention across Australia’s building and construction landscape, with many cases being deconstructed to shed light on a court’s interpretation of various provisions.

Impero Pacific Group Pty Ltd v Bonheur Holdings Pty Ltd [2019] NSWSC 286 recently established that, despite a construction contract being terminated for convenience, a contractor may still claim for work carried out between the last accrued reference date and the termination date. Much will depend on the wording of the contract.

The decision diverges from previous case law which holds that a contract terminated for convenience does not provide ongoing reference dates, and consequently no entitlement for a contractor to claim for work carried out between the last reference date and termination.

Background

The contractor, Impero Pacific Group Pty Ltd (Impero) entered into a contract with Bonheur Holdings Pty Ltd (Bonheur), as principal, for construction of a residential strata complex, with a completion date of 1 March 2019.

The reference date, for the purposes of making payment claims was the 25^th day of the month.

Crucially, the contract contained a termination for convenience clause (clause 39A), allowing the principal at its discretion to terminate the contract and complete any part of the works either itself or through another party. If invoked, the contractor would be entitled to payment for certain works carried out to the date of termination that would otherwise have been payable if the contract had not been terminated.

The contract was terminated for convenience by Bonheur on 29 or 30 October 2018.

Impero served a payment claim on 27 November 2018 for approximately $1.4 million relating to work undertaken between the last reference date being 25 October 2018 and the termination date, namely 29 or 30 October 2018.

Bonheur failed to respond to the claim as required under the Act and Impero sought judgement from the Supreme Court.

Bonheur argued that the payment claim was invalid as it was not supported by an available reference date pursuant to clause 8 of the Building and Construction Industry Security of Payment Act 1999 (NSW) (the ‘Act’).  It contended that if the contract was terminated for convenience, “the Act cannot be used to obtain a progress payment for work done between the last contractual progress payment date and the date of termination.”

It was also submitted that, if Impero did have a right to a progress payment, it was “limited to part only” on the basis that it had claimed for items not within the scope of the Act and therefore no judgement could be obtained.

Impero argued that on construction of clause 39A, termination resulted in the creation of a new reference date and a consequential entitlement to claim and receive payment.

Decision

Justice Parker was not persuaded by the principal’s submissions and ordered the judgement sought by Impero.

The Act provides that on and from each reference date under a construction contract a person is entitled to a progress payment for work carried out under the contract.

Justice Parker acknowledged that under the current Act “there is no entitlement to a progress payment, and there can be no valid progress claim, unless there is an available reference date”. A reference date is defined as:

“(a)    a date determined by or in accordance with the terms of the contract as the date on which a claim for a progress payment may be made in relation to work carried out…under the contract, or

(b)     if the contract makes no express provision with respect to the matter – the last day of the named month in which the construction work was first carried out…and the last day of each subsequent named month.“

The last reference date prior to termination (on 29 or 30 October) was 25 October, which would have been available to claim for work carried out up to that date, but not beyond. Had the contract not been terminated, the next available reference date would have been 25 November.

Justice Parker considered the present matter in the context of previous cases and clause 39A of the construction contract. Clause 39A provided an entitlement for Impero to claim for work carried out under the contract up to the date of termination, and crucially this clause expressly stated that it would survive termination.

In the circumstances it was determined that “termination of the contract gave rise to a fresh reference date for the purposes of the Act“ and the entitlement for Impero to claim up to termination.

As to the contention that Impero’s right to a progress payment, if awarded, should be limited to part only, Justice Parker confirmed that “the Act does not permit the Court to make its own assessment of the extent to which the claimed amount represents payment for construction work or the supply of related goods or services. In that sense, it is an all-or-nothing provision.” The opportunity for a principal to argue that items fall beyond the scope of the Act arises by serving a payment schedule in response to a contractor’s payment claim. In the present case, the principal failed to do this.

Key takeaways

• The exercise of a right to terminate a construction contract for convenience will not prevent a contractor from claiming for work carried out up to the termination date;
• Progress claims should specify the works carried out between the last accrued reference date and the date of termination and relate only to works defined within the scope of the Act; and
• Principals who terminate a contract for convenience should anticipate that a contractor may make a claim up to the date of termination. Items considered to be claims beyond the scope of the Act should be identified in the payment schedule.

Readers should be aware that Justice Parker makes it clear that termination for convenience is not the same as termination for breach nor is it similar to accepting the repudiation of the other party. The situation may be different in these cases. The High Court of Australia has previously ruled that in these cases, unless the contract expressly provides so, reference dates do not accrue after termination or accepted repudiation.

Where to next?

Determinations such as this are frequently analysed, particularly as participants in the building and construction industry await reforms yet to commence under the Building and Construction Industry Security of Payment Amendment Act 2018 (NSW). For more details on these amendments, click here.

Upon commencement of the current reforms proposed, the reference date system will be abolished, and a contractor will be able to make a progress claim for work carried out up to the date of a terminated contract, whether the contract is terminated for convenience or otherwise.

The policy behind these amendments is to discourage principals from strategically terminating a contract primarily to avoid a final payment claim being made under the Act.

If you or someone you know wants more information or needs help or advice, please contact us on +61 2 9248 3450 or email [email protected].