WHO SHOULD READ THIS

  • Industry participants in the construction sector.

THINGS YOU NEED TO KNOW

  • This decision is a reminder that contractual preconditions that modify or restrict the circumstances under which a reference date arises or a contractor’s entitlement to payment are likely to be void under security of payment legislation.

WHAT YOU NEED TO DO

  • Payment terms and conditions should be carefully reviewed to ensure that they are consistent with the requirements of the relevant security of payment legislation.

In the recent decision of J Hutchinson Pty Ltd v Glavcom Pty Ltd1, the Supreme Court of New South Wales held that the provision of a statutory declaration as a precondition to payment was void under the Building and Construction Industry Security of Payment Act 1999 (NSW) (SOPA).

The facts in brief

Hutchinson Pty Ltd (Builder) and Glavcom Pty Ltd (Subcontractor) entered into a subcontract under which the Subcontractor agreed to carry out joinery works at a residential and commercial redevelopment at Bondi Beach (Subcontract).

Clause 37 of the Subcontract required the submission of a statutory declaration as a ‘precondition to a reference date arising under the Security of Payment Act [and] the Subcontractor being entitled to make a payment claim under the Security of Payment Act’.

In November 2015, the Subcontractor served a payment claim on the Builder. The Builder then served a payment schedule in response. The matter proceeded to adjudication. The adjudicator determined that the Builder owed the Subcontractor a particular sum of money for the carrying out of the joinery works.

The Builder applied to the Court to set aside the adjudication determination. One of the issues before the Court was whether clause 37 of the Subcontract was void under SOPA. In addition to the Court dismissing the Builder’s appeal, the Court determined that clause 37 of the Subcontract was void pursuant to section 34 of the SOPA for seeking to modify or restrict the circumstances in which a contractor is entitled to a progress payment. The precondition did not facilitate the object of the SOPA, which is to ensure cash-flow to those that perform construction work.

Impact

This decision highlights that preconditions qualifying reference dates or a right to payment under construction contracts are likely to be void under security of payment legislation. This is further supported by the recent Supreme Court of Queensland decision in BRB Modular Pty Ltd v AWX Constructions Pty Ltd & Ors2, where the Court similarly found that a precondition to provide a statutory declaration was invalid under the security of payment legislation in Queensland. Both decisions confirm the increasing willingness of Courts to strike down clauses that limit a contractor’s right to receive a progress payment.

The impact of these recent decisions does not, however, mean that all precondition clauses will be void. You can still include precondition clauses in your contract but they must be consistent with the requirements of the relevant security of payment legislation. Precondition clauses which facilitate the purposes of security of payment legislation may not infringe the legislation. Separately, clauses which operate to provide a mechanism for ‘working out’ a reference date for payment (provided theses clauses are consistent with the objectives of the relevant security of payment legislation) look to be compliant with the requirements of security of payment legislation.

What next for your business?

With limited guidance from the Courts on this issue, principals and contractors alike should review their payment terms and conditions to ensure that they do not contain preconditions which are not compliant with the relevant security of payment legislation. Principals and contractors should:

  • draft or amend any such preconditions so that they are compliant with the requirements of security of payment legislation – that is, determining the reference date as opposed to qualifying the contractual entitlement to payment, and
  • avoid preconditions that focus on pure form and subjective elements and, instead, ensure that they are objective and demonstrate some practical utility (and otherwise facilitate the timely payment of progress payments under a construction contract).