10 March 2006

The NSW Court of Appeal recently considered the application of the Building and Construction Industry Security of Payment Act 1999 (NSW) to certain progress claims submitted by a contractor (respondent) to a client (appellant) pursuant to a construction contract. The two issues raised on appeal were:

• whether the progress claims were payment claims under the Act: the client argued they had failed to adequately identify the construction work to which they related; and
• whether the due dates for payment had arisen before commencement of the court proceedings: the client argued they had not and therefore the proceedings were premature.

The Court of Appeal found in favour of the contractor on both issues and dismissed the appeal.

Background

Under the Act, a payment claim may give rise to a statutory debt unless the recipient delivers a payment schedule within the relevant time limit, or makes payment of the claimed amount (in full) by the due date. The relevant provisions are:

• Section 14 of the Act which provides that, where the recipient of a payment claim does not provide a payment schedule within the relevant time limit (which schedule must specify the amount it intends to pay and indicate the reasons for not paying the claimed amount in full), the recipient becomes liable to pay the claimed amount on the due date. The time limit for delivery of a payment schedule is 10 business days after service of the payment claim or, if earlier, on the date required by the contract.
• Section 15 of the Act provides that, where the recipient has failed to provide a payment schedule and then fails to pay the claimed amount (in full) by the due date, the claimant is entitled to recover any unpaid portion of the claimed amount as a statutory debt.

However, a document which satisfies the contractual requirements for a progress claim may or may not satisfy the statutory requirements for a valid payment claim under the Act.

In this case, the contractor had served two progress claims (nos. 12 and 13) and the client had failed to provide payment schedules and pay the claimed amounts in full. The contractor recovered judgment for over $900,000 and the client appealed.

Were the progress claims valid payment claims under the Act?

The first issue was whether progress claims 12 and 13 constituted valid payment claims under the Act. Section 13(2) of the Act provides:

“13(2) A payment claim:

(a) must identify the construction work (or related goods and services) to which the progress payment relates, and

(b) must indicate the amount of the progress payment that the claimant claims to be due (the claimed amount), and

(c) must state that it is made under this Act.”

The client argued that the progress claims were not valid payment claims under the Act because they did not adequately identify the construction work to which the claimed payment related. The progress claims identified the work by single line item descriptions and a reference to the variation number (where relevant). The client’s quantity surveyor swore on affidavit that it was not possible for him to assess the progress claims in the form in which they were originally submitted. Instead, it had been necessary to undertake discussions with the contractor’s representatives to determine exactly what the contractor was claiming for each period, and to check subcontractors’ invoices to obtain measurements to justify the amounts claimed.

However, progress claims 12 and 13 were, both in form and substance, the same as the previous 11 progress claims, and the client had never suggested previously that the earlier payment claims did not adequately identify the construction work or had required further investigation.

Furthermore, the contractor’s quantity surveyor (retained as an independent expert) submitted evidence that progress claims 12 and 13 were well prepared in accordance with good industry practice. The progress claims were also of the style and content expected for such a project, and contained sufficient detail and information to identify the related construction work.

At first instance, McDougall J applied the reasoning of Palmer J in Multiplex Constructions Pty Ltd v Luikens & Anor [2003] NSWSC 1140 which concerned the requirements of a payment schedule:

“A payment claim and a payment schedule are, in many cases, given and received by parties who are experienced in the building industry and are familiar with the particular building contract, the history of construction of the project and the broad issues which have produced the dispute as to the claimant’s payment claim. A payment claim and a payment schedule must be produced quickly; much that is contained therein in an abbreviated form which would be meaningless to the uninformed reader will be understood readily by the parties themselves. A payment claim and a payment schedule should not, therefore, be required to be as precise and as particularised as a pleading in the Supreme Court. Nevertheless, precision and particularity must be required to a degree reasonably sufficient to apprise the parties of the real issues in the dispute.

 

… Section 14(3) of the Act, in requiring a respondent to “indicate” its reasons for withholding payment, does not require that a payment schedule give full particulars of those reasons … as long as the essence of “the reason” for withholding payment is made known sufficiently to enable the claimant to make a decision whether or not to pursue the claim and to understand the nature of the case it will have to meet in an adjudication.”

The parties agreed that these principles were generally applicable to payment claims. The Court of Appeal noted that a payment claim is simply a claim - unlike a payment schedule, its function is not to identify the scope of a dispute. Nevertheless, the Court of Appeal agreed with McDougall J’s application of the principles. McDougall J had held:

“In principle, I think, the requirement in s 13(2)(a) that a payment claim must identify the construction work to which the progress payment relates is capable of being satisfied where:

(1) The payment claim gives an item reference which, in the absence of evidence to the contrary, is to be taken as referring to the contractual or other identification of the work;

(2) That reference is supplemented by a single line item description of the work;

(3) Particulars are given of the amount previously completed and claimed and the amount now said to be complete;

(4) There is a summary that pulls all the details together and states the amount claimed.”

Both McDougall J and the Court of Appeal gave weight to the fact that the client had failed to explain why progress claims 12 and 13 were distinguishable from the previous 11 (that is, why there had been no problem identifying the construction work in the previous claims).

The Court of Appeal also held that the question was to be determined objectively:

“The payment claims are to be read in context, including the context of industry conventions and the usage adopted by the parties in their earlier contractual dealings. Construction work for which a claim is made may be identified by reference to earlier documents such as variation claims and other documents capable of being identified by reference to the contract or the earlier dealings of the parties. This list is not intended to be exhaustive.”

On this point, the Court of Appeal noted the distinction between understanding a claim and accepting it. Section 13(2)(a) of the Act is only concerned with identification of the construction work. It was therefore unhelpful to focus on the investigations which the client’s quantity surveyor had subsequently made in order to assess the claim.

As a result, the Court of Appeal found that progress claims 12 and 13 amply satisfied the statutory requirements.

Had the due date for payment arisen before commencement of the court proceedings?

The second issue was whether the payment terms of the contract prevented the contractor from recovering the claimed amounts under the Act. Before judgment may be given on a claim for a statutory debt arising under the Act, the court must be satisfied that:

• the client is liable to pay the claimed amount by virtue of its failure to provide a payment schedule with the relevant time limit; and
• the client has failed to pay the whole or any part of the claimed amount on or before the due date for the progress payment to which the payment claim relates (s15(1)(b) of the Act).

Under section 11(1) of the Act, a progress payment becomes due and payable:

• on the date specified in the contract; or
• in the absence of an express provision in the contract, on 10 business days after the payment claim is made.

The contract specified a due date for payment, which was 28 days from the end of the month in which the contractor gave the progress claim to the Superintendent. The client argued that this date had not arrived because clause 42.1 of the contract conditions required progress claims to be supported by “evidence of the amount due to the Contractor and such information that the Superintendent may reasonably require”. Progress claims 12 and 13 were neither supported by such evidence (because the contractor had failed to adequately identify the construction work) nor such information. This non-compliance with the contractual requirements precluded the due date from arriving, both in respect of the contractual entitlement to payment and in respect of the statutory entitlement to payment. In other words, the due date for payment of the statutory debt had not arrived by the time the contractor commenced proceedings. As a result, the contractor’s entitlement to enforce the statutory debt had not arisen.

This argument was rejected by the Court of Appeal for a number of reasons. Firstly, in respect of the progress claims, all contractual pre-conditions of validity had been met. Evidence of the amount due had been provided with each payment claim, and there had been no withholding of “other information that the Superintendent may reasonably require”, because the Superintendent had not made any request for further information.

Secondly, section 15(4)(b) of the Act provides that, where the client has failed to provide a payment schedule and, as a result, the contractor has become entitled to recover the unpaid amount as a statutory debt:

“the [client] is not, in those proceedings, entitled:

(i) to bring any cross-claim against the [contractor], or

(ii) to raise any defence in relation to matters arising under the construction contract.”

Accordingly, the Court of Appeal held (as had McDougall J at first instance) that even if the Superintendent had requested further information which the contractor had not provided, this was a defence which the client was not entitled to raise.

Thirdly, the Court of Appeal held that the contractual date for payment was indeed 28 days from the end of the month after receipt by the Superintendent of the progress claim. This was the relevant date for the purposes of section 11(a) of the Act, even if the contractual obligation to pay was conditional on receipt of any supporting evidence and other information (which was doubtful, the requirement to provide such evidence and information being simply an obligation in the contract, and not forming part of the progress claim itself).

As a result, the Court of Appeal found that the due date for payment of the statutory debt had arisen and McDougall J had been correct to allow recovery.

Link to Case