Security of Payment Claims Following Termination or Suspension of the Construction Contract

The first High Court decision¹ to consider the operation of the security of payment legislation found that a claimant may be unable to submit a payment claim after the termination or suspension of the construction contract.

The Facts – Southern Han Breakfast Point Pty Ltd (in liquidation) v Lewence Construction Pty Ltd

The facts are as follows:

• In 2013, Southern Han Breakfast Point Pty Ltd (Principal) entered into a modified AS4000-1997 contract (Contract) with Lewence Constructions Pty Ltd (Contractor) for the construction of apartments.
• The contract provided that the Principal could suspend progress payments pending the completion of work taken out of the hands of the Contractor.
• On 10 October 2014, the Principal issued the Contractor with a show cause notice.²
• On 27 October 2014, the Principal purported to suspend progress payments pursuant to the show cause notice (Suspension).³  In turn, the Contractor purported to terminate the Contract on 28 October 2014 for repudiation (Termination).
• On 4 December 2014, the Contractor issued a progress claim (Claim) for work performed up to 27 October 2014 (Relevant Period). Crucially, however, the Contractor was required under Clause 37.1 to “claim payment progressively” on the 8th day of each calendar month for work done to the 7th of that month. Applying Clause 37.1, the reference date for the Relevant Period would have been 8 November 2014.
• On 17 February 2015, the Contractor made an application for adjudication which was ultimately determined in the Contractor’s favour.

The Outcome

The High Court found that the adjudicator lacked jurisdiction to make the determination based on the following rationale:

• A reference date⁴  is needed to support a valid payment claim under the Act. That is, the claimant must be entitled to make a payment claim under the contract.
• Assuming the Suspension was valid, the Contractor’s rights to make payment claims were suspended.
• Assuming the Termination was valid, both parties were “discharged from further performance of the Contract” and the Contractor’s “rights under the Contract were limited to those which had then already accrued under the Contract”.⁵
• In both scenarios, there was no reference date to support a valid payment claim under the Act. Although the reference date would have been 8 November 2014, this reference date did not arise following the suspension or termination of contract.

The Take-Home Message

• For claimants – In order to make a payment claim under the security of payment legislation, it is essential that you are able to identify a reference date. There is a risk that you may be unable to make a valid payment claim if the contract is suspended or terminated before a reference date arises. You should consider submitting any progress claims prior to terminating the contract.
• For respondents – You should ensure that your contract is clear about when a reference date arises. Special conditions should be inserted in the contract to avoid reference dates arising during suspension or after termination of the contract.  You may also wish to consider provisions that make the accrual of reference dates dependent on the claimant’s compliance with certain requirements (for e.g. submission of subcontractor statements). However, it is unclear whether such provisions are effective in light of recent case law.⁶

¹ Southern Han Breakfast Point Pty Ltd (in liquidation) v Lewence Construction Pty Ltd [2016] HCA 52 (Southern Han).
² Clause 39.2
³ Clause 39.4
⁴ Section 8(2) of the Act defines “reference date” as:

• a date determined by or in accordance with the terms of the contract as the date on which a claim for a progress payment may be made in relation to work carried out or undertaken to be carried out (or related goods and services supplied or undertaken to be supplied) under the contract, or
• if the contract makes no express provision with respect to the matter-the last day of the named month in which the construction work was first carried out (or the related goods and services were first supplied) under the contract and the last day of each subsequent named month.