In late December 2016, the High Court handed down its first-ever decision about how the security of payment legislation in Australia should be used to obtain payments.1
The High Court confirmed that there must be a reference date for when payments can be claimed under a construction contract in order for a builder, contractor or consultant to make a valid security of payment claim.
A reference date is a date that is prescribed either in the construction contract or calculated in accordance with security of payment legislation as the date when a builder, contractor or consultant is entitled to make a payment claim.
The decision provides greater certainty to those who would typically receive such a claim, such as principals/developers and contractors, as to when a payment claim is allowed to be made under the NSW Security of Payment Act and equivalent Security of Payment Acts in other states and territories.
In this eBulletin, we review the High Court's decision and clarify what it means for principals, developers and contractors.
Southern Han (principal) and Lewence (contractor) entered into a construction contract for the construction of an apartment block at Breakfast Point in New South Wales.
The contract was substantially in the commonly-used Australian Standard General conditions of contract, known as AS4000-1997. The Building and Construction Industry Security of Payment Act 1999 (NSW) (SOP Act) applied to the contract, which permitted payment claims to be made by Lewence on (and from) a date prescribed either in the construction contract or, if the contract did not provide for such dates, then a date calculated in accordance with the SOP Act known as a "reference date".
The construction contract permitted Lewence to "claim payment progressively" by making a "progress claim" on the eighth day of each calendar month for work done under the contract to the seventh day of that month.
On 27 October 2014, Southern Han gave Lewence a notice that it would exercise its right under the contract to take the whole of the work that remained to be completed out of Lewence's hands. Under the contract, if work was taken out of Lewence's hands payment for work under the contract would be suspended. Lewence treated that notice as a repudiation of the contract and terminated the contract.
Subsequently, on 4 December 2014, Lewence served Southern Han with a payment claim under the SOP Act for work it had carried out up to 27 October 2014 - that is, for work performed between the last progress payment reference date (8 October 2014) and the date on which the contract terminated. Southern Han responded by issuing a payment schedule indicating its position that no payment was due and, in fact, Lewence had been overpaid.
Lewence sought adjudication under the SOP Act of its payment claim. In the adjudication, Southern Han submitted that the adjudicator was not empowered to determine Lewence's payment claim because the payment claim was not made on (or from) a reference date which was a requirement of the SOP Act. This argument was rejected by the adjudicator, who decided that Lewence was not only able to make a payment claim, but that Southern Han should pay approximately $1.2 million in relation to the claim.
Southern Han successfully applied to the Supreme Court of NSW to have the adjudicator's decision declared void on the basis that there was no applicable reference date and therefore no entitlement to make the payment claim, and therefore, that the adjudicator lacked jurisdiction under the SOP Act to determine the claim.
The Court of Appeal disagreed, holding that the existence of a reference date is not an essential precondition for the making of a valid payment claim, as people who "claim to be entitled" to progress payments are entitled to serve payment claims under the SOP Act. Accordingly, the Court of Appeal held that Lewence was entitled to make its claim for payment, that the adjudicator had jurisdiction to determine the issue, and that the adjudicator's decision was not subject to appeal.
The Court of Appeal held that, even if no more claims for payment could be made under the contract (because payments had been suspended or the contract had been terminated), Lewence was still entitled to make a claim for payment on (and from) the dates calculated in accordance with the SOP Act.
Unsurprisingly, Southern Han did not agree with the Court of Appeal's decision and took its appeal to the High Court.
The High Court's decision
The High Court unanimously found that the existence of a reference date (provided for by the construction contract or calculated in accordance with the SOP Act) is required to make a valid payment claim. This means that where there is no reference date on and from which a payment claim is made, and where a payment claim is made and adjudication sought in relation to the payment claim, the adjudicator should decline to make a decision about the claim.
The High Court held that 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.
Accordingly, the SOP Act cannot be used to create alternative dates for payment where, for instance, the right to make payment claims under the contract has been suspended (for example, where a principal takes work out of the hands of the contractor), or where the right to make payment claims under the contract has been extinguished (for example if the contract has been terminated).
The High Court found that Lewence's payment claim was not valid because:
- The contract made provision for the calculation of reference dates. Therefore Lewence could not rely on the provisions of the SOP Act to create a new reference date for its claim.
- Under the contract, upon work being taken out of Lewence's hands, Lewence's right to make a claim for payment was suspended. This included not only future claims for payment, but also the right to make a claim for the period before the work was taken out of its hands.
- Even if Southern Han was not entitled to take work out of Lewence's hands, Lewence had terminated the contract which precluded any further claims being made under the contract. (Note: a claim can be made for loss and damage arising as a result of the contract being terminated, but that is different to enforcing the provisions of the contract to make a claim for work done under the contract).
What this means for principals, developers and contractors
- If a construction contract makes provision for when claims for payment can be made, builders, contractors and consultants can only make claims when the contract allows payment claims to be made. They 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. For principals, this means that, following termination, builders will lose their ability to make payment claims 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.
- Where there is no right to make a payment claim in the contract or under the SOP Act, then an adjudicator has no jurisdiction to decide whether the contractor is entitled to any payment, regardless of whether a contractor claims to be entitled to make a payment claim.
- Given the substantial similarity between New South Wales' security of payment legislation and those of many other states and territories (save those of the Northern Territory and Western Australia), this decision is likely to apply in those jurisdictions also.