‘Accrual’ reminder for developers

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The recent Supreme Court decision of Broadview Windows Pty Ltd v Architectural Project Specialists Pty Ltd [2015] NSWSC 955 again demonstrates the contrast between the security of payment statutory regime for the accrual of reference dates and the corresponding rights under a typical contract, and the consequences for builders and developers alike.

Broadview Windows concerned whether the claimant had made more than one payment claim in respect of the same reference date, which is prohibited under section 13(5) of the Building and Construction Industry Security of Payment Act 1999 (NSW) (Act).

Reference dates

Section 8 of the Act states that a person who has carried out construction work or supplied related goods and services is entitled to a progress payment “on and from each reference date”.

A reference date is to be determined in accordance with the contract as the date on which a progress claim can be made for work carried out or undertaken to be carried out. If the contract does not “make express provision” for a reference date, section 8 of the Act provides that the reference date is the last day of the named month in which construction work was first carried out and the last day of each subsequent month.

Typical contractual regime v statutory regime

In Broadview Windows, the contract was formed by an acceptance of a quote and, unsurprisingly, the contract did not make express provision for a reference date. The reference date was therefore, in accordance with the Act, the last day of each month.

The work under the contract was completed by the end of August 2014. The claimant made two subsequent payment claims on 24 November 2014 and 23 February 2015 and proceeded to adjudication on the second payment claim. The respondent applied to the Court for an order quashing the adjudication determination because it claimed that the second payment claim was in respect of the same reference date (as the first payment claim).

The Court dismissed the respondent’s claim and affirmed the position that, under the statutory regime, reference dates continue to accrue on a monthly basis until 12 months after the construction work to which the claim relates was last carried out (as per section 13(4) of the Act).

Unintended benefits for builders

As we have noted in recent updates, the absence of express reference dates in a construction contract can (and often unintentionally does) have benefits for builders.

  1. If a contract is terminated, reference dates continue to accrue under the statutory regime, thereby entitling a builder to make a payment claim after termination and enabling a builder to apply for adjudication if unsatisfied by the principal’s payment schedule. In contrast, contracts rarely expressly state that the accrual of reference dates survives termination and therefore the builder’s right to make further payment claims in accordance with the Act is terminated with the contract.
  2. As can be seen in Broadview Windows, the statutory regime entitles the making of a payment claim each month, even where no work has been carried out. The only limitation on this period is the 12 month period after completion of the construction work. Accordingly, a builder can continue to make payment claims (including for the same work) each month, up to a year after work has been completed. Conversely, typically a contract will limit an entitlement to make a payment claim to the months in which work under the contract is being undertaken and a final payment claim (usually at the expiration of any defects liability period).

The recent decisions of the Supreme Court exemplify the need for principals and head contractors to make express provision for reference dates in contracts. Although this usually occurs, Broadview Windows, where the contract was formed by the acceptance of a quote, demonstrates the potential adverse consequences for a principal or head contractor of lax contract documentation.

The importance of unequivocal termination of construction contracts in the eyes of Security of Payment legislation

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A series of recent NSW Supreme Court decisions have highlighted just how important timing can be when it comes to constructions contracts and their termination.  The court has confirmed that where the relevant construction contract includes a reference date (as contemplated by section 8(2) of the Building and Construction Industry Security of Payment Act 1999 (NSW) (Act), reference dates do not continue to accrue under the Act after termination.

The recent Supreme Court decision in Illawarra Retirement Trust v Denham Constructions Pty Ltd [2015] NSWSC 823 is a stark reminder of the importance of unequivocally communicating the time for termination of construction contracts and the adverse consequences of failing to do so.

In Illawarra Retirement Trust, the principal sought to terminate the contract at its convenience by the issue of a notice of termination, in accordance with the contract.  There was no dispute that the principal was entitled to terminate for its convenience, however the principal’s notice of termination did not specify a time for termination, only that the notice was “with effect from Friday, 29 May 2015”.

A dispute arose as to the date that the contract was, in fact, terminated.  The date that the contract was terminated was important because the contractor had made a payment claim on 29 May 2015.  The principal asserted that the contract had been terminated on 28 May 2015 and so there was no reference date to make the payment claim on 29 May 2015.  Conversely, the contractor asserted that the contract had been terminated on 29 May 2015 and so there was a reference date to make the payment claim.

His Honour Justice Darke determined that the date of termination, objectively understood by the notice of termination, was at the conclusion of 28 May 2015.  However, his Honour also reviewed correspondence between the principal and the contractor after the issue of the notice of termination.  That correspondence concerned, amongst other things, the last of the contractor’s contract works, the contractor’s insurances and obligations as principal contractor for the site, all of which were stated to be concluded on 29 May 2015.  By this correspondence, his Honour found that there had been a subsequent agreement that the termination would occur at the conclusion of 29 May 2015.

As a result, there was a reference date to enable the contractor to make a payment claim on 29 May 2015.  The principal’s application for an injunction preventing the contractor from proceeding to adjudication on the payment claims was dismissed.

Ensuring a clear termination date

Principals can ensure that they clearly and unequivocally terminate their construction contract by:

  1. strictly following the procedure set out in the contract, including compliance with the regime for the form and service of required notices;
  2. in notices, stating a time and date that termination of the contract will take effect; and
  3. so as to avoid any inference to the contrary, adhering to the date of termination in any subsequent correspondence and requiring the contractor to act in accordance with the date of termination.

No reference dates after termination

As discussed in our previous article entitled “Contractors beware: risk of no reference dates after termination”, the Supreme Court has confirmed that, where a contract provides for reference dates, unless the clause providing for reference dates is expressed to survive termination of the contract, no reference dates will arise after termination of the contract.

This position has been reinforced in the subsequent Supreme Court decisions of Southern Han Breakfast Point Pty Limited v Lewence Constructions Pty Limited [2015] NSWSC 502 and Veer Build Pty Limited v TCA Electrical and Communication Pty Ltd [2015] NSWSC 864.  Further, in Illawarra, his Honour said: “The defendant advanced an alternative argument that, even if the contract had terminated immediately prior to 29 May 2015, s 8(2)(b) of the Act would operate to provide a further reference date on the last day of May. I think that argument faces considerable difficulties, but in view of my conclusion about the time of termination, it is not necessary to deal with it.”

Accordingly, it is important for contractors, particularly in contracts with termination for convenience clauses, to include either a clause providing for reference dates to survive termination of the contract or a clause requiring the principal to give notice of its intention to terminate the contract for its convenience.

A failure to include either of these clauses may result in a contractor losing its entitlement to make a further payment claim under the Act.