On 21 December 2016, the High Court, for the first time, handed down a decision relating to security of payment legislation. In Southern Han Breakfast Point Pty Ltd. (in Liquidation) v. Lewence Construction Pty Ltd. [2016] HCA 52 the High Court unanimously held that “the existence of a reference date under a construction contract is a precondition to the making of a valid payment claim.” 

The Facts

Southern Han and Lewence entered into a construction contract for the construction of an apartment block at Breakfast Point in New South Wales, therefore the contract was governed by the Building and Construction Industry Security of Payment Act 1999 (NSW) (SOP Act). 

On 10 October 2014, Southern Han gave Lewence a notice to show cause under the contract. Then, on 27 October 2014, Lewence having responded to the notice to show cause, Southern Han gave Lewence a further notice purporting to exercise its right to remove the whole of Lewence’s remaining work to be completed under the contract. Lewence treated the removal of work as repudiation of the contract by Southern Han and, on 28 October 2014, purported to accept the repudiation and terminate the contract. 

Subsequently, on 4 December 2014, Lewence served Southern Han with a payment claim under the SOP Act for work carried out between the last progress payment reference date (being 8 October 2014) up to 27 October 2014 (being the date on which the contract terminated).

The key issue before the High Court was whether the payment claim was a valid payment claim.

Decision

The High Court held that the existence of a reference date, whether it is provided for by the construction contract or calculated in accordance what the SOP Act, is required to make a valid payment claim. Therefore, where a payment claim is made but there is no reference date on and from which the payment claim is made, and when an adjudicator is sought, the adjudicator should decline to make a decision about the claim.

Where a construction contract provides a mechanism for determining reference dates, the reference dates must be determined by reference to the construction contract only. The mechanism for calculating reference dates in the SOP Act only applies where a construction contract makes no express provision for reference dates. 

The SOP Act cannot be used to create alternative dates for payment where the right to make payment claims under the contract has been suspended or where the right to make payment claims under the contract has been extinguished. 

The High Court found Lewence's payment claim was not valid for the following reasons:

1. The contract contained an express provision for calculating reference dates, therefore Lewence could not rely on the provisions of the SOP Act to create a new reference date for its claim

2.Lewence had terminated the contract which precluded any further payment claims being made under the contract 

What Does This Mean?

This recent High Court decision has provided practitioners and clients guidance on the following:

  • If a construction contract makes express provisions for when claims for payment can be made, then parties to the contract cannot rely on the SOP Act to calculate alternative dates on and from which they may make a claim • Where a construction contract is terminated, no further payment claims can be made under the SOP Act
  • Where a construction contract suspends the right to make payment claims, no further payment claims can be made under the SOP Act
  • An adjudicator has no jurisdiction to decide a payment claim where there is no right to make a payment claim in the contract or under the SOP Act

Given the similarity between the SOP Act and security of payment legislation of other states and territories, this decision is likely to have wide application.