Southern Han Breakfast Point Pty Ltd (In LIQ) V Lewence Construction Pty Ltd [2016] HCA 52

On 21 December 2016, the High Court delivered judgment in this matter, which concerned rights and entitlements under the Building and Construction Industry Security of Payment Act 1999 (NSW) (the SoP Act).

The facts

• Southern Han Breakfast Point Pty Ltd (Southern Han) and Lewence Construction Pty Ltd (Lewence) were parties to a contract for the construction by Lewence of an apartment block at Breakfast Point in New South Wales (the Contract).
• Clause 37 of the Contract dealt with payment and provided (with Item 28 of Annexure Part A) that Lewence was to “claim payment progressively” from Southern Han by making a “progress claim” on the 8th day of each calendar month for work under the Contract done to the 7th day of that month.
• Clause 37.2 of the Contract made provision for a progress certificate evidencing the Superintendent’s opinion of the moneys due from Southern Han to Lewence pursuant to the progress claim and for Southern Han to pay the amount certified.
• Clause 39 of the Contract dealt with default, and clause 39.2 entitled Southern Han, in the event of Lewence committing a “substantial breach of the Contract“, to give Lewence a notice to show cause. In the event that Lewence failed to show reasonable cause by the stated time and date, clause 39.4 provided that Southern Han may take the whole or part of the work remaining to be completed out of Lewence’s hands and suspend payment until it becomes due and payable pursuant to subclause 39.6, or terminate the Contract.
• Clause 39.5 of the Contract obliged Southern Han to complete work taken out of Lewence’s hands.
• Clause 39.6 of the Contract provided that when work taken out of Lewence’s hands had been completed, the Superintendent was to assess the cost thereby incurred and certify the difference between that cost and the amount which would otherwise have been paid to Lewence if the work had been completed by Lewence as moneys due and payable.
• Similar rights were given to Lewence in the event of Southern Han committing a “substantial breach of the Contract” pursuant to clauses 39.7 and 39.9.
• Clause 39.10 of the Contract provided that if the Contract was terminated pursuant to subclause 39.4(b) or subclause 39.9, the parties’ remedies, rights and liabilities were to be the same as they would have been under the law governing the Contract had the defaulting party repudiated the Contract and the other party elected to treat the Contract as at an end and recover damages.
• On 10 October 2014, Southern Han gave Lewence a notice to show cause under clause 39.2 of the Contract.
• Lewence responded to that notice. On 27 October 2014, Southern Han then gave Lewence a further notice purporting to exercise its rights under clause 39.4 to take out the whole of the work remaining to be completed under the Contract out of Lewence’s hands.
• Lewence treated the giving of that further notice as repudiation of the Contract by Southern Han and, on 28 October 2014, purported to accept the repudiation and terminate the Contract.
• On 4 December 2014, Lewence served on Southern Han a document which purported to be a payment claim for work carried out under the Contract for approximately $3.2M. The document complied with the formal requirements of section 13(2) of the SoP Act, but it did not nominate a reference date. It claimed payment for work carried out by Lewence under the Contract up to 27 October 2014, including for work carried out to 7 October 2014 which had been the subject of a prior payment claim which Lewence had served on Southern Han on or about 8 October 2014.
• Southern Han replied by providing a payment schedule to Lewence indicating that the scheduled amount Southern Han proposed to pay was “nil” (and in fact noted that it considered that it was owed approximately $65,000 by Lewence).
• Lewence then purported to make an adjudication application to Australian Solutions Centre, an authorised nominating authority. The application was referred to an eligible adjudicator, who purported to accept it by giving notice to Lewence and Southern Han.
• Southern Han lodged a response which contained a submission asserting that the adjudicator lacked jurisdiction to determine the application. The adjudicator did not accept this contention, purported to determine the application and found that Lewence was entitled to a progress payment of approximately $1.2M.

The earlier decisions

• At first instance, the primary judge (Ball J) found that the SoP Act required a reference date to have arisen under the Contract as a precondition to the making of a valid payment claim (and therefore also a precondition to the making of a valid adjudication application and determination). It was held that there was no reference date to support the purported payment claim of 4 December 2014 on the alternate bases where:

a. if Southern Han had validly exercised its rights under clause 39.4 on 27 October 2014, then Lewence’s right to make a progress claim under clause 37.1 was suspended by clauses 39.4 and 39.6;

b. if Southern Han had not validly exercised its rights, and Lewence had accepted Southern Han’s repudiation and terminated the Contract on 28 October 2014, then Lewence’s only right to make a progress claim was the right which had accrued as at 8 October 2014 and which had already been exercised.

• Upon appeal, the Court of Appeal (Ward and Emmett JJA, and Sackville AJA) unanimously held that the existence of a reference date was not a precondition to the making of a valid payment claim under the SoP Act and further rejected the contention of Southern Han that the purported payment claim was in respect of the reference date of 8 October 2014 such that it was prohibited by section 13(5) of the SoP Act.
• Further, Ward JA (with whom Sackville AJA relevantly agreed) considered the further grounds of Lewence’s appeal which challenged the primary judge’s finding that there was no reference date to support the purported payment claim of 4 December 2014 and held:

a. on the hypothesis that Southern Han had validly exercised its contractual rights to take out of Lewence’s hands the whole of the work remaining to be completed under the Contract, Lewence’s right to make a progress claim under clause 37.1 of the Contract was suspended;

b. on the hypothesis that Southern Han had not validly exercised its contractual rights and that Lewence had accepted Southern Han’s repudiation and terminated the Contract, while the termination of the Contract terminated Lewence’s contractual right to make further progress claims under clause 37, it did not prevent continuing reference to the Contract for the purpose of determining Lewence’s statutory right to make a further progress claim – termination did not alter the fact that clause 37.1 provided for the making of a progress claim on the 8th day of each calendar month for work under the Contract done to the 7th day of that month, and 8 November 2014 was therefore an available reference date.

The High Court’s judgment and reasoning

• Southern Han’s appeal to the High Court was on three grounds:

a. the NSW Court of Appeal was wrong to conclude that the existence of a reference date was not a precondition to the making of a valid payment claim;

b. the majority in the NSW Court of Appeal was wrong to consider that 8 November 2014 was an available reference date on the hypothesis that Lewence had accepted Southern Han’s repudiation and terminated the Contract;

c. the purported payment claim was in respect of the reference date of 8 October 2014 and it was precluded by section 13(5) of the SoP Act as there had already been a payment claim made utilising that reference date.

• The High Court allowed the appeal and held that the existence of a reference date is a precondition to the making of a valid payment claim under section 13(1) having regard to the proper construction of the opening words of section 13(1) in the context of the structure of the Act.
• Section 8(1) of the SoP Act states, in the present tense, that “[o]n and from each reference date under a construction contract” a person who has undertaken to carry out construction work or to supply related goods and services “is entitled to a progress payment“. The entitlement is immediate where the elements exist.
• In contrast, section 9(1) states, in the future tense, that the amount of a progress payment “is to be” ascertained as set out in that section. Section 9 therefore “anticipates the procedure for recovery of a progress payment set out in Pt 3” (paragraph [59]).
• At paragraphs [60]-[62], the High Court stated:

[60] That distinction drawn in Pt 2, between a present entitlement to a progress payment and the future ascertainment of the amount of the progress payment to which that present entitlement relates, explains the two-part description in section 13(1) of a person who is able to make a payment claim so as to trigger the procedure for recovery set out in Pt3. The first part of the description – “[a] person referred to in section 8(1)” – refers to a person whom section 8(1) makes “entitled to a progress payment“. The second part of the description – “who is or who claims to be entitled to a progress payment” – neither contradicts nor qualifies the first part of the description. The second part of the description rather recognises, consistently with section 9, that the amount of the progress payment to which that person is entitled might ultimately be ascertained, according to the procedure set out in Pt3, to be less than the amount that the person claims to be due and might even be ascertained according to that procedure to be nothing.

[61] The construction of section 13(1) consonant with the structure of the Act is accordingly that advanced by Southern Han. The description in section 13(1) of a person referred to in section 8(1) is of a person whom section 8(1) makes entitled to a progress payment. 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 section 8(1) is a precondition to the making of a valid payment claim under section 13(1).

[62] That construction of section 13(1) affords to section 13(1) an operation that is harmonious with section 13(5). Section 13(1) operates to require that each payment claim be supported by a reference date and section 13(5) operates to require that each reference date support no more than one payment claim. Section 13(5) has been held to produce the result that “a document purporting to be a payment claim that is in respect of the same reference date as a previous claim is not a payment claim under the [Act]” (per Dualcorp Pty Ltd v Remo Constructions Pty Ltd (2009) 74 NSWLR 190 at 194 [14]). Section 13(1) correspondingly produces the result that a document purporting to be a payment claim that is not in respect of a reference date is not a payment claim under the Act. The document is ineffective in either case to trigger the procedure established by Pt 3.

• The issue of how any reference date is to be determined was considered by first examining the definition of “progress payment“.
• Under the SoP Act, a progress payment is a payment to which a person is entitled under section 8, and includes (without affecting any such entitlement) the final payment for construction work carried out or for related goods and services supplied, a single or one-off payment, or a payment that is based on an event or date (a “milestone payment”).
• Given the various kinds of progress payment entitlements covered by the definition (instalments, final payment, single or one-off payment, and/or milestones), the SoP Act provides a statutory mechanism for progress payments that may arise both during the currency of an existing construction contract or after the contract has been completed.
• Furthermore, the references in section 8 and elsewhere in the SoP Act to payment “for” work carried out or to be carried out (or goods and services supplied or to be supplied) “under” a construction contract limit the SoP Act to claims for payment arising pursuant to an obligation to pay imposed by the contract. The SoP Act cannot be used for claims for damages for breach of a contract or for an amount which might be claimed as an alternative to damages (a restitutionary quantum meruit for work carried out in the event of the construction contract terminating upon the acceptance of repudiation).
• This limit to the operation of the SoP Act “explains the express temporal limitation in the opening words of section 8(1), by which a statutory entitlement to a progress payment exists only on and from each reference date” (paragraph [69]).
• A reference date is determined either expressly by the contract terms (section 8(2)(a)) or by section 8(2)(b) where a construction contract contains no express provision for determining a date for making a claim.
• Where the construction contract makes express provision in fixing the date for the claiming of progress payments, section 8(2)(b) has no application.
• In this case, the High Court concluded that primary judge was correct in finding that there was no available reference date in either circumstance considered.
• In the first scenario (Southern Han acted validly), clause 39.4 operated expressly to suspend payment until completion of the process for which clause 39.6 provided. This “was a suspension of the totality of the rights conferred and obligations imposed in relation to payment by clause 37. The rights so suspended included Lewence’s right to make a progress claim under clause 37 for work carried out up to the time of the work being taken out of its hands.” (paragraph [78]).
• In the second scenario (Southern Han acted invalidly, and Lewence terminated the Contract by accepting the repudiation of Southern Han), the effect of termination was that both parties were discharged from further performance and their rights were limited to those which had then already accrued, except in so far as the Contract is properly to be interpreted as stipulating to the contrary (McDonald v Dennys Lascelles Ltd (1933) 48 CLR 457 at 476-477; Westralian Farmers Ltd v Commonwealth Agricultural Service Engineers Ltd (1936) 54 CLR 361 at 379).
• In this case, the right to make a progress claim under clause 37.1 of the Contract in relation to work carried out to 27 October 2014 had not accrued as at 28 October 2014 (this would have occurred on 8 November 2014). Further, nothing in the Contract suggested any intention that clause 37 was to survive termination. Therefore, there was no available reference date and no entitlement to make a payment claim after termination.

Conclusion

• The High Court decision resolves a number of matters concerning the entitlement to seek and recover a payment under the SoP Act, particularly where a contract makes express provision for progress payments.
• The law in this area continues to develop. The next question may be how this reasoning affects a construction contract which does not expressly provide for the making of progress claims affect the statutory entitlement – i.e. does section 8(2)(b) survive termination?

Dated: 22 December 2016

Frank Hicks
Greenway Chambers