CONSTRUCTION & INFRASTRUCTURE UPDATE: ARE YOUR PAYMENT CLAIMS IN ORDER?

CONSTRUCTION & INFRASTRUCTURE UPDATE: ARE YOUR PAYMENT CLAIMS IN ORDER?

Justice Ball’s decision in Grocon (Belgrave St) Developer Pty Ltd v Construction Profile Pty Ltd [2020] NSWSC 409, is a timely reminder that payment claims served under a construction contract must be for work performed or related goods and services.

The decision also highlights the ability to seek an injunction from the Court to prevent a claimant from seeking adjudication of a payment claim, before lodgement of the adjudication application.

It also confirms the High Court position that it is ultimately a question for the Court, not an adjudicator, to determine whether the adjudicator has jurisdiction to determine a particular claim.

Background

On 24 May 2017, a construction contract was entered between Grocon (Belgrave St) Developer Pty Ltd (Grocon) and Construction Profile Pty Ltd (CP) for the construction of the Telstra Exchange residential development in Manly (the Contract) for the sum of $20,836,850.00 (ex. GST).

A dispute arose between the parties and Grocon filed a Summons seeking:

  • a declaration that a payment claim served by CP, dated 17 March 2020, purportedly under the Building and Construction Industry Security of Payment Act 1999 (NSW) (the Act) was void and of no effect for the purposes of the Act; and
  • an injunction restraining CP from seeking a determination under the Act with respect to the claim.

First Payment Claim by Construction Profile Pty Ltd

On 10 January 2020, CP served Payment Claim 32 for the sum of $3,220,377.56 (inc. GST) and on 23 January 2020, Grocon served a Payment Schedule stating the amount due to CP was -$1,360,307.40 and the scheduled amount was nil.

The amount of -$1,360,307.40 comprised:

  • $295,332.60 (including GST) in respect of the work the subject of the payment claim; and
  • a deduction for liquidated damages said to total $1,655,640.00 for the delay in reaching practical completion under the set-off provision of the Contract in clause 42.8.

On 23 January 2020, Grocon purported to serve a tax invoice on CP for the liquidated damages component of the claim in the amount of $1,665,640.00, however on 12 February 2020 CP issued a notice disputing that invoice.

On 21 February 2020, Grocon reissued the invoice for liquidated damages, and again CP served a notice of dispute in response on 24 February 2020.

During this time, Payment Claim 32 was the subject of an adjudication.

On 3 March 2020, the Adjudicator determined that that CP’s EOT claims regarding the date for practical completion were valid, and Grocon’s claims for liquidated damages were not. 

CP was awarded an adjudicated amount of $1,241,238.07 (including GST).

In accordance with the Contract, CP had provided two bank guarantees, each for $498,911.10 as security. Grocon was entitled to call on the guarantees if it had not been paid after 5 days from the date a tax invoice was issued.

On or about 6 March 2020, Grocon called on both bank guarantees in satisfaction of the invoice it had sent CP on 27 February 2020.

On 11 March 2020, Grocon paid the adjudicated amount.

Second Payment Claim by Construction Profile Pty Ltd

On 17 March 2020, CP served Payment Claim 33 on Grocon for the amount of $1,054,386.38 for works performed under the Contract and amounts paid in relation to same, including a negative value for the liquidated damages claimed by Grocon previously totalling $997,822.20, noted to be applied “to cover LDs under the contract.”

The argument put forward by Grocon

Grocon submitted that the amounts paid under the bank guarantees did not fall within the definition of “construction work” or “related goods or services” under the Contract, and therefore Payment Claim 33 was invalid.

The argument put forward by CP

CP put forward three main arguments in response to Grocon’s claim:

  • whether the claim is a claim for construction work or related goods or services, is a question that can be determined by the adjudicator;
  • Payment Claim No 33 is a proper claim for construction work; and
  • Clause 42.8 of the Contract is rendered void by section 34 of the Act

The Court’s findings

Justice Ball considered CP’s arguments and ultimately came to the following conclusions in his Judgment:

First argument

His Honour followed the High Court decision in Southern Han Breakfast Point Pty Ltd (In Liquidation) v Lewence Construction Pty Ltd (2016) 260 CLR 340; [2016] HCA 52, namely that:

  • the jurisdiction of the adjudicator is determined by the Act and it is ultimately a question for the Court, not the adjudicator, to determine whether the adjudicator has jurisdiction to determine a particular claim; and
  • the Act concerns securing payment for construction work or related goods or services under a contract, not simply any payment that is alleged to be due and payable under a construction contract.

Second Argument

His Honour did not accept that the claim for the amount of the two bank guarantees totalling $997,822.20 could be properly described as a claim for “construction work” or “related goods and services” under the contract and found that aspect of the claim was essentially a claim for a credit against the amounts Grocon claimed for liquidated damages.

The fact that the entirety of the works performed under the contract were claimed in Payment Claim 33, less the amounts previously paid to CP, did not cure the issue with the bank guarantee amounts not relating to construction work or related goods and services. 

Third Argument

His Honour found difficulty with CP’s submissions which attacked the set-off provision in clause 42.8 of the Contract, even though Grocon’s claim did not rely on the right of setoff. Instead CP’s argument stemmed from Grocon calling on the bank guarantees in circumstances where the Adjudicator had determined that Grocon had no claim for liquidated damages.

His Honour made the passing remark that Clause 42.8 may well operate to modify or restrict the operation of the Act because it effectively reduced the amount CP was entitled to recover as a consequence of the Adjudicator’s determination. 

However, the real question to be tried by the Judge was whether Payment Claim 33 was a payment claim within the meaning of the Act, which his Honour ultimately found difficulty seeing how the call on the bank guarantees was relevant to that question, and so ultimately found in favour of Grocon and:

  • declared Payment Claim 33 void under the Act;
  • ordered that CP be restrained from seeking an determination under the Act in relation to Payment Claim 33; and
  • ordered costs in favour of Grocon.

Key take-aways

Justice Ball’s decision highlights the importance of ensuring your payment claims comply with the Act, and also illustrates the ability to obtain an injunction from the Court to restrain a claimant from submitting an adjudication application in respect of a particular payment claim.

It also leaves the question open as to whether contractual clauses that allow a party to call on bank guarantees, contravenes the act in circumstances where they are called on in respect of amounts that were the subject of an adjudication determination.

For more information on how Madison Marcus Law Firm can assist you and your team ensure your payment claims and contract administration are in check, feel free to give us an obligation free call on (02) 8022 1222.

For all enquiries in relation to Construction and Infrastructure matters or advice, please contact our expert team today. 

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