16 March, 2016
The recent 25 February 2016 decision of J Hutchinson Pty Ltd v Glavcom Pty Ltd [2016] NSWSC 126 provides important guidance on several significant issues:
- the enforceability of attempts to impose preconditions on reference dates arising under the Building and Construction Industry Security of Payment Act 1999 (NSW) (SOP Act). Drafters risk the preconditions being held to be unenforceable under the anti-avoidance provisions of the SOP Act;
- in a decision which is also likely to surprise both contractors and principals, the Court also held that the truth or falsity of a statutory declaration required to be attached to a payment claim will be irrelevant to an Adjudicator’s determination under the SOP Act;
- that the contract must include an express contractual entitlement to set-off liquidated damages against amounts claimed in a payment claim, otherwise the Adjudicator will have no jurisdiction to apply the liquidated damages set-off in the consequent Adjudication Determination.
In our 'Key Lessons', found at the bottom of this update, we provide guidance on how to draft reference date preconditions which comply with the SOP Act.
Background
J Hutchinson Pty Ltd (Hutchinson) entered into a subcontract with Glavcom Pty Ltd (Glavcom) in 2014, under which Glavcom would carry out joinery works for Hutchinson for a commercial and residential development in New South Wales.
In 2015, Glavcom served a payment claim for approximately $2.9M against Hutchinson under the SOP Act.
Included in the bundle of documents making up Glavcom’s payment claim were two statutory declarations from Glavcom’s sole director, one of which declared that Glavcom had paid all workers compensation insurance premiums in respect of the works done under the subcontract (Workers Compensation Stat Dec).
The subcontract expressly provided that, amongst other things, the submission of these statutory declarations was a precondition to a reference date arising under the SOP Act.
Hutchinson accordingly served a payment schedule on Glavcom under the SOP Act. In rejecting Glavcom’s claim, Hutchinson claimed that Glavcom owed it a set-off amount of approximately $6.3M, of which a substantial portion was for liquidated damages.
At adjudication, the Adjudicator rejected Hutchinson's claim for liquidated damages on the basis Hutchinson had no contractual entitlement to set-off and held that Hutchinson was required to pay Glavcom $1,263,399.72 plus GST (Determination).
Following receipt of the Determination, Hutchinson discovered that a creditor’s statutory demand had been made against Glavcom claiming $134,030.83 as owing by Glavcom in respect of unpaid workers compensation insurance. Hutchison accordingly formed the view that the Workers Compensation Stat Dec provided with Glavcom’s payment claim was false.
Hutchinson applied to the Court to have the Determination set aside, on the grounds that:
(a) the Adjudicator had committed a jurisdictional error, as a result of its refusal to set-off Hutchinson's liquidated damages claim; and
(b) the Determination was procured by fraud, arising from the subsequently discovered fact that the Workers Compensation Stat Dec was false (and that the director knew it was false, or was recklessly indifferent to the truth of the matter).
The Court accordingly considered the following key issues:
- Was the truthfulness or reckless indifference of the deponent to the facts stated in the Workers Compensation Stat Dec relevant to the Determination?
- Was the submission of a Workers Compensation Stat Dec, whether truthful or not, a valid precondition to the existence of a reference date under the subcontract?
- Did the Adjudicator commit a jurisdictional error in refusing the liquidated damages claim? Alternatively, would the Adjudicator have committed an error if he had allowed a set-off claim for which there was no express contract entitlement?
- Statutory Declarations – does the truth matter?
The Workers Compensation Stat Dec provided by the director was required by clause 37.0(b) of the subcontract, which stated:
"It is a precondition to a reference date arising under the Security of Payment Act, the Subcontractor being entitled to make a payment claim under the Security of Payment Act and to the Subcontractor becoming entitled to make a progress claim under this subclause 37.1, that the Subcontractor … submits the 'Payment Claim Documentation', which is as follows:
(a) …
(b) a declaration in the form of Annexure Part M executed by a person authorised to do so on behalf of the Subcontractor." (our emphasis)
Hutchinson argued, on the basis that the facts sworn to in the Workers Compensation Stat Dec turned out not to be true and that the Adjudicator had expressly accepted the truth of the same document, that the Determination in favour of Glavcom had been obtained by fraud.
While acknowledging that an adjudication determination obtained by fraud may be set aside[1], Glavcom argued that the director had not acted fraudulently as, at the time of signing the Workers Compensation Stat Dec, he did not know that the declaration he made was false.
Glavcom explained that the director was not responsible for matters of administration, including payment of workers compensation insurance premiums. While admitting to "skimming" through the Workers Compensation Stat Dec before he signed it, the director stated he did so on the assumption that the person who prepared the statutory declaration was aware of the correctness of the document.
The Court accepted Glavcom's argument, concluding that the director was entitled to rely on what he had been told by others as the truth. Relevantly, it was the Court's view that:
"… when he swore in the statutory declaration that he was in a position to know the truth of the statements contained in the statutory declaration and that to the best of his knowledge and belief workers compensation premiums had been paid, in my opinion, he was entitled to rely on what he was told by others who were involved in the administration of the company and could be expected to know the relevant facts. The statement that he was in a position to know the relevant facts did not require him to undertake his own investigation of the matter."[2]
The Court accordingly found that the truth, or falsity, of the Workers Compensation Stat Dec was irrelevant to the Adjudicator's determination[3], and dismissed Hutchinson's first ground to set aside the Adjudication Determination on the basis of fraud.
Reference Date Preconditions and Contracting Out of the Act
In further defence against Hutchinson's allegations of fraud, Glavcom also argued that subcontract clause 37.0, requiring the submission of the statutory declarations as a precondition to a reference date arising under the SOP Act was:
(a) an attempt to contract out of the Act in breach of section 34 of the SOP Act, and was therefore void; and
(b) accordingly, immaterial to the Adjudicator's determination entirely (making the question of the truthfulness, or otherwise, of the Workers Compensation Stat Dec irrelevant).
Glavcom submitted that it would have been a jurisdictional error for the Adjudicator to take account of clause 37.0 in determining whether a valid reference date had arisen under the subcontract[4]. The Court agreed.
In the Court’s view, section 8 of the SOP Act, as it defines ‘reference date’:
- operates primarily to “fix a date, or provide a method for fixing a date, other than the date set out in s 8(2)(b)”; and
- should not be interpreted “as permitting other conditions to be attached to the occurrence of a reference date or a right to receive a progress payment…".[5]
The Court continued:
"… In my opinion, a provision in a contract that makes the occurrence of a reference date conditional on the provision of a statutory declaration or a true statutory declaration concerning the payment of other amounts owed by the subcontractor … is not a provision which provides a mechanism for fixing a date. Rather, it is a provision that seeks to add an additional condition to the right to obtain a progress payment."[6]
The Court concluded that clause 37.0 was accordingly void, as it attempted to contract out of the SOP Act, and that if the Adjudicator had applied clause 37.0 of the subcontract, he would have made a jurisdictional error.
In support of its conclusion, the Court referred to the Queensland Supreme Court decision of Lean Field Developments Pty Ltd v E & I Global Solutions (Aust) Pty Ltd[7], in which the Court determined that a precondition to a reference date arising which does not facilitate the purpose of the SOP legislation will likely to be treated as an attempt to contract out of the Act and will be void.
The Queensland Supreme Court also explored this issue in BRB Modular Pty Ltd v AWX Constructions Pty Ltd[8], when determining that a precondition clause which also required the submission of a statutory declaration was void under the Queensland SOP Act. Relevantly, the Court said in that instance:
"…The contractual provision has no real utility in advancing the purposes of the Act. Non-compliance with the statutory declaration precondition thwarts the payment of a statutory payment claim which otherwise would be payable on or after the reference date. The withholding of such a payment affects cash flowing to a contractor and the contractor, in turn, paying its creditors, including sub-contractors. The contractual provision enables a party to withhold payment in a case in which a contractor experiences a temporary lack of liquidity or otherwise has a good reason to not pay a sub-contractor. Depriving such a contractor of the cash-flow required to carry on its business and complete the construction contract is inconsistent with the objectives of the Act.
Courts in both New South Wales and Queensland have therefore made it clear that a precondition clause requiring the submission of a statutory declaration will not be valid under their respective SOP Acts.
Entitlement to Set-Off – An Essential Contract Inclusion
In challenging the Adjudication Determination, it was one of Hutchinson's primary submissions that the Adjudicator had made a jurisdictional error in failing to properly consider its liquidated damages claim.
In dismissing Hutchinson's submissions the Court considered Hutchinson's asserted entitlement to set-off liquidated damages under the subcontract. The Court concluded that that an Adjudicator is not entitled to deduct liquidated damages in the calculation of a progress payment where the contract does not expressly state how to make such a deduction.
The Court explained that, in circumstances where a contract does not provide an express method to value the progress payment (including, for example, a right to set-off clause), section 10(b) of the SOP Act requires the Adjudicator to value the works the subject of the claim using other methods, such as looking at rates provided under the contract, variations agreed to between the parties, and the estimated costs of rectifying any defects.
The deduction of liquidated damages as a set-off is not identified in section 10(b) of the SOP Act as a consideration for the Adjudicator. Consequently, unless expressly provided for as an entitlement under the contract, an Adjudicator will have no power to deduct liquidated damages as a set-off from amounts claimed in a payment claim.
Key Lessons
With limited case law guidance as to what constitutes a valid precondition to the existence of a reference date, contractors and principals are understandably uncertain as to what conditions they can include.
Following Glavcom and BRB Modular, it appears clear that the requirement for provision of statutory declarations as a precondition to a reference date arising under the SOP Act will not be considered to be valid.
This does not mean that reference date precondition clauses cannot be included in your construction contract. It does require, however, that those clauses be drafted to add some practical or commercial utility to the parties' dealings and to facilitate the "purpose" of the SOP Act (being the payment of contractors who carry out construction works, so they can meet their financial obligations).[9]
A practical example of a precondition clause likely to be viewed as valid by the Courts[10] would look as follows:
(a) on the 20th day of the month, the subcontractor is to submit a draft progress claim to the contractor, which estimates what WUC will be completed by the time of the reference date, and its expected value; and
(b) only if a draft claim has been submitted on the 20th day of the month, in accordance with subclause (a), will a reference date for the purposes of the SOP Act then arise on the 28th day of the month, from which the subcontractor can make a payment claim for WUC carried out that month.
Precondition clauses of this type reduce the element of surprise for the superior contractor or Principal when the payment claim is delivered, and accordingly serves a commercial purpose for the parties.
We warn, however, that head contractors should not treat this decision as affecting their own obligations under the NSW SOP Act to submit a "supporting statement" with a payment claim to a principal, which is to include a declaration to the effect that all subcontractors have been paid[11]. This provision of the SOP Act also expressly provides that a head contractor cannot serve a payment claim on a principal if it knows that the "supporting statement" is false, or misleading in a material manner, with serious penalties involved should this provision be breached[12]. Failure to do so will render the service of the payment claim invalid.[13]
Set-Off clauses
Further, in an industry where it is common practice for liquidated damages to be levied for delay in achievement of Practical Completion, care must be taken to ensure your contract includes a clause expressly allowing set-off of those liquidated damages.
Failure to do so could expose a principal or head contractor to significant financial loss, resulting in it being unable to recover the costs of a contractor's delay, or damage, to contract works.[14]
[1] Confirmed in Brodyn Pty Ltd v Davenport [2004] NSWCA 394, as well as in Queensland in Hansen Yunken Pty Ltd v Ericson [2010] QSC 156.
[2] [2016] NSWSC 126 at [21]
[3] [2016] NSWSC 126 at [24]
[4] [2016] NSWSC 126 at [17]
[5] [2016] NSWSC 126 at [26]
[6] [2016] NSWSC 126 at [27]
[7] [2014] QSC 293
[8] [2015] QSC 218
[9] [2016] NSWSC126 at [27]
[10] As discussed by the Qld Supreme Court in Lean Field Developments Pty Ltd v E & I Global Solutions (Aust) Pty Ltd, and BRB Modular Pty Ltd v AWX Constructions Pty Ltd.
[11] Section 13(7), (9)
[12] Section 13(8) provides a maximum penalty of 200 penalty units, or 3 months imprisonment
[13] Kitchen Xchange v Formacon Building Services [2014] NSWSC 1602
[14] Parties should be aware, however, that under the Victorian SOP legislation, liquidated damages cannot be set-off at all against a payment claim, regardless of any entitling contract clause: Seabay Properties v Galvin Construction [2011] VSC 183
For further information, please contact:
Leigh Duthie, Partner, Baker & McKenzie
leigh.duthie@bakermckenzie.com
