Introduction
In this Update we look at a recent NSW Supreme Court decision arising from a dispute in relation to a construction project being built under the AS4000-1997 contract. The decision has a significant effect on the rights of building contractors to make claims for progress payments when the principal decides that the work should be taken out of their hands[1].
Background
Southern Han Breakfast Point Pty Ltd (“Han”) entered into the AS4000 contract with Lewence Construction Pty Ltd (“Lewence”) for the construction of a 5 storey, 60 unit apartment block for a contract price of $14.2m. Construction commenced and the parties fell into dispute before the apartment block was completed.
On 8 October 2014, Lewence sent Han a payment claim for work done up to the end of 7 October 2014. This claim was paid by Han, but Han was clearly extremely unhappy with Lewence by this stage.
On 10 October 2014, Han issued a notice to Lewence under clause 39.2 of the contract, asking Lewence to show cause as to why Han should not take the remaining work out of its hands and engage another contractor to complete the apartment block.
Lewence responded on 20 October 2014 claiming it should be allowed to continue the works. On 27 October 2014, Han wrote to Lewence removing the remaining work out of its hands under clause 39.4 of the contract. Lewence then responded claiming Han had repudiated the contract and said it accepted the contract was now terminated.
Han replied saying the contract was not terminated, it remained alive, and all payments were to be suspended while Han engaged another contractor to complete the apartment block.
There is a significant difference between the termination of a contract and the termination of the engagement of a contractor under that contract. AS4000-1997 allows the principal to choose between these two options when the building contractor has substantially breached the contract.
On 4 December 2014, Lewence sent a payment claim to Han seeking $3.2m. Han responded with a payment schedule saying Lewence had already been overpaid in the amount of $65k and refusing to pay anything further.
Lewence lodged an adjudication application. The adjudicator handed down a determination requiring Han to pay Lewence $1.2m. Han applied to the NSW Supreme Court seeking a declaration stating the adjudicator’s determination was void.
Progress payment claims under AS4000
Most commercial construction projects operate on the basis of monthly progress payments calculated by the value of the work performed to an agreed date in that month. AS4000 allows parties to nominate the day in the month before which requests are to be made and also the day in the month at which the value of the work is to be assessed.
In this case, Han and Lewence had agreed in their contract that requests for progress payments were to be made by the 8th of the month for the value of the work completed by the 7th of the month. Hence the claim made by Lewence on 8 October 2014 and paid by Han was a typical monthly claim.
The Building and Construction Industry Security of Payments Act 1999 (NSW) (“Act”) refers to the date from which progress payments can be requested in each month as a “reference date”. A reference date is an essential requirement in the Act before a payment claim can be made. Only one payment claim can be made for each reference date.
Han’s basis for its application
Han said the adjudicator had made a jurisdictional error because when the work was taken out of Lewence’s hands, all payments had been suspended and no further reference dates occurred. Here, a jurisdictional error means the adjudicator has stepped outside of his authority and made a decision he has no power to make.
Han said the existence of a reference date is an essential fact giving an adjudicator jurisdiction or power to commence considering a dispute. Han said no reference date had arisen after 27 October 2014 and hence the adjudicator had no authority to even consider the dispute.
Under the Act, a party is entitled to make only one payment claim for each reference date under a construction contract.
Han said Lewence had made a payment claim on 8 October 2014 and had therefore used up the October reference date. Han referred to clause 39.6 of the AS4000 contract which says that when the work has been completed by the new contractor, the Superintendent is to assess the final cost of the project and certify as money due and payable to Lewence the amount it was due to be paid.
Han said clause 39.4 of the contract entitled it to suspend payments until the certification under clause 39.6 had been completed. Therefore, Han said, no reference date could exist for the making of the December payment claim as the contract expressly stated that all payments were suspended from 27 October 2014 onwards until the works were completed by the new contractor.
Lewence said this was incorrect. It said the adjudicator was able to make the decision as to whether a reference date had arisen to enable the payment claim to be made. It said the words of s13 of the Act allow a person who “claims to be” entitled to a progress payment to make a payment claim. Lewence said the adjudicator was entitled to decide whether Lewences “claim” to a progress payment was appropriate.
The Court’s decision
The Court examined s13 of the Act and noted the section commences with the words “a person referred to in s8 … who claims to be entitled to a progress payment”. The Court said while the adjudicator’s task is to work out whether a person’s claim to a progress payment is appropriate, an adjudicator can only start that task if the person is as described in s8 of the Act:-
On and from each reference date under a construction contract, a person—
(a) who has undertaken to carry out construction work under the contract; or
(b) who has undertaken to supply related goods and services under the contract,
is entitled to a progress payment.
The Court said:
“It is apparent from the wording of s8 that the occurrence of a reference date is as essential as the existence of a construction contract and the performance of construction work or the supply of related goods and services under that contract.”
If there is no construction contract or no performance of construction work, then an adjudicator has nothing to adjudicate. The Court said a reference date is of equal fundamental importance. If there is no reference date, the adjudicator has no authority to even start the adjudication. He has exceeded his power if he does so and any decision he makes is void.
Therefore Lewence was not entitled to be paid anything for its December payment claim and would have to wait until the works were completed by others for the assessment to be made as to its future entitlement under clause 39.6.
Conclusion
The decision clarifies the position in relation to the termination of engagement of a contractor under AS4000 and is likely to have a persuasive application in South Australia and other States that mirror the NSW legislation.
Principals might consider there is a strategic advantage in waiting until payment claims have been made by a contractor before sending a notice to show cause.
[1] Southern Han Breakfast Point Pty Limited v Lewence Construction Pty Limited [2015] NSWSC 502
