At the end of last year, the High Court delivered its first judgment on security of payment legislation: Southern Han Breakfast Point Pty Ltd (In Liquidation) v Lewence Construction Pty Ltd  HCA 52. The decision confirms that the existence of a reference date under a construction contract is a precondition to the making of a valid payment claim (and, in turn, a precondition to the making of a valid adjudication application and determination)
Southern Han Breakfast Point Pty Ltd and Lewence Construction Pty Ltd were parties to a contract for the construction by Lewence of an apartment block in New South Wales.
The Contract provided for Lewence to claim payment progressively from Southern Han by making a progress claim on the eighth day of each month for work completed up to the seventh day of that month.
On 27 October 2014, Southern Han gave Lewence a notice purporting to exercise its right under the Contract to take out of Lewence’s hands all of the work remaining to be completed. Lewence treated the giving of that notice as repudiation of the Contract by Southern Han and, on 28 October 2014, purported to accept the repudiation and terminate the Contract.
On 4 December 2014, Lewence served a purported payment claim on Southern Han for work carried out under the Contract up to 27 October 2014. Southern Han responded by providing a payment schedule to Lewence indicating that the scheduled amount Southern Han proposed to pay was nil.
Lewence then attempted to make an adjudication application. In its response, Southern Han submitted that the adjudicator lacked jurisdiction to determine the application. This argument was rejected by the adjudicator and the adjudicator proceeded in determining the application.
Southern Han sought a declaration from the New South Wales Supreme Court that the adjudicator’s determination was void. It argued that, as a result of the events of 27 and 28 October 2014, no reference date for making a progress payment could have arisen under the Contract after 8 October 2014 and therefore the document Lewence served on Southern Han on 4 December 2014 was not a valid payment claim under the Building and Construction Industry Security of Payment Act 1999 (NSW).
The primary judge at first instance made the declaration sought by Southern Han. Lewence appealed to the Court of Appeal, which set aside the Supreme Court’s declaration. Southern Han then appealed to the High Court.
The High Court decision
The High Court allowed the appeal, confirming that the existence of a reference date under a construction contract is a precondition to the making of a valid payment claim under the Act and that, in the circumstances of the case, no reference date existed at the time Lewence made the payment claim.
The High Court rejected the argument that Lewence’s right to make progress claims under the Contract survived either suspension or termination of the Contract. First, if the Contract was suspended by Southern Han, the High Court found that this included a suspension of all of the contractual rights and obligations in relation to payment under the Contract, which included Lewence’s right to make a progress claim under the Contract for work carried out up to the time of the work being taken out of its hands. On the other hand, if the Contract was terminated by Lewence, the High Court found that there was nothing in the Contract to indicate an intention between the parties that Lewence’s right to make progress claims survived termination, therefore preventing a future reference date from arising.
The High Court also rejected Lewence’s argument that section 8(2) of the Act provided an alternative reference date from which Lewence could make the progress claim. Section 8(2) provides that a reference date means either a date determined by the contract or, if the contract makes no express provision, the last day of the month. The High Court found that, where a construction contract makes express provision for how reference dates are to be determined (i.e. when progress claims can be made), claimants cannot rely on this section of the Act to calculate alternative reference dates on and from which progress claims can be made, even where a reference date does not arise under the relevant clause in the contract. Because the Contract expressly provided for when progress claims could be made (on the eighth day of each month for work done to the seventh day of that month), Lewence was accordingly unable to argue that an alternative reference date had accrued pursuant to the Act.
The High Court therefore found that the adjudicator’s decision was void as no new reference date existed to support the payment claim, making the adjudication application invalid.
The decision provides greater certainty as to when payment claims are valid and effective in triggering the adjudication process established by the Act.
In particular, the decision confirms that contractors will lose the ability make payment claims under the Act where:
- the contract is terminated;
- the contract provides for when progress claims can be made, but does not expressly state that the right to make progress claims survives termination; and
- the right to make a progress claim has not yet accrued at the time of termination, in that a new reference date has not yet arisen at the time of termination.
In these circumstances, contractors will have to rely on other legal methods to receive payment, such as suing for damages under the Contract.
Contractors should take care when terminating or suspending contracts to ensure they are not compromising their rights under the contract, such as the right to make a progress claim for outstanding work. Correspondingly, principals should have regard to this case when considering how to deal with progress claims submitted by the contractor after the contract has been terminated or suspended.
The provisions of the Act considered by the High Court in this case are very similar to those in the Queensland security of payment legislation (the Building and Construction Industry Payments Act 2004 (Qld)), as well as other in other jurisdictions, and accordingly this decision is likely to apply.
Cooper Grace Ward has extensive expertise in all aspects of construction disputes and security of payment matters. To discuss how we can assist you, please don’t hesitate to call Rocco Russo from our building and construction disputes team on 07 3231 2444.