On 24 April 2014 the Western Australian Court of Appeal handed down a unanimous decision in the case of Diploma Construction (WA) Pty Ltd v KPA Architects Pty Ltd  WASCA 91. The Court confirmed that a security of payment adjudication made pursuant to the Construction Contracts Act 2004 (WA) (CCA) creates a debt that is immediately due and payable to a construction contractor, and which can be the subject of a statutory demand to a corporate principal. It does not appear to be necessary to first register the adjudication as a judgement of a court.
The Court also clarified the circumstances in which the statutory demand may be set aside. A statutory demand will not be set aside on the basis that an underlying dispute exists as to the debt created by the adjudication under the CCA. To challenge a statutory demand on substantive grounds the principal must demonstrate that it has a legitimate and separate offsetting claim, of quantifiable value, which should reduce the debt payable by it.
These principles are likely to apply to security of payment regimes in other states of Australia.
KPA Architects Pty Ltd (KPA) was contracted by Fabcot Pty Ltd to provide architectural services for the Kwinana Hub Shopping Centre Redevelopment project. In late 2011 the agreement was novated to Diploma Constructions (WA) Pty Ltd (Diploma).
KPA ceased performing the agreement on about 12 December 2012, and on 8 February 2013 Diploma commenced proceedings in the District Court of Western Australia against KPA alleging breach of contract and negligence. KPA in turn claimed that it was owed money under a number of invoices it had issued to Diploma, which were unpaid. Instead of making a counterclaim, KPA made an application under section 26 of the CCA for an adjudication of the amount owing to it. The adjudicator determined that Diploma should pay KPA $504,545.29. Diploma refused to pay KPA.
KPA had the determination registered as a judgement of the District Court of Western Australia, and subsequently issued Diploma with a statutory demand for payment under section 459E of the Corporations Act 2001 (Cth).
Diploma applied to the Supreme Court of Western Australia to have the demand set aside on the ground that there was a genuine dispute as to the debt, and that its action in the District Court was an offsetting claim which should reduce the amount it owed.
The case was heard at first instance by Master Sanderson in the Western Australian Supreme Court on 7 November 20131. Master Sanderson dismissed the application to set aside the statutory demand, citing the decision of the High Court of Australia in Deputy Commissioner of Taxation v Broadbeach Properties Pty Ltd (2008) 237 CLR 473 as a “complete answer” to Diploma’s submissions.
Diploma sought leave to appeal to the Court of Appeal.
Decision on appeal
The Court of Appeal granted Diploma leave to appeal, but dismissed the appeal on all grounds.
Justice Pullin (with whom the balance of the Court agreed) emphasised2 that the purpose of the CCA, “insofar as it relates to payment disputes, is to ensure that, in construction contracts, progress claims are paid on time and that principals obliged to pay do not act as their own judge and jury and hold up payment on their own assertion that they have a defence warranting refusal to pay. It is a 'pay now, argue later' system, with the primary aim of keeping the money flowing by enforcing timely payment”.
His Honour went on to find that an adjudication under the CCA gives rise to a debt that can be the subject of a statutory demand pursuant to section 459E(1) of the Corporations Act 2001 (Cth). Justice Pullin stated that a statutory demand cannot be challenged on the basis that there is a genuine dispute surrounding the debt, because a determination made pursuant to the CCA gives rise to a final and enforceable debt that is immediately due and payable. His Honour also stated that a contractor may enforce a determination made under the CCA by utilising the relevant provisions of the Civil Judgments Enforcement Act 2004 (WA).
His Honour then observed that a statutory demand can be set aside if there is evidence of a genuine offsetting claim, arising from a transaction separate to the one which gave rise to the adjudicated debt under the CCA. The key point is that the offsetting claim must be capable of being quantified in monetary terms. Simply producing an affidavit or statement of claim alleging an offsetting claim does not provide the court with evidence by which it can estimate the value of the offsetting claim.
The Court’s decision confirms that contractors in Western Australia who are successful in obtaining an adjudication under the CCA may issue a statutory demand to ensure payment of the adjudicated amount. A determination made under the CCA gives rise to a debt that is due and payable, and other enforcement actions under the Civil Judgments Enforcement Act 2004 (WA) can also be taken.
It does not appear that it is necessary to first register the adjudication as a judgement of a Court before issuing the statutory demand.
In our opinion, these principles are likely to apply to the security of payment regimes in the other states of Australia. This should provide comfort to construction contractors that the aims of the CCA will be upheld by the courts and they will be afforded a timely and cost effective means of enforcing an adjudication made in their favour.
Principals may be able to challenge a statutory demand in these circumstances if they can demonstrate the existence of a genuine and quantifiable offsetting claim against the contractor.