security of payment
These protections are contained in the Building and Construction Industry Security of Payment Act 2002 (Vic.) and equivalent Security of Payment Acts (SOPA) interstate.
The SOPA regime allows a contractor (claimant) to serve a payment claim on a principal (respondent) requesting a progress payment in relation to work carried out under a construction contract. Such claims may also be served by sub-contractors on contractors. A number of cases in recent years have considered the ability of insolvent claimants to make payment claims. Courts in Victoria and New South Wales appear to have adopted diverging views on this matter. However, with new legislation soon to commence in New South Wales, it appears that the building and construction industry now has some certainty on this question.
The Victorian Position
The Victorian position on the rights of insolvent contractors is set out by the Victorian Court of Appeal in Façade Treatment Engineering Pty Ltd (in liq) v Brookfield Multiplex Constructions Pty Ltd [2016] VSCA 247. In Façade Treatment, it was held that insolvent contractors are not entitled to seek recovery of a payment claim under SOPA.
The dispute in Façade Treatment concerned a payment claim for $1.19m. The claimant brought legal proceedings to recover the claimed amount after entering into liquidation. The claimant was unsuccessful in recovering payment on two grounds. First, the Court of Appeal considered the words of s9(1) of SOPA:
(1) 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 under this Act, calculated by reference to that date.
This was interpreted to only provide protection for contractors whose construction work is ongoing. As companies in liquidation exist solely for the purpose of being wound up, they cannot continue to carry out construction work as required by s9(1).
The second ground for rejection arose by virtue of a counter claim from $10m brought by the respondent. The Court held that in such circumstances, the respondent could rely on s553C of the Corporations Act to set-off the claimed amount. The payment claim was therefore eliminated. It is worth noting that the respondent’s right to set-off prevailed in spite of s16(4)(b) of the SOPA which prohibits cross claims. Section 16(4)(b) was held to be inconsistent with the Corporations Act and was read down pursuant to s109 of the Constitution.
The NSW Position
Earlier this year, the NSW Court of Appeal held that insolvent claimants could seek payment under SOPA. In Seymour Whyte Constructions Pty Ltd v Ostwald Bros Pty Ltd (in liq) [2019] NSWCA 11, the Court held that the interpretation of s9(1) of SOPA in Façade Treatment was “plainly wrong.” Instead, the NSW Court of Appeal held that the words of SOPA did not impose any restriction on the ability of insolvent claimants to make payment claims.
Unfortunately, in Seymour Whyte, the appeal did not consider the applicability of Corporations Act provisions. It is possible that if this were argued, a very different decision could have been reached.
The impact of the Seymour Whyte decision will be short lived. The Building and Construction Industry Security of Payment Amendment Act 2018 (NSW) received royal assent in 2018 and is expected to commence in the coming months. The new section 32B of SOPA in NSW will expressly prohibit a corporation in liquidation from serving payment claims. This will bring the NSW position back into line with the Victorian position.
If you have any queries about any of the issues raised in this article, please do not hesitate to contact a member of our Construction Law team.