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Projects - Special Edition
31 January 2005
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31 January 2005
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Security of payment special edition overview

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Lack of uniformity in SOP legislation warrants care

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Security of payment: some recent developments

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Challenging an adjudication

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Review of NSW SOP Act

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Security of payment: some recent developments

 
 Image of Jonathan Hoyle

Jonathan Hoyle (pictured) and Bjorn Gehle

Key Point

  • Recent cases have given some guidance on how the NSW security of payment regime operates.

Since the March 2003 amendments to the Building and Construction Industry Security of Payment Act 1999 in New South Wales, there have been over 50 decisions about the operation of the Act. A great many of these decisions deal with challenges to the adjudication, however they also give guidance on the application and workings of the Act. This article briefly reviews some areas of recent interest.

When might payment provisions in a contract be void under the Act?

In Minister for Commerce v Contrax Plumbing [2004] NSWSC 823, Justice McDougall had to consider the operation of section 34 of the Act, which provides that any agreement which purports to exclude, modify or restrict the operation of the Act, or may be reasonably construed as an attempt to deter someone from taking action under the Act, is void.

In this case, the contract entitled the contractor to make payment claims but the aggregate of the payment claims could not exceed the contract price. Any adjustment to the contract price was in the form of a lengthy process of determination by the superintendent's representative, the superintendent, expert determination and then arbitration.

Justice McDougall held that these provisions were contrary to section 34. He considered that the contractor was not entitled to be paid until the adjustment process had been completed (which the contractor submitted could take six months). As such the provisions purported to defer entitlement to progress payments, something which was inconsistent with the right to a progress payment on and from the reference date under section 8(1). He similarly concluded that the limitation on the aggregate of payments not exceeding the contract prices was also void.

This is a very significant decision, in particular for parties drafting contracts who wish to try to control when and how payment occurs. One aspect of section 34 which the decision does not resolve is whether a provision held to be void is void merely for the purpose of the Act or void entirely (and therefore cannot be relied upon subsequently). Although the rationale for section 34 suggests that the former interpretation is the correct one, the question awaits definitive judicial consideration.

What do you put in a payment claim?

One of the difficulties for a respondent under the Act is that under section 20(2B) it cannot include any reasons for withholding payment which were not included in its payment schedule. As a result, respondents have to be careful to ensure that they put their case as widely as possible in their payment schedule.

It was not clear whether there was a similar restriction on the claimant in respect of matters put in its payment claim. In John Holland Construction Pty Ltd v Cardno MBK (NSW) Pty Limited [2004] NSWSC 258, it was argued that the restriction in section 20(2B) should be read into section 17(3) - which sets out the requirements for an adjudication application. That argument was rejected by Justice Einstein as a matter of construction of the Act. However, he held that when a claimant advances an argument in its adjudication application that it had failed to make in its payment claim, then in any ensuing adjudication the adjudicator would not have jurisdiction to hear such an "additional" claim. This was because the respondent, in turn, would be prevented from dealing the new claim by virtue of section 20(2B). Considering the claimant's claim in such circumstances would be a denial of natural justice.

Thus, a claimant should consider carefully what to put into a payment claim as it may be prevented from pursuing arguments which it has only raised for the first time in its adjudication application.

How many times can you make a "final" claim?

Under section 13(5) of the Act, a party may only make one payment claim in respect of "each reference date under the construction contract" (a date, which if not specified in the contract, is the last day of the month in which the work in question was first carried out).

Does this apply to what might be considered a "final" claim? The NSW Court of Appeal has recently stated in Brodyn Pty Ltd v Davenport [2004] NSWCA 394 that, subject to contract terms to the contrary, a claimant is entitled to serve further payment claims even though the work on the project has ceased or the contract has been terminated. This is because, according to Justice Hodgson, the Act does not provide for the reference date to cease upon termination. Successive payment claims do not necessarily have to be about additional work (in fact, it can relate to the same work). This is particularly so given that a claimant's losses could continue to arise well after work had been completed.

It should be noted, however, that, as mentioned above, this has no effect where the contract stipulates that a final claim can only be made on one occasion. As with all matters under the Act, the claimant needs to consider carefully both the terms of the contract and the Act.

Is there a time limit for making a payment claim?

Section 13(4) of the Act states that a payment claim may only be served within the period set out in the contract or the period "12 months after the construction work to which the claim relates was last carried out" (whichever of these is the later).

In Barclay Mowlem Construction Limited v Estate Property Holdings Pty Limited [2004] NSWSC 649 Justice Einstein considered three possible interpretations of the section: first, that the section required only that some work be performed under the contract within the 12 month period (but not necessarily work for which payment was claimed); secondly, the section required some work for which payment was claimed to have been performed within the 12 month period; or, thirdly, that what the section required was that some work in respect of each item for which payment was claimed had been performed within the 12 month period. Justice Einstein concluded that the correct interpretation was the first one.

However, the NSW Court of Appeal disagreed (see Estate Property Holdings Pty Ltd v Barclay Mowlem Construction Limited [2004] NSWCA 393). Justice Hodgson stated that it was the second interpretation that was correct and that therefore some of the construction work to which a payment claim relates must have been carried out within the relevant 12 month period. He based this view, in part, on the wording of section 13(2)(a) which refers to "construction work… to which the progress payment relates".

Must a payment claim conform to the requirements of the contract?

In Consolidated Construction Pty Ltd v Ettamogah Pub [2004] NSWSC 110, the claimant failed to comply with certain conditions precedent to an entitlement to progress payments under the contract. In light of this the respondent did not serve a payment schedule. It was held that the claimant's failure did not invalidate the payment claim or the referral to adjudication - the appropriate response for the respondent was to raise any contractual failure in its payment schedule. Justice McDougall came to this view in part on the basis that section 13(1) allowed service of a claim by a person who "is or who claims to be entitled to a progress payment" (emphasis added).

Respondents need to ensure in these circumstances that they always respond with a payment schedule (within the required time limit) and raise all issues in the schedule including any failure to follow the provisions of the contract in question. In contrast, claimants are given greater latitude in making a claim - although, if a claimant fails to follow a requirement of the contract, it may result in a failure to recover payment at any subsequent adjudication.

What can be claimed in a payment claim?

In Quasar Construction v Demtech [2004] NSWSC 116, the question arose of whether a claimant was entitled to claim an amount that could be characterised as "damages" for breach of contract, as opposed to payment for work done. In that case, the head contractor had engaged a contractor to carry out demolition work on a single "lump sum" basis (rather than progress payments for which there was no provision under the contract). The contractor ceased work prior to completion and served a claim for the lump sum amount.

Justice Barrett concluded that a claimed amount for a "progress payment" under the Act can only be such an amount if it is "for work done or, where some element of advance payment had been agreed, ‘for' work to be undertaken". On this basis he rejected the argument that a claim can be for damages for breach of contract including - as in this case - damages for the loss of an opportunity to receive in full a contracted lump sum price.

Two things should be borne in mind about this result. First, because of the interim nature of the process under the Act, the contractor in this case did not lose the right to recover the money but merely the ability to do so under the Act. Secondly, it does not appear to cover situations where the contract itself provides for recovery of amounts that might otherwise be considered to be "damages" such as delay costs (a conclusion which Justice McDougall came to in Kembla Coal & Coke v Select Civil [2004] NSWSC 628 in which he did not follow the reasoning of Quasar).

  
 

For more information, please contact Jonathan at jhoyle@claytonutz.com or Bjorn at bgehle@claytonutz.com

  
  
  
  
  
 

Disclaimer
Clayton Utz Insights is produced by Clayton Utz. It is intended to provide general information in summary form on legal topics, current at the time of publication. The contents do not constitute legal advice and should not be relied upon as such. Formal legal advice should be sought in particular matters. Persons listed may not be admitted in all states.

 

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