Security of Payments Act Lessons from 2019

On the global financial front, the trade-war between the US and China continue to brew whilst Great Britain continues to move towards a BREXIT deal with the EU. Scientifically, the Event Horizon Telescope has captured the first ever image of a black hole. The famed historical landmark Notre-Dame Cathedral suffered devastating damage from a fire whilst Avengers: Endgame breaks the record for fastest movie to cross $2 billion in global collections.

And in Australia, our construction industry continues to develop and refine its practices in line with the Building and Construction Security of Payment Act (“SOP Act”). We highlight below some of the key lessons that our growing construction team has learnt during 2019.

Early Service of a Payment Claim

Scenario

The subcontract does not expressly stipulate when a Reference Date arises or provide for any form of calculating when the Reference Date arises. The subcontractor begins construction work on 4 June 2019 and subsequently serves a payment claim under the SOP Act on 1 July 2019, is that payment claim valid?

Analysis

The first step is to determine the exact date of the Reference Date, which in the above scenario will be determined with reference to s.9(2)(b) of the SOP Act. This section stipulates that, where there are no express provisions relating to the determining of a Reference Date in the contract, the Reference Date will be taken to be 20 business days after the date construction work was first carried out under the contract. In the above scenario this means that the first Reference Date was 2 July 2019.

The issue then becomes whether the payment claim, being served earlier than the Reference Date, is a valid payment claim for the purposes of the SOP Act. With reference to s.9(1) of the SOP Act, it is expressly stipulated that “On and from each reference date under a construction contract, a person who has undertaken to carry out construction work under the contract is entitled to a progress payment…” Consistent with the wording of the SOP Act, the High Court in Southern Han Breakfast Point Pty Ltd (in Liquidation) v Lewence [2016] HCA 52 held that the existence of a Reference Date is an essential pre-condition to the making of a payment claim under the SOP Act, and that the Reference Date must be in existence before a payment claim can be made upon it. The application of the High Court’s reasoning with respect to the above scenario is exemplified in the recent case of MKA Bowen v Carelli Constructions [2019] VSC 436 where the Supreme Court of Victoria held that a payment claim cannot be served prior to the Reference Date as that Reference Date has not yet arisen.

Conclusion

A payment claim can only be made after the Reference Date under the contract, and any payment claim made before the Reference Date will be deemed to be invalid.

Multiple Invoices Forming a Payment Claim

Scenario

A subcontractor serves two invoices on 12 June and 26 June respectively. Can the subcontractor then make a single payment claim under the SOP Act on 30 June for the cumulative total of the two invoices?

Analysis

The leading case law on this scenario is found in the case of Amaysa Enterprises Pty Ltd & Anor v Asta Developments (Aust) Pty Ltd & Anor (No 2) [2015] VSC 500, which follows the position of the Victorian Supreme Court in Hickory Developments Pty Ltd v Schiavello (Vic) Pty Ltd & Anor [2009] VSC 156. In both cases the claimant submitted two tax invoices in the one single payment claim, with each invoice being separately stamped with the statement “This is a payment claim under the Building and Construction Industry Security of Payment Act 2002.”

Vickory J, in Hickory Developments, states the reasoning of the Court as:

From a practical point of view, the delivery of the Two Tax invoices at the same time and in the same envelope could properly be described as one payment claim…[1]

Even if there was a technical defect in the making of the payment claim, the defect falls far short of that which could possibly be described as a “basic requirement” of the Act or an “essential pre-condition for the existence of an adjudicator’s determination” such that non-compliance would render the ultimate determination of the adjudicator void…[2]

The adjudicator accepted the two Tax Invoices as constituting a valid progress claim upon which the adjudication determination could be founded. He was entitled to do so. There is no basis for the Court to intervene.[3]

Conclusion

Multiple invoices can be combined into one payment claim for the purposes of the SOP Act provided that they do not overlap with each other with respect to works claimed for and, most importantly, that they are served simultaneously with each other (e.g. in the same envelope, email, stapled together, etc).

Amending Mistakes in Payment Claims

Scenario

A subcontractor serves a valid payment claim under the SOP Act and subsequently realizes there is a mistake on the payment claim. Can the subcontractor serve a second payment claim with the correction for the purposes of the SOP Act?

Analysis

The starting point for the above scenario is section 14(8) of the SOP Act, which expressly states that “A claimant cannot serve more than one payment claim in respect of each reference date under the construction contract.” With respect to the above scenario, this section expressly prohibits the subcontractor from serving the second payment claim so long as the first payment claim is still valid and in force.

However, what if the first payment claim was withdrawn or extinguished? The Victorian Supreme Court in Valeo Construction Pty Ltd v Pentas Property Investments Pty Limited [2018] VSC 243 considered whether a claimant could validly withdraw a payment claim and then re-submit that same (or amended) payment claim. The Court reasoned that the purpose of section 14(8) of the SOP Act was to prevent multiple claims being made in respect of the same Reference Date so as to prevent the unreasonable burden on recipient respondents to expend resources to address the multiple claims. The re-sending of the same payment claim, even if reasonably supplemented with additional material and information, does not conflict with the purposes of section 14(8). However, where the second payment claim is a revised, amended or corrected version of the initial payment claim, this may then conflict with section 14(8) of the SOP Act as it would burden the recipient respondent with expending additional resources to address a substantially different claim. In this case the revised payment claim would be considered a separate second payment claim served with respect to the same Reference Date as the initial payment claim and therefore be invalid.

Conclusion

A second payment claim, being a revised or amended version of an initial payment claim, cannot be served with respect to the same Reference Date as the initial payment claim. With respect to the above scenario, where the subcontractor wishes to correct the initial payment claim, they must:

1. Wholly and completely withdraw the initial payment claim prior to the recipient respondent serving a payment schedule to that payment claim; and

2. Contemporaneously with or after, but not before, serve the amended payment claim on the recipient respondent.

Claiming for Work Done After the Reference Date

Scenario

A subcontractor submits a payment claim on 12 June attaching to a 31 May Reference Date under the SOP Act, but includes a claim for work done between 31 May and 12 June. Does this invalidate the entire payment claim?

Analysis

Although there is no direct case law on this matter, the question can be interpreted as being comprised of the following:

1. Whether an adjudicator is allowed to consider work done after the reference date; and

2. Whether the adjudicator must consider the payment claim as a whole.

With respect to the above scenario and the first question, we refer to s.9(1) of the SOP Act which states that that

“On and from each reference date under a construction contract, a person who has undertaken to carry out construction work under the contract is entitled to a progress payment…calculated by reference to that date.”

In accordance with standard construction industry practices, this is interpreted as meaning that the amount claimable by the subcontract at 31 May is only for the constructions they have conducted up to 31 May. Any work done after 31 May would then be claimable pursuant to the next Reference Date. This is likely to be the approach taken by an adjudicator or a court in such an event and thus it is not recommended for payment claims to include claims for work done after the Reference Date.

However, in the event that a payment claim submitted for adjudication does include a claim for such work, does that invalidate the entire claim as the adjudicator is bound to consider the payment claim as a whole? In the case of Gantely Pty Ltd & Ors v Phoenix International Group Pty Ltd & Anor [2010] VSC 106, Vickery J held that:

“…it was argued…if one part of the progress claim did not satisfy the requirements of s.14(3)(a) the whole of the progress payment would therefore fail and should be set aside as being invalid.

I do not accept this submission. The question should be whether the Act, either expressly or impliedly, operates to exclude the common law doctrine of severance. I find that it does not. Indeed, the purposes and objects of the Act earlier described are best served by processes which, so far as possible, ought to accommodate reasonable flexibility and avoid unnecessary technicality.”[4]

This case is good law for the argument that, if a payment claim includes a claim for work done after the Reference Date, this does not invalidate the entire payment claim, but would be a matter for the adjudicator to take into account when assessing the amount payable with respect to the progress claim and further entitles the adjudicator to sever off that portion of such invalid work claimed.

Conclusion

Claiming for work done after the Reference Date for the payment claim does not invalidate the entire claim and the adjudicator is entitled to sever off that portion of the payment claim when assessing the adjudication amount payable.

For more information, please contact our Construction Team.

[1] Hickory Developments Pty Ltd v Schiavello (Vic) Pty Ltd & Anor [2009] VSC 156, 31-32.

[2] Ibid, 153.

[3] Ibid, 154.

[4] Gantley Pty Ltd & Ors v Phoenix International Group Pty Ltd & Anor [2010] VSC 106, 114-115.

Disclaimer:

The material contained in this publication is meant to be informational only and is not to be construed as legal advice. Tisher Liner FC Law will not be held liable or responsible for any claim, which is made as a result of any person relying upon the information contained in this publication.