Australia: Payment claims under contract and under the Security of Payment Act: dual system or parallel universe?

Last Updated: 30 April 2013
Article by Andrew Murray
Two roads diverged in a yellow wood,
And sorry I could not travel both
And be one traveler, long I stood
And looked down one as far as I could
To where it bent in the undergrowth;

Then took the other, as just as fair,
And having perhaps the better claim,
Because it was grassy and wanted wear;
Though as for that the passing there
Had worn them really about the same...
- from Robert Frost, The Road Not Taken

In brief - Supreme Court finds adjudication determination is void due to adjudicator's misconstruction of Building and Construction Industry Security of Payment Act

The purpose of the Act is to facilitate payment under a construction contract. Although it can overcome procedural hurdles imposed by a contract to the making of a payment, it cannot create an entitlement to payment under a contract where one does not exist or has been validly extinguished.

Distinction between claims under the Act and claims under contract

Industry participants will now be well aware of the fact that security of payment legislation in many jurisdictions has created what has been coined a "dual railroad track system". (See Transgrid v Siemens Limited & Anor [2004] NSWSC 87 at [56], per Macready AJ. References to "the Act" in this article are references to the Security of Payment Act 1999 (NSW).)

A distinction can be drawn between a payment claim made under the relevant Act and a payment claim made under a contract. A payment claim that is effective for one purpose may not be sufficient for the other. However, the recent case of Lahey Constructions Pty Limited v Trident Civil Contracting Pty Limited [2013] NSWSC 176 demonstrates that the limitations of this concept may still not be adequately appreciated.

Subcontractor retained by construction company to perform earthworks

The plaintiff, Lahey Constructions Pty Limited (Lahey) retained the defendant, Trident Civil Contracting Pty Limited (Trident) as a subcontractor to perform earthworks at a site. A dispute arose as to whether a direction issued by Lahey in the course of administering the subcontract constituted a variation and, if so, whether Trident was barred from claiming additional cost for the work by reason of its non-compliance with a notice provision under the subcontract.

Trident issued a payment claim under the Act that included an amount in respect of the variation. In its responsive payment schedule, Lahey rejected the claim.

Subcontractor serves adjudication application after payment claim rejected

Trident served an adjudication application pursuant to section 17 of the Act. An adjudicator was appointed. In granting Trident the full value of the variation claim, he relevantly stated:

[Lahey] submits that the conditions of contract provide a bar on any variation made other than in accordance with the contract conditions. The Act provides at section 3 that a person who undertakes to carry out construction work under a construction contract is entitled to receive and is able to recover progress payments in relation to the carrying out of that work. I determine that where [Trident] has undertaken construction work it is entitled to payment for that work and the conditions of contract do not provide a bar to the payment for that work.

Construction company commences proceedings in Supreme Court

Lahey commenced proceedings in the Supreme Court of NSW seeking a declaration that the adjudication determination was void because, amongst other things, the adjudicator had committed a jurisdictional error.

Lahey argued that the adjudication determination was void because the adjudicator had proceeded upon a misconstruction of the Act which led to a misconception of his function. This was one of the three categories of jurisdictional error which the court in Chase Oyster Bar Pty Limited v Hamo Industries Pty Limited [2010] NSWCA 190 recognised as being capable of invalidating an adjudication determination.

Were contractual restrictions on a right to payment contrary to the Security of Payment Act?

The question at issue was whether the adjudicator was correct in asserting that the provisions of the subcontract that barred the making of variation claims in certain circumstances offended against section 3 of the Act, which relevantly states:

(1) The object of this Act is to ensure that any person who undertakes to carry out construction work (or who undertakes to supply related goods and services) under a construction contract is entitled to receive, and is able to recover, progress payments in relation to the carrying out of that work and the supplying of those goods and services.

In asserting that it did, the adjudicator was perhaps persuaded by the line of authority recognising that some contractual restrictions on a right to payment may offend against the Act and be unenforceable in the defence of a payment claim made under it.

"No contracting out" provisions in NSW and Queensland

In particular, in Minister for Commerce v Contrax Plumbing [2004] NSWSC 823, McDougall J found that a contract regime which provided that a contractor's right to payment under the contract did not accrue until a certain regime had been worked through (which regime could effectively mean that payment wasn't due until six months after the month in which the relevant work was performed) was void because it was contrary to the "no contracting out" provision in section 34 of the Act.

In a similar vein, a spate of recent Queensland decisions have concluded that attempts to impose contractual pre-conditions on the time for payment, or which purport to condition the accrual of a reference date (for example, by requiring the production of certain documentation or information to a Superintendent) are contrary to "no contracting out" provisions of the Queensland version of the Act. (SeeJohn Holland Pty Limited v Coastal Dredging & Construction Pty Limited [2012] 2 Qd R 435; BHW Solutions Pty Limited v Altitude Constructions Pty Limited [2012] QSC 214; andState of Queensland v T&M Buckley [2012] QSC 265.)

Contractual provisions not contrary to the operation of the Act

However, none of those authorities goes so far as to assert that a contractual provision such as the one in the subcontract, which bars claims for variations altogether if notice provisions are not satisfied, is contrary to the operation of the Act.

As Stevenson J observed in finding that the determination was void for jurisdictional error, the Act makes clear (in particular, sections 9(a), 10(1) and 22(b)) that a fundamental matter for consideration by an adjudicator is the provisions of the contract.

Act cannot create entitlement to payment under a contract

So where lies the dividing line between contractual provisions that fall foul of the Act by restricting rights to payment and those that may have the same effect but which remain valid? To explain, Stevenson J relied upon the argument of Brereton J in Roseville Bridge Marina Pty Limited v Bellingham Marine Australia Pty Limited [2009] NSWSC 320 at [43], in which his Honour stated:

The Act does not create a right to remuneration for construction work - that right is created by the construction contract. What the Act does is to create and regulate a right to obtain a progress payment. It is inherent in the concept of a progress payment that it be a payment on account of the amount ultimately due.

The purpose of the Act is to facilitate payment under a construction contract. Although it can overcome procedural hurdles imposed by a contract to the making of a payment claim or receipt of payment, it cannot create an entitlement to payment under a contract where one does not exist or has been otherwise legitimately extinguished by mechanisms unrelated to the accrual of reference dates.

Andrew Murray
Construction disputes
Colin Biggers & Paisley

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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Andrew Murray
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