This article discusses the judgments in disputes known as A-Tech Australia v Top Pacific Constructions Australia which illustrate how the brutally short deadlines under the Act spill over into litigation where it is critically important for litigants to promptly prosecute any cross-claims. A version of this article has been published in the Australian Construction Law Bulletin.
The SOP Act
There is an alternative to the adjudication process under the Building and Construction Industry Security of Payment Act 1999 (NSW) (the Act), when a claimant does not receive a valid payment schedule in answer to a payment claim. The Act provides the claimant the option of making a claim in Court pursuant to section 15 of the Act.
Section allows a claimant to recover in Court the unpaid portion of the claimed amount from the respondent as a debt due to the claimant, that is, as a statutory debt. When such a claim is commenced in Court, it is usually followed by an application for summary judgment on the part of the claimant. The respondent is left in a position where its defence and ability to raise a cross-claim are heavily limited by operation of the Act.
Once the claimant obtains a judgment, in the normal course the respondent is required to pay the judgment amount and, if the respondent disputes that it was required to pay that amount, the respondent may commence proceedings against the claimant to recover any amount it says it was not required to pay. Commercially, this can be problematic where the claimant is at risk of insolvency. For that reason, in addition to relying on, limited defences the respondent may also rely on existing claims against the claimant in an effort to apply for a stay of enforcement of any judgment.
What happened at Court?
The section 15 application
Briefly stated the facts are as follows:
- In September 2018 ATA commenced proceedings in the Supreme Court of New South Wales seeking judgment against TPC in the amount of $466,120.80 (the Claimed Amount). ATA’s claim was based on section 15 of the Act. ATA had served two invoices (payment claims) and it was asserted that TPC had not served any payment schedules in response (Section 15 Claim). ATA made an application seeking summary judgment in November 2018.
- TPC filed a Commercial List Response and cross-claim complaining about the quality of the works and, by virtue of the allegedly sub-standard work, asserted that ATA was not entitled to payment.
- On 7 December 2018 (the December Orders) ATA’s application for summary judgment was resolved out of Court by agreement and consent orders were made which required TPC to pay the Claimed Amount into Court and for TPC to amend its cross-claim. TPC breached the timetable and on 1 February 2019 ATA’s Section 15 Claim was fixed for final hearing on 11 March 2019.
- On 6 February 2019, TPC sought leave to amend its cross-claim, vacate the 11 March 2019 hearing and an order pursuant to section 73 of the Civil Procedure Act 2005 that on 7 December 2018 parties reached an agreement such that the parties would proceed to argue the merits of the competing substantive claims in the ordinary way. The Court refused to grant the orders sought by TPC.
Can consent orders be a private agreement?
One of the issues before the Court was whether the December Orders constituted a binding agreement that in consideration of TPC’s payment of the Claimed Amount into Court, ATA would not proceed on its Section 15 Claim and was in effect prevented from moving for judgment on its Section 15 Claim in advance of determination of TPC’s cross-claim.
If there existed such an agreement then section 15 of the Act and the Act itself would not act as a bar to a defence and cross- claim by TPC, as it otherwise would.
After considering the authorities, His Honour concluded that the Court is never bound by an agreement between the parties. However, the idea that the December Orders could be analysed on contractual terms needed consideration to ascertain whether a contract existed and whether, if so, it could in some way be enforced by TPC against ATA to prevent ATA from proceeding on the Section 15 claim.
His Honour found that the December Orders:
- did not provide for ATA’s notice of motion for summary judgment on the Section 15 Claim to be withdrawn or dismissed, despite that being the effect, and His Honour also found that the December Orders could not give rise to an issue estoppel.
- were not a barrier to further application by ATA for summary judgment and TPC could only prevent ATA from making such a further application if the December Orders and resolution of ATA’s summary judgement application involved some sort of agreement on ATA’s part that its claim and TPC’s cross-claim would be conducted together.
- did not, expressly or impliedly, constitute an undertaking that ATA would not make any further application for judgement before the determination of TPC’s cross-claim.
Prohibition of contracting out of the SOP Act (section 34)
A further issue before the Court was whether the December Orders (if it was a binding agreement) was void pursuant to section 34 of the Act because it prevented ATA from relying on section 15 of the Act.
Section 34 of the Act renders void any provision in an agreement which causes “the operation of the Act” to be excluded, modified, or restricted. The Court determined that matters of procedure (for example, at section 15) that arise under the Act fall within the “operation of the Act”. His Honour noted the alleged agreement was analogous with an agreement made prior to the institution of proceedings which expressly enabled TPC to raise a cross-claim if ATA made a claim under section 15 of the Act, which would clearly be void by operation of section 34 of the Act.
His Honour entertained a counterfactual that if there was otherwise an enforceable contractual obligation on ATA which prevented ATA from obtaining a judgment on the Section 15 Claim, such an obligation would have been void by operation of section 34 of the Act.
As stated in the judgment, the proper avenue for TPC to complain about departure from any agreement about how the proceedings were to be conducted is by applying for a stay of enforcement of any judgment made in favour of ATA.
The Court found that that both invoices issued by ATA were valid payment claims under the Act and that neither invoice was the subject of a payment schedule from TPC within the time allowed by the Act. ATA was entitled to judgment on the Section 15 Claim despite the December Orders.
TPC foreshadowed an application for a stay and the Court adjourned the proceedings for the entry of final orders and hearing of any application for a stay.
The stay on enforcement
Prior to the claimed amount being released to ATA, TPC applied to Court for a stay of enforcement of the judgment pending the outcome of its cross-claim. For practical purposes the fate of the stay application determined whether the money was paid out.
The Court noted that in determining whether to grant a stay the Court must balance two competing policies of the SOP Act. One is that contractors should be paid promptly for the work that they have done. The other is that any payment under the Act is not intended to affect the rights of the parties under the relevant construction contract.
The factors that the court will take into account in balancing the competing policies include the following:
- the strength of the principals claim;
- the basis of the principals claim. Whether the principal challenges the adjudicator’s determination and whether the principal challenges the debt the subject of the adjudication determination. The absence of a challenge to the debt is a powerful factor against the grant of a stay;
- The likelihood that the contractor will be unable to repay the amount the subject of the determination. It is accepted in this context that the policy of the Act is generally to place the risk of insolvency on the principal. However, where there are strong reasons for believing that the principal will be unable to recover any amount paid, that fact favours granting a stay; and
- The risk that the contractor will become insolvent if a stay is granted.
Findings on the stay application
The Court considered each of the factors and dismissed the application for a stay of enforcement. The reasons given by His Honour are summarised (relevantly) below:
- On the Court’s findings, there could be no challenge to ATA’s entitlement to payment;.
- In respect of TPC’s cross-claim, the Court found that:
- the cross-claim was an offsetting claim and it was not possible to make any sensible assessment of the outcome of TPC’s cross-claim;
- there was nothing compelling about TPC’s claim; and
- the cross-claim raised by TPC was of the nature that was intended by Parliament not to delay progress payments – being the policy mantra of “pay now and argue later”.
- In respect of the financial position of ATA, His Honour considered that it would be a significant factor if it was proven that it was reasonably arguable that payment of the claimed amount to ATA would, for practical purposes, render final what was intended to be interim. TPC bore the onus of proof and was unable to establish that ATA was trading unusually nor did TPC establish that if the money was paid to ATA, it would be unable to repay it. Notably, TPC only relied on a company search of ATA which showed that the company was incorporated in February 2012 and had paid-up share capital of $1.00.
TPC also sought to rely on the events surrounding the December Orders as an additional basis in favour of granting a stay of enforcement. The Court placed little weight on the agreement which was reflected in the December Orders and was critical of TPC’s delay in prosecuting its cross-claim and noted that if TPC had promptly prepared its cross-claim, that factor may have been given more weight. At the time, TPC’s cross-claim was still at case management stage and had not been fixed for a hearing.
Lessons for builders
- Once an application pursuant to section 15 of the Act has been made, take care with any agreements made addressing summary judgment, payment of money into Court, stay of enforcement and conduct of claims and cross-claims – such an agreement may not be enforceable if it relies only on consent order and / or offends section 34 of the Act.
- Any agreements that curtail rights under the Act should be in deed form so as to assist with later damages claims where possible and applications to stay enforcement of judgments obtained under the Act.
- A relevant (but not determinative) factor is whether the judgment debt under the Act is challenged. But consider that such a challenge, whilst improving prospects of a stay, will require payment of money into court.
- Cross-claims must be prosecuted diligently to succeed in an application for a stay of a judgment debt obtained under the Act. A cross-claim should be well developed and advanced. Additionally, the Court will require evidence of the contractor’s financial position which establishes that it is reasonably arguable that any payment made will be irreversible, and in effect not interim.
If you have any questions about this article, or require any further information about security given under head contracts, please contact Mark Yum or Nelson Arias-Alvarez on (02) 9324 5300 or get in touch online (below).