Australia: Recent judgment provides key Security of Payment insights

Last Updated: 26 April 2018
Article by Scott Alden and Joshua Clark
Most Read Contributor in Australia, September 2018

Case Update: Seymour Whyte Constructions Pty Ltd v Ostwald Bros Pty Ltd (in liq); Ostwald Bros Pty Ltd (in liq) v Seymour Whyte Constructions Pty Ltd [2018] NSWSC 412

Summary

A recent NSW Supreme Court case has considered:

  • the rectification of a construction contract where the final terms are inconsistent with, and do not reflect, the parties' common intention at the time of entering into the contract; and
  • the availability of Security of Payment to an insolvent contractor.

The case – Seymour Whyte Constructions Pty Ltd v Ostwald Bros Pty Ltd (in liq); Ostwald Bros Pty Ltd (in liq) v Seymour Whyte Constructions Pty Ltd [2018] NSWSC 412 – creates a division between NSW and Victoria in how each jurisdiction's courts apply the building and construction industry Security of Payment legislation to insolvent companies.

Justice Stevenson found that the Victorian Court of Appeal's decision in Façade Treatment Engineering Pty Ltd (in liq) v Brookfield Multiplex Constructions Pty Ltd [2016] VSCA 247 (Façade) was "plainly wrong" in finding that the payment regime in the security of payment legislation was not available to companies in liquidation. However, agreement about the automatic effect of s553C of the Corporations Act 2001 (Corporations Act) to payment claims involving an insolvent company may limit the practical difference between future results in each state.

Nevertheless, clarification in future cases will be necessary after this bold disagreement of a NSW judge with the decision of a superior Victorian Court.

The case also demonstrates the value of having the parties' pre-contractual understandings recorded in writing in case a mistake is made in the contract and one party seeks rectification.

Background

On 6 September 2016, the plaintiff, Seymour Whyte Constructions Pty Ltd (SWC), as contractor, entered into a contract with Ostwald Bros Pty Ltd (Ostwald) as subcontractor, for the performance of works on the Pacific Highway (the Contract). On 24 August 2017, SWC terminated the Contract.

On 28 July 2017, Ostwald had served on SWC a payment claim for $6,351,066.08, pursuant to s13 of the Building and Construction Industry Security of Payment Act 1999 (NSW) (the SOPA). On 11 August 2017, SWC served on Ostwald a payment schedule pursuant to s14 of the SOPA, which proposed to make a payment of $2,505,237.58 as the scheduled amount.

On 27 September 2017, having not received any payment from SWC, Ostwald made an adjudication application under s17(1)(a)(ii) of the SOPA, relying on s16(2)(a)(ii). The resulting adjudication determined the amount owed by SWC to Ostwald to be $5,074,218.27.

On 30 November 2017, Ostwald's creditors resolved to wind up the company under s439C(c) of the Corporations Act. Having appointed administrators the day after the Contract was terminated, Ostwald's winding up was taken to have commenced on that day – 25 August 2017.

Dispute

With the Court's leave, SWC sought a declaration that the adjudication determination was void and a stay of any judgment - arising from Ostwald's filing of an adjudication certificate - until the final determination of the parties' rights.

Main issues

The first issue to be determined was whether the Contract should be rectified as sought by Ostwald. An inconsistency between terms in the Contract resulted in there being two possible payment due dates for SWC of the payment claim served by Ostwald. This was significant, in light of the main dispute about the timeliness of Ostwald's adjudication application, below.

The second issue was whether Ostwald made its adjudication application in time, upon consideration of s16 and s17 of the SOPA.

The third issue was whether Ostwald was entitled to rely on the provisions of the SOPA now that it was in liquidation.

The fourth issue was whether Ostwald's enforcement of its adjudication determination should be stayed in light of the mandatory "set-off" procedure under s553C of the Corporations Act.

Should the Contract be rectified?

The Contract was comprised of the "Formal Instrument of Agreement", the "Special Conditions" and the "Subcontract Conditions". There was an inconsistency between the due date provided by the Subcontract Conditions and that provided by the Special Conditions; the latter which had priority over the former in the event of any such inconsistency, per the Formal Instrument of Agreement. Payment was therefore due either "within 30 days of the end of month of claim" (Clause 20.7 of the Subcontract) or "within 15 Business Days after the Contractor receives the payment claim" (Clause 9.1 of the Special Conditions).

Ostwald argued that, notwithstanding the priority of the Special Conditions in the event of a discrepancy, the 30 day time limit was what was agreed to by the parties.

A "Departures Table" created by the parties set out their respective negotiation positions regarding clauses in the contract prior to its execution. With respect to the payment date, SWC's recorded position was that it required payment within 30 days from the end of the month in which the claim is made. This was described in the table as "non-negotiable". Further, a "set up form" sent by SWC to Ostwald on the day the contract was executed stated, "Stated Payment Terms are 30 Days from Month End unless otherwise arranged".

Justice Stevenson considered the principles for rectification summarised in Simic v New South Wales Land and Housing Corporation [2016] HCA 47. The prerequisites for rectification include that the parties had an agreement or "common intention" at the time of the contract's execution, including that the written instrument would conform to that agreement, and that the instrument did not conform because of a common mistake. Those matters must be satisfied with "clear and convincing evidence". What matters is the subjective and actual intention of the parties, objectively ascertained.

Justice Stevenson found that the evidence clearly confirmed the common intention of the parties as to the 30 day time limit, and that the written agreement did not reflect the agreement because of a common mistake. In so finding, his Honour rejected SWC's submission that rectification should not be granted because rectification would affect the adjudicator as an "innocent third party" by "giving him statutory powers and imposing on him statutory duties that he otherwise would not have had".

Accordingly, Justice Stevenson ordered the deletion of clause 9.1 of the Special Conditions to rectify the Contract.

Was the adjudication application made in time?

Since a rectified document is treated as having been in its rectified form from its execution, s16(1) of the SOPA was enlivened and satisfied when SWC did not pay Ostwald by the due date of 20 August 2017. Accordingly, Ostwald was entitled to rely on s16(2)(a)(ii) to make an adjudication application under s17(1)(a)(ii) from that date. As per s17(3)(d), such applications must be made within 20 business days after the due date for payment, which was 27 September 2017. It was on this day that Ostwald made the application.

SWC argued that, on a proper construction of s17 of the SOPA, Ostwald made its application out of time. In particular, it was contended that s17(1)(a)(i) and s17(1)(a)(ii) provide two alternatives, where the latter is only available when the circumstances described in the former are not met. This would have the effect of limiting the time for Ostwald to have made its adjudication application to within 10 days from when it received the payment schedule from SWC, per s17(3)(c).

However, Justice Stevenson disagreed, finding that the provisions were not alternatives in that sense – once the circumstances described in s17(1)(a)(ii) were met, the 20 business day limit in s17(3)(d) applied, whether or not s17(1)(a)(i) also applied.

Therefore, his Honour held that Ostwald made its adjudication application in time.

In the alternative, Justice Stevenson determined Ostwald was entitled to rely on s16(2)(a)(i), to recover the unpaid portion of the scheduled amount "as a debt due... in any court of competent jurisdiction", if its adjudication application was not made within time (though this was unnecessary given his Honour's conclusion above).

His Honour considered the principle, from GJ Coles & Co Ltd v Retail Trade Industrial Tribunal (1986) 7 NSWLR 503 (GL Coles), that the failure to perform a mandatory condition imposed by statute invalidates the doing of any act dependent on the fulfilment of that condition, such that the act is incapable of creating legal consequences. Applied to the hypothetical at hand, the issue was whether an adjudication application that was made out of time was capable of being an election under s16(2)(a)(ii); if so, the alternative route under s16(2)(a)(i) would be foreclosed to the claimant.

Justice Stevenson found that the words "adjudication application" in s16(2)(a)(ii) could not be construed to include an application made out of time, given it did not fulfil the requirements of s17(3) and thus did not satisfy the definition of "adjudication application" in s4 of the SOPA. According to his Honour, to hold otherwise would amount to rewriting the statutory definition.

Applying the principle from GJ Coles, Justice Stevenson found that it therefore would have been open for Ostwald to seek recovery of the unpaid scheduled amount under s16(2(a)(i) if its adjudication application under s16(2)(a)(ii) had been made out of time.

Can a company in liquidation rely on the SOPA?

The question of whether the SOPA continued to apply after Ostwald was wound up turned on whether Ostwald was still a "claimant" for the purposes of Pt 3 of the Act.

In Façade, the Victorian Court of Appeal found that a subcontractor in liquidation is not a "claimant" under the Building and Construction Security of Payment Act 2002 (Vic) (the Victorian SOPA). Justice Stevenson was bound to that decision unless it was "plainly wrong".

Ultimately, his Honour did consider the decision in Façade to be "plainly wrong".

The Court in Façade had interpreted the meaning of "claimant" from s14 of the Victorian SOPA, which resembles s13 of the SOPA. Section 14 of the Victorian SOPA entitled a person referred to in s9 of that Act to serve a progress claim, thereafter referring to that person as "the claimant" for the remainder of Part 3 of the Victorian SOPA (which provides for the enforcement of rights arising from the service of a progress claim). Section 9(1) of the Victorian SOPA, which mirrors s8(1) of the SOPA, provides that a person who has "undertaken" to carry out construction work is entitled to a progress payment. By reference also to extrinsic materials and other parts of the legislation, this section was found to connote the continued performance of construction work.

On this interpretation of the Victorian SOPA, only a person who could continue to perform construction work can benefit from Part 3 of that Act. This evidently excludes companies in liquidation, as concluded by the Court in Façade.

On the contrary, Justice Stevenson found that nothing in s9 of the Victorian SOPA indicates that "undertake" means not only to undertake to carry out construction work, but also to "continue to perform such activities". Further, his Honour noted that the term "the claimant" used in s14 of the Victorian SOPA is not its statutory definition, which is in fact found in s4. Significantly, the Victorian Court of Appeal did not have regard to s4. "Claimant" is defined in s4 of the Victorian SOPA as "a person who serves a payment claim under section 14." Thus, a person's status as a "claimant" depends only on whether the person served, and was entitled to serve, a payment claim by virtue of an asserted entitlement to a progress payment. Justice Stevenson held that this status contains no additional requirement that the person undertook to carry out construction work.

His Honour illustrated the inaptness of the interpretation of 'claimant' in Façade, with the example of a person who has served a payment claim but finished the requisite construction work and vacated the site. That person could not continue to carry out construction work and therefore, on the Victorian Court of Appeal's interpretation, would not be entitled to serve and enforce a payment claim.

Having determined that the decision in Façade was "plainly wrong", Justice Stevenson concluded that Ostwald remained a "claimant" for the purpose of the SOPA notwithstanding that it had been wound up.

Should enforcement of the adjudication determination be stayed?

Since Ostwald went into liquidation after it made the adjudication application but before it moved for judgment, s553C of the Corporations Act dictated that an account must be taken of the parties' liabilities against each other. Section 553C had automatic and "self-executing" effect upon the winding up of Ostwald.

Justice Stevenson accepted the correctness of the propositions referred to in Façade, which note that the operation of s553C has the effect that the original claim is overridden by the statutory process in s553C. This meant that Ostwald could not enforce the adjudication determination and could only recover from SWC any such amount as determined under s553C.

Is there an inconsistency with s109 of the Constitution?

Justice Stevenson, in obiter, considered the possibility that the SOPA is inconsistent with s553C of the Corporations Act for the purposes of s109 of the Constitution. Support for this view had been expressed by the Victorian Court of Appeal in Façade, but only in obiter. Justice Stevenson appeared to cast doubt on the Victorian Court of Appeal's view in light of other judicial opinion on the point, but suggested that further consideration would be needed.

This publication does not deal with every important topic or change in law and is not intended to be relied upon as a substitute for legal or other advice that may be relevant to the reader's specific circumstances. If you have found this publication of interest and would like to know more or wish to obtain legal advice relevant to your circumstances please contact one of the named individuals listed.

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