When claiming statutory debts under the Security of Payment Act may not be a slam dunk

It is well established policy now enshrined under the Building and Construction Industry Security of Payment Act 1999 (NSW) (SOPA) that for the construction industry to remain sustainable, subcontractors and suppliers must have regular and reliable access to cashflow. Aside from limited circumstances[1], the risk of insolvency (of either party) rests with the payor (recipient of the payment claim) subject to the final determination of the parties’ rights.

SOPA (as well as legislation in other states and territories) enables a subcontractor[2] who remains unpaid after submitting a payment claim, to which a lesser amount has been scheduled or no schedule provided, to elect to proceed to an adjudication or have the matter determined as a debt in a court of competent jurisdiction.

If the subcontractor wishes to proceed to an adjudication, the contractor must have notice of the election and be given the opportunity to provide a payment schedule. In effect, the contractor will have a ‘second bite of the cherry’. This may be a preferred course if the parties have an amicable relationship and a payment, for whatever reason, had been inadvertently missed. If the contactor then pays the amount claimed, there will be no further action required (aside from potential claims for interest). If the contractor fails to provide a payment schedule a second time, the subcontractor may proceed to an adjudication and the contractor will be unable to submit or rely on any adjudication response. Subcontractors might prefer to proceed to adjudication, relying on what has become known colloquially as the ‘pay now argue later’ system of justice, as opposed to a court hearing where a judge has broader jurisdiction to determine what can be included in a defence (as discussed in Marques below). SOPA timelines are also strictly enforced which may be preferable compared with the uncertainty of time in bringing a proceeding to a final hearing.

Taking the court option for enforcement of the debt has the advantage of depriving the contractor from a second chance at delivering a payment schedule. However, proceeding to court has two important caveats for subcontractors to bear in mind:

1. the court must be satisfied that there is a valid payment claim and that it was served on the contractor; and
2. the contractor may raise a defence provided that the defence does not relate to ‘matters arising under the construction contract’.

In relation to 1 above, the subcontractor should ensure that:

1. the payment claim has been issued to the correct contracting entity;[3]
2. there is a construction contract (which does not have to a be written contract, provided that the ‘arrangement’ gives rise a legally binding obligation);[4]
3. the payment claim has met the requirements of SOPA, by sufficiently describing the work to which the claim relates, and by ensuring valid service of the payment claim within the strict time requirements under SOPA.

If there is doubt about any of the above, the subcontractor will need to consider whether to submit another payment claim the following month (ensuring it is compliant with SOPA) or run the risk of a court finding that the payment claim was invalid.

There is a further issue of disentitling conduct, including whether a payment claim was paid on the basis of misleading conduct (under the Australian Consumer Law (ACL)) in circumstances where the claimant incorrectly stated that all subcontractors had been paid their entitlements. This issue was considered in a recent case in the NSW Supreme Court, Marques Group Pty Ltd v Parkview Constructions Pty Ltd [2023] NSWSC 625 (Marques).

The decision in Marques

Justice Rees in Marques declined to order summary dismissal of a defence in a SOPA debt claim that included a defence of misleading or deceptive conduct under section18 of the ACL. The contractor in that case had alleged that a supporting statement accompanying the subcontractor’s payment claim was misleading or deceptive under s18 of the ACL. The defence alleged that the subcontractor’s statutory declarations – that it had paid its workers all due payments, was not true because the subcontractor had not paid its workers’ superannuation contributions and Australian Construction Industry Redundancy Trust contributions. The contractor relied on these statements when preparing and issuing the payment schedules and had the contractor been aware of the underpayments, they would have scheduled an amount of $0, or an amount less than that scheduled.

The contractor relied on the principles established in Bitannia Pty Ltd v Parkline Constructions Pty Ltd (2006) 67 NSWLR 9: a defence under the Australian Consumer Law is not barred by ss 15(4) and 16(4) of SOPA. Further, where a plaintiff sues on a cause of action, one essential element of which has been created by the plaintiff’s misleading conduct, the contravention affords a defence and judgment cannot be obtained: Bitannia at [8], [13], [17], [124]. As a result of the subcontractor’s contravention of section 18 of the ACL, the contractor scheduled positive amounts when, had the contraventions not occurred, it would have scheduled nothing. It was argued that the defence under the ACL trumped the contractor’s rights under SOPA, where Commonwealth legislation prevailed in the event of inconsistency and entitled the contractor to dismissal of the subcontractor’s claim.

The subcontractor’s arguments for summary judgment were based on the underlying policy of SOPA – to shift insolvency risk to the payor while rights under a construction contract are finally determined. It was submitted that to allow recipients of payment claims to raise points of this kind (insolvency of the claimant) would have a ‘chilling effect’ as such allegations are easily made and it would be a simple matter for the recipient to thereby delay payment, contrary to the purpose of SOPA.

While Rees J agreed that the contractor’s defence based on alleged misleading and deceptive conduct in respect of the subcontractor’s solvency “appears to run contrary to the SOPA scheme”, her Honour ultimately applied well established principles of summary judgment thresholds, holding that “[a]s inherently unattractive as that defence is [the ACL defence], I cannot say that it is so clearly untenable that it cannot possibly succeed.” The motion for summary dismissal was dismissed, with costs and the proceedings listed for further directions.

Implications

Subcontractor’s rights to regular cashflow are fundamental to the sustainability of the construction industry. SOPA provides this framework, however when subcontractors pursue late (or no) payments in court, they should ensure that:

• there is a valid construction contract and complying payment claim has been correctly served on the correct contracting person or entity; and
• there has been no other disentitling conduct in relation to matters existing outside of the construction contract, for example by providing incorrect statements in subcontractor payment declarations or by engaging in unconscionable conduct – which can be raised as a defence in a court proceeding and have the counter-intuitive effect of delaying payment while the parties incur further costs in a court battle.

If there is doubt over any one or more of these steps after the payment claim has been issued, the subcontractor should address them in the next payment claim in the subsequent month.

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Authored by:

Matthew Taylor, Partner
Ryan James, Lawyer
Maggie Liang, Lawyer

[1] More limited rights have been recently introduced to SOPA to preclude a party in liquidation from submitting a payment claim (on the basis that payment to a liquidator would be unrecoverable under the construction contract, thus making the interim nature of the relief final, which is contrary to the policy of the legislation).

[2] The term ‘subcontractor’ has been used for convenience. Any party (including for example a head contractor, design consultant or supplier) who undertakes construction work under a construction contract is able to utilise SOPA.

[3] Grave v Blazevic Holdings [2010] NSWCA 324.

[4] Lendlease Engineering Pty Ltd v Timecon Pty Ltd [2019] NSWSC 685.