KENNEDY CIVIL CONTRACTING PTY LTD (ADMINISTRATORS APPOINTED) v RICHARD CROOKES CONSTRUCTION PTY LTD; IN THE MATTER OF KENNEDY CIVIL CONTRACTING PTY LTD [2023] NSWSC 99

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This case concerns the issue of whether an insolvent company’s creditors are able to enter into a DOCA to recover payments that would have been lost upon entry into liquidation and, furthermore, whether this comes into a direct conflict with the Building and Construction Industry Security of Payment Act 1999 (SOP Act).

 

FACTS

On 1 November 2021 Kennedy Civil Contracting began the process of carrying out construction work on behalf of its principal Richard Crookes Construction. Following this, under the SOP Act, KCC served several payments claims to RCC. However, only some of these payment claims were responded to by RCC.

 

On 1 August 2022, administrators at KCC determined that they were “hopelessly insolvent”. Yet the decision was made on 29 September 2022 to pursue sections 15 and 16 of the SOP Act (which address the consequence of a failure of correct payments) in direct response to the RCC’s failure to make the correct payments, or payments at all. KCC then entered into a Deed of Company Arrangement (DOCA) as per Part 5.3 A of the Corporations Act in order to avoid liquidation.

 

In response to this action, on 9 November 2022 RCC claimed that this action by KCC was an abuse of process and sought that their DOCA be terminated. Despite this, on 10 November 2022, KCC entered into a ‘Holding DOCA’ in order to allow for the proceedings under SOP Act to continue, while simultaneously acknowledging that liquidation would occur at a later date.

ISSUE

The main issue before the Supreme Court was whether there was an abuse of process. The Supreme Court considered whether KCC’s decision to enter into the DOCA was being done in order to avoid operations of section 32B of the SOP Act which notes that the SOP Act does not apply to a construction company in liquidation (“A corporation in liquidation cannot serve a payment claim”).

HELD

The RCC argued that the entering into a DOCA for the purpose of avoiding section 32B of the SOP Act was, in fact, an improper purpose.

The Court found that the RCC’s argument was not valid as it did not draw on the correct authorities that noted DOCA’s use to circumvent the SOP Act, but rather the Corporations Act. Furthermore, Ball J considered that entering into a DOCA was to serve the purpose of giving the corporation the best chance of maximising returns. Hence, the Court found that the ‘Holding DOCA’ used by KCC remained within the scope of the SOP Act, therefore it did not need to be terminated.

 

Secondly, and relating to the first point here, it was held that no abuse of process had occurred in this matter due to the fact that KCC had appropriately used a ‘Holding DOCA’. This was critical in considering the scope of section 32B of the SOP Act in addition to preserving a company’s right to enforce payment claims.

TO CONSIDER

This case is highly significant as it considers the scope an application of section 32B of the SOP Act. Here, construction companies who are potentially facing hardship in terms of their cashflow now have a significant chance of being paid by their debtors if they enter into administration and should continue to submit valid payment claims under the SOP Act, notwithstanding that they may be entering into administration.

AMENDMENTS MADE TO THE SECURITY OF PAYMENT REGIME IN NSW – WHAT BUILDERS NEED TO KNOW

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Further reforms to the Building and Construction Industry Security for Payment Act 1999 (NSW) (the Act) have been proposed with the Building and Construction Legislation Amendment Bill 2022 (the Bill) and in the Building and Construction Legislation Amendment Regulation 2022 (the Regulation). The Bill outlines various proposed amendments in relation to the role of adjudicators, the threshold of value of projects when triggering retention funds, and regarding the process of serving payment claims.

Proposed Amendments

The following are the key proposed amendments:

  • The introduction of an ‘adjudication review model’ will allow claimants and respondents to request a review of an adjudication determination.
  • There will be a significant reduction in the threshold of the value of projects in triggering retention funds from $20 million to $10 million.
  • Payment claims which are served on owner occupiers will need to attach a Homeowners Notice information to the payment claim to ensure homeowners understand the SOPA provisions relating to payment claims and to outline the consequences of non-compliance.
  • Increasing the powers of adjudicators in engaging experts to investigate aspects relevant to the adjudication.

Adjudication Review Model

The adjudication review model will allow claimants and respondents to request a review of an adjudication determination.

However, there will be some restrictions in applying for a review of a determination. The determined amount must be:

  • Equal or greater than $100,000 of the scheduled amount; or
  • Less than $100,000 of the claimed amount.

While this amendment will allow parties to have a determination reviewed in specific circumstances, it will also add a layer of extra time and cost to the adjudication process. This is despite security of payment processes generally being considered a timely and less expensive means to resolve payment claim disputes.

Decrease in Threshold When Triggering a Retention Fund

The threshold of the value of a project which requires a retention fund will be reduced from $20 million to $10 million. This will allow for greater protection of retention funds held for the benefit of subcontractors, especially in circumstances where the head contractor becomes insolvent.

New Requirements for Payment Claims

The Bill has proposed changes with respect to the issuing of payment claims to homeowners, with the new requirement that there be a Homeowners Notice enclosed.

The Homeowners Notice will include information regarding the reason that the payment claim is being issued, the correct procedure in responding to the payment claim, and the consequences of disregarding the payment claim.

The Homeowners Notice has been proposed due to the level of uncertainty among homeowners who are unfamiliar with the security of payment regime. It is inferred that issuing a Homeowners Notice will allow homeowners to adequately understand the procedure under the security of payment regime and respond appropriately.

Strengthening the Powers of Adjudicators

The Bill endeavours to afford adjudicators further power in settling disputes. In brief, the powers will extend to adjudicators engaging an independent expert to investigate the relevant works and provide a report indicating their findings.

To Consider

In light of the proposed amendments to the security of payment regime, it is crucial that those who are involved in the construction industry are aware of the proposed changes and, if implemented, take note of the date the legislation will be in effect.

Please click the following link to access the Bill and Regulation:

Regulations link

Bill link

WESTERN AUSTRALIA LEGISLATIVE REFORMS FOR SECURITY OF PAYMENT- THE BUILDING AND CONSTRUCTION INDUSTRY (SECURITY OF PAYMENT) ACT 2021 (WA)

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OVERVIEW

The Building and Construction Industry (Security of Payment) Act 2021 (WA) (the “new Act”) will introduce new security of payment laws that aim to provide a higher level of protection for contractors in recovering payments.

The first stage of reforms will take effect on 1 August 2022 and the following stages will be effective from 1 February 2023 (Stage 2) and 1 February 2024 (Stage 3). It is important to note that all construction contracts entered into prior to 1 August 2022 will continue to be subject to the Construction Contracts Act 2004 which, as of the date of enforcement, will be referred to as the Construction Contracts (Former Provisions) Act 2004.

CHANGES TO BE IMPLEMENTED

The new Act introduces additional rights to payment under construction contracts and further avenues to recover payments owed to contractors.

The changes to be implemented include but are not limited to:

New Security of Payment Laws

  • Payment timeframes where a payment claim is made will be shortened to 20 business days for the head contractor on a project, 25 business days for subcontractors, and 10 business days for certain types of home building works;
  • If no payment schedule is provided, the respondent is required to pay the amount claimed and will be unable to respond to any application for adjudication;
  • A rapid adjudication process will be implemented with the time period for bringing an adjudication application being reduced from 90 to 20 business days;
  • There will be a prohibition of certain contract terms including “pay when paid” and unfair time bars; and
  • There will be a right to suspend work for reasons of non-payment of progress claims.

Retention Trust Scheme

A retention trust scheme will now apply to construction contracts valued over $1 million and the minimum contract value for the scheme to be applicable will be lowered to contracts over $20,000 (by regulations).

To protect retention money in the event of insolvency, the money held or withheld under a construction contract will be held in trust for the benefit of the party who provided the money.

Expanding the Powers of Building Industry Regulators

Building industry regulators will now have the authority to exclude persons with a history of financial failure from the registered building contractor market. This is to prevent persons from contracting with incompetent or predatory businesses.

Further, persons who exercise intimidation or threatening behaviour to prevent another from exercising their rights under the new Act may be prosecuted.

 

TO CONSIDER

With the introduction of legislative reforms with regards to security of payment in Western Australia, it is essential for contractors to become familiar with the additional rights that arise under the new Act, and for principals to be aware of the importance of providing a valid payment schedule when served a payment claim and managing their finances accordingly.

If you require further information, please see the Action Plan for Reform dated September 2021 and issued by the Department of Mines, Industry Regulation and Safety, or contact our office to speak to one of our lawyers to discuss how the new Act will apply to your construction contract.

 

The Importance of Distinguishing Domestic Works in Construction Contracts- Applying the Victorian Security of Payment Act to Contracts for Mixed-Use Developments

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Overview

The application of the Building and Construction Industry Security of Payment Act 2002 (SOP Act) and the Domestic Building Contracts Act 1995 (DBC Act) were considered in the recent decision in Piastrino v Seascape Constructions Pty Ltd [2022] VSC 20, which emphasises the importance of avoiding ambiguity when drafting contracts, particularly when it involves domestic building work or mixed-use development projects. Clear drafting can protect builders under the SOP Act and limit the likelihood of the contract being excluded under the Act as “domestic building” works.

The Facts

A construction contract was entered into between Seascape Constructions (Builder) and Mr and Mrs Piastrino (Owners). It was agreed that the following works were to be completed:

  1. The construction of four apartments;
  2. Modifications to be made to a hair salon; and
  • The installation of a car stacker.

Following a dispute between the Builder and the Owners, the Builder issued an Adjudication Application under the SOP Act.

The Owners disputed this application on the basis that the SOP Act excludes domestic building contracts as per section 7(2)(b) which provides that the Act does not apply to:

a construction contract which is a domestic building contract within the meaning of the Domestic Building Contracts Act 1995 between a builder and a building owner (within the meaning of that Act), for the carrying out of domestic building work (within the meaning of that Act), other than a contract where the building owner is in the business of building residences and the contract is entered into in the course of, or in connection with, that business.

The determination concluded that the SOP Act did in fact apply and that the adjudicator therefore had jurisdiction to issue a determination under the SOP Act.  The adjudicator’s reasoning included consideration that the Owners were in the business of building residences and that the above exception applied.  The Owners applied to the Court for a certiorari to override the adjudicator’s determination.

Proceedings

Three questions arose when the Court considered whether the exclusion in section 7(2)(b) applied in the above-mentioned circumstances.

Mixed-Used Developments and Domestic Building Work

The first question was whether the exception under section 7(2)(b) regarding mixed-use developments applied. Namely, if there was domestic building work in addition to work of a different nature that had been distinguished in the contract.

Under section 12(2) of the DBC Act, a builder is only entitled to payment for carrying out domestic building work if the builder clearly identifies and distinguishes:

(a) the domestic building work from the other work or reason; and

(b) the amount of money the builder is to receive under the contract as a result of carrying out the     domestic building work from the amount of money the builder is to receive under the contract as a result of carrying out the other work or for the other reason.

It was found that the Contract did not distinguish the domestic building work from any other kind of work.

As a result, the Court applied the “dominant character” test in determining whether the construction works under the Contract were considered domestic building work, upon which the SOP Act would apply to the entirety of the contract. As the Contract involved the construction of apartments, the Court held that the dominant character of work was that of domestic building work, meaning that the exclusion under section 7(2)(b) could potentially be applicable to the contract as a whole.

The Business of Building Residences

Although the Owners had a minor victory in relation to the first question with the Court concluding that the building works were not considered “mixed-use developments”, it was held that despite this, the Owners were in the business of building residences and that the construction contract was entered into in connection with that business. Though the Owners had not previously engaged in the business of building residences, their initial intention of entering into the Contract for the purposes of contracting and leasing the apartments for profit in the future was found to be in the course of business. It was further found that the commercial scale and nature of the project to redevelop the property and the long-term objective of holding the property as an investment aligned with the scope in relation of business of building residences.

Accordingly, the section 7(2)(b) exclusion of the SOP Act did not operate in the favour of the Owners and the application for certiorari to quash the adjudication determination was denied.

 

To Consider

As highlighted in this matter, it is crucial that builders distinguish “domestic building work” as required under the DBC Act. This is to avoid a potential fine under the act, in addition to preventing pecuniary losses in circumstances where the “dominant character” of the work is found to be domestic building work, the consequences of which would potentially lead to the construction contract, as a whole, being excluded from section 7(2)(b) of the SOP Act. Likewise, even when carrying out domestic building work, it is important for principals to consider the nature of the construction contract at hand and be aware that the SOP Act could potentially apply to the project.

Jurisdictional argument derails application for summary judgment under security of payment legislation

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The District Court recently considered whether a defendant was able to claim works the subject of a payment claim under the Building and Construction Industry Security of Payment Act 1999 (NSW) (the Act) were performed under more than one contract, despite this reason not being included in any payment schedule issued by the defendant.

In Cosmo Cranes & Rigging Pty Ltd v EQ Constructions Pty Ltd [2022] NSWDC 6, the plaintiff issued two payment claims which included amounts for works completed the subject of variations which had been previously rejected by the defendant.  The defendant did not issue a payment schedule in response to either payment claim.

In seeking summary judgment, the plaintiff submitted that the defendant was unable to dispute the amount payable in respect of these variations as no payment schedule had been issued (see section 15(4) of the Act).  However, the court preferred the submission of the defendant that because it was arguable that the variations were in fact different contracts, there was a question as to whether a valid payment claim under the Act had been served. The court relevantly stated:

Although section 15(4)(b) of the Act places a limitation upon matters which a respondent may raise in opposition to a proceeding to recover a debt sourced in the Act, in order to obtain a judgment, it still remains necessary for a claimant to establish that the respondent was liable to pay the debt (ss 15(4)(a) and 15(1)).  Such liability in the respondent will only arise if, in fact, a valid payment claim has been issued (under s 14(4)(a)).  A payment claim cannot be valid if it claims for work performed under two or more contracts.

The defendant also argued a set-off applied in respect of late and defective works, which had the effect of reducing the plaintiff’s claim.  However, on this point the court decided the set-off should have been properly raised in a payment schedule as a defence arising under the construction contract (see section 15(4)(b)(ii) of the Act).

The court ultimately decided not to order summary judgment.  This decision is a timely reminder that when considering applying for summary judgment, a payment claim must comply with the requirements of the Act.  If a jurisdictional issue is raised by the defendant which submits that the payment claim does not comply with the Act, even when this reason is not included in a payment schedule, courts are generally reluctant to award summary judgment.  The matter will proceed to hearing whether these jurisdictional issues can be properly considered by the court.

This is undoubtedly frustrating to plaintiffs who may not be aware that their payment claim does not comply, particularly if the plaintiff properly considered the works to be variation works and not pursuant to another construction contract.  Given the nuances of the Act, if a project seems to be becoming contentious, it may be valuable to engage a lawyer to minimise the risk of jurisdictional issues associated with payment claims and enforcement options under the Act.

How security of payment mistakes can turn the tables in a negotiation

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We recently assisted a contractor client on a major infrastructure project in Queensland who was engaged in the early stages of dispute with the principal.  The contractor claimed to be entitled to significant additional time and costs under the contract, yet was facing a principal who:

  1. was generally unwilling to engage and properly consider the contractor’s claims; and
  2. had routinely failed to correctly apply contractual provisions.

Some of our client’s claims had been under consideration or assessment for several months and when decisions were ultimately made, reasons for those decisions were scarce or demonstrated the principal’s failure to properly consider the claims and apply the contract.

Strategy

We developed a without prejudice paper for the contractor to submit to the principal.  This paper set out in detail the contractual and evidentiary basis for the contractor’s claims and included the provision of expert reports where necessary.  The claims were ultimately put to the principal by contractual notices and open letters, which were then being discussed and negotiated between the parties.

One of the strategies we recommended was submitting these claims for assessment as part of a payment claim made under the Building Industry Fairness (Security of Payment) Act 2017 (Qld) (BIFA).  On previous occasions, the principal had failed to state or properly explain why the amount proposed to be paid in relation to certain claims was less, including their reasons for withholding any payment, as required by section 69(c) of the BIFA.

Accordingly, our view was that the principal may again slip-up by giving inadequate reasons in respect of certain claims, meaning that the contractor would be in a good position to run an adjudication.  This is because section 82(4) of the BIFA would operate to prohibit the principal from including reasons for withholding in any adjudication response that were not included in the payment schedule.

We assisted the contractor in formulating and submitting the payment claim, which claimed the significant additional costs that had been put to the principal via the without prejudice paper and contractual notices.

The principal’s mistake

As it transpired, the principal failed to serve a payment schedule within the time required under the BIFA.  The principal was only one business day late.  Nevertheless, this meant that the principal would become liable to pay the full claimed amount on the due date for payment under the BIFA[1].

The scheduled amount given by the principal was markedly less than the claimed amount.  While the principal had given some reasons in respect of some additional costs claims, the payment schedule ultimately served (and the arguments made within it) could not be relied upon by the principal for the purposes of the BIFA.

Our client was free to recover the full claimed amount as a debt due and owing in the Supreme Court of Queensland[2].  The principal would not be entitled to bring any counterclaim in those proceedings, nor raise any contractual defence to the action[3].

Letter of demand and engaging with the principal

We drafted an open letter of demand from the contractor to the principal, highlighting the mistake and advising that if payment of the full claimed amount was not received on or before the due date for payment under the BIFA, the contractor would take necessary steps to recover[4].

The next letter we assisted with was a without prejudice letter which set out why the principal’s position as put in the payment schedule was incorrect and demonstrated a failure to properly apply the contract.  This is important because the principal would be liable to pay the full claimed amount under the BIFA, however the BIFA provides the parties with interim rights only.  It would be open to the principal in future to exercise contractual rights to engage in dispute resolution and ultimately litigation.

Progress of negotiation

The principal’s level of engagement with the contractor increased noticeably once there was recognition that they were now liable to the contractor for the full amount claimed and could soon be the listed defendant in judgment debt proceedings for the full amount.  It was now in the principal’s best interests to try to cut a deal with the contractor to avoid the embarrassment and adverse financial impact of court proceedings.

The contractor was now in a position where it all but literally had the disputed sums in its pocket in the ensuing negotiations and discussions.  It was now up to the principal to work through the various claims and supporting documentation that the contractor had provided and come to the contractor with a reasonable settlement offer to avoid proceedings.

Furthermore, the principal was effectively forced to step into the shoes of a plaintiff should it wish to commence a contractual dispute that the contractor had been overpaid to overturn or circumvent the outcome of the BIFA.  Running this dispute would take a great deal of time and effort for the principal.

The contractor advised that the principal’s engagement on the issues had drastically increased in without prejudice discussions.  The principal had now given indications when it would revert to the contractor with assessments and offers on claims.

We recommended that any agreement reached in discussions be formally documented by a succinctly drafted deed of settlement and release.

We regularly assist construction industry participants Australia-wide in contractual disputes and security of payment processes.  Please feel free to get in touch if you would like assistance with these issues.

[1] Section 77(2) of the BIFA.

[2] Section 78(1) of the BIFA.

[3] Section 100(3) of the BIFA.

[4] The first step would be serving of a “warning notice” as required by section 99 of the BIFA.

Security Of Payment Reminder: Christmas Is Coming, But Adjudicator Shopping Is Not Permitted

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The Building and Construction Industry Security of Payment Act (NSW) (‘SOPA’) is touted as establishing a scheme of “pay now, argue later” which promotes the speedy payment of progress claims and resolution of disputes. While these objects do not prevent parties from serving multiple payment claims in respect of the same amount,[1] they do dictate that parties will not be permitted to reagitate the same issues at multiple adjudications. It is necessary to examine the circumstances in which a previous adjudicator’s finding will be binding in a subsequent adjudication.

 

Section 22(4) of SOPA

Section 22(4) of the SOPA provides a helpful starting point for this analysis. This section provides that where one adjudicator has determined the value of any construction work or of any related goods or services under a construction contract, an adjudicator in a subsequent adjudication must give the work (or goods or services) the same value as previously determined, unless satisfied that the value has since changed.

 

Back in 2009, the New South Wales Court of Appeal considered the effect of section 22(4) of the SOPA in the decision of Dualcorp Pty Ltd v Remo Constructions Pty Ltd.[2] Macfarlan JA held that section 22(4) is not an exhaustive statement of the matters determined by an earlier adjudication which are binding on a subsequent adjudicator. His Honour held that the Act as a whole “manifests an intention to preclude reagitation of the same issues”.[3]

 

Objects of SOPA

Section 3 of the SOPA sets out the objects of the Act: promoting the prompt making and payment of progress claims and speedy resolution of disputes. In Dualcorp, the court held that it would be inconsistent with this objective to allow a claimant who was dissatisfied with the outcome of an adjudication to obtain a fresh reconsideration of its claim by simply serving an identical payment claim. If this were possible, there would be no limit to the number of times a claimant could seek to reagitate the same issues at adjudication.[4] Clearly, such abuse would be inconsistent with the object of the legislation.

 

Did the previous adjudicator determine the merits of the issue?

A claimant will only be barred from reagitating an issue addressed in a previous adjudication where the adjudicator decided the merits of the issue. This point was emphasised by the New South Wales Supreme Court in Arconic Australia Rolled Products Pty Ltd v McMahon Services Australia Pty Ltd.[5] In that case, McMahon made three contentious payment claims describing costs for delay and variations. In a fourth adjudication between the parties, Arconic argued that McMahon was not entitled to reagitate its claim since it had been determined by the previous adjudicator.[6]

 

The Court followed the approach in Dualcorp[7] but clarified that the objects of the SOPA would only be frustrated where the first adjudicator had heard and decided the merits of the claim.[8] Here, the adjudicator had rejected the relevant payment claim as it was made prematurely by McMahon. Given that the adjudicator did not consider the merits of the claim, McMahon was entitled to reagitate the issues raised in that payment claim in a subsequent adjudication.[9]

 

Take home tips

Parties should be wary that they are not entitled to raise the same issues at multiple adjudications.

If you are claimant considering whether to proceed with a second adjudication application, you should carefully consider whether the merits of your claim has been determined by a previous adjudicator.

We can assist with advice regarding a previous adjudication determination and the prospects of seeking a further determination.

[1] SOPA s 13(6).

[2] [2009] NSWCA 69 (‘Dualcorp’).

[3] At [67].

[4] At [52].

[5] [2017] NSWSC 1114.

[6] At [3]–[9].

[7] At [13]–[15].

[8] At [29].

[9] At [31]–[32].

Is a progress certificate issued by the Superintendent (or Architect) a payment schedule for the purposes of security of payment?

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It is trite that the “East Coast model” security of payment legislation provides that a respondent in receipt of a payment claim may provide a payment schedule in response[1].  If a respondent fails to provide a payment schedule within the relevant statutory timeframe, generally, the respondent becomes liable to pay the claimed amount[2].

What happens in a case where the contract is administered by a third party – e.g. a project manager, superintendent, architect or quantity surveyor – who provides a progress certificate to one or both parties?  E.g. the superintendent’s certificate under clause 37.2 of an AS4902-2000 or the architect’s certificate under clause N5.1 of the ABIC MW 2018?

Is this certification a payment schedule for the purposes of security of payment?

In our view, the answer will generally be yes.  Below is a summary of some case law in support of our view.

RHG Construction Fitout and Maintenance Pty Ltd v Kangaroo Point Developments MP Property Pty Ltd & Ors [2021] QCA 117 (RHG Constructions)

In RHG Construction, the Queensland Court of Appeal considered an amended AS4902-2000 contract and whether or not the provision of a payment certificate by the superintendent was a payment schedule under the Building Industry Fairness (Security of Payment) Act 2017 (BIFA).

Clause 37.2 of that contract was in generally standard form terms, requiring the superintendent to receive payment claims and issue to the principal and contractor:

“a certificate evidencing the Superintendent’s assessment of retention moneys and moneys due from the Contractor to the Principal pursuant to the Contract.”

Clause 37.2 of the contract contained the following paragraphs included by way of amendment to the AS4902-2000 standard drafting (Deeming Clause):

“In so far as necessary to ensure compliance with the Security of Payment Act, the Superintendent is deemed to issue any payment schedule under clause 37.2 or final payment schedule under clause 37.4 as the agent of the Principal and each such schedule shall constitute a payment schedule for the purposes of the Security of Payment Act.

For the purposes of and where permitted by the Security of Payment Act, each of the dates for delivery of a payment claim in subclause 37.1 constitutes a reference date.”

The contractor issued a payment claim and the superintendent issued an assessment within the relevant statutory timeframe[3].  The assessment stated (relevantly):

“This Payment Schedule has been produced pursuant to the Works Contract for the residential flat being constructed at 98 River Terrace, Kangaroo Point, between the Principal ‘Kangaroo Point Developments MP Property Pty Ltd’ and the Contractor ‘RHG Contractors Pty Ltd’. This Payment Schedule confirms that the Superintendent has assessed, calculated and certified the proper value of Work Under the Contract.”[4]

A week later, the principal’s solicitors issued correspondence enclosing a further purported “payment schedule” to the contractor denying the validity of the payment claim and stressing that if it was incorrect on that point, the document under the correspondence was to be taken to be the principal’s payment schedule for the purposes of the BIFA[5].

The contractor proceeded to adjudication citing the superintendent’s assessment as the principal’s payment schedule under the BIFA and the adjudicator agreed[6].  The principal applied to court for an order declaring the adjudicator’s determination void.

At first instance, Dalton J agreed with the principal that (notwithstanding the Deeming Clause) the superintendent’s assessment was not a payment schedule and ordered the adjudicator’s determination void.  Her Honour considered that the assessment did not comply with s 69(b) of the BIFA because it was a recommendation only as to payment and the document failed to state “the amount of the payment, if any, the respondent proposes to make”, as required by the BIFA[7].

The Queensland appellate court (Sofronoff P, wth McMurdo and Mullins JJA agreeing) overturned the trial judge’s order.  Sofronoff P said the following as to the standard form clause 37.2:

“For many years now, those engaged in construction have employed the standard form contracts drafted by a committee of Standards Australia, a not-for-profit company which, among other things, prepares draft general conditions of contract for various kinds of commercial transactions… Clause 37, which deals with progress claims, as been in its current form since 2004 when the Act of that year was passed.  It has been the subject of much academic analysis and has doubtless been relied upon by commercial parties thousands of times since then.  The effectiveness of clause 37.2 to engage the adjudication provisions of the 2004 Act, and now the current Act, has never been called into question.”[8] (emphasis added)

The effect of the issue of the certificate by the superintendent was the triggering of the principal’s obligation to pay.  Accordingly, the certificate does meet the requirement of s 69(b) of the BIFA[9].

The Deeming Clause was, therefore, “neither artificial nor contrived” [10].  The court considered it relevant that there was no other contractual mechanism whereby a payment schedule would be provided[11].  It would be commercially unworkable for the principal and the superintendent to each issue payment schedules (i.e. one for the purposes of statute and one for the purposes of the contract) because they may differ materially (e.g. provide a vastly differing scheduled amount) [12].

Bucklands Convalescent Hospital v Taylor Projects Group [2007] NSWSC 1514 (Bucklands)

We are not sure whether Sofronoff P’s comment that the effectiveness of clause 37.2 of the Australian Standard contract had never been called into question considered authorities from other east coast jurisdictions.

For example, in Bucklands, Hammerschlag J considered the effectiveness under the NSW statute of clause 37.2 of the AS4000-1997, which provides for the same mechanism of superintendent assessment as the AS4902-2000.

While His Honour considered that the question of jurisdiction should be determined by the adjudicator at first instance[13], His Honour[14], noted that a principal may clothe an agent with authority to provide a payment schedule on their behalf for the purposes of the Building and Construction Industry Security of Payment Act 1999 (NSW) (NSW Act).  The requirement for the superintendent to act honestly and impartially in performing certain functions under the contract, including assessing payment claims, is not the issue at hand[15].  The question:

“…is whether in the circumstances Simmat was exercising function under the contract. Whether it was or was not is a matter of fact. As a matter of law it does not seem to me that a person who is a Superintendent under a contract and who has certifying functions under it is incapable of being appointed as agent to respond to a payment claim under the Act.”[16]

The question was not answered in Bucklands as this was the job of the adjudicator.

However, His Honour’s comments suggest that the use of the standard-form contractual mechanism by the superintendent when progress certificates is likely to give rise to an implication that the superintendent had authority to issue a statutory payment schedule and that the payment certificate was indeed to be interpreted as such.  We consider it likely that the courts would continue to take positions on these issues which is facilitates the objects of the legislation, rather than unduly technical interpretations which themselves would prejudice a party.

Take away tips

As:

  1. the agent (e.g. superintendent, architect, quantity surveyor, etc) will usually act as agent of the respondent under the contract for the purposes of issuing progress certificates (even if they must assess payment claims honestly, reasonably, fairly or the like); and
  2. judicial interpretation of the interplay between widely-used standard form contractual mechanisms tends to favour and facilitate commercial workability,

we are of the view that additional drafting of the kind of the “Deeming Clause” in the RHG Constructions case may not necessarily be required to ensure compliance with the legislation and ensure that the respondent’s interests will not be prejudiced[17].  However, if it is omitted, ensuring that the agent’s payment certificate:

  1. states that it is a payment schedule under the relevant legislation; or
  2. annexes a further document provided by the respondent confirming that the superintendent’s assessment of the amount payable should be taken to be the scheduled amount under the legislation,

are prudent steps to take.  It would also be beneficial for the contract or terms of engagement between the agent and the respondent to expressly state that part of the agent’s engagement is to issue payment schedules under the legislation on behalf of the respondent, having regard to Bucklands and the classic agency case Baulderstone Hornibrook Pty Ltd v Queensland Investment Corporation [2007] NSWCA 9.

What to do if you are the respondent party (e.g. the principal or owner) and you disagree with your agent’s assessment of the payment claim?  That will be the subject of one of our next articles!

[1] E.g. see s 14(1) of the NSW Act.

[2] E.g. see s 14(4) of the NSW Act (subject to s 17(2)).

[3] Kangaroo Point Developments MP Property Pty Ltd v RHG Construction Fitout and Maintenance Pty Ltd & Ors [2021] QSC 30 at [5].

[4] Ibid at [13].

[5] Ibid at [6].

[6] Ibid at [19].

[7] Ibid at [14].

[8] RHG Construction Fitout and Maintenance Pty Ltd v Kangaroo Point Developments MP Property Pty Ltd & Ors [2021] QCA 117 at [23].

[9] Ibid at [27].

[10] Ibid.

[11] Ibid at [28].

[12] Ibid.

[13] Bucklands Convalescent Hospital v Taylor Projects Group [2007] NSWSC 1514 at [26].

[14] At [33] referring to Baulderstone Hornibrook Pty Ltd v Queensland Investment Corporation [2007] NSWCA 9.

[15] Ibid at [34].

[16] Ibid at [35].

[17] Assuming the respondent agrees with the superintendent’s assessment.

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

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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].

Attention residential builders in NSW – big changes ahead from 1 March 2021 you will be able to use the Building and Construction Industry Security of Payment Act to recover money owed by homeowners

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On 1 September 2020, the NSW Government released the Building and Construction Industry Security of Payment Regulation 2020 (2020 Regulation) which radically changes the way residential builders and homeowners resolve disputes in relation to outstanding progress claims after 1 March 2021.

Currently, section 7(5) of the Building and Construction Industry Security of Payment Act 1999 (NSW) (the Act) and section 4(1) of the Act provide that the Act does not apply to owner occupier construction contracts, that is, contracts where the homeowners intend to live in the premises.  In these instances, residential builders cannot use the Act to recover outstanding progress claims due from homeowners.

This will all change on 1 March 2021 when the 2020 Regulation commences which will remove owner occupier construction contracts as a prescribed class to which the Act does not apply.

This means come 1 March 2021, residential builders will have a statutory right to payment and be able to serve payment claims on homeowners under the Act and apply for adjudication in relation to any outstanding progress claims.

This is a big game changer for residential builders as it will improve cash flow and mean that residential builders will be able to claim outstanding progress claims from homeowners without having to get involved in expensive and lengthy Tribunal and Court proceedings in order to get paid.

Whilst homeowners will still be entitled to bring a building claim in the Tribunal or Court for defective work and the like, such a claim will not defeat or delay residential builder’s entitlements under the Act.  This means that homeowners will be required to pay any amount awarded pursuant to an Adjudication Determination prior to the determination of any Tribunal or Court proceedings which will (in most cases) reduce in the issues in dispute in any Tribunal or Court proceedings.

What residential builders need to know now

The NSW Government has given residential builders and homeowners a transition period to adjust to these major reforms.  We suggest during this period residential builders should familiarise themselves with the Act and their contracts in relation to:

  • the requirements of valid payment claims including serving supporting statements with all payment claims where builders contract directly with homeowners;
  • the dates from and methods of service of valid payment claims;
  • identification of a valid payment schedules by homeowners;
  • review of your standard contracts to ensure that they comply with the minimum contracting requirements and minimum variation requirements under the Home Building Act 1989 NSW (HBA), as this may effect how an adjudicator assesses amounts payable under the contract so your paperwork has to be in order;
  • review your practices and procedures to ensure that you have the necessary resources to utilise the adjudication process and respond within the strict time frames. The benefit of this is that it will reduce the time and cost (in most cases) of litigation as an Adjudication Determination will usually be received within 21 days of lodging the Adjudication Application; and
  • get legal advice to set yourself up so you can utilise the Act and put yourself in the best position to get paid.