In brief - Developer's payment into court did not breach section 26C
Where a principal contractor pays money into court on account of a disputed adjudication, this is not a voluntary payment and does not discharge a principal contractor's obligation to retain that money in respect of a payment withholding request to a subcontractor.
Dispute between property developer, builder and scaffolding supplier
The case of Hanave Pty Ltd v Nahas Construction (NSW) Pty Ltd  NSWSC 888 concerns the following parties engaged on the development and construction of a multi-storey commercial and residential building in Sydney:
- Hanave, a property developer
- Nahas, a builder
- Waco, a scaffolding supplier and creditor of Nahas
(Please see also our earlier article Disclaimer in expert report does not void adjudication determination.)
Developer's challenge to adjudication determination dismissed
Nahas served on Hanave a payment claim pursuant to the Security of Payment Act for $1,469,510.87 excluding GST. Hanave served a payment schedule indicating that it proposed to pay $418,830.87. Hanave commenced proceedings to restrain Nahas from taking any step to enforce the adjudication determination.
As part of those proceedings, Hanave was ordered to pay into the court the amount under the adjudication determination of $1,100,471.78, as security for the debt, which it did. Hanave’s challenge to the adjudication determination was dismissed and the money paid into court was handed over to Nahas.
Next, Waco obtained an adjudication determination against Nahas for $292,155.26.
Scaffolding supplier serves developer with payment withholding request
On 24 November 2011, Waco served on Hanave a payment withholding request requiring Hanave to retain $292,155.26 out of the money owed by Hanave to Nahas.
Under section 26A of the Security of Payment Act a claimant (like Waco) who has made an adjudication application for a payment claim can require a principal contractor (like Hanave) for the claim to retain sufficient money to cover the claim.
Having been served with the payment withholding request, Hanave was obliged to retain out of money owed to Nahas, the amount of money to which Waco's payment claim relates until either (section 26B(3)):
- Waco withdraws the adjudication application
- Nahas pays Waco
- Waco serves a notice of claim on Hanave pursuing the debt under the Contractors Debts Act 1997, or
- Twenty business days elapse after the adjudicator’s determination was served on Hanave
Section 26C of the Security of Payment Act provides that if Hanave discharges its obligation to pay money to Nahas (in contravention of a requirement to retain the money for Waco), then Hanave becomes jointly and severally liable with Nahas in respect of the debt owed to Waco.
Developer argues it lost any interest in the money it paid into court
During the proceedings, Waco submitted that when Hanave paid the money into court, it breached section 26C of the Security of Payment Act by not retaining the money for Waco.
The issues the court looked to determine included if upon payment into court, Hanave retained any interest in the funds and, if so, the nature of that interest.
Hanave submitted that it lost any interest in the money it paid into court as it had no control over the money from the time it was paid to the court.
The court did not accept Hanave's submission. This is because the money paid in as security for the debt would have been returned to Hanave had its challenge to the adjudication determination with Nahas been successful.
The court determined that Hanave was powerless to stop the money ultimately being paid over to Nahas (when the court found in favour of Nahas).
In deciding the case, the court made these key points about Hanave's payment to Nahas:
- It happened before Hanave received the notice from Waco
- It was made by reason of a court order
- It was not voluntary
Breach of section 26C would have required voluntary payment by developer
By bringing these proceedings, Waco attempted to prove that Hanave had failed to take steps to prevent discharge of the debt.
The only action taken by Hanave which could have been interpreted as a discharge of the debt to Nahas was the original payment made into court.
A breach of section 26C of the Security of Payment Act requires a voluntary act by Hanave after having received the payment withholding request.
Ultimately, the court found that there has been no breach by Hanave, as the payment made to Nahas from the money paid into court was not a voluntary payment.