Summary

The various forms of security of payment legislation around Australia are designed to provide construction contractors with a quick means of resolving payment claim disputes, with a view to having those contractors paid sooner rather than later. The expediency of the adjudication process under this legislation is balanced by enabling an aggrieved principal to issue civil proceedings against the contractor to recover any over-payment. However, what options are available to a contractor if it receives a favourable adjudication determination under security of payment legislation, but the principal still does not pay?

The legislation enables the adjudication determination to be registered as a judgment of a relevant Court, allowing the contractor to make use of the various mechanisms under the civil judgements enforcement legislation. This is not necessarily a quick process, as it requires a number of applications to the Court to be made by the contractor.

In Diploma Construction (WA) Pty Ltd v KPA Architects Pty Ltd [2013] WASC 407, Master Sanderson of the Supreme Court of Western Australia considered a simpler option. He found that, if the principal is a company, a contractor that has received an adjudication determination under the Construction Contracts Act 2004 (WA) (CCA) may issue the principal with a ‘statutory demand’ for payment under the Corporations Act 2001 (Cth) (CA), and that demand cannot be set aside on the basis that there is a ‘genuine dispute’ about the payment claim.

This is likely to be a more efficient means of enabling construction contractors to enforce security of payment adjudication determinations, as statutory demands are simpler to prepare than applications to register determinations as Court judgments and subsequent civil judgment enforcement processes. A failure to comply with a validly-issued statutory demand is a ground for having a company wound up, and this is invariably a powerful motivator to have a debt paid.

It will be interesting to see if Master Sanderson’s decision is overturned on the appeal, which was heard by the Western Australian Court of Appeal on 28 January 2014.

Diploma Construction (WA) Pty Ltd v KPA Architects Pty Ltd

Dispute

KPA Architects Pty Ltd (KPA) provided architectural and design services for the Kwinana Hub Shopping Centre Redevelopment project to Fabcot Pty Ltd (Fabcot). The agreement under which these services were performed was novated by Fabcot to Diploma Construction (WA) Pty Ltd (Diploma).

On about 12 December 2012 KPA ceased performing the agreement, and on 8 February 2013 Diploma issued proceedings against KPA in the District Court of Western Australia alleging unsatisfactory works.

KPA considered that it was owed $709,605.39 by Diploma. However, rather than make a counterclaim against Diploma in the District Court proceedings, KPA made applications under section 26 of the CCA. The adjudicator of those applications determined that Diploma should pay KPA $504,545.29, but Diploma did not do so.

KPA then applied to have the adjudicator’s determinations registered as a judgment of the District Court of Western Australia. Diploma opposed this application, but failed: judgment in the sum determined by the adjudicator was registered. KPA subsequently issued Diploma with a demand for payment under the CA.

Diploma then applied to the Supreme Court of Western Australia to have that demand set aside, arguing that there was a genuine dispute as to whether the payment was due (including that Diploma had an off-setting claim in light of its own District Court action).

Reasoning

Master Sanderson dismissed Diploma’s application: there was not a ‘genuine dispute’ about the debt for the purposes of section 459G of the CA, and KPA’s demand was upheld.

The Master relied on the decision of the High Court of Australia in Deputy Commissioner of Taxation v Broadbeach Properties Pty Ltd [2008] HCA 41. In that case, the High Court found that the Deputy Commissioner was entitled to issue statutory demands for unpaid taxes that he had determined notwithstanding that Broadbeach had sought a review of the Deputy Commissioner’s determination by the Administrative Appeals Tribunal. The Deputy Commissioner’s entitlement to payment upon his determination was found by Master Sanderson to be analogous to a construction contractor’s entitlement to payment upon an adjudication determination, notwithstanding that there may be an ongoing dispute about the debt.

Significantly, Master Sanderson made the following finding (at [16]):

… the obtaining of the registration of the judgment would not be a necessary precursor to a subcontractor issuing a statutory demand. In the Broadbeach Properties case the Commissioner had not taken the step of obtaining a court judgment before issuing the demand. But nonetheless in both Broadbeach Properties and in this case the statutory requirements necessary to establish the existence of the debt had been met. That being so the operation of the genuine dispute provisions in the statutory demand procedure were not available.

The Master also made clear that the same reasoning applied to Diploma’s off-setting claim.

Appeal

Diploma appealed Master Sanderson’s decision to the Western Australian Court of Appeal, in Diploma Construction (WA) Pty Ltd v KPA Architects Pty Ltd (CACV 129 of 2013).The appeal was heard on 28 January 2014 by Pullin JA, Newnes JA and Murphy JA, and their decision and reasons will hopefully be delivered soon.

Conclusion

The Diploma Construction decision of Master Sanderson has implications for both contractors and corporate principals. Although it has limited authority as a decision of the single Master of the Supreme Court of Western Australia, and has been appealed, it does have the rationale of the ruling of the High Court of Australia in Broadbeach Properties behind it.

Corporate principals that withhold or delay payment to contractors notwithstanding that there has been an adjudication determination against them run the risk of a statutory demand being served on them. While there may be other bases on which the demand can be challenged (as was attempted in Diploma Construction), it might be prudent for a principal to prepare to issue civil proceedings against the contractor in these circumstances.

Contractors who are faced with a recalcitrant corporate principal are armed with the knowledge that the powerful statutory demand procedure under the CA becomes available to them once there has been an adjudication determination. On the view of Master Sanderson of the Supreme Court of Western Australia and the application of the decision of the High Court of Australia in Broadbeach Properties, this does not even require the adjudication determination to be registered as a judgment of a Court.

In light of this, it may be much more efficient for the beneficiary of a CCA adjudication determination to simply issue a statutory demand than to take the time and effort to register the determination as a judgment and then have to make further applications under the Civil Judgments Enforcement Act 2004 (WA). The same logic is likely to apply in all Australian jurisdictions with a security of payment regime for construction contractors.

We look forward to the decision of Western Australia’s Court of Appeal.