The High Court decides – Do you need a valid reference date?

Is it imperative to have a valid reference date for a payment claim made under Security of Payment Legislation? The High Court determines the importance and effect of reference dates once and for all in Lewence Construction Pty Ltd v Southern Han Breakfast Point Pty Ltd [2016] HCA 52.

Summary

Today the High Court handed down its first ever decision concerning security of payment legislation in Australia (Lewence Construction Pty Ltd v Southern Han Breakfast Point Pty Ltd [2016] HCA 52). The High Court affirmed the view that a valid reference date is essential to a claimant’s right to recover payment under security of payment legislation.

This decision will have far reaching consequences for the building and construction industry, as it clarifies the recent confusion regarding whether a payment claim will be automatically invalid if it is not made in relation to a valid reference date.

Context of the High Court decision

The High Court’s decision in Lewence Construction Pty Ltd v Sourthern Han Breakfast Point Pty Ltd [2016] HCA 52 concerns the significance and relevance of reference dates. A reference date is a peculiar beast whose relevance is specific to the building and construction industry. Before 1999, “reference date” was not a common term. Contracts often contained what would now be known as “reference dates” but they were not referable to any entitlement to rapid adjudication, and as such their significance was diminished by the fact that payment disputes in the building and construction industry were at that time litigated through the Courts, with final entitlement often determined through complex legal debate unless contractor insolvency brought an end to the proceeding prematurely.

In 1999, the New South Wales Government enacted the Building and Construction Industry Security of Payment Act 1999, which introduced a fast-track adjudication model for the interim resolution of progress payment disputes in the industry. Each State and Territory soon followed suit, starting with Victoria¹  in 2002, followed by Queensland² , Western Australia³  and Northern Territory⁴  in 2004, and finally Tasmania⁵ , South Australia⁶  and ACT⁷  in 2009.

With the exception of Northern Territory and Western Australia⁸ , each jurisdiction’s security of payment legislation was quite similar in its operation. Each created a process whereby a person who is, or claims to be, entitled to a progress payment could make a progress claim which the respondent must pay or dispute (by way of a payment schedule) within strict and brief time periods. If the respondent fails to pay or dispute a progress claim, the claimed amount becomes immediately payable⁹ and recoverable in Court.

In each jurisdiction (other than NT and WA), the right to recover an interim progress payment was made contingent upon a reference date arising under a construction contract. The legislature, understanding the construction industry’s need for regular cashflow and speedy resolution of payment disputes, enacted legislation which required progress claims to be issued on or after a reference date determined under a construction contract; usually occurring once per month. Additionally, in each jurisdiction a claimant is limited to making one progress claim for each reference date.

Courts in most jurisdictions have, until very recently, taken the approach that a progress claim will not be valid for the purpose of the security of payment legislation unless it is made for a valid reference date¹⁰ . This means that an adjudicator will not have the power to make a decision in respect of a progress claim unless the adjudicator is satisfied that a valid reference date exists, and that there has not already been a progress claim made in relation to that valid reference date . Additionally, a claimant will not become immediately entitled to payment in the absence of a payment schedule unless the payment claim has been made for a valid reference date¹¹.  According to the Courts in most jurisdictions, the existence of a valid reference date¹² is essential to the claimant’s right to recover under the legislation.

Victorian Courts have differed in their view as to the importance and relevance of reference dates, finding that the lack of a valid reference date will not automatically invalidate a progress claim for the purpose of the legislation. The Victorian Supreme Court has determined that the giving of a progress claim before the relevant reference date arises will not necessarily invalidate the progress claim because the legislation grants a right to make a progress claim to any person who is or claims to be entitled to a progress payment¹³ . The Court’s reasoning was that the legislation allows claimants to make a progress claim where they claim to be entitled to the progress payment, irrespective of whether they have an actual present entitlement at the time the claim is submitted. The Court reasoned that the entitlement to be paid does not arise until the reference date has arisen, but that a claim submitted earlier than that date will not necessarily be invalid. On this view, the occurrence of a valid reference date remains essential to a claimant’s right to be paid.

Reference dates have come under the microscope again recently with Courts in Queensland and New South Wales considering the applicability of reference dates after contract termination. The Courts have determined that reference dates do not continue to accrue following termination of a contract¹⁴, but that reference dates which had accrued prior to termination will not be extinguished by the termination of the contract¹⁵.

It is against this background that the High Court has been called upon to consider the question of whether the lack of a valid reference date will render a progress claim invalid for the purpose of security of payment legislation in most jurisdictions in Australia. The bulk of recent judicial reasoning has supported the position that a valid reference date is essential to a claimant’s right to recover payment under security of payment legislation in Australia. That was so, until the New South Wales Court of Appeal considered the case of Lewence Construction Pty Ltd v Southern Han Breakfast Point Pty Ltd¹⁶.

The case

In 2013, Southern Han Breakfast Point Pty Ltd (Southern Han) engaged Lewence Construction Pty Ltd (Lewence) to build a 5 storey, 60 unit apartment block in Sydney’s Breakfast Point for the sum of approximately $15.6 million. On 27 October 2014, Southern Han took the remaining work out of the hands of Lewence as a result of alleged breaches of contract by Lewence. Lewence asserted that Southern Han’s conduct amounted to repudiation of the contract and terminated the contract.

On 4 December 2014, Lewence issued a payment claim under the security of payment legislation in the sum of $3,229,202.50 which related to work performed by Lewence up to 27 October 2014 when the work was taken out of Lewence’s hands. Southern Han contended that an amount of $64,909.67 was owed by Lewence to Southern Han. The last available reference date under the contract prior to termination was 8 October 2014 and Lewence had already submitted a progress claim after 8 October 2014 but before the claim submitted on 4 December 2014. An adjudicator determined that the amount of $1,221,051.08 was owed to Lewence.

Southern Han commenced proceedings in the Supreme Court to set aside the adjudicator’s decision. Southern Han (in line with the Courts in all jurisdictions other than Victoria) argued that the reference date of 8 October 2014 had been used by Lewence, that no further reference dates arose after 8 October 2014 by reason of the termination of the contract and that Lewence’s claim must therefore be invalid for lack of a valid reference date. Lewence argued (in line with the Courts in Victoria) that it was a party who claimed to be entitled to payment under the relevant legislation, and it was therefore not imperative to have a valid reference date in order for its claim to be valid. The Supreme Court preferred Southern Han’s argument and declared the adjudicator’s decision void¹⁷ . Lewence appealed.

The New South Wales Court of Appeal unanimously overturned the Supreme Court decision¹⁸. The Court held that the question of whether a reference date has yet arisen may be a valid matter for an adjudicator to consider in deciding whether a progress payment is due, but the lack of a reference date will not automatically invalidate a payment claim. Southern Han appealed to the High Court.

The High Court’s decision

The High Court unanimously held that a reference date is essential to the validity of a payment claim. The Court emphasised the distinction in the legislation between a present entitlement to a progress payment and the future determination of the amount of that progress payment. Against that background, the legislation only grants a present entitlement to a progress payment on and from a relevant reference date, but the words “or claims to be entitled” relate to the future determination of the amount of that progress payment through adjudication, and the reference to a person who claims to be entitled to a progress payment is simply a recognition that the amount of the progress payment may be $nil. In other words, the words “or claims to be entitled” do not extend the class of person who can make a valid claim under the Act, they merely recognise that, although the person may have a right to make a claim, the amount that the person is entitled to recover may still be zero.

The Court held:

Section 8(1) makes a person who has undertaken to carry out construction work or supply related goods and services under a construction contract entitled to a progress payment only on and from each reference date under the construction contract. In that way, the existence of a reference date under a construction contract within the meaning of s 8(1) is a precondition to the making of a valid payment claim under s 13(1).¹⁹

The Court found this interpretation consistent with section 13(5) of the Act. Section 13(5) prohibits a second claim for one reference date, whereas section 13(1) prohibits a claim in respect of no reference date.

Having determined that a reference date was essential to the validity of Lewence’s payment claim, the High Court then needed to determine whether a reference date had arisen. The Court recognised two alternative hypotheses:

1. Southern Han was entitled to take work out of the hands of Lewence on 27 October 2014, and therefore did not repudiate the contract, having the result that the contract was not terminated by reason of Lewence’s attempt to rely on that repudiation to terminate; or

2. Southern Han repudiated the contract by taking the work out of the hands of Lewence, and the contract was terminated validly by Lewence on 28 October 2014.

The Court held that, in either scenario, no reference date arose for which Lewence could rely as a basis for the 4 December 2014 payment claim. The contract between Lewence and Southern Han provided that if Southern Han took work out of the hands of Lewence, all further obligations to pay Lewence were suspended until the completion of the work taken out of the hands of Lewence. The practical purpose being to ensure that Southern Han is not left out of pocket if the cost of completing the work taken out of the hands of Lewence exceeds whatever amount otherwise remains owing to Lewence. The Court held that the suspension of payment was a suspension of the totality of the rights and obligations in respect of payment, including the right of Lewence to make a claim for payment. Alternatively, if the contract was properly terminated on 28 October 2014, no reference dates arose following termination. In either scenario, no reference date arose after 28 October 2014 to support the 4 December 2014 claim.

1. Building and Construction Industry Security of Payment Act 2002 (Vic).
2. Building and Construction Industry Payments Act 2004 (Qld).
3. Construction Contracts Act 2004 (WA).
4. Construction Contracts (Security of Payments) Act (NT).
5. Building and Construction Industry Security of Payment Act 2009 (Tas).
6. Building and Construction Industry Security of Payment Act 2009 (SA).
7. Building and Construction Industry (Security of Payment) Act 2009 (ACT).
8. The remainder of this article relates to the security of payment legislation in each jurisdiction of Australia other than Western Australia and Northern Territory.
9. This remains the case in all jurisdictions, however the recent amendments to the Building and Construction Industry Payments Act 2004 (Qld) in December 2014 create some ambiguity in Queensland, as a claimant is required to give the respondent a second opportunity to submit a payment schedule before taking action in Court to recover payment.
10. See for example: Protectvale Pty Ltd v K2K Pty Ltd [2008] FCA 1248.
11. See for example: Skinner v Timms [2009] QSC 46; Simcorp Developments and Constructions Pty Ltd v Gold Coast Titans Property Pty Ltd [2010] QSC 162.
12. See for example: FK Gardner & Sons Pty Ltd v Dimin Pty Ltd [2007] 1 Qd R 10; Impulse Electrical (Aust) Pty Ltd v Mother Natures Chermside Pty Ltd [2007] QDC 23.
13. See for example: Seabay Properties Pty Ltd v Galvin Construction Pty Ltd [2011] VSC 183; Metacorp Pty Ltd v Andeco Construction Group Pty Ltd [2010] VSC 199.
14. Walton Construction (Qld) Pty Ltd v Corrosion Control Technology Pty Ltd & Ors [2011] QSC 67; McNab NQ Pty Ltd v Walkrete Pty Ltd & Ors [2013] QSC 128; McConnell Dowell Constructors (Aust) Pty Ltd v Heavy Plant Leasing Pty Ltd [2013] QSC 269; Kellett Street Partners Pty Ltd v Pacific Rim Trading Co Pty Ltd & Ors [2013] QSC 298; Patrick Stevedores Operations No 2 Pty Ltd v McConnell Dowell Constructors (Aust) Pty Ltd [2014] NSWSC 1413; Omega House Pty Ltd v Khouzame [2014] NSWSC 1837.
15. McNab Developments (Qld) Pty Ltd v MAK Construction Services Pty Ltd [2013] QSC 293.
16. [2015] NSWCA 288.
17. Southern Han Breakfast Point Pty Ltd v Lewence Construction Pty Ltd [2015] NSWSC 502.
18. Lewence Construction Pty Ltd v Southern Han Breakfast Point Pty Ltd [2015] NSWCA 288.
19. Southern Han Breakfast Point Pty Ltd (in Liquidation) v Lewence Construction Pty Ltd [2016] HCA 52 at [61].

Authored by:

Craig Tanzer