Key Points:

A statutory demand based on an adjudication determination under the Construction Contracts Act 2004 (WA) without a court's leave, is at risk of being set-aside by the court.

On the basis of the recent decision in Kellogg Brown & Root v Doric [2014] WASC 206, there would appear to be a basis for a court to set aside a statutory demand under section 459 of the Corporations Act 2001 (Cth) founded on an adjudication determination under the Construction Contracts Act 2004 (WA), where a court has not first granted leave to enforce the determination under section 43(2) of the Construction Contracts Act.

In resisting an application for enforcement under section 43(2) of the Construction Contracts Act on the ground of jurisdictional error, the test is whether there is an arguable case that the determination is invalid.

The adjudication and the statutory demand

Kellogg Brown and Root ("KBR"), and Doric were parties to a contract under which KBR was required to provide engineering services to Doric on the Jimblebar Iron Ore Project in Western Australia.

Doric, which was the principal under the contract, made claims against its contractor KBR, and two adjudication applications under the Construction Contracts Act in respect of those claims. It was successful in both adjudications.

KBR failed to pay the amounts of the determinations and commenced judicial review proceedings in the West Australian Supreme Court to quash the determinations.

After the judicial review proceedings began, Doric issued a statutory demand to recover the amounts of the determinations from KBR, but did so without having first obtained leave from the court under section 43(2) of the Construction Contracts Act to enforce those determination as judgments.

Kellogg sought to set aside the statutory demand on the basis that:

  • Doric had failed to obtain leave of the court to enforce the determinations pursuant to section 43(2) of the Construction Contracts Act;
  • there was a "genuine dispute" as to the debt for the purposes of section 459H(1)(a) of the Corporations Act: and
  • the determinations were invalid due to jurisdictional error.

The Acting Master held that the statutory demand should be set aside. The decision may be limited in its application to security of payment legislation in Western Australia, where leave to register and enforce a determination must be sought from the court. This is distinguishable from other security of payment legislation in Australia, where an adjudication determination becomes a debt due which may be filed in a court as a judgment.

Leave under section 43(2)

Acting Master Gething concluded that Justice Pullin's comments in Diploma Constructions v KPA Architects [2014] WASCA 91 meant that a determination under the Act can only be enforced by way of the issue of statutory demand if the party issuing the statutory demand had first obtained the leave of the court to enforce the determination pursuant to section 43(2).

In reaching that position, Acting Master Gething analysed the Construction Contracts Act and concluded that section 43(2), in requiring a court to give leave to enforce an adjudication determination, thereby submits that determination to the oversight of the court: Thiess Pty Ltd v MCC Mining (Western Australia) Pty Ltd [2011] WASC 80.

Furthermore, without leave pursuant to section 43(2) of the Construction Contracts Act, the ability to enforce the determination (under the Act or at all) is not enlivened, and therefore issuing a statutory demand would circumvent that regime. This may be grounds for the court to:

  • find that there is "some other reason" under section 459J(1)(b) of the Corporations Act not to enforce a statutory demand; and
  • make an order restraining a party from using the statutory demand procedure on the basis of an abuse of process.

Acting Master Gething went on to consider that if he was incorrect in his interpretation of section 43(2), there would be grounds to set aside the statutory demand under section 459H(1)(a) of the Corporations Act on the basis that there was a "genuine dispute" based on jurisdictional error in the determination. In this regard, he found that there were two levels of dispute that could give rise to a "genuine dispute":

  • the "primary dispute" which went to arguments of competing claims of set-off; and
  • the "secondary dispute" which went to whether or not the determination creating the debt the subject of the statutory demand was invalid due to jurisdictional error.

In relation to the primary dispute, he found that the determination gave rise to a statutory debt that remained due and payable, notwithstanding the existence of set-off claims. Therefore, there was no "genuine dispute" for the purposes of section 459H(1)(a).

In relation to the secondary dispute, he found that where the creditor had failed to obtain leave pursuant to section 43(2) of the Construction Contracts Act, provided that the party on whom the statutory demand had been served could demonstrate a bona fide arguable case for judicial review, there would be sufficient grounds to set aside a statutory demand on the basis of a "genuine dispute" for the purposes of section 459H(1)(a) of the Corporations Act.

On that basis, Acting Master Gething held that Doric's actions were an abuse of process under the head of the secondary dispute because it was effectively using the statutory demand procedure to compel payment of the disputed debt where leave to enforce had not been granted and where there was a bona fide arguable case for judicial review.

He also went on to find that bona fide arguable judicial review proceedings would constitute "some other reason" to set aside a statutory demand for the purposes of section 459J(1)(b) of the Corporations Act.

An arguable case that the determination is invalid

On a separate pointActing Master Gething (referring to various recent authorities) also considered the implications of raising arguable grounds for judicial review in opposition to an application for leave to enforce an adjudication application under section 43(2) of the Construction Contracts Act. Acting Master Gething appeared to proceed on the basis that, while an arguable case for judicial review would be a reason for refusing the grant of leave to enforce, it would not by itself result in the determination being invalid and that a separate application for judicial review would be required for that outcome.

Similarly, in RNR Contracting Pty Ltd v Highway Constructions Pty Ltd [2013] WASC 423 which involved an application for leave to enforce a determination, the court, despite finding that there was an arguable jurisdictional error, still proceeded to enforce the determination. One of the factors taken into account by the court in that decision was that the defendant had not issued an application for judicial review.

Both of these cases demonstrate a reluctance to find a determination which is arguably afflicted with jurisdictional error, to be invalid. That is inconsistent with Justice Murphy's observation that a determination tainted by jurisdictional error was a nullity: Perrinepod Pty Ltd v Georgiou Building Pty Ltd [2011] WASCA 217; (2011) 43 WAR 319. It is also a shift from Justice Murphy's comments in Perrinepod wherein he held that jurisdictional error could be raised either in opposition to an application for leave to enforce a determination under section 43(2) of the Construction Contracts Act, or by a separate application for judicial review by way of certiorari.

Accordingly, a cautious party seeking to oppose the enforcement of a determination should initiate separate judicial review proceedings in addition to resisting an application for leave to enforce under section 43(2).