This recent case (Kitchen Xchange v Formacon Building Services [2014]) concerns the essential requirement, for head contractors to provide a supporting statement as a pre-requisite to making a payment claim against a principal under the Building and Construction Industry Security of Payment Act 1999 (NSW) (Act)

supporting statement is a statement in the form prescribed by the Building and Construction Industry Security of Payment Regulation 2008 (Regulations) and includes a declaration to the effect that all subcontractors, if any, have been paid all amounts that have become due and payable in relation to the construction work concerned.

The facts of the dispute were as follows:

  1. In May 2014, Kitchen Xchange and Formacon entered into a construction contract within the meaning of the Act under which Formacon was to perform fit-out works for Kitchen Xchange.  As such the recent amendments to the Act were applicable.
  2. The contract provided that the contract price was to be paid by four instalments.
  3. Formacon did not dispute that it was a head contractor for the purposes of the Act, ie that it had engaged subcontractors or suppliers to perform some part of its works under the contract with Kitchen Xchange.
  4. There were three relevant payment claims served in respect of the same reference date:
    1.  The first payment claim, which was withdrawn after discussion between the parties.
    2. The second payment claim, issued some 8 days after the first payment claim for a slightly reduced amount than was claimed in the first payment claim.  The second payment claim was answered in a payment schedule served the following day.
    3. The third payment claim, served 8 days after the second payment claim, which claimed a substantially increased amount to that of the second payment claim, the increase being largely attributable to including a claim for a variation for “damages for failing to pay on time”.  There was no payment schedule served in response to the third payment claim.
  1. Each of the three payment claims contained statements that they were made under the Act even though the requirement that they do so was removed by the recent amendment to section 13(2)(c) of the Act.
  2. None of the three payment claims was accompanied by the prescribed form of supporting statement.
  3. As there was no payment schedule served in respect of the third payment claim, Formacon issued a notice under section 17(2)(a) of the Act.  Kitchen Xchange did not issue a payment schedule in five business days following receipt of that notice.
  4. Formacon pursued the third payment claim to adjudication under the Act and the adjudicator determined that it was entitled to the whole of the claim  except for the claimed variation for “damages for failing to pay on time”.
  5. Kitchen Xchange then sought to have the adjudication determination quashed by the Supreme Court, arguing that the adjudicator lacked jurisdiction as the third payment claim was in breach of section 13(5) and section 13(7) of the Act.

Section 13(5) of the Act provides that  “A claimant cannot serve more than one payment claim in respect of each reference dated under the construction contract”.  McDougall J was found that Formacon had breached this prohibition as the third payment claim was served in respect of the same reference date as the second payment claim. It sought, unsuccessfully, to argue that the second payment claim had been unilaterally ‘withdrawn’.  McDougall J assumed, without deciding, that unilateral withdrawal of a payment claim was possible but decided that it had not occurred in this case as there was no evidence of circumstances that would make it ‘very clear’ to the respondent that the third payment claim was to be withdrawn. 

Section 13(7) of the Act (one of the recent amendments) provides that “A head contractor must not serve a payment claim on a principal unless the claim is accompanied by a supporting statement that indicates that it relates to that payment claim.”  While McDougall J was critical of the term “accompanied” in the amendment, His Honour construed section 13(7) as a prohibition and enforced it, finding that while failure to comply with its requirements would not make a payment claim invalid, it would invalidate the service of that payment claim and that that was a basis for finding that the adjudicator lacked jurisdiction to make his determination.

Conclusions

The definition of head contractor under the Act is very wide.  It is essentially any contractor performing work under a main contract so it is likely that most contractors who engage subcontract trades would be caught by the definition to the extent that they wish to make a claim against the principal.

The significance of this decision is that a service of payment claim may be invalidated under the Act if the claimant is a head contractor and fails to provide a properly completed and executed supporting statement with its payment claim.

This is also a reminder that section 13(8) of the Act provides that there is also a maximum penalty is $220,000 fine or 3 months imprisonment or both for providing a false supporting statement.

The decision is also of note for the manner in which some of the recent amendments are described by McDougall J, particularly given the upcoming review of the Act in 2015 and the substantial reform taking place in Queensland [see our previous article here]. Most notable is the blunt assessment that the amendment to section 13(2)(c) to remove the requirement that a payment claim state that it was made under the Act was ‘unwise’.  It will be interesting to see if similar sentiments are repeated in future decisions concerning the recent amendments and if section 13(2)(c) or any other recent amendment is modified or reversed in the near future.