Australia: Victorian Supreme Court declares enforcement of payment awards by insolvent contractors unconstitutional

Last Updated: 31 March 2015
Article by Murray Thornhill

Never do subcontractors have more reason to be worried than when head contractors become insolvent and no longer have the financial means to pay their subcontractors for the work they have done. Indeed, the need ensure that cash flows to the subcontractors who need it the most is the very purpose of security of payment legislation.

In Hammersley Iron Pty Ltd v James [2015] WASC 10 Beech J of the WA Supreme Court may be said to have struck the right balance between the right of employees and subcontractors of insolvent head contractors, to be paid for the work they have done and the right of principals to prove and set off their counterclaims in the liquidation. Beech J achieved this simply and practically by staying the head contractor's application for leave to enforce an adjudication award under security of payment legislation pending determination of the counterclaims which the principal said it was entitled to set off against that award under section 553C of the Corporations Act. At the same time, his Honour allowed the contractor to bring its application back before the Court if the principal did not take timely steps to prosecute the counterclaims which it relied on as the basis for staying the contractor's application. By allowing for the principal's foreshadowed counterclaims (remember, it hadn't claimed them yet) to be heard and determined before the insolvent contractor was allowed to enforce the adjudication award, Beech J's decision was consistent with the policy of both the mutual set-off provisions of the Corporations Act and the security of payment provisions which governed the adjudication. This is further considered in the article: WA SUPREME COURT ENSURES LIQUIDATORS OF INSOLVENT CONSTRUCTION CONTRACTORS GIVE AS GOOD AS THEY GET: HAMERSLEY IRON PTY LTD v JAMES [2015] WASC 10

More recently, in the Victorian Supreme Court, Vickery J took a very different approach in Façade Treatment Engineering Ltd v Brookfield Multiplex Constructions Pty Ltd. In that case, Vickery J held that security of payment legislation was, in some cases, unconstitutional because it was capable of operating inconsistently with s553C of the Corporations Act where (in this order):

  1. a contractor obtains an adjudication award under security of payment legislation;
  2. that contractor then becomes insolvent;
  3. that contractor then applies for leave to enforce the adjudication award; and
  4. the principal resists this application by the insolvent contractor, in reliance on counterclaims which the principal says it is entitled to set off against the contractor's claims under s553C.

According to Vickery J, when these very specific facts apply, security of payment legislation is invalid because of section 109 of the Commonwealth Constitution, which reads:

"Inconsistency of laws

When a law of a State is inconsistent with a law of the Commonwealth, the latter shall prevail, and the former shall, to the extent of the inconsistency, be invalid."

However, on one view, security of payment legislation, far from being inconsistent with s553C, can be made to operate alongside it, just as Beech J has one in Hammersley Iron.

Vickery J then says that where security of payment legislation is invalid because of inconsistency with Commonwealth law, it can be revalidated if the principal's asserted counterclaims fail or are not progressed through the court in a timely way. His Honour seeks to justify this finding by quoting a passage from a textbook on statutory interpretation. However, as we read it, this passage says that the only way to revalidate a State law that is invalid because of inconsistency with a Commonwealth law is to repeal the Commonwealth law.

Vickery J concludes his judgment by saying that, having found security of payment legislation to be invalid (but only in limited circumstances and for a limited time), he did not have to:

"consider the second and alternative limb of the Brodyn [Pty Ltd v Dasein Constructions Pty Ltd [2004] NSWSC 1230] that, in construing security of payment legislation, it manifests an intention to operate only when the head contractor and the subcontractor are going concerns, and should be so construed".

This may be seen as a missed opportunity to give consideration to the basic purpose of security of payment legislation. The legislation is there to provide contractors with a quick and informal way to keep cash flowing down the contractual chain in accordance with the contractual payment regime until the works under contract are substantially completed. Where the principal or head contractor becomes insolvent, that contractual payment regime no longer applies and so, neither does security of payment legislation. The contractual payment regime might appear to have survived the contractor's insolvency in cases like Hammersley Iron and Façade However, in those cases, before the contractor became insolvent, it had already had its payment claims adjudicated. All that was left for the insolvent contractor (or its liquidators) to do once it had become insolvent was to enforce the payment award which had already been made. This means that, when the adjudication award was made in each case, no constitutional issue of the kind identified in Façade could have arisen.

In recent commentary, it was said that in fact, the decisions in Hammersley Iron and Façade were consistent because they both led to:

  1. the insolvent contractor having no immediate entitlement to enforce its adjudication award pending determination of the principal's asserted counterclaims; and
  2. the contractor not losing its right to enforce the adjudication award later, should the asserted counterclaims be either dismissed by the court or abandoned by the principal.

That may be so at this early stage, each contractor having just applied for leave to enforce its adjudication award. In due course, however, the two approaches are likely to lead to very different outcomes. For a start, unlike in Façade, the approach in Hammersley Iron recognises that courts have a discretion, which security of payment legislation gives them, to decide in each case whether and when to allow contractors to enforce their adjudication awards. If, in exercising this discretion, a court does not take proper account of what the principal says are its rights of set-off under s553C, the principal can appeal on the basis that the court's discretion in that particular case has miscarried.

However, if the courts start adopting the approach taken in Façade, they are likely to end up dismissing, as a matter of course (rather than a considered exercise of judicial discretion), all applications by insolvent contractors for leave to enforce their adjudication awards. This is likely because, if there is any prospect at all that perhaps, one day, the principal might possibly have prosecuted its asserted counterclaims, and succeeded, and taken steps to set them off against the contractor's entitlements under section 553C, then this would, on Vickery J's reasoning, make prior enforcement of the contractor's adjudication award unconstitutional. This lingering risk of unconstitutionality could lead to permanent unenforceability of payment awards based merely on an asserted counterclaim, however unmeritorious, even if the principal never actually takes substantive action against the contractor. This would be bad news for subcontractors and employees of the insolvent contractor who might well depend, for their own solvency or cash flow, on the cash injection that an enforceable payment award would have yielded.

Principals resisting future applications by insolvent contractors to enforce payment awards might consider arguing instead that the contractual payment regime, and the adjudication based on it, totally failed when the contractor became insolvent. This argument, explained in our Daniel Morris's Brooking Prize winning paper,1 would leave the liquidator to make an alternative claim outside the contract for the fair value (quantum meruit) of works done by the contractor before it had become insolvent. This kind of application tends to be complex, and difficult and expensive to prove, which would make it a far less attractive option for any liquidator than simply enforcing an existing payment award.


1"Restitution sans Rescission: Exposing the Myth of a Fallacy", Australian Law Journal (2015) 89 ALJ 117.

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.

To print this article, all you need is to be registered on

Click to Login as an existing user or Register so you can print this article.

Murray Thornhill
Some comments from our readers…
“The articles are extremely timely and highly applicable”
“I often find critical information not available elsewhere”
“As in-house counsel, Mondaq’s service is of great value”

Mondaq Advice Centre (MACs)
Related Video
Up-coming Events Search
Font Size:
Mondaq on Twitter
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
Email Address
Company Name
Confirm Password
Mondaq Topics -- Select your Interests
 Law Performance
 Law Practice
 Media & IT
 Real Estate
 Wealth Mgt
Asia Pacific
European Union
Latin America
Middle East
United States
Worldwide Updates
Check to state you have read and
agree to our Terms and Conditions

Terms & Conditions and Privacy Statement (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

Use of

You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.


Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.


Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.

Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

If you do not want us to provide your name and email address you may opt out by clicking here .

If you do not wish to receive any future announcements of products and services offered by Mondaq by clicking here .

Information Collection and Use

We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to with “no disclosure” in the subject heading

Mondaq News Alerts

In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.


A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

Log Files

We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.


This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

Surveys & Contests

From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.


If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.


This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to

Correcting/Updating Personal Information

If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to

Notification of Changes

If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

How to contact Mondaq

You can contact us with comments or queries at

If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at and we will use commercially reasonable efforts to determine and correct the problem promptly.