The recent Supreme Court of Queensland decision in Lean Field Developments Pty Ltd v E & I Global Solutions (Aust) Pty Ltd & Anor1 serves as a timely reminder to contracting parties that they do not have absolute freedom to contract as to when a reference date arises for the purposes of the Building and Construction Industry Payments Act 2004 (Qld) (BCIPA). Specific care is required when drafting contractual clauses which impose pre-conditions which must be satisfied before a reference date will accrue.
In Lean Field, a contractor’s pre-condition was deemed void and unenforceable because:
- The clause’s mandatory requirements had no direct nexus to the anticipated payment claim and lacked any utility in advancing the BCIPA’s purposes; and
- The parties’ general freedom to contract as to how a reference date is to be worked out was accordingly overborne by s 99 of the BCIPA.
E&I Global Solutions (Aust) Pty Ltd (claimant) was a subcontract supplier to Lean Field Developments Pty Ltd (respondent) of services relating to high voltage and fibre optic cables.
The claimant made an adjudication application under the BCIPA and was awarded the sum of $527,783.08. The respondent challenged the decision, arguing that it was void for want of a valid reference date. The respondent relied upon the claimant’s failure to comply with contractual pre-conditions to a reference date arising, which required the submission of a ‘draft claim’ on a specific date with an entitlement to then serve a payment claim 14 days later.
The BCIPA confers a statutory entitlement to a progress payment ‘from each reference date under a construction contract’.2
‘Reference date’ is defined3 to mean:
'(a) a date stated in, or worked out under, the contract as the date on which a claim for a progress payment may be made for construction work carried out or undertaken to be carried out, or related goods and services supplied or undertaken to be supplied, under the contract; or
(b) if the contract does not provide for the matter -
(i) the last day of the named month in which the construction work was first carried out, or the related goods and services were first supplied, under the contract; and
(ii) the last day of each later named month.’
The BCIPA therefore provides contracting parties with significant freedom to agree on how a reference date is to be worked out under their contract. Lean Field considered the limits of that freedom.
Section 99 – no contracting out
The claimant in Lean Field argued that the preconditions to a reference date prescribed by the subcontract were void pursuant to s 99 of the BCIPA.
Section 99 invalidates any provision of a contract or arrangement which:
- Is contrary to the BCIPA;
- Purports to annul, exclude, modify, restrict or otherwise change the effect of a provision of the BCIPA; or
- May reasonably be construed as an attempt to deter a person from taking action under the BCIPA.
Under the subcontract in Lean Field, the process required to be followed before the claimant was entitled to serve a payment claim was as follows:
- The claimant was required, at specific times including those set out in the appendix, to submit a draft claim for payment for works carried out to that time, supported by relevant evidence;
- Within 14 days after receipt of a draft payment claim, the respondent was to issue to the claimant a preliminary assessment of the amount which, in its opinion, was payable in respect of the draft payment claim;
- Not earlier than 14 days after the delivery of the draft claim for payment, the claimant was entitled to then deliver a payment claim, for works carried out to that time, supported by relevant evidence; and
- The date ‘not earlier than 14 days after the delivery of the draft claim for payment’ was deemed to be the ‘reference date’ for the purposes of the BCIPA.
One of the better known and frequently cited decisions dealing with pre-conditions to reference dates is Simcorp Developments and Constructions Pty Ltd v Gold Coast Titans Property Pty Ltd.4 In that case, the pre-condition required:
- A progress claim to be made to the superintendent;
- The superintendent then to issue a progress certificate by the 30th day of the month after receiving the claim, failing which the progress claim was deemed to be the progress certificate; and
- Only after the progress claim had been made and the certificate had been received (or being deemed to have been received), a payment claim under BCIPA to then be made.
Upon challenge in the Supreme Court of Queensland, Douglas J held5 that the terms in Simcorp which provided for the working out of a period of service of a payment claim, being the precondition to a reference date arising, were not inconsistent with the BCIPA and did not contravene s 99.
In Lean Field, Applegarth J endorsed the reasoning in Simcorp and noted6 that subsequent decisions have emphasised that the application of s 99 to preconditions to a reference date arising will turn upon the specific contractual provisions:
‘…it might seem somewhat unsatisfactory that there is no hard and fast rule about the validity of such conditions. But this is the consequence of an Act which provides some freedom to the parties to determine when a reference date arises, and which does not automatically impose a default position of monthly reference dates if the agreed condition is not met.’7
His Honour summarised the applicable law as follows:8
- The purpose of the BCIPA and s 99’s role mean that the parties do not have an unconstrained freedom to contract about when a reference date will arise;
- The BCIPA does not allow the contract to impose onerous conditions which make a reference date more of a theoretical possibility than an actuality;
- The extent to which a particular condition is contrary to, or purports to change the effect of the BCIPA (and so offends s 99) depends upon its content and practical consequences;
- In assessing the validity of such a condition, a useful inquiry is whether the condition facilitates or impedes the purpose of the BCIPA;
- A condition is likely to be contrary to s 99 where it does not facilitate a statutory entitlement to progress payments or the resolution of payment claims made under the BCIPA. This is likely to be the case where the condition impedes the making of a payment claim with no corresponding benefit in achieving the BCIPA’s purpose; and
- Even a condition which has some utility in a contractor making a payment claim and receiving a progress payment may be excessively onerous and be invalid because of its unjustified effect in denying a party what otherwise would be a statutory entitlement.
The Court offered the following examples:
- ‘A provision which stated that a reference date only arose once the principal was of the opinion that it should pay a progress payment might have the practical effect of making the existence of a reference date dependant upon a subjective state of mind which might never exist. It might make the existence of a reference date and the statutory entitlement to a progress payment illusory.’9 Such a clause would breach s 99 and be invalid; and
- In contrast, a contract might provide that ‘a reference date arises a few days after a contractor has provided a basic document which simply estimates what work will have been done by the time of the reference date and its expected value. Such a condition might be said to reduce the element of surprise in the payment claim that is delivered after the reference date arises and enable the principal to prepare for its payment.’10 Such a clause would be valid.
In summary, the court stated:11
‘A condition which has no significant utility in terms of the scheme created by the Act may be invalid, not because it is particularly onerous, but because it impedes a statutory entitlement without any corresponding benefit.’
Lean Field – the court’s decision
In applying those principles, the court in Lean Field considered the utility of the subcontract clause which required the submission and assessment of a draft payment claim for works carried out to that date, in circumstances where the later payment claim would also include works carried out in the 14 days since the draft payment claim was served.
The claimant argued that the requirement was onerous and in breach of s 99 because:
- The work done and period applicable to the draft payment claim was different to that applicable to the later, actual payment claim; and
- A failure to satisfy the clause’s mandatory requirements for a draft payment claim, even as to form, would extinguish any right to serve a payment claim.
Accepting the claimant’s submission, His Honour found that the mandatory precondition did lack any utility given that:
- There was no direct nexus between the content of the draft payment claim and any later payment claims as they related to different periods of time and different works;
- The actual payment claim would include additional items not included in the draft payment claim; and
- Any preliminary assessment by the respondent of the draft payment claim did not bind the respondent in its response to the later served payment claim.
- The court expressly acknowledged12 that ‘There may be circumstances in which it is possible to condition not only when, but whether or not, a reference date will arise’ and that ‘Such a condition may be justified as facilitating the purpose of the Act’. However, in the present case, the pre-condition did not advance the BCIPA’s purposes and the broad freedom to contract about how a reference date is worked out was overborne by the provisions of s 99.
‘…Whether or not a reference date arises is contingent upon compliance on a particular day with a condition which has no significant utility in terms of facilitating the payment of a progress payment to which the first respondent would otherwise have a statutory entitlement. The condition thereby amounts to an unnecessary and impermissible constraint on the right to claim for payment under the Act…’13
Lessons for contracting parties
There is no hard and fast rule as to how valid and effective preconditions to a reference date may be drafted.
Parties do enjoy a primary freedom to contract as to how reference dates are to be worked out and indeed, in appropriate circumstances, as to whether or not a reference date will arise. However, Lean Field makes it clear that such freedom is not absolute.
Drafters of construction contracts should ensure that any clauses prescribing pre-conditions to a reference date accruing will both:
- Add some practical and commercial utility to the parties’ dealings; and
- Enhance, rather than hinder, the BCIPA’s intended operation by, for example, placing the principal/superior contractor in a better position to assess and respond to the actual payment claim when it is ultimately received.
Pre-conditions which fail to do so or which make a reference date ‘more of a theoretical possibility than an actuality’ will be voided by s 99.