The importance of unequivocal termination of construction contracts in the eyes of Security of Payment legislation

A series of recent NSW Supreme Court decisions have highlighted just how important timing can be when it comes to constructions contracts and their termination.  The court has confirmed that where the relevant construction contract includes a reference date (as contemplated by section 8(2) of the Building and Construction Industry Security of Payment Act 1999 (NSW) (Act), reference dates do not continue to accrue under the Act after termination.

The recent Supreme Court decision in Illawarra Retirement Trust v Denham Constructions Pty Ltd [2015] NSWSC 823 is a stark reminder of the importance of unequivocally communicating the time for termination of construction contracts and the adverse consequences of failing to do so.

In Illawarra Retirement Trust, the principal sought to terminate the contract at its convenience by the issue of a notice of termination, in accordance with the contract.  There was no dispute that the principal was entitled to terminate for its convenience, however the principal’s notice of termination did not specify a time for termination, only that the notice was “with effect from Friday, 29 May 2015”.

A dispute arose as to the date that the contract was, in fact, terminated.  The date that the contract was terminated was important because the contractor had made a payment claim on 29 May 2015.  The principal asserted that the contract had been terminated on 28 May 2015 and so there was no reference date to make the payment claim on 29 May 2015.  Conversely, the contractor asserted that the contract had been terminated on 29 May 2015 and so there was a reference date to make the payment claim.

His Honour Justice Darke determined that the date of termination, objectively understood by the notice of termination, was at the conclusion of 28 May 2015.  However, his Honour also reviewed correspondence between the principal and the contractor after the issue of the notice of termination.  That correspondence concerned, amongst other things, the last of the contractor’s contract works, the contractor’s insurances and obligations as principal contractor for the site, all of which were stated to be concluded on 29 May 2015.  By this correspondence, his Honour found that there had been a subsequent agreement that the termination would occur at the conclusion of 29 May 2015.

As a result, there was a reference date to enable the contractor to make a payment claim on 29 May 2015.  The principal’s application for an injunction preventing the contractor from proceeding to adjudication on the payment claims was dismissed.

Ensuring a clear termination date

Principals can ensure that they clearly and unequivocally terminate their construction contract by:

  1. strictly following the procedure set out in the contract, including compliance with the regime for the form and service of required notices;
  2. in notices, stating a time and date that termination of the contract will take effect; and
  3. so as to avoid any inference to the contrary, adhering to the date of termination in any subsequent correspondence and requiring the contractor to act in accordance with the date of termination.

No reference dates after termination

As discussed in our previous article entitled “Contractors beware: risk of no reference dates after termination”, the Supreme Court has confirmed that, where a contract provides for reference dates, unless the clause providing for reference dates is expressed to survive termination of the contract, no reference dates will arise after termination of the contract.

This position has been reinforced in the subsequent Supreme Court decisions of Southern Han Breakfast Point Pty Limited v Lewence Constructions Pty Limited [2015] NSWSC 502 and Veer Build Pty Limited v TCA Electrical and Communication Pty Ltd [2015] NSWSC 864.  Further, in Illawarra, his Honour said:

The defendant advanced an alternative argument that, even if the contract had terminated immediately prior to 29 May 2015, s 8(2)(b) of the Act would operate to provide a further reference date on the last day of May. I think that argument faces considerable difficulties, but in view of my conclusion about the time of termination, it is not necessary to deal with it.

Accordingly, it is important for contractors, particularly in contracts with termination for convenience clauses, to include either a clause providing for reference dates to survive termination of the contract or a clause requiring the principal to give notice of its intention to terminate the contract for its convenience.

A failure to include either of these clauses may result in a contractor losing its entitlement to make a further payment claim under the Act.