On 10 October 2024, the New South Wales Court of Appeal delivered judgment in Kennedy Civil Contracting Pty Ltd (subject to deed of company arrangement) v Linx Constructions Pty Ltd [2024] NSWCA 243.  The judgment concerned a Local Court judgment entered under section 15(2)(a)(i) of the Building and Construction Industry Security of Payment Act 1999 (NSW).

Background facts

Linx Constructions Pty Ltd (Linx) contracted Kennedy Civil Contracting Pty Ltd (KCC) for building works.

On 25 May 2022, KCC issued a tax invoice to Linx, which was expressly stated to be a payment claim under the SOP Act, for the total sum of $147,879.17. Linx did not serve a payment schedule within the time permitted and by consequence of s. 14(4) of the SOP Act became liable to pay the full amount claimed.

Linx made payments on 19 and 20 July 2022 in the total amount of $102,800.

On 2 August 2022 Civilcast a third-party contractor issued a tax invoice to Linx for $60,166.70. That figure was the sum of three earlier invoices (for $32,349.90, $3,918.20 and $23,898.60), which were originally issued by Civilcast to KCC.

On 8 August 2022, Linx reached an agreement with Civilcast whereby it agreed to pay Civilcast $30,083.35 in satisfaction of the $60,166.70 invoice on behalf of KCC.

The Local Court hearing

On 19 September 2022 KCC commenced proceedings in the NSW Local Court against Linx under s. 15(2)(a) of the SOP Act for the balance of $45,079.17 and sought summary judgment.

Linx raised 2 defences, being:

1. that KCC had orally withdrawn the payment claim and should be estopped from proceeding on the claim; and
2. that Linx was acting on behalf of KCC when it paid the money to Civilcast therefore should be entitled to a set off the amount it paid to Civilcast against KCC’s claim.

KCC argued that Linx had no right to make a cross claim by operation of section 15(4)(a)(i) of the Act. It is important to note that according to the subsequent appeals, KCC did not contend in the Local Court that Linx was prohibited from raising those defences by operation of s. 15(4)(a)(ii).

The Local Court found that the set off claim did not constitute a cross claim under section 15(4)(b)(i) and allowed Linx to set off the amount it paid to Civilcast against the amount claimed by KCC. The nett result being that Linx was required to pay to KCC the sum of $14,995.82.

The Supreme Court (first appeal)

KCC appealed the Local Court judgment to the Supreme Court pursuant to s 39(1) of the Local Court Act 2007 – being an appeal only on a question of law. KCC claimed that the Local Court erred by allowing the set-off of the Civilcast payment.

The questions for determination by the Supreme Court were:

1. Whether reliance on the payment of $30,083.35 by Linx to Civilcast Pty Ltd (Civilcast) amounted to a cross-claim within s 15(4)(b)(i) of the SOP Act?
2. Whether the payment of $30,083.35 by Linx to Civilcast must be taken into account in determining the “unpaid portion of the claimed amount” for the purposes of s 15(2)(a)(i)?

As to the first question, the Supreme Court considered the definition of a “cross claim” for the purpose of section 15(4)(b)(i) of the SOP Act. The Supreme Court found that a “cross claim” requires a person to be claiming some form of relief “based on an articulated cause of action or other right or equity, independent from or in addition to the relief claimed by the plaintiff in the originating process”.

In the Local Court, Linx raised the off-setting claim in its defence.  Linx did not file a cross claim.  The Supreme Court found that Linx’s defence was not a separate claim for relief but instead it was a dispute regarding the outstanding amount of the payment claim from KCC, it did not seek any additional relief from KCC.

The Supreme Court determined that the second question was one of fact and not of law, and therefore found there was no right of appeal on that ground.

There was further discourse surrounding s 15(4)(b)(ii) and whether the magistrate erred in finding that the set-off claim was not a defence under this section.  KCC conceded that the Civilcast set off claim was not a defence under s 15(4)(b)(ii) and therefore was not prohibited by s. 15(4)(b)(ii) – and instead, was only prohibited because it was a cross-claim (by s 15(4)(b)(i)).

The Supreme Court dismissed KCC’s appeal: Kennedy Civil Contracting Pty Ltd (subject to Deed of Company Arrangement) v Linx Constructions Pty Ltd [2024] NSWSC 366.

Court of Appeal (second appeal)

KCC appealed from the Supreme Court judgment.

As the appeal related to a claim under $100,000, KCC required leave to appeal.  The Court of Appeal concurrently determined the application for leave and substantive appeal.

KCC appealed on the following grounds:

1. the Supreme Court erred in finding that the set off claim did not constitute a cross claim under section 15(4)(b)(i);
2. the Supreme Court ought to have found that the ruling in Stehar Knitting Mills Pty Ltd v Southern Textile Converters Pty Ltd [1980] 2 NSWLR 514 should apply which determined that a cross claim is not limited to just a specific filed statement of cross claim; and
3. that the Supreme Court should have found that the Local Court erred in reducing the judgment sum by $30,083.35.

The Court of Appeal did not grant KCC leave to appeal and the application was dismissed with costs.  The Court of Appeal gave 3 primary reasons, being:

1. The amount was substantially less than the $100,000 threshold for appeals to the Court of Appeal. Basten AJA referred to the case of Cheng v Motor Yacht Sales Australia Pty Ltd t/as The Boutique Boat Company (2022) 108 NSWLR 342 (Cheng), where the court provided an alternate approach to determining whether leave should be granted for a reduced Sum. Ward P in Cheng stated that the amount must be of a significant value for the parties concerned. In this case Basten AJA highlighted that the $30,000 in dispute made up approximately 1% of the contract sum which does not weigh in favour of this being of significant value to the parties.
2. The dispute had already been subject of appellate review in the Supreme Court.
3. The facts that are subject of the appeal are limited and not helpful for the Court of Appeal to deliver a judgment on principle (i.e. the judgment would unlikely be capable of being authoritative on the legal principles), because the underlying facts:
   • did not involve a full consideration of the statute;
   • the construction contract was not admitted into evidence; and
   • points were abandoned by concessions and the challenge to the defence was presented on a limited basis.[1]

The Court of Appeal also found that the appeal would not have been upheld, because:

• The authority of Stehar Knitting Mills Pty Ltd v Southern Textile Converters Pty Ltd [1980] 2 NSWLR 514 was distinguished and did not apply to assist in defining a “cross claim” for the purpose of the SOP Act. The Supreme Court (and Local Court) did not err by failing to follow Stehar.
• The legal characterisation of the payment by Linx to Civilcast was clouded. It was open for the Local Court to accept the evidence from KCC’s director that he accepted that the relevant payment claim would be reduced by payments to Civilcast.

When will off-setting claims be prohibited?

This case is consistent with the SOP Act objective – “pay now, fight later”.  The parties’ final rights are not determined by this dispute.  The judgment is a useful reminder for those either applying for judgment under section 15(2) of the Security of Payment Act (or opposing an application) that:

• A “cross claim” for the purpose of section 15(4)(b)(i) of the SOP Act is an application seeking relief in the form of a “statement of cross-claim” or “cross-summons” (or similar).
• A set-off raised in a defence (but not a cross-claim) might fall within the “defence in relation to a matter under construction contract” and be prohibited by section 15(4)(b)(ii), but this point was not determined by the Court of Appeal.

[1] At [3].