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

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.