Security of payment finally reaches the High Court

In the decision of Southern Han Breakfast Point Pty Ltd (in liquidation) v Lewence Pty Ltd, the High Court has held that the existence of a reference date is an essential precondition to a valid payment claim under the Building and Construction Industry Security of Payment Act 1999 (NSW) (Act).

The decision marks the first time that the High Court has considered Australian security of payment (SOP) legislation and should bring an end to a recent divergence in the way that similar legislation has been applied in different States.

The decision has important repercussions for parties seeking to rely on SOP legislation because:

  • it confirms that unless a valid reference date has accrued, a payment claim (and any subsequent adjudication of it) will be invalid and therefore unenforceable;  and
  • depending on the terms of the construction contract, contractors wishing to rely on SOP legislation may lose the right to do so if the works are taken out of their hands or the contract is terminated.

Security of payment legislation in Australia

All Australian States and Territories have enacted SOP legislation that creates a statutory right to claim progress payments for the provision of work, goods and services under a construction contract.  The legislation across the eastern seaboard and South Australia is broadly similar and based on the same model originally developed in NSW, while Western Australia and the Northern Territory have taken a different approach.

In the eastern States, a contractor’s right to make a statutory claim for payment arises on a “reference date”.  This date can be specified by the parties in the construction contract (for example, the 25th day of the month for work done to that date) or calculated by reference to rules in the legislation.

Despite similarities in legislation, courts in different States have arrived at different conclusions regarding the importance of the reference date.

Generally, Victorian Courts had considered that the “reference date” was relevant to calculating the time for delivery of a payment schedule in response to a payment claim, but was not an essential precondition to making a valid payment claim.  So, in Victoria, a payment claim made before a reference date had accrued was not necessarily invalid, so long as the person “claimed to be entitled” to make the payment claim.

Conversely, Queensland Courts had held that the existence of a valid reference date was essential to making a valid payment claim under the Act.  As such, a payment claim made in Queensland without a reference date having accrued, had been considered invalid.

NSW Courts had generally adopted the Queensland approach.

Background to the litigation

In 2013, Southern Han Breakfast Point Pty Ltd (Southern Han) engaged Lewence Pty Ltd (Lewence) to build a large residential apartment block.  The construction contract was based on the widely used AS4000-1997 General Conditions of Contract.

Importantly, the contract provided for Lewence to issue progress claims on the 8th day of each month.  This was the “reference date” for the purposes of the Act.

Disputes arose between the parties and on 27 October 2014, Southern Han took the remaining work out of Lewence’s hands.  Lewence considered that Southern Han’s conduct amounted to a repudiation and on 28 October 2014, Lewence terminated the contract.

On 4 December 2014, Lewence issued a payment claim under the Act.  Southern Han disputed Lewence’s entitlement to do so, on the basis (amongst others), that there was no reference date available and so the claim was invalid.

Lewence applied for adjudication of the 4 December payment claim and was awarded about $1.2m by the adjudicator.  Southern Han issued proceedings in the Supreme Court of NSW seeking to quash the determination of the adjudicator.

The trial and appeal

Consistent with previous NSW decisions (and the Queensland approach), the trial judge agreed with Southern Han and held that the existence of a reference date was essential to making a payment claim.

The trial judge concluded that following termination of the contract, no further reference dates had accrued and therefore, the 4 December payment claim was invalid.  The Court quashed the adjudication and Lewence was denied the amount which it claimed.

Lewence appealed the trial judge’s decision and the New South Wales Court of Appeal upheld the appeal.  The Court of Appeal held that the existence of a reference date was not an essential precondition to making a payment claim under the Act, because the Act allows a person to make a claim where the person is, or claims to be, entitled to a progress payment.  Instead it held that the reference date simply determines the time from which the person is entitled to a progress payment.

The High Court decision

The High Court unanimously overturned the Court of Appeal and held the existence of a reference date was an essential precondition to the right to issue a payment claim.  The High Court interpreted the wording of sections 8(1) and 13(1) of the Act, to mean that the existence of the entitlement (or the claimed entitlement) to a progress payment, was in fact contingent on a valid reference date having first accrued.

The Court also went on to determine that, given the wording of the AS4000 General Conditions of Contract, no reference date was available since:

  • reference dates are not expressed to continue to arise after termination of the contract; or alternatively
  • subclause 39.4(a) expressly states that if the work is taken out of the contractor’s hands, payment is suspended until it becomes due and payable pursuant to subclause 39.6 (being the point at which the works have been completed and a financial reconciliation is therefore required).

In either case, there was no valid reference date available at the time the payment claim was served, and consequently it, and the subsequent adjudication, was invalid.

What does it mean?

The decision confirms that in most States, a payment claim cannot be made under SOP legislation unless a valid reference date has arisen.  It is for the Court to decide if a valid reference date has arisen. If an adjudicator makes an error in finding that a reference date has arisen, a Court will quash the adjudication.

It is not uncommon for construction contracts to contain a range of preconditions to the valid existence of a reference date.   Previously, many of these preconditions had been considered as potentially invalid, because they were seen as attempts to contract out of the SOP legislation (which is prohibited).

However, given the way in which the High Court has interpreted subclause 39.4(a) of AS4000, the door may now be open for principals to revisit the question of reference dates and the degree to which the express terms of the contract may regulate their existence.

For contractors, there is a risk that this may lead to a reduction in the availability of statutory SOP rights in certain circumstances and contractors should therefore be alive to this issue when reviewing tender contracts.

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: 14 February 2017

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