Australia: Pre-conditions to reference dates arising under the SOP Act: Are they valid?

Last Updated: 5 October 2016
Article by Sofia Marchesi

There are limits upon the freedom of contracting parties to provide for whether and when a reference date arises for the purposes of the SOP Act.

It is common for construction contracts to state that a reference date under the Building and Construction Industry Security of Payment Act 1999 (SOP Act) will only arise once a specified date has passed and the contractor has submitted all required documentation.

The required documentation is often a statutory declaration by the contractor that all sub-contractors have been paid all moneys due and payable in respect of the work the subject of the payment claim and/or a "Subcontractor Statement" regarding worker's compensation, payroll tax and remuneration.

In the recent decision of J Hutchinson Pty Ltd v Glavcom Pty Ltd [2016] NSWSC 126, the Supreme Court of NSW held that a provision requiring the submission of a "Subcontractor Statement" as a precondition to accrual of the reference date was void under section 34 of the SOP Act as a provision that sought to contract out of the SOP Act.

The effect of the decision in Hutchinson is that contractors may not be entitled to rely upon a failure by a sub-contractor to submit the documentation required under the contract as the basis for contesting (or not assessing) a sub-contractor's payment claim.

Relevantly, the decision in Hutchinson does not affect the requirement under section 13(7) of the SOP Act for a "head contractor" to submit a "supporting statement" in respect of a payment claim served on the principal.

Further, Hutchinson is distinguishable from the authorities dealing with a situation where a reference date has arisen but the contract purports to require a payment claim to meet certain conditions or provides that if certain conditions are not met, the payment claim is ineffective and the reference date is deferred (see, for example, John Holland Pty Ltd v Coastal Dredging & Construction Pty Ltd [2012] QCA 150). Hutchinson deals with circumstances where a reference date has not arisen because the contract purports to provide that no reference date will arise until certain conditions are fulfilled.

The facts in the Hutchinson case

Hutchinson and Glavcom were parties to a sub-contract under which Glavcom (as sub-contractor) agreed to carry out the design, fabrication and installation of joinery at a development known as "Pacific Bondi Beach".

Clause 37 of the sub-contract required Glavcom to submit certain declarations "as a precondition to a reference date arising" under the SOP Act.

Glavcom submitted a payment claim with the required statutory declarations. Hutchinson contested the payment claim. Glavcom obtained an adjudication determination under section 22 of the SOP Act. Hutchinson sought to set aside the adjudication determination on the basis that, amongst other things, one of the statutory declarations provided by Glavcom was knowingly false and, as such, the determination was obtained by fraud and voidable.

The Court upheld the adjudicator's determination and found that the issue of whether Glavcom had "fraudulently failed" to comply with clause 37 was irrelevant to the adjudicator's determination because clause 37 was rendered void by the "no contracting out" provision in section 34 of the SOP Act.

The rationale for the Court's finding was that:

  • a person who performs construction work or provides related goods and services under a construction contract has a right, under section 8 of the SOP Act, to receive a progress payment on each reference date;
  • section 8 of the SOP Act allows a contract to fix a reference date, or provide a method for fixing a reference date, but does not allow a contract to prescribe conditions to be attached to the occurrence of a reference date; and
  • any provision that purported to make the occurrence of a reference date conditional upon, for example, the provision of a statutory declaration, would be a provision which sought to modify or to restrict the circumstances in which a person was entitled to a progress payment and would therefore be void.

An exception?

The Hutchinson decision follows two decisions in the Queensland Supreme Court on the same issue: Lean Field Developments Pty Ltd v E & I Global Solutions (Aust) Pty Ltd [2014] QSC 293 and BRB Modular Pty Ltd v AWX Constructions Pty Ltd [2015] QSC 218.

In Lean Field Developments the Court held that a provision which required the submission of a draft payment claim as a precondition to a reference date arising was rendered void by section 99 of the Building and Construction Industry Payments Act 2004 (Qld) (BCIPA), the Queensland equivalent of section 34 of the SOP Act.

Similarly, in BRB Modular, a precondition which required the contractor to provide a statutory declaration declaring that all sub-contractors and suppliers had been paid all moneys due and payable in respect of the works the subject of the payment claim was also declared void under section 99 of the BCIPA.

However, in both decisions, the Queensland Supreme Court acknowledged that there may be circumstances in which it is possible to condition not only when, but whether or not, a reference date will arise. Such a condition may be justified "where it facilitates the purpose of the BCIPA".

There has been very little guidance from the courts on what type of condition would facilitate the purpose of the SOP Act.

The applicant in BRB Modular sought to rely upon section 13(7) of the NSW SOP Act as the basis for arguing that the BCIPA is concerned with protecting the position of third parties down the construction chain and the precondition requiring the contractor to provide the statutory declaration facilitated this objective. The Court rejected this argument and held that:

  • the BCIPA confers an entitlement to a provisional progress payment upon a party to a construction contract who qualifies for that entitlement;
  • the BCIPA does not give any entitlement to third parties to be paid out of a progress payment or for the progress payment to be secured for their benefit;
  • the BCIPA proceeds on the basis that a contractor to whom a progress payment is made will deal with the moneys it receives in accordance with its legal obligations; and
  • as section 13(7) of the SOP Act applies only to a "head contractor", the NSW Parliament "did not apparently see any advantage in imposing such a requirement upon an intermediate contractor or sub-contractor in AWX's position".

In Hutchinson, the Court stated that a condition which "sets out the form of a payment claim" may fall within the exception but held that it was not clear how a requirement to provide a "subcontractor statement" furthered the purpose of the SOP Act, which is to ensure that those who do construction work have cash flow so that they can meet their financial obligations.

Key takeaways

  • There are limits upon the freedom of contracting parties to provide for whether and when a reference date arises for the purposes of the SOP Act.
  • A clause in a construction contract which attaches conditions to the occurrence of a reference date may be void under section 34 of the SOP Act on the basis that it seeks to modify or to restrict the circumstances in which a person is entitled to a progress payment.
  • There is a risk for contractors that they could be liable to pay for the full amount of a sub-contractor's payment claim if they rely upon a sub-contractor's failure to satisfy the pre-conditions to a reference date arising as the basis for not providing a payment schedule within the required time period or as the sole reason provided in a payment schedule for contesting the sub-contractor's payment claim.

RELATED KNOWLEDGE

Clayton Utz communications are intended to provide commentary and general information. They should not be relied upon as legal advice. Formal legal advice should be sought in particular transactions or on matters of interest arising from this bulletin. Persons listed may not be admitted in all states and territories.

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