The High Court has determined that a reference date is a precondition to a valid payment claim under the Building and Construction Industry Security of Payment Act 1999 (NSW) (Act) with its landmark judgment in Southern Han Breakfast Point Pty Ltd (in Liquidation) v Lewence Construction Pty Ltd [2016] HCA 52.  Whether or not a reference date exists will continue to be contentious in security of payment disputes and the High Court decision is likely to lead to an increase in security of payment disputes coming before courts.

The decision also creates uncertainty around when a reference date will accrue and raises doubts about a number of Supreme Court decisions in respect of the accrual of reference dates and contracting out of the Act.  The High Court has adopted a much more literal interpretation of the wording of the Act than lower courts, which have regarded the objects and purposes of the Act as paramount.  In our opinion, the decision may ultimately result in an amendment to the wording of section 8 of the Act.

It is the first time the High Court has considered security of payment legislation in Australia and the decision will affect similar security of payment regimes to New South Wales, being all states and territories except Western Australia and the Northern Territory.

Facts

Southern Han Breakfast Point Pty Ltd (Southern Han) engaged Lewence Construction Pty Ltd (Lewence) to construct an apartment block for a contract sum of approximately $15.6 million (Contract).  On 27 October 2014, Southern Han gave Lewence notice to show cause in relation to alleged breaches of contract.  Despite alleged compliance with this request, the work was subsequently taken out of the hands of Lewence.  Lewence characterised the allegedly invalid taking of the work out of its hands as a repudiatory act and purported to accept that repudiation, with the effect that the Contract was terminated.

Under the Contract, reference dates accrued on the “8th day of each calendar month for work under the contract done to the 7th day of that month.”  A payment claim had previously been served on 8 October 2014 for work carried out to 7 October 2014, and on 4 December 2014 Lewence served what purported to be another payment claim.  This later claim failed to identify the reference date to which it related and concerned works carried out prior to 27 October 2014, including prior to 7 October 2014.

Decision and its effect

The High Court decision includes the following important points.

1. Reference date is precondition to a valid payment claim

The first issue before the court was whether a reference date is a precondition to a valid payment claim. This turned on the meaning and interpretation of section 13(1) of the Act, which defines those who are entitled to make a payment claim.  Lewence argued that the phrase “who is or who claims to be entitled to a progress payment” was purposefully expansive so as to apply to circumstances where a reference date had not arisen.  The court rejected this argument finding rather that the two-part description of those who may make a payment claim illustrates the distinction the Act makes between “present entitlement to progress payment and future ascertainment of the amount of the progress payment.”

From this the court held that all those making a payment claim must fall within the scope of section 8(1) of the Act, which grants such entitlement only “on and from each reference date under the construction contract” and as such concluded that a reference date under the contract is a precondition to the making of a valid payment claim.

2. Affirmation of one payment claim per reference date

The court provided further clarification as to the mechanics of section 13 generally, making it clear that not only must each payment claim be made in relation to a reference date, but that only one payment claim may be made in relation to a reference date.  A payment claim purportedly made that contravenes either of these requirements is not a payment claim under the Act, and is therefore incapable of ‘triggering’ the operation of Part 3 of the Act.  This affirms existing authority (see Dualcorp Pty Ltd v Remo Constructions Pty Ltd [2009] NSWCA 69 and Kitchen Xchange v Formacon Building Servics [2014] NSWSC 1602).

3. No reference dates accrue after termination (unless clear contractual intention)

A further issue before the court was the process by which a reference date is determined and ancillary to this, whether reference dates continue to arise after the termination of the Contract.  The court found that reference dates do not accrue after termination of the contract, unless there is a clearly expressed intention otherwise.

4. Accrual of reference dates can be suspended by operation of contract

The High Court found that there was no prohibition on Southern Han suspending payment and suspending the accrual of reference dates in reliance on clauses in the Contract.  The Court found that taking work out of Lewence’s hands had the effect of suspending the entirety of clause 37 of the Contract, including the accrual of reference dates.

5. When a reference date accrues depends on contract

The Court considered section 8(2) of the Act (set out below).

“(2)  In this section, reference date, in relation to a construction contract, means:

(a)  a date determined by or in accordance with the terms of the contract as the date on which a claim for a progress payment may be made in relation to 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 makes no express provision with respect to the matter—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 the last day of each subsequent named month.”

The Court confirmed that, if the Contract makes express provision for the accrual of reference dates, only section 8(2)(a) of the Act has work to do (i.e. the default reference date on the last day of each month only applies if a contract does not deal with reference dates).  Therefore, it is open to parties to agree on when reference dates will accrue and the circumstances around the accrual of reference dates.

It appears that the High Court was not required (or asked to) consider in what circumstances the no contracting out provision in section 34 of the Security of Payment Act may render such a clause void.

What does this mean for me?

The High Court decision is very important for construction industry stakeholders and the decision will affect principals and contractors in different ways.  All stakeholders should review and tailor construction contracts in light of the High Court’s decision.  Particular issues for principals and contractors to consider are set out below.

For principals

  • A reference date must exist for a contractor to make a valid payment claim.  A payment claim that is not in respect of a reference date will not be a valid payment claim under the Act.  Notwithstanding, principals should still always issue a payment schedule within 10 business days of receipt of a payment claim or a purported payment claim.  The payment schedule can still state that a reference date does not exist to validate the purported payment claim.
  • The High Court’s view is that the contract is king when it comes to determining when a reference date accrues.  Therefore, it is open to parties to agree on the circumstances when a reference date will arise.  Principals have previously attempted to impose conditions on the accrual of reference dates or provided that reference dates accrue after the occurrence of a specified event, but these conditions have generally been declared void for contracting out of the Act.  The High Court decision, which approves parties contracting to suspend the accrual of reference dates, provides some hope to principals that agreed conditions on the accrual of reference dates may be upheld.
  • To avoid doubt, construction contracts should state that reference dates do not accrue after termination of a contract.  Principals can take some comfort from the High Court’s decision in this regard.
  • Principals may wish to include other circumstances that result in suspension of payment and therefore also seek to suspend the accrual of reference dates.

For contractors

  • Contractors should ensure that there is a clear, unconditional and simple provision in their construction contracts for reference dates to accrue (on a monthly or milestone basis).
  • Contractors should also require an additional clause providing for reference dates to continue to accrue after termination of the contract, particularly if termination arises out of the principal’s breach of contract.  Alternatively, contractors should carefully consider their position before terminating a contract because reference dates will not accrue after termination and contractors will lose their rights to apply for adjudication.
  • Contractors should minimise the circumstances in which the accrual of reference dates and payment can be suspended to avoid being prevented from making a valid payment claim under the Act.