By Georgina King a Senior Associate of Matthews Folbigg, in our Insolvency, Restructuring and Debt Recovery Group
On 21 December 2016, the High Court of Australia handed down its decision in Southern Han Breakfast Point Pty Ltd (In Liquidation) v Lewence Construction Pty Ltd  HCA 52.
In the decision, the High Court has overturned the previous decision of the Supreme Court of New South Wales Court of Appeal and held that an adjudication determination arising from a payment claim purportedly served pursuant to the Building and Construction Industry Security of Payment Act 1999 (NSW) (“Act”) after purported suspension of payment and termination of a construction contract is void by reason of there being no reference date available in respect of the claim.
Prior to serving the payment claim, the contractor seeking payment purportedly terminated the construction contract on the basis that the Principal had repudiated the contract by seeking to exercise a right provided for in the contract to take the work remaining to be completed under the contract out of the contractor’s hands and suspend payment if the contractor committed a substantial breach. The contractor alleged that it had not committed a substantial breach and the Principal’s actions in removing the work from the contractor constituted repudiation of the contract entitling the contractor to terminate the contract.
The issue that arose in the case was whether in the circumstances referred to above, a reference date (being the date from which a party is entitled to a progress payment under the Act) could be said to have arisen in respect of the payment claim purportedly served by the contractor, and whether in the absence of a reference date the claim could be considered a payment claim under the Act which the adjudicator had jurisdiction to determine.
After being served with the payment claim, the Principal responded with a payment schedule and response to the payment claim. The contractor proceeded to apply for adjudication of the claim under the normal adjudication procedure provided for in the Act. The Principal sought to oppose the adjudication application on the basis that the payment was not a valid payment claim under the Act given the circumstances in which it was issued and therefore the Adjudicator did not have jurisdiction to determine the claim. The Adjudicator did not agree with that proposition and determined that the contractor was entitled to payment of the sum of $1,221,051.08 in respect of its claim.
The Principal shortly thereafter commenced proceedings in the Supreme Court of New South Wales seeking to have the adjudication determination declared void. In seeking to have the determination declared void the Principal argued that having regard to sub-sections 8(1) and 13(1) of the Act, in order for the Adjudicator to have jurisdiction to determine the claim, there needed to be a reference date within the meaning of the Act arising in relation to the payment claim. Sub-section 8(1) of the Act provides that on and from each reference date under a construction contract, a person of the type referred to in sub-section 8(1) is entitled to a progress payment. This is connected to sub-section 13(1) of the Act which provides that a person referred to in sub-section 8(1) who is or who claims to be entitled to a progress payment may serve a payment claim on the person who is or may be liable to make the payment. The Principal alleged that no reference date had arisen in respect of the purported payment claim following the purported termination of the contract and the removal of the work from the contractor for substantial breach and therefore the payment claim purportedly issued pursuant to the Act was invalid.
The contractor in opposition to this interpretation of the Act argued that sub-section 13(1) of the Act, by its express terms, includes a party who claims to be entitled, as opposed to a party who is entitled, to a progress payment, and provided that a party is a person who has undertaken to carry out construction work or supply related goods and services under a construction contract, as referred to in sub-section 8(1) of the Act, a payment claim served by that person is a payment claim within the meaning of the Act and invokes the jurisdiction of an adjudicator to determine the claim, including whether a reference date exists. On that basis, the contractor contended that the adjudicator had jurisdiction to determine whether a reference date had arisen and the Principal was bound by the Adjudicator’s determination on that issue and the payment claim generally.
Following differing decisions from the Supreme Court of New South Wales at first instance and the Supreme Court of New South Wales Court of Appeal on appeal, the High Court has found in favour of the Principal, determining that a reference date is a requirement and pre-condition to a valid payment claim being made and a document that is not issued in respect of a reference date is not a payment claim under the Act and is ineffective to trigger the payment claim and adjudication procedures set out in the Act. In this regard the High Court concluded that the purpose of the reference in the Act to a person who claims to be entitled as well as one who is entitled, to a progress payment, is to recognise the fact that the amount of a progress payment to which a person is entitled might ultimately be found to be less than or even nothing of what the person claims to be entitled to in a payment claim issued pursuant to the Act. Having regard to this limited purpose, the words “claims to be entitled” cannot be taken to have the broader effect of removing the requirement for a reference date as a pre-condition to making a valid payment claim. Accordingly a claim cannot be determined by an Adjudicator as a payment claim pursuant to the Act in circumstances where no reference date is available and an adjudication determination can be the subject of a declaration that it is void on that basis.
The High Court also held that no reference date had come into existence in respect of the work the subject of the disputed payment claim and therefore the document served by the contractor was not a valid payment claim under the Act. As in the earlier decisions, the High Court was required to consider this issue in respect of two hypotheses, that the removal of the work from the contractor and suspension of payment by the Principal was valid, or alternatively that the contractor had validly terminated the contract for repudiation by the Principal.
The High Court agreed with the decision of the Supreme Court at first instance, and the obiter of comments of Ward, AJA in the Court of Appeal, that if the Principal validly exercised its right under the contract to in a case of substantial breach remove the remaining work from the contractor and suspend payments, this precluded the contractor from making a valid payment claim. This conclusion was reached having regard to the terms and commercial purpose of the clause entitling the Principal to take that action. The relevant clause provided that if the remaining work under the contract was removed from the contractor pursuant that clause, the Principal could suspend payment until it became due and payable under a process provided for in the contract whereby an adjustment was to be made to the amount due and payable to the contractor having regard to any difference between the cost to the Principal of completing the work and the amount which would have been paid to the contractor if the work had been completed by it. The purpose of this clause was to provide a form of security to the Principal in the event that the costs of completion of the work removed from the contractor were greater than the amount the Principal would have had to pay if the contractor had completed the work itself. That purpose would be defeated if the suspension clause was interpreted as relating only to work taken out of the contractor’s hands rather than all work in respect of which payment was due. Accordingly the rights to payment to be suspended pursuant to that clause included all rights and obligations otherwise imposed in relation to payment including the right to make a payment claim, and the clause of the contract providing for reference dates to arise would not continue to operate once the rights under the suspension of payment clause had been validly exercised.
In respect of repudiation and termination of the contract, the High Court held that the effect of termination would be that the contractor and Principal were both discharged from further performance of the contract and the contractor’s rights under the contract would be limited to those that had already accrued under the contract, except to the extent the contract provided to the contrary. In this case the right to make a progress claim under the clause of the contract relating to progressive payment claims would not have accrued until 8 November 2014 (which would have been the reference date in respect of the claim), which was after termination of the contract, and nothing in the construction contract indicated an intention that the clause relating to payment claims was to survive termination. This meant that no reference date could be said to arise following termination and no valid payment claim could be issued by the contractor on the basis of a reference date arising at that time.
Having made its determination, the High Court ordered that the contractor repay to the Principal (which has gone into liquidation during the course of the matter) the sum of $1,276,000 which the contractor received by way of payment out of court following the Court of Appeal’s earlier appeal decision in its favour.
The High Court’s decision and the outcome in this case demonstrates the importance and impact of clauses in a construction contract addressing what is to take place following termination or any other action in relation to breach of a contract. The decision also confirms that an adjudication determination in respect of a payment claim can be declared void if a court finds that no reference date in respect of the claim existed.
Read the judgment here
If you would like more information or advice in relation to insolvency, restructuring or debt recovery law, contact Georgina King on (02) 9806 7485 or firstname.lastname@example.org or a Principal of the Matthews Folbigg Insolvency, Restructuring & Debt Recovery Group:
Jeffrey Brown on (02) 9806 7446 or email@example.com
Stephen Mullette on (02) 9806 7459 or firstname.lastname@example.org.