Construction Alert: High Court of Australia rules on security of payment legislation for the first time

Dec 21 2016

Publications

The High Court of Australia has today delivered its first ever judgment in relation to security of payment legislation.  In a joint judgment, the High Court allowed an appeal from the New South Wales Court of Appeal (effectively adopting the first instance decision), and determined that the existence of a reference date under a construction contract is a precondition to the making of a payment claim under security of payment legislation.  Accordingly, if a reference date does not exist or is no longer available and an adjudicator determines an amount payable under the adjudication process, that determination can be set aside.

The decision in the High Court in Southern Han Breakfast Point Pty Ltd (in Liquidation) v Lewence Construction Pty Ltd [2016] HCA 52 brings the New South Wales position back into line with the position adopted by the appellate Courts in Victoria and Queensland.

Background

In January 2013, Southern Han Breakfast Point Pty Ltd (Southern Han) entered into a contract with Lewence Construction Pty Ltd (Lewence) for the construction of an apartment block at Breakfast Point.

The dispute between the parties related to the validity of a payment claim made by Lewence on 4 December 2014.  Prior to Lewence serving its payment claim, Southern Han had issued to Lewence a notice purporting to take further work under the contract out of Lewence’s hands.  In response, Lewence notified Southern Han that it regarded this as a repudiation of the contract which Lewence accepted, bringing about an end to the contract on 28 October 2014.

On 30 March 2015, an adjudication determination was made in respect of the payment claim in favour of Lewence.

The Act

Although the dispute traversed a number of issues, the significant issue in the context of the appellate decisions was the interpretation of sections 8(1) and 13(1) of the Building and Construction Industry Security of Payment Act 1999 (NSW).  Section 8(1) provides that “on and from each reference date under a construction contract“, a person who has undertaken to carry out construction work under the contract is entitled to a progress payment.   Section 13(1) provides that “a person referred to in section 8(1) who is or who claims to be entitled to a progress payment may serve a payment claim…”.

Reference dates under a construction contract provide for the dates from which a claimant may give claim for a progress payment.  For example, it is common for construction contracts to provide that progress claims can be made on the 25th day of each month or the last day of each month.  The importance of an existing reference date is that without one, a claimant is not entitled to a progress payment under security of payment legislation.

First instance judgment

Southern Han challenged the adjudication determination on the basis that the adjudicator’s finding that a reference date had arisen by which Lewence could serve the payment claim amounted to a jurisdictional error.  The trial judge accepted the position advanced by Southern Han.  His Honour found that on the hypothesis that Southern Han had validly taken over the work and suspended all payments under the contract, there could be no further reference dates under the contract.  On an alternative hypothesis, His Honour found that reference dates ceased to accrue upon the valid termination of the Contract by Lewence.

Appeal to the New South Wales Court of Appeal

The New South Wales Court of Appeal allowed Lewence’s appeal and determined that the words “on and from each reference date” specify only the time ‘on and from’ which a payment claim can be made and bear no weight on the characterisation of the person who is or who claims to be entitled to a progress payment.  The Court of Appeal found that Lewenece was a person who claimed entitlement under the construction contract, and was thereby entitled to make a payment claim.  Whether that claim was valid, including whether it was valid because it was supported by a reference date, was not a jurisdictional fact.  As a result, the Court of Appeal held that the existence of a reference date was not a precondition to the making of a valid payment claim.

Appeal to the High Court of Australia

By grant of special leave, Southern Han appealed the decision to the High Court of Australia.  The High Court held that the reference in section 13(1) to a “person referred to in section 8(1) who is or claims to be entitled to a progress payment” is to be construed as relating to a person who has undertaken to carry out construction work under a construction contract (which is the characterisation of that person in section 8(1)).  The existence of a reference date under a construction contract was therefore a precondition to Lewence’s entitlement to make a payment claim under section 13(1).  In the absence of any contractual clause which indicated that Lewence’s right to make progress claims was to survive termination of the contract, the High Court held that any future reference dates had ceased to accrue.

Analysis

The decision brings into sharp focus a number of issues that tend to plague security of payment disputes in varying jurisdictions.  At the least, the decision serves as confirmation that:

  • the existence of a reference date under a construction contract is a jurisdictional precondition to the making of a payment claim;
  • reference dates do not accrue following the termination of a construction contract; and
  • the position in New South Wales with respect to the existence of a reference date as a jurisdictional fact has now been brought into line with the existing position in Queensland and Victoria, which is to the same effect.

For further information please contact:

Andrew Kelly | Partner | +61 7 3338 7550 | akelly@tglaw.com.au
Thomas McKillop | Senior Associate | +61 7 3338 7530 | tmckillop@tglaw.com.au