CONTRACTOR STRIKES SECURITY OF PAYMENT GOLD BY SKIRTING THE MINING EXCEPTION

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Mining owners and operators in most Australian States[1] will be aware of the “mining exception” in security of payment legislation.  The mining exception excludes ‘the extraction (whether by underground or surface working) of minerals, including tunnelling or boring, or constructing underground works for that purpose’[2] (Mining Exception) from the definition of the term “construction work” and, consequently, the ambit of statutory interim progress payment mechanisms.

However, in a decision handed down on 11 November 2020, the NSW Supreme Court[3] followed the approach of the Queensland courts[4] by construing the Mining Exception narrowly in favour of contractors and subcontractors.  In short, the Mining Exception does not  extend generally to some broad category of mining industry operations.[5]

Facts

Downer EDI Mining Pty Ltd (Downer) was engaged by Cadia Holdings Pty Ltd (Cadia) the operator of the Cadia East underground panel cave mine south-west of Orange, under a “Works Contract” dated 16 November 2018 (Contract), to perform “development phase” works, being (for the most part) underground works to provide access to the proposed undercut and extraction levels for future extraction of minerals in the “production phase”[6]

Downer proceeded to adjudication on a payment claim served on Cadia.  An adjudicator appointed under the Building and Construction Industry Security of Payment Act 1999 (NSW) (SOPA) determined that Cadia pay Downer $1,017,741.72.[7]

Cadia challenged the determination on two grounds:

  1. the Mining Exception applied so the Contract was not a “construction contract” within the meaning of the SOPA; and
  2. there was no available reference date to support Downer’s payment claim.

Decision

Cadia’s challenge to the adjudication determination was unsuccessful on both grounds.

Stevenson J framed the effect of the Mining Exception as excluding ‘from the definition of “construction work”, the following works:

  • extraction (whether by underground or surface working) of minerals;
  • tunnelling or boring for the purpose of extraction (whether by underground or surface working of minerals; and
  • constructing underground works for the purpose of extraction (whether by underground or surface working) of minerals.’[8]

His Honour held that the heart of the question of the application of the Mining Exception to a contract is what a contractor undertakes to do under the contract in question, not what work that contractor actually does[9] (which comes to be answered later).

The works under the Contract did include “tunnelling or boring” as well as “constructing underground works”.  However:

  1. these activities were not for the “purpose of” extraction of minerals; and
  2. the Contract required Downer to undertake work beyond these activities which fell within the meaning of “construction work” or the supply of “related goods and services”.

On considering generally whether activities performed by a contractor are for the “purpose of” extraction of minerals, His Honour:

  1. agreed with Fryberg J in Thiess that the relevant purpose should be decided ‘by reference to what a reasonable person in the position of the parties would conclude as to the object of what purpose of the contract’[10];
  2. held that the Mining Exception is to be construed narrowly to benefit the subcontractor[11];
  3. held that a close “proximity” between the act of extraction and the tunnelling and boring or construction of underground works was required (and this was not so in this case, where the extraction phase would not begin until 2022 after subsequent works)[12];
  4. considered that “extraction” does not include work “associated with” or “preparatory to” extraction[13]; and
  5. noted that the SOPA expresses where there is an intention to bring in ancillary activities, which is not the case with the Mining Exception[14].

Further, in this case, His Honour considered that some works under the Contract required of Downer were “construction work” or supply of “related goods and services”, meaning the SOPA applied.  Relevantly, His Honour stated (accepting Downer’s counsel’s submission):

‘…if there is a contract which contains undertakings to carry out construction work and undertakings to carry out work that it not construction work, the contract remains a construction contract. If a payment claim includes a claim for work that is not construction work, the payment claim is valid, but the adjudicator should not award an amount for work that is not construction work. Thus, the Mining Exception has an important role to play in limiting the amount that the adjudicator should award.’[15]

On the reference date point, His Honour determined that there was an available reference date under the Contract for the service of the payment claim.  Most of the points raised were of limited significance for general application.  One point of general interest was that a clause of the Contract required Downer to invoice ‘in respect of the Services performed’ of the proceeding month.[16]  Downer’s works were performed not in the preceding month, but at an earlier time.

His Honour relied on s.13(4) of the SOPA which allows a contractor to serve a payment claim within the period determined under the construction contract or 12 months after construction work to which the claim relates was last carried out.  The payment clause in the Contract attempted to restrict the operation of s.13(4) and was a void provision, by operation of s.34 of the SOPA.

Take Home Tips

Contractors who consider that they are not entitled to have recourse to security of payment legislation simply because they work on a mine site should re-examine closely the terms of their contract.  Can it really be said that the contract works are for the “purpose of” extraction?  Or is there some distance between the works to be performed and the eventual act of extraction?

Perhaps there are portions or stages of works under the contract to which the Mining Exception would apply, but this would not necessarily mean that the entire contract is not a “construction contract” within the meaning of the security of payment legislation.

 

 

[1] Queensland, Victoria, South Australia, Tasmania and the Australian Capital Territory.  However, Western Australia is likely to shortly follow suit once the Building and Construction Industry (Security of Payment) Bill 2020 (WA) passes through Parliament.

[2] Section 5(2) of the Building and Construction Industry (Security of Payment) Act 1999 (NSW).

[3] Cadia Holdings Pty Ltd v Downer EDI Mining Pty Ltd [2020] NSWSC 1588 per Stevenson J.

[4] HM Hire Pty Limited v National Plant and Equipment Pty Ltd [2012] QSC 4 and Thiess Pty Ltd v Warren Brothers Earthmoving Pty Ltd [2012] QCA 276 (Thiess)

[5] At [133].

[6] At [92] and [93].

[7] At [3].

[8] At [34].

[9] At [70].

[10] At [96], quoting Fryberg J in Thiess at [76].

[11] At [102]

[12] At [103] and [91].

[13] At [104].

[14] At [105].

[15] At [134].

[16] At [171].

How the new 2020 SOPA Regulation will affect owner occupier construction contracts: the key changes that you need to know

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Following our article HERE that summarised the reforms introduced by the Building and Construction Industry Security of Payment Regulation 2020 (NSW) (2020 Regulation), this article explains in detail one of the key reforms.

Reform effecting owner occupier construction contracts

Currently, section 7(5) of the Building and Construction Industry Security of Payment Act 1999 (NSW) (the Act) and clause 4(1) of the provide that the Act does not apply to the prescribed class of owner occupier construction contracts.

An owner occupier construction contract is a construction contract for the carrying out of residential building work (as defined in the Home Building Act 1989 (NSW)) on such part of any premises as the party for whom the work is carried out resides or proposes to reside in. Accordingly, for this type of construction contract, builders are not able to apply for adjudication if there is a payment dispute.

This position will change when Schedule 2 of the 2020 Regulation commences on 1 March 2021. Schedule 2 of the 2020 Regulation will omit the current clause 4(1) of the 2020 Regulation and remove owner occupier construction contracts as a prescribed class to which the Act does not apply. The effect of this is will be that the Act will apply to owner occupier construction contracts so that builders will be able to serve payment claims on owner occupiers under the Act and apply for adjudication.

What residential home builders and owner occupiers need to know

While the 2020 Regulation commenced on 1 September 2020 and currently provides that the Act does not apply to owner occupied construction contracts, it seems that the NSW Government has provided residential home builders and owner occupiers with a transition period to adjust to the reform.

The period from now until 1 March 2021 should be utilised to understand how the changes will effect residential home builders and owner occupiers. Importantly, both parties should be aware that:

  • Residential home builders will be able to serve payment claims pursuant to the Act on owner occupiers.
  • Owner occupiers should familiarise themselves with the Act as it will apply to contracts entered into for residential building work at their residence (or proposed residence). Most significantly, owner occupiers should be aware of the requirement to serve a payment schedule within 10 business days after the payment claims is served by the builder if the amount claimed is disputed and will not be paid in full. The consequences of not serving a payment schedule within the timeframe prescribed in the Act are serious and may compromise an owner occupier’s right to participate in an adjudication.
  • The due date for payments will be effected. In accordance with section 11(1C) of the Act, a progress payment becomes due and payable on the date on which the payment becomes due and payable in accordance with the contract or within 10 business days after a payment claim is made (if the contract has no express provision regarding the due date for payment).
  • As the adjudication process is relatively quick and cheap to recover progress payments compared to litigation (in some circumstances), it is likely that adjudication will become a popular method for resolving payment disputes under owner occupier construction contracts.

If you would like to discuss or would like any more information, please contact us at info@bradburylegal.com.au or (02) 9248 3450.

 

 

Spring is here and so is the Building and Construction Industry Security of Payment Regulation 2020

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On 1 September 2020, the Building and Construction Industry Security of Payment Regulation 2020 commenced (2020 Regulation) repealing the 2008 Regulation.

The 2020 Regulation will provide the legislative support and administrative detail for the operation of the Building and Construction Industry Security of Payment Act 1999 (NSW) (Act) as provided by the amendments which commenced on 21 October 2019. These amendments came about to address poor payment practices and the high incidence of insolvencies in the building and construction industry and also, to facilitate prompt payment, preserve cash flow and resolve disputes quickly and efficiently.

The 2020 Regulation is not retrospective and will not apply to contracts entered into prior to its commencement date.

Key reforms of the 2020 Regulation include:

  • removing the annual reporting requirements for trust accounts to NSW Fair Trading,
  • introducing a requirement for head contractors to keep a ledger for retention money held in relation to each subcontractor and provide the subcontractor with a copy of a ledger at least once every 3 months or longer period of 6 months if agreed in writing, and also to provide trust account records to subcontractors if their money is held in trust,
  • supporting statements are only required for subcontractors or suppliers directly engaged by the head contractor,
  • removing owner occupier construction contracts as a prescribed class of construction contract to which the Act does not apply, and
  • introducing qualifications and eligibility requirements for adjudicators to improve the quality of adjudication determinations under the Act.  The eligibility requirements include either a degree or diploma in a relevant specified field with at least 5 years’ experience, or at least 10 years’ experience in a relevant specified field.  The continuing professional development requirements for adjudicators will commence on 1 September 2021.

Of particular note, the project value threshold (value of the head contractor’s contract with the principal) for retention money trust account requirements will not be reduced from $20 million to $10 million as previously foreshadowed. The existing threshold will remain. Perhaps, given the current climate, it was considered too much of an administrative burden on head contractors who are already dealing with the pressures of delivering projects during Covid. A copy of the 2020 Regulation is  here.

If you would like to discuss or would like any more information, please contact us at info@bradburylegal.com.au or (02) 9248 3450.

If you would like to receive our regular newsletters, please click  here.

When are settlement agreements concerning payment claims void under SOPA?

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If a respondent fails to issue a payment schedule in time, but the parties then reach a settlement agreement in relation to the payment claim and construction contract, can the claimant still pursue summary judgment for the full claimed amount due to s.34 of the Building and Construction Industry Security of Payment Act 1999 (NSW) (SOPA)?

Facts

In Reward Interiors Pty Ltd v Master Fabrication (NSW AU) Pty Ltd [2020] NSWSC 1251, the claimant served a payment claim and the respondent did not respond within 10 business days as required by the SOPA.  The parties attended a meeting three weeks after the payment claim was issued and agreed to a reduced amount to be paid on the payment claim.[1]  The respondent paid the settlement amount the following day.[2]

The respondent then commenced proceedings against the claimant for damages arising from work performed by the claimant.

The claimant cross-claimed and sought summary judgment on the full payment claim amount. The claimant argued that s.34, which prohibits parties from contracting out of the SOPA, rendered the settlement agreement void.[3]

Decision

The claimant offered no authority for the argument that s.34 of the SOPA renders void settlement agreements which compromise a dispute concerning an amount claimed in a payment claim or the construction contract between the parties generally.[4]  The claimant had agreed not to move for summary judgment on the full claimed amount by accepting the reduced settlement amount.[5]

Stevenson J held that it was at least arguable that the settlement agreement was not rendered void because it acknowledged the operation of the SOPA, yet recorded the parties’ intention that in the particular circumstances their rights would instead be governed by their agreement.[6]  This did not constitute an ‘attempt to deter a person from taking action under’ the SOPA.[7]

Tips for binding settlement agreements on payment claims

The answer to the question posed in the introduction is no.  Assuming the settlement agreement seeks to properly compromise existing entitlements, it will not be voided by s.34 of the SOPA.

The terms should be clearly expressed and specific.  It should state that the claimant has agreed to accept the settlement amount in “full and final satisfaction” of the payment claim and claims made in the payment claim. The terms should provide that once the respondent pays the settlement amount, the claimant “releases” the respondent from any claims or proceedings in respect of the payment claim and claims made in the payment claim.

Where settlement agreement may be rendered void under s 34 is where it seeks to exclude or restrict rights or entitlements arising in the future.  For example, where the parties simply agree (without more) that the claimant will have no entitlement to submit further payment claims.

Of course, the respondent should always serve a proper payment schedule (scheduling nil or a reduced amount and giving reasons) in response to a payment claim, even if confident in securing a settlement, in order to avoid the type of argument raised in Reward Interiors.

[1] At [11].

[2] At [14].

[3] At [15].

[4] At [19].

[5] At [23].

[6] At [24] and [26].

[7] At [25], re s.34(2)(b).

Suspension of relief: take out notices, jurisdictional error and Security of Payment Act

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In Parrwood Pty Ltd v Trinity Constructions (Aust) Pty Ltd, the Court confirmed that, for the purposes of the Building and Construction Industry Security of Payment Act 1999 (NSW) (SOPA), taking the work out of the hands of a contractor will not remove reference dates accrued before the take out notice is served, even if they are not actually used until after the take out notice is issued.

Although the facts were unusual and complicated, in the unique world of the SOPA they are not unheard of. This note is useful for parties considering whether:

  1. to issue a take out notice instead of a termination notice (particularly for NSW construction contracts entered into before 21 October 2019); or
  2. to withdraw an adjudication application in the event of jurisdictional error by an adjudicator on the first determination, to re-lodge before a new adjudicator.

The facts

The contractor was working under the principal in a residential building project. The contractor accrued reference dates on the 25th day of each month. The contract contained an AS standard clause where the contractor fails to show reasonable cause for its default:

“the Principal may by written notice to the Contractor:

(a) take out of the Contractor’s hands the whole or part of the work remaining to be completed and suspend payment until it becomes due and payable pursuant to subclause 39.6; or

(b) terminate the Contract.”

The parties fell into dispute and the principal asked the contractor to show cause.

Then:

  • on 25 August 2019, the monthly reference date for a SOPA claim came about;
  • on 3 September 2019, the principal issued a notice that took out of the contractor’s hands all of the work remaining to be completed, instead of terminating the contract; and
  • on 6 September 2019, the contractor issued a payment claim in the amount of $2,023,645.76. This payment claim was said to use the 25 August 2019 reference date.

In response, the principal scheduled “$Nil”.

The contractor applied for adjudication under the SOPA. The adjudicator declined to determine an amount that the contractor was owed (if any), finding the payment claim was invalid.

After it received the first adjudicator’s decision, the contractor “withdrew” its application, and made a second adjudication application. The contractor argued that the first adjudicator had failed to exercise his statutory function in declining to determine the amount owing. The second adjudicator considered the application and awarded over $400,000 to the contractor. The principal applied to the Supreme Court to set aside the second adjudication determination.

There were two broad issues that the Court was required to consider.

Suspension and payment claims

The first issue was what effect the take out notice had on the ability to issue payment claims.

The Court found that even though the payment claim was served after a take out notice, it was saved by the fact that it was served for a reference date occurring before the take out notice was made.

The outcome would have been different if the take out notice was served before the reference date. In this case, the contractor’s rights are suspended by the take out notice, and it cannot make a payment claim under the fast-track SOPA. It can, however, still make a claim under general law.

A take out notice cannot extinguish a right to make a payment claim that already exists.

Second Adjudication

Jurisdictional error

The second issue concerned the unusual circumstances in which a claimant may effectively redo its application.

The Court found that the first adjudicator had not made a ruling that, for example, the contractor was entitled to “$Nil”. Rather, the adjudicator had decided that, no matter what he thought about the facts, he could not determine any adjudicated amount (“I must decline therefore from determining …”).

The first adjudicator had failed to determine the amount of the progress payment (if any) to be paid, as required under section 22(1) of the SOPA. Therefore, the first purported determination was void.

Making a second application

Section 26(3) of the SOPA allows for a claimant to withdraw an application and make a new adjudication application, if the adjudicator accepts the application but then “fails to determine the application within the time allowed”. The claimant must withdraw and make the new application within five business days after it is entitled to withdraw the previous adjudication application.

This may occur where the adjudicator has made a jurisdictional error in failing to determine the application.

If the original decision is decided by a court to be valid (because there was no jurisdictional error), then the second application is wasted. However, if the original decision is declared void, then the second application may still be valid.

Conclusion

It pays to be aware of when reference dates arise, and when take out notices can and should be served. Principals concerned to issue effective take out notices should be mindful of existing reference dates which have or may accrue before that notice.

Claimants should be keenly aware of the existence of any jurisdictional error on the part of adjudicators. Such error may allow them to re-lodge an adjudication application.

 

 

A Downer of a decision: The importance of articulating adjudication submissions

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In Diona Pty Ltd v Downer EDI Works Pty Ltd [2020] NSWSC 480 (Diona), the Supreme Court considered an application to set aside an Adjudicator’s Determination for failure to consider the terms of the contract as required by s 22(2)(b) of the Building and Construction Industry Security of Payment Act 1999 (the SOP Act).

Key takeaway:

  • It is important to ensure that adjudication submissions clearly articulate all relevant arguments and contractual provisions. Unclear, poorly framed or ambiguous submissions can be costly.
  • An adjudicator’s decision will not be declared void simply because it contains what one party considers to be an error or failure by the adjudicator to expressly address all arguments made in parties’ submissions.
  • Lawyers can be useful to assist in preparing an adjudication application and response. Having prepared and responded to numerous security of payment claims, the lawyers at Bradbury Legal are experts at ensuring your arguments are clearly articulated.

 

Background

Diona Pty Ltd (Diona) entered into a subcontract with Downer EDI Works Pty Ltd (Downer), for Downer to provide works in relation to safety upgrades on the Great Western Highway, Blackheath. Downer proceeded to adjudication on a payment claim under the SOP Act. On 16 April 2020, the relevant Adjudicator determined that Downer was entitled to a progress payment of $430,990.13 (Determination).

Diona made an application to the Supreme Court, seeking a declaration that the Determination was void and an injunction preventing Downer from requesting an adjudication certificate or filing the adjudication certificate as a judgment debt. Diona contended that the Adjudicator had incorrectly awarded a set off claim by Downer, in response to Diona’s liquidated damages claim, in the amount of $30,000 on account of two extension of time claims (EOT Claims).

Diona argued that the Adjudicator had not fulfilled the requirements of s 22(2)(b) of the SOP Act because the Adjudicator had failed to give any reference to, or consideration of, Diona’s contention in its adjudication response submissions that Downer was not entitled to these extensions of time, due to the operation of a time bar in the contract.

 

Did the Adjudicator consider the time bars?

The central question was whether the Adjudicator considered the provisions of the contract. Under section 22(2)(b) SOP Act, an adjudicator must consider the provisions of the construction contract.

To determine if the Adjudicator did consider the contractual provisions, especially those containing the time bar, the Court looked at the submissions made by both parties and the Adjudicator’s determination.

The Court noted that Downer had ‘devoted a number of pages to its contentions concerning extension of time and, in particular, its asserted entitlement to EOT 18 and EOT 21’. This was contrasted with Diona’s submissions, the Court found did not properly engage with Downer’s EOT Claims. Diona’s submissions stated:

‘Determinations of claims for…extension of time…by Diona are final and cannot be disturbed except by raising a Claim under the Contract, see relevant clauses of the Subcontract.’

The Court highlighted a part of the Adjudicator’s reasons which stated:

‘The Act at section 22(2)(b) requires the adjudicator to consider the provisions of the construction contract when making the determination’

Having regard to the Adjudicator’s express reference to s 22(2)(b) of the SOP Act, the Court stated that there were several reasons why the Adjudicator did not refer to the dispute clause in the Determination. Firstly, the Adjudicator may have felt that Diona did not properly articulate and develop the time bar argument. Alternatively, the Adjudicator may have misunderstood the submissions. The Court concluded that:

‘The Adjudicator may have come to the wrong decision about Dower’s entitlement to EOT 18 and EOT 21. But that, without more, is not a basis to set aside the set aside the determination.’

The argument that Diona sought to raise, while potentially valid, was not properly articulated. Therefore, it could not be inferred that the Adjudicator had failed to consider the provisions of the subcontract as required by s 22(2)(b) of the SOP Act.

 

So what?

The significance of this case is that it shows that what appear to be errors or failures to consider an argument by an adjudicator will not always result in a basis to set aside the adjudicator’s determination. The adjudicator’s decision can be rough and ready, provided the adjudicator makes their decision in accordance with the SOP Act. Payments made under SOP Act are on account only and may be determined on a final basis at a later stage.

 

Case article – Brolton Group Pty Ltd v Hanson Construction Materials Pty Ltd

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In Brolton Group Pty Ltd v Hanson Construction Materials Pty Ltd [2020] NSWCA 63 (Brolton), the NSW Court of Appeal considered the jurisdictional and procedural fairness grounds of an adjudicator’s determination.

Background

Brolton was contracted by Hanson to build a quarry processing plant at Bass Point. The parties agreed on a guaranteed maximum price of $85 million (excluding GST) in which Brolton was entitled to claim monthly progress payments on the last Tuesday of each month. Hanson claimed liquidated damages and the contract was eventually terminated on 3 October 2018. In August 2019, Brolton served a payment claim on Hanson. The payment claim claimed work up to September 2018 as well as interest on unpaid amounts to August 2019. The adjudicator determined in favour of Brolton, issuing an adjudication amount of $2,877,052.75. Hanson challenged the decision in the Supreme Court, with the Supreme Court finding in favour of Hanson. This resulted in the appeal by Brolton to the NSW Court of Appeal.

The Court’s decision

Brolton raised two main grounds of appeal. The first and most pertinent issue, concerning jurisdiction, centred predominantly on the availability of a reference date on which Brolton could make its payment claim.
Importance of jurisdiction and the trouble of jurisdictional error
Under the Building and Construction Industry Security of Payment Act 1999 (NSW) (SOP Act) section 22, an adjudicator is given the statutory authority to determine the amount of a progress payment, the date on which such amount became payable and the rate of interest payable on any such amount. The importance of section 22 is that it sets out the jurisdiction of an adjudicator. As the saying goes, with great power comes great responsibility. While the adjudicator is given the power to make these determinations, section 22 sets out the limited factors that the adjudicator can consider. These are the responsibility components of the adjudicator’s determination. Two of the relevant factors to consider in Brolton was the provisions of the SOP Act and the payment claim.
While adjudicators are given the power to make determinations, they can only do so in certain circumstances or if there are specified preconditions. In the legal world, this is called a ‘jurisdictional fact’. As Gleeson JA described in Brolton (at paragraph 28), the term jurisdictional fact is used to describe ‘any precondition which a statute requires to exist in order for the decision-maker to embark on the decision-making process’. Jurisdictional facts fall into two types:

1. The existence of an identified state of affairs; or
2. A state of satisfaction of the decision-maker as to an identified state of affairs.

A jurisdictional fact gives a decision-maker the power to make the decision. If it exists, then an adjudicator can make a determination. In this way, the reference date activates the adjudicators powers to make a determination under the SOP Act.
Under the SOP Act, a claimant is only able to make a payment claim when there is a reference date under the construction contract. Therefore, the existence of a reference date is a jurisdictional fact that falls into the first category. This is because the existence or non-existence of a reference date is objective and does not depend on whether the adjudicator is satisfied that a reference date exists. Where an adjudicator exercises its power, but the jurisdictional fact does not actually exist, the adjudicator has made a jurisdictional error..
Getting back to the case, in submitting its payment claim, Brolton claimed in its adjudication submissions that the reference dates for August 2018 and September 2018 were available for the payment claim. Hanson also contended that the September 2018 reference date was available for the progress payment. However, the adjudicator ‘went rogue’ and determined that the reference date was in fact 23 October 2018. There were a few issues with this. Firstly, the 23 October 2018 was not the last Tuesday of the month (which in fact was 30 October 2018). Secondly, the contract had been terminated on 3 October 2018, meaning no further reference dates arose. As the clause entitling Brolton to a progress payment did not continue beyond the termination of the contract, the adjudicator had made a jurisdictional error. The reference date the adjudicator relied on did not exist, and therefore the determination was void and the $2.8 million decision was overturned (as if it had never been made).

Although Hanson succeeded on the first issue, the Court was still minded to consider the second issue on appeal. The second issue concerned the procedural fairness of the adjudicator’s decision. Like jurisdiction, procedural fairness is a legal term that has important consequences for adjudication determinations. Procedural fairness is an aspect of natural justice, a foundational legal principal that sets the standards of how people are to exercise their authority. The concept of procedural fairness means the process in which a decision is made should be just. Procedural fairness requires that parties have the right or opportunity to have their case heard by the decision-maker. If there is a substantial denial of natural justice, the decision-maker’s determination will be void. In this case, the issue of procedural fairness arose because the adjudicator determined that the relevant reference date was a date not submitted by either party. Brolton argued that while procedural fairness was denied to the parties, it was immaterial and should not void the adjudicator’s decision. The Court found that the findings by the adjudicator were a material breach of procedural fairness and therefore there was a breach of natural justice.

Take-away points

While this article has discussed a few technical legal concepts, the main take away points from Brolton are that:
• A progress payment must be linked to a specific reference date. If an adjudicator incorrectly attributes a payment claim to a reference date which does not exist, the determination will be void.
• It is not enough that another reference date is available for the payment claim to be linked to. If the adjudicator goes rogue and determines a reference date not submitted by the parties, the decision will be void.
• Claimants should identify and make it abundantly clear the relevant reference date to which a payment claim relates and make submissions in the adjudication application as to what the relevant reference date is.
• Reference dates are essential for an adjudicator to make a determination. A failure by the adjudicator to appropriately determine a reference date can have dire consequences to claimants.
• Note: The recent amendments to the NSW SOP Act have eliminated the post-termination payment claim issue. Section 13(1C) now states that for construction contracts that have been terminated, a payment claim may be served on and from the date of termination. This change will only apply to contracts entered into after 21 October 2019.

Subcontractor Supporting Statements in the SoPA

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It is commonly understood by participants within the building and construction industry that payment claims made by a head contractor under the Building and Construction Industry Security of Payment Act 1999 (NSW) (SoPA), are to be served with a supporting statement in respect of subcontractors.

The purpose of imposing this obligation on head contractors is clear and simple: to ensure payment of subcontractors is a priority. Ideally, the inherent insolvency risks will be passed ‘up the chain’ to head contractors and ultimately, to the developers who are often better placed to weather the consequences.

But, what happens when the Head Contractor does not comply with their supporting statement requirements under the SoPA? Does the developer still need to pay it?

This question has been the subject of some judicial deliberation, and has been answered with some finality in the recent case of TFM Epping Land Pty Ltd v Decon Australia Pty Ltd [2020] NSWCA 93.

The Parties

TFM Epping and Katoomba Residence Investments Pty Ltd (TFM), as the developer, engaged Decon Australia Pty Ltd (Decon) as the builder and head contractor to carry out building and construction works on a residential development located at Epping in Sydney’s North West.

The Facts

On 3 June 2019, Decon served on TFM a Progress Claim under the SoPA, seeking approximately $6.4 million (the Claim). The Claim included works carried out throughout project history, for which Decon had not previously been paid.

The supporting statement accompanying the Claim had referenced only one subcontractor that had completed works about 1 year prior to issuing the Claim and specified that the supporting statement applied for works undertaken between 27 June 2018 and 3 July 2018.

TFM did not, within the 10 days prescribed by SoPA, serve a Payment Schedule on Decon, and as a consequence, became liable to pay the full sum sought in the Claim. Payment was not made.

On 3 July 2019 Decon filed a Summons and Notice of Motion in the Supreme Court of New South Wales, both of which sought summary judgment in their favour, for the full amount of the Claim. Shortly after, TFM filed a response, challenging the validity and service of the Claim.

The Decision at First Instance and Issues on Appeal

It was the decision of the Court at first instance that the response filed by TFM did not raise triable issues and to find in favour of Decon. On appeal, TFB sought to challenge this decision.

TFM sought to challenge the decision at first instance on the following 3 grounds:

  1. The Claim was not valid as it had not been accompanied by a supporting statement as required under s13(7) of the SoPA;
  2. The Claim sought payment in respect of variations, which were not performed under the contract and ought to have been claims in quantum meruit; and
  3. The Claim was invalid as it was not made in respect of an available reference date.

The key argument on appeal was that the supporting statement served by Decon was defective for the following reasons:

  • It had not included a ‘list’ of the subcontractors, it had simply given details of one subcontractor; and
  • The dates for which the supporting statement applied did not align with the dates of the works which were the subject of the Claim.

On this Basis, TFM asserted there was an absence of a compliant supporting statement, which rendered the service of the Claim invalid. In the alternative, TFM asserted the Claim itself was invalid.

The Decision on Appeal

The Court found in favour of Decon on all 3 grounds and dismissed TFM’s appeal for the following reasons.

Supporting Statements

The critical document giving rise to the legal right to recover (and obligation to pay) a progress payment, is the payment claim. Despite the wording of s13(7) of the SoPA, the Court determined that it does not attach a condition to the nature or content of the payment claim itself.

In arriving at this Decision, the Court noted that s13(7) of the SoPA included within itself a penalty for parties that did not comply, in terms of a fine. The Court gave significant weight to the purpose of the SoPA, and noted that in circumstances where Parliament has not stated an intended consequence, the Court would be reluctant to imply one.

Variations

The Court found that it could be possible that the variations had not properly arisen under the contract, for example, if some procedural step had not been taken. However, if TFM were of this view, the Court determined it ought to have been raised in a payment schedule. The Court found that including the variation items in the Claim, even if they were disputed, did not render the Claim invalid.

In the present case, Decon had not formulated the variations as a claim for quantum meruit, but rather had stated them to be a claim for work undertaken under the Contract.

Takeaway

This case highlights the fact that the document giving rise to the right to recover (and obligation to pay) a progress payment is the progress claim itself.

A failure to provide a supporting statement in accordance with the SoPA will not invalidate a progress claim. However, head contractors should take a strong note of the reference to the penalty provisions within the SoPA, and should ensure strict compliance with their obligations when serving payment claims for progress payments.

The case also serves as a reminder to respondents that the Court system cannot be used as a ‘second chance’ forum to respond to payment claims. The Court has shown it will not hear matters which should have been raised by way of a payment schedule, and determined in the adjudication system.

As always, preventing problems with your payment claims and payment schedules is much easier (and cheaper) than fixing them. If you or someone you know wants more information or needs help or advice, please contact us on 02 9248 3450 or email info@bradburylegal.com.au.

Letter of Demand 101

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Given the current economic climate, it is important more than ever for a business to ensure that they are able to receive payment for work carried out. This is particularly important for businesses in the construction industry as cashflow is the lifeblood of many construction companies, particularly subcontractors.

If an invoice remains unpaid past the due date for payment, one of the first steps would be to issue a letter of demand.

A letter of demand is a demand to get a third party to do a specific thing, or to cease doing a certain thing. However, in most instances, it is used to seek payment for debts due and payable.

A comprehensive letter of demand for an outstanding debt should include the following:

  1. Details of the arrangement/contract between the parties regarding the debt that is due and payable;

 

  1. Set out the amount owed and why it is owed;

 

  1. Provide a breakdown of the amount owed with any relevant supporting information;

 

  1. Provide a timeframe for the payment to be made, but in most instances should be a minimum of seven days; and

 

  1. The letter should clearly state what could happen if no response and no payment is received e.g. legal proceedings will be commenced.

The letter of demand should provide sufficient detail for the recipient to understand the claim that you have and why you have issued the letter of demand.

It is advisable to include a copy of the outstanding invoice, though it is not necessary. However, the added benefit of including the unpaid invoice is that issuing a letter of demand with the outstanding invoice will also start time ticking pursuant to the Security of Payment Act, in the event that you are entitled to issue a payment claim.

The courts generally do not require a letter of demand to be sent prior to commencing proceedings, however failing to issue a letter of demand prior to commencing proceedings may reduce the amount of legal costs you can claim should you be successful in the proceedings.

Whilst you do not need a lawyer to write a letter of demand, there are a number of benefits in having a lawyer draft and issue a letter of demand on their letterhead. In particular, it gives an indication to the recipient of the letter of demand that you are serious about pursuing the matter, and that you are willing to spend money in legal costs to obtain the item sought in the letter of demand. Further, seeking legal advice prior to issuing a letter of demand may assist you to understand your legal rights, and based on the legal advice, you might find that there are other potential actions or claims that could be pursued against the recipient of the letter of demand.

Bradbury Legal has issued many successful letters of demand in which our clients have obtained payment in full, even for claims exceeding $100,000.00. Though, each response will depend on the position of the recipient.

Once the letter of demand is issued, the recipient can:

  1. pay the money sought in the letter of demand in full;

 

  1. start a dialogue between the parties that could assist in reaching a settlement of the dispute; or

 

  1. not respond or dispute the claim.

 

Should you wish to pursue the matter further if there is no response and no payment received, you could:

  1. commence proceedings in a court or a tribunal; or

 

  1. prepare an adjudication application in accordance with the Security of Payment Act,

depending on your legal rights to do so.

If you require any assistance with any issues regarding debt recovery, or any other disputes which require a letter of demand, feel free to get in contact with Bradbury Legal on 02 9248 3450.

 

Coronavirus (COVID-19) and Construction Contracts: What are your options?

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Coronavirus (COVID19) and the construction industry: What are your options?

We recently published an article about how construction contracts can incorporate concepts of force majeure events. A copy of our article can be found here.

As the disruptions of corona virus begin to become more extensive with government mandates coming into effect, we believe it’s important for those in the construction industry to have a quick reference guide as to their options or important things to think about.

 

Pre-contract: Tendering, negotiating and drafting of contract
Force Majeure clause ·         Manages the relationship between the parties where there has been an ‘Act of God’ or other similar severely disrupting event

·         Depends on the contractual definition of the term

·         Generally, suspends the obligations until the force majeure event has concludes

·         Important to consider when the parties’ obligations will resume – what will indicate the end of the force majeure event
Scope of Works and mitigation of supply chain risk ·         Where possible, alternative supply or materials should be specified in the scope of works with pre-agreed variation prices
Extensions of Time ·         Can include force majeure event as a qualifying cause of delay

·         What circumstances can the contractor or subcontractor seek an EOT?

·         Generally appropriate for an EOT to be granted where there is suspension of works, variation, act, omission or breach of the other party, force majeure events and/or industrial action occurring across the relevant state or territory

·         Are there any duties to mitigate the delay which are a precondition to receiving an EOT
Delay Costs and/or damages ·         Does the contract provide for any delay costs or damages?

·         What are the circumstances that the contractor or subcontractor is entitled to costs and are there any relevant caps?
Legislative Provisions ·         How are the change in legislative requirement provisions worded?

·         Consider the definition of legislative requirement (and/or equivalent and related definitions)

·         Consider whether legislative provisions should include a carve out for where there is a change in the legislative requirements in relation to COVID19. Given the uncertainty around how the government will proceed, it is difficult to predict how the legislative regimes or executive orders will change as the response to COVID changes and adapts
Labour and Key Personnel ·         Are there any key personnel of the contractor or the subcontractor that should be specifically identified?

·         Are there specific measures the Principal/Contractor want to specifically implement? Examples may include split teams
Security ·         Consider what types of security will protect against insolvency risk of contractors or subcontractors – Parent guarantee, retention monies, material security and/or bank guarantees

·         Consider circumstances where there may be recourse to the security such as where a party becomes insolvent or there are defective works that require rectification

·         Consider Principal security for payment if there are any solvency concerns
Insurance ·         Principals should consider whether there are suitable insurance policies to protect from any delays to the works or any consequences that the delays may have at the end of the project

·         For example, Principals may wish to discuss delay in start-up insurance with their insurance broker
Warranty deeds and defects ·         Principals may wish to require warranty deeds from the subcontractors to insure against any insolvency risk from contractors and to allow for any defects to be rectified independent of the contractor
Financial capacity of the tenders ·         When assessing potential contractors, Principals should consider the financial capacity of contractors and whether there are any solvency concerns and if there are any parent companies that can provide guarantees
Project deadlines ·         What deadlines are imposed by related contracts such as sale of land for off the plan properties

·         How long are the deadlines and timeframes of the project? Can they be extended to account for coronavirus
Contract structures ·         Profit/cost-saving sharing models of contract or guaranteed maximum price may be considered by Principals to minimise cost exposure of contracts that may be affected by coronavirus (such as supply chain risk)
Contract administration
Extension of time ·         Principals and Superintendents generally have the power to issue an EOT even when a claim may not be made by the Contractor. While they are not obliged to use this power for the benefit of the contractor, there may be practical and goodwill benefits in using these powers

·         Contractors should seek legal advice in terms of the relevant EOT clause and whether they have a right to seek an EOT or what other options are available to them under the contract
Suspension ·         Suspension is generally a grounds for an EOT

·         Consider who bears the cost of suspension under the contract

·         Is there a right for the contractor to claim any suspension costs or costs associated
Change to legislative requirements ·         In the event of government mandated shutdown, there is likely going to be claims for legislative changes. These will largely depend on the wording of the clauses, who bears the risk on legislative changes and the form of the government shut down

·         Other considerations include whether construction work is considered an essential service and to what extent
Variations ·         Where there is a supply chain breakdown due to closed borders, there may be claims for variations being made by Principals or Contractors to allow the project to continue

·         Variations will be linked to the scope of work and whether there are alternatives that can be sourced
Payments ·         Principals may wish to change payment terms to accommodate contractors or subcontractors

·         As the effects of coronavirus move throughout the economy, there will undoubtedly be businesses that struggle and become insolvent. Where possible, Principals may want to consider changing milestone payments or frequency of payment claims to assist contractors’ cashflows

·         Any agreement between the Principal and relevant contractor should be evidenced in writing
Acceleration ·         If there is relatively small amount of work left, Principals may consider giving directions to accelerate

·         While this may increase the cost of the project, the Principal may be able to ensure the project is completed before shutdowns come into effect
Employment ·         Employment law advice should be sought about how to manage employee relationships while projects are on hold by reason of coronavirus
Teams and social distancing ·         Head contractors may wish to implement policies that flow down the contracting chain in relation to splitting teams and social distancing where possible
Other arrangements agreed between the parties ·         Sometimes the best changes are those made between the parties and not from the lawyers

·         However, even where this is the case, ensure that such agreements are evidenced in writing and you seek legal advice on the impacts of the agreement and whether there are any potential consequences that you may not have considered
Other issues
Financiers ·         In many developments, there may be a financier involved and different obligations that arise under these loans and security documents

·         Principals should consider their obligations to notify their financier(s) where appropriate
Other stakeholders ·         There may be a range of other stakeholders that may have an interest in the construction contracts

·         It is important to manage these aspects of the development to reduce or eliminate any potential problems later on
Dispute resolution
SOPA claims ·         At the time of writing, there have been no changes to the strict deadlines imposed on submitting and responding to payment claims under the NSW Security of Payment legislation

·         SOPA is a contractor friendly forum, allowing for money to flow down the contracting chain

·         SOPA claims can be challenged on jurisdictional grounds or can be settled at the end of the contract if there has been an overpayment
Alternative dispute resolutions ·         Many alternative dispute resolution professionals are not taking new appointments. This can create a delay in parties complying with the relevant dispute resolution clauses

·         Parties may consider teleconferences or videoconferences to resolve disputes, rather than physically meeting
Courts ·         Many courts are operating via videoconferencing, with physical appearances limited

·         The court process may have more delays than usual as judges and parties adjust to the temporary measures of case management

·         Where a party is seeking urgent injunctive or other relief, it is important to seek legal advice as soon as possible to ensure that an application can be made efficiently and protect your interests
Contract termination ·         If you are seeking to terminate the contract it is important to terminate in accordance with the contractual provisions and to consider any common law rights or duties in relation to termination

·         Those seeking to terminate where the counterparty has become insolvent will also need to be aware of the recent insolvency changes and the restrictions on terminating pursuant to insolvency