Don’t jump the gun – Premature Security of Payment Act claims are invalid

A recent decision of the New South Wales Court of Appeal has clarified that:

  • payment claims under the Building and Construction Industry Security of Payment Act 1999 NSW (SOP Act) are invalid if they are served before a reference date has arisen; and
  • contractual deeming provisions will not cure the invalidity of a premature payment claim served before a reference date.

The case clarifies a situation left unanswered by the High Court after its decision in Southern Han Breakfast Point Pty Ltd (in Liq) v Lewence Construction Pty Ltd and about which there have been inconsistent findings across different jurisdictions.

Given the similarity in the legislation, the case resolves that divergence and should be considered authority in all “East Coast” Security of Payment States.

Refresher on Reference Dates and Deeming Provisions

The SOP Act creates a “parallel” payment regime which normally runs alongside, but legally separate to, any contractual payment regime.

Under the SOP Act:

  • a person who has undertaken to carry out building or construction work (or related work) is entitled to a progress payment on and from each reference date – Section 8; and
  •  a person referred to in section 8 who is, or who claims to be, entitled to a progress payment may serve a payment claim – Section 13.

In Southern Han the High Court confirmed that the existence of a reference date was an “essential precondition” to making a payment claim under the SOP Act. That is, you cannot be “a person referred to in section 8” (and thus entitled to make a payment claim) until a reference date has arisen.

However, many construction contracts contain clauses that:

  • provide for the contractor to submit progress claims on a particular day (or date); and
  • deem a progress claim made before the contractual due date to have been made on that date.

Can such a clause validate a purported payment claim (under the SOP Act) which has been served before the contractual due date, by “deeming” that it becomes a “payment claim” only when that date rolls around? Based on the decision in All Seasons Air Pty Ltd v Regal Consulting Pty Ltd [2017] NSWCA 289, the answer is “no”.

Factual background

In 2015, Regal Consulting Services Pty Ltd (Regal) and All Seasons Air Pty Ltd (ASA) entered into a construction contract which relevantly provided that:

  • ASA was to submit claims for progress payments on the 20th day of each month; and
  • an early progress claim shall be deemed to have been made on the date for making that claim. (Deeming Provision)

On 20 June 2016, ASA issued “Payment Claim No.10” (First Claim). Then, on 12 July 2016, ASA issued another payment claim which it claimed was for “completion of the entire project”. It was stated to be a payment claim under the SOP Act (Second Claim).

On 26 July 2016, Regal served a payment schedule stating that it had no liability to pay to Second Claim. There was a dispute about whether the project was complete. However additionally, Regal also claimed that the Second Claim was in respect of the same reference date as the First Claim, namely 20 June 2016. ASA sought to rely on the Deeming Provision to save the Second Claim.

Following an adjudication determination in ASA’s favour, Regal successfully appealed to the NSW Supreme Court on the basis (amongst other things) that despite the Deeming Provision, the Second Claim was premature and thus void. ASA appealed to the NSW Court of Appeal.

The decision – and sting in the tail

ASA argued (amongst other things) that because of the Deeming Provision, the Second Claim only became a payment claim under the SOP Act once the reference date arrived, even though it had been served before that time. This argument therefore required the Court to find that the terms of a construction contract can influence when a payment claim should be taken to have been validly submitted under the SOP Act.

The NSW Court of Appeal dismissed the appeal and determined that:

  • Southern Han authoritatively determined that the entitlement of a person to a progress payment arises only “on and from” each reference date.
  • The SOP Act regime sits alongside, and independently of, any contractual entitlement to payment.
  • To engage the SOP Act regime, a “payment claim” answering that description must be served on the respondent and this requires a reference date to have already arisen.
  • Contractual deeming provisions cannot modify how the SOP Act is engaged as this would have the effect that a contractual claim “morphs” into a statutory “payment claim” on a date after its actual delivery.

Accordingly, payment claims served prematurely will be void and any purported adjudication determination is liable to be quashed.

The Court of Appeal’s decision reinforces that the SOP Act regime operates independently of any contractual entitlement to payment. This ruling is sensible where service of a payment claim marks the start of a process which is subject to strict and unalterable time limits, breaches of which can have severe consequences.

However, and perhaps unfortunately, Justice White in a separate judgment noted that neither party in the case submitted that the words “on and from” may be read as meaning “on and with effect from” – and not “on and after” as they normally are. This argument potentially leaves the door open for further judicial consideration of this issue in the future.

Until that time comes, and even where your construction contract contains a deeming provision:

  • contractors should assume that statutory payment claims served before a reference date will be void; and
  • principals should be aware of the potential to resist statutory payment claims and adjudication applications where a payment claim has been served before the relevant reference date.

If you have any queries or would like further information regarding this article, please contact:

Alastair Oxbrough
Partner
M: 0400 818 636
E: aoxbrough@pageseager.com.au

Joe Mullavey
Associate
M: 0416 794 061
E: jmullavey@pageseager.com.au

Published: 12 December 2017

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