Introduction
The commercial construction industry is familiar with the contractual requirement to provide a statutory declaration with progress claims. Most construction contracts require contractors to certify they have paid all the money due to their subcontractors and suppliers in relation to the work they are claiming for before they are entitled to the progress claim.
A recent Queensland Supreme Court decision has examined this requirement in a contract to decide whether a failure to provide the statutory declaration in the specified form means the contractor is unable to obtain payment under an adjudication determination[1].
Background
BRB Modular Pty Ltd (“BRB”) and AWX Constructions Pty Ltd (“AWX”) entered into a contract by which AWX agreed to construct a camp and accommodation village at an LNG processing facility.
AWX was entitled to make a progress claim on the 28th of each month subject to conditions in the contract. One of those conditions was as follows:
“[AWX] must deliver to [BRB]’s Representative a completed and signed statutory declaration in the form set out in Schedule 3, at least 2 working days prior to the time when … claim for payment may be made.”
The contract required the statutory declaration to include the following words:
“To the best of my knowledge all sub-contractors and suppliers who have at any time been employed by [AWX] for work under the Subcontract have as at the date of this declaration been paid all moneys due and payable to them in respect of their employment in relation to that work.”
When AWX delivered its payment claim it added the following to the end of the required wording:
“other than those owed variations, payable by the head contractor.”
BRB contested the payment claim saying the addition of the qualifying words to the statutory declaration meant the progress payment claim was not compliant with the requirements of the contract. On that basis, BRB said the payment claim was not a valid claim under the Building and Construction Industry Payments Act 2004 (Qld) (“Act”). BRB said the failure to provide the statutory declaration in the form required meant a reference date had not arisen under the contract. The Act requires a reference date to occur for the claiming of each payment. BRB said the absence of a reference date was fatal to the payment claim.
AWX disputed this assertion. AWX applied for adjudication and the adjudicator agreed with it. The adjudicator made a determination that BRB pay to AWX the sum of $3.7m.
BRB applied to the Supreme Court seeking a declaration the adjudicator’s determination was void. BRB said the absence of the reference date meant the adjudicator had no valid payment claim to consider, and therefore his determination had been made without jurisdiction. BRB also sought an injunction restraining AWX from giving effect to the adjudicator’s determination.
The submissions in Court
In Court, AWX said if the requirement for a statutory declaration imposed under the contract precluded the operation of the Act, then the requirement was cutting across the objects and purpose of the Act and impeding its operation. AWX said the basic purpose of the Act is to provide a statutory right to progress payments and to provide a mechanism for prompt payment of an adjudicated amount. The Act does not require a party to pay its creditors before making a payment claim.
AWX also said the precondition of providing a statutory declaration was unduly onerous. AWX claimed the consequences of non compliance as asserted by BRB as disproportionate and extreme. Finally, AWX said the requirement to provide the statutory declaration has no utility or relevance to the payment claim or its assessment.
In answer to these submissions, BRB said the Act is concerned with protecting the position of third parties down the construction chain, such as subcontractors. BRB argued it would encourage payment to subcontractors if parties were free to agree a contractor had no entitlement to a payment claim until it had paid its own subcontractors.
The NSW amendments
BRB drew attention of the Court to the changes in the NSW equivalent Act in 2013. The NSW Act now includes a requirement that a “head contractor” which submits a payment claim must accompany it with “a declaration to the effect that all subcontractors, if any, have been paid all amounts that have become due and payable in relation to the construction work concerned”.
BRB said these amendments made by the NSW Parliament were further support for its position. Given the similar wording of the Queensland and NSW Acts and the consistency of the amendments with the remaining provisions of the Queensland Act, BRB said the NSW amendments were a clear indicator the same provision should be read into the Queensland Act.
Unsurprisingly, the Court did not give much weight to this last submission. The Court felt the NSW amendments to the Act should not be taken to have any impact on the intent of the Queensland Parliament in electing not to amend the Queensland Act.
BRB also said if a contractor was unable to provide the statutory declaration because it could not pay undisputed amounts to its creditors it would be insolvent. BRB said as a general rule, to require a contractor to pay an insolvent subcontractor would not assist.
The Court did not agree. The Court said contractors sometimes refuse to pay undisputed amounts when they are solvent. Secondly, a contractor might be able to sell plant or machinery at a fire sale price to raise the funds to pay undisputed amounts and therefore not be insolvent, but this might make their business future bleak. The Court said this is the very type of situation the Act seeks to prevent. The failure to make the payment may well lead to the liquidation of the contractor.
The Court said:
“Insolvency and liquidation of the contractor, together with the termination of contracts as a result of an insolvency event, are likely to mean that whatever money is eventually paid to the contractor who is then in liquidation will be dissipated on lawyers and liquidators. I am not persuaded that withholding payment to a contractor who is suffering a temporary shortage of liquidity and who may be on the brink of insolvency is likely to assist sub-contractors. Instead, they are more likely to be assisted by a developer or head contractor paying a contractor a statutory progress payment to which it is entitled in the expectation that it will then pay its creditors.”
The Court acknowledged that on occasion, payment to a contractor might not prevent the contractor becoming insolvent and creating a risk for the principal. However, the Court said the risk of insolvency is a risk under the legislation to be carried by the principal.
The Court looked at s99 of the Act which says a provision in a contract that excludes, modifies, restricts or changes the effect of the Act is void. The Court said:
“If, absent a contractual provision, a contractor would have a statutory entitlement to make a claim for a progress payment under the Act, then the provision will have the effect of excluding, modifying, restricting or otherwise changing the effect of the Act. The position is otherwise where, even absent the provision, there would be no entitlement under the Act, for example, because no reference date will have arisen.”
The Court did not agree the requirement of a statutory declaration was onerous, but did agree the consequences of non compliance could well be disproportionate and extreme, particularly where only a minor amount left owing could disentitle the contractor to a substantial payment.
The Court said the utility of the requirement was outweighed by the adverse consequences of non-compliance. On the basis that the payment claim would have been valid if not for the contractual requirement for the statutory declaration, the Court held the requirement for the statutory declaration was void for its attempt to modify or exclude the operation of the Act.
The Court held the determination of the adjudicator was valid and ordered BRB to pay AWX the $3.7m.
Conclusion
In Queensland, if a clause in a contract precludes a contractor from making a payment claim until it has completed some step not required in the Act, then the clause is void. Based on the reasoning in this decision, it seems likely the same principle may apply in South Australia under the equivalent Act.
[1] BRB Modular Pty Ltd v AWX Constructions Pty Ltd & Ors [2015] QSC 218
