Castle Constructions Pty Ltd v Ghossayn Group Pty Ltd

1. [1]

   On 16 December 2016, an adjudicator appointed under s 19 of the Building and Construction Industry Security of Payment Act 1999 (NSW) (the “SoP Act”) made a determination pursuant to s 22 of that Act that the first plaintiff, Castle Constructions Pty Ltd, pay the first defendant, Ghossayn Group Pty Ltd, $134,107.22.

2. [2]

   The adjudicator’s determination was in respect of a payment claim made by Ghossayn Group on Castle Constructions (pursuant to s 13 of the SoP Act) on 30 September 2016.

3. [3]

   Castle Constructions and its wholly owned subsidiary, the second plaintiff, Castlenorth Pty Ltd, contend that the adjudicator had no jurisdiction to make the determination on three bases.

4. [4]

   The first is that there was no available “reference date” within the meaning of s 8 of the SoP Act to support the 30 September 2016 payment claim.

5. [5]

   The second is that Ghossayn Group was a “head contractor” in relation to the relevant project within the meaning of that term as defined in s 4 of the SoP Act but did not, as is required by s 13(7), serve with the payment claim a “supporting statement” of the kind referred to in s 13(7) and defined in s 13(9).

6. [6]

   The third is that the adjudicator wrongly concluded that Castle Constructions did not serve its adjudication response within two business days after receiving notice of the adjudicator’s acceptance of the application (as required by s 20(1)(b) of the SoP Act) and, by reason of that error, wrongly concluded that he was precluded (by s 21(2)) from considering Castle Constructions’s adjudication response.

7. [7]

   Mr Christie SC, who appeared with Mr Hume for Ghossayn Group, did not dispute that establishment of any one of these contentions would bespeak jurisdictional error on the part of the adjudicator such as to warrant the determination being quashed.

Decision

1. [8]

   The second (although not the first or third) of the bases advanced to challenge the adjudicator’s jurisdiction is made out. The determination must be quashed.

Background

1. [9]

   Castle Constructions was incorporated in 1979. Mr Victor Lahoud is its sole director. Between 1979 and 2001, Castle Constructions was involved in various construction projects in the property development industry. Thereafter, Castle Constructions ceased involvement in construction and operated as a property developer. It held a building contractor’s licence until 2010. It renewed that licence in January this year after the parties fell out.

2. [10]

   Castlenorth was incorporated in 1997. Mr Lahoud is its sole director. Since its incorporation, Castlenorth has operated as a property investment and development company. Castle Constructions is now the sole shareholder of Castlenorth.

3. [11]

   The relevant project involves land owned by Castlenorth in Sailors Bay Road, Northbridge.

4. [12]

   Castlenorth acquired the site between 2002 and 2004 and, for some years, held the site as an investment and leased the buildings on the site to third parties.

5. [13]

   In mid 2014, Castlenorth engaged an architect, Mr Daniel Younan, to design a project for the site.

6. [14]

   In mid 2015, Castlenorth obtained development consent for the demolition of the existing structures on the site and the erection thereon of a mixed-use building.

7. [15]

   Mr Lahoud said in his affidavit:

8. [16]

   In December 2015, Castlenorth, or Castle Constructions (it is not clear which) entered a contract with Ghossayn Group to demolish the buildings on the site.

9. [17]

   It is common ground that thereafter, on or about 6 May 2016, Castle Constructions and Ghossayn Group entered into a “construction contract” for the purposes of the SoP Act, pursuant to which Ghossayn Group agreed to undertake bulk excavation, piling, anchoring and shoring works at the site.

10. [18]

    That contract was oral and made in a conversation on 6 May 2016 between Mr Lahoud on behalf of Castle Constructions (it is agreed) and Mr George Ghossayn (as managing director) on behalf of Ghossayn Group.

11. [19]

    The agreement was also evidenced by a letter that Mr Elie Badr, an estimator employed by Ghossayn Group, sent Mr Younan on 9 May 2016.

12. [20]

    There is a dispute between Mr Lahoud, Mr Ghossayn (and Mr Badr, who was also present during the 6 May 2016 conversation) as to precisely what was said on 6 May 2016.

13. [21]

    The impression I gained of each of these witnesses was that, for the most part, they were doing their best to give an accurate account of their recollection of what was said on that day; with the unsurprising result that their recollections differed somewhat.

14. [22]

    In those circumstances I consider the most reliable evidence of what was said to be a note that Mr Lahoud made on the evening of 6 May 2016 (at a time when there was no disputation between the parties).

15. [23]

    That note recorded that the parties had agreed on a contract price of $650,000 for the proposed works (which figure was confirmed in Mr Badr’s letter of 9 May 2016) and included the following:

16. [24]

    The note requires a little explanation.

17. [25]

    The reference to “same as demo” was a reference to the earlier agreement between the parties concerning demolition of the structures formerly erected on the Northbridge property.

18. [26]

    The reference to the “conditions of sale” was a reference to a document recording an offer that Castlenorth had received from a third party in March 2016 to purchase the Northbridge site for $13.85 million. That offer was expressed to be subject to “demolition of existing buildings and the completed bulk excavation to bench levels” being effected, and the “basement excavation and retention system...[being] certified prior to settlement by both a Geotechnical engineer and a Certified Practicing [sic] Structural Engineer”.

19. [27]

    Mr Ghossayn, in cross-examination, denied knowing anything of the proposed sale. However, Mr Lahoud’s note makes clear that it must have been mentioned.

20. [28]

    Later, in May 2016, Mr Badr asked Mr Lahoud to sign a copy of the 9 May 2016 letter because, Mr Badr said, Ghossayn Group’s insurer wanted “something signed showing the value of the work involved”.

21. [29]

    Mr Lahoud complied with this request. In cross-examination, he said he did not do so “as a quote” or “to accept the quote”.

22. [30]

    However that may be, Mr Lahoud returned the signed letter under cover of an email with a Castle Constructions electronic signature. That appears to be the first documentary indication of the parties’ intention that Castle Constructions (rather than Castlenorth) was the counterparty to the excavation contract.

23. [31]

    Thereafter, Ghossayn Group made progress claims on Castle Constructions on 30 June 2016 (for $323,319.34), on 4 August 2016 (for $240,733.47) and on 31 August 2016 (for $136,523.99). Each was expressed to be under the SoP Act. Castle Constructions paid each of them.

24. [32]

    Evidently, these were the “3 progress invoices” referred to in Mr Lahoud’s 6 May 2016 note. In any event, there is no dispute before me about them.

25. [33]

    On 30 September 2016, Ghossayn Group made the payment claim with which these proceedings are concerned. It was described as “our Progress Claim #4 & Final claim for the works”.

26. [34]

    It was, as I have mentioned, for $134,107.22.

27. [35]

    The payment claim asserted that 100 per cent of the work called for by the contract had been performed.

28. [36]

    Castle Constructions contended that, as at 30 September 2016, work at the site was not complete. There is no dispute, however, that no engineer or surveyor had “sign[ed] off on completion of work in accordance with approvals” as contemplated in Mr Lahoud’s note of 6 May 2016.

The reference date point

1. [37]

   The matter that divides the parties is whether a “reference date” for the purpose of s 8 of the SoP Act arose on 30 September 2016, such as to justify the payment claim made by Ghossayn Group that day.

2. [38]

   In the List Statement, Castle Constructions and Castlenorth contended (relying on the term of the contract recorded in Mr Lahoud’s note of 6 May 2016 set out at [23] above) that:

3. [39]

   On the other hand, it was contended by Ghossayn Group that the term to which I have referred at [23] was void by reason of s 34 of the SoP Act and that a reference date to support the 30 September 2016 payment claim arose on that day pursuant to s 8(2)(b).

4. [40]

   A payment claim can only be made if there is an available “reference date” for the purpose of s 8 of the SoP Act: Southern Han Breakfast Point Pty Ltd (in liq) v Lewence Construction Pty Ltd [2016] HCA 52 at [61].

5. [41]

   Section 8 of the SoP Act is in the following terms:

6. [42]

   Section 34 of the SoP Act is in the following terms:

7. [43]

   The object of the SoP Act is set out in s 3 as follows:

8. [44]

   The purpose of the SoP Act, as stated by Ball J in Patrick Stevedores Operations No. 2 Pty Ltd v McConnell Dowell Constructors (Aust) Pty Ltd [2014] NSWSC 1413 (at [38]) is:

9. [45]

   The matter for consideration is whether a contractual provision which states that a contractor’s right to payment is contingent upon a third party forming an opinion, or certifying a particular state of affairs, is one which purports to or has the effect of excluding, modifying or restricting the operation of the SoP Act or might reasonably be construed as an attempt to deter a person from taking action under the SoP Act and is therefore void by reason of s 34.

10. [46]

    The structure of s 8 is that:

11. [47]

    The SoP Act thus “provides some freedom to the parties to determine when a reference date arises” (Lean Field Developments Pty Ltd v E & I Global Solutions (Aust) Pty Ltd [2014] QSC 293 at [71] (Applegarth J: referring to the corresponding provision in the Building and Construction Industry Payments Act 2004 (QLD)).

12. [48]

    The parties to a construction contract can fix a date or provide a mechanism for fixing a date other than the date set out in s 8(2)(b) (Hutchinson Pty Ltd v Glavcom Pty Ltd [2016] NSWSC 126 at [26] (Ball J)).

13. [49]

    A reference date may be set by reference to a milestone, for example, practical completion (Energetech Australia Pty Ltd v Sides Engineering Pty Ltd [2005] NSWSC 801 at [19] (McDougall J)) or “completion by the contractor of a defined part of the work” (Lean Field at [67]).

14. [50]

    However, the parties do not have “unconstrained freedom to contract about when a reference date will arise” (Lean Field at [73]).

15. [51]

    A provision which goes beyond fixing a mechanism for determining the date on which the contractor is to be paid, and which:

16. [52]

    In Trysams Pty Ltd v Club Constructions (NSW) Pty Ltd [2008] NSWSC 399, McDougall J held that a provision that a contractor’s entitlement to a retention fund was conditional on the superintendent issuing a final certificate certifying the final balance due and payable to the contractor, and for the payment of the amount to be certified, would restrict, or have the effect of restricting, the operation of the SoP Act for the purpose of s 34.

17. [53]

    In Hutchinson, Ball J held that a provision that a contractor’s entitlement to a progress claim was conditional on it providing a declaration that its employees, subcontractors and suppliers had been paid would also restrict the operation of the Act and be void by reason of s 34.

18. [54]

    In this case, the contract did not purport simply to provide that payment be made on achievement of a milestone (completion of the work).

19. [55]

    Rather, it purported to provide that the payment be made only when an “engineer and surveyor [have signed] off on completion of work in accordance with approvals”.

20. [56]

    That condition did more than simply provide a mechanism whereby the time on which Ghossayn Group would receive a progress payment could be ascertained and does not, in my opinion, facilitate Ghossayn Group’s statutory entitlement to a progress claim.

21. [57]

    Indeed, as Mr Lahoud’s note makes clear, the condition was not intended to promote Ghossayn Group’s entitlement to a progress payment. Rather, it was intended to accommodate the requirements of the prospective purchaser of the site (see [26] above); hence the reference in Mr Lahoud’s note that the “reason” for the provision was the “conditions of sale” that Mr Lahoud showed Mr Ghossayn on 6 May 2016.

22. [58]

    In those circumstances, my conclusion is that the condition in the 6 May 2016 contract that Ghossayn Group only be entitled to a final payment when the relevant engineers and surveyors had signed off on completion of the work did purport to exclude, modify or restrict the operation of the Act, and might reasonably be construed as an attempt to deter Ghossayn Group from taking action under the SoP Act. It is therefore, by reason of s 34 of the SoP Act, void.

23. [59]

    The result is that the reference date is to be determined by reference to s 8(2)(b) of the SoP Act. There is no dispute between the parties that, if that is the correct conclusion, the relevant reference date was 30 September 2016.

24. [60]

    For those reasons, my conclusion is that Castle Constructions and Castlenorth have not established the first basis to impugn the adjudicator’s determination.

The “head contractor” issue

1. [61]

   Castle Constructions and Castlenorth contend that Ghossayn Group was a “head contractor” for the purposes of the SoP Act and was thus obliged not to serve a payment claim unless it was “accompanied” by a “supporting statement” of the kind referred to in s 13(9) of the SoP Act.

2. [62]

   Section 13(7) of the SoP Act provides:

3. [63]

   Section 13(9) of the SoP Act provides:

4. [64]

   Section 4 of the SoP Act defines “head contractor” as follows:

5. [65]

   There is no dispute that Ghossayn Group engaged subcontractors for this project and thus no dispute that the second limb of this definition was engaged (as it was a party “for whom” construction work was to be carried out as part of the work to be carried out under the “main contract”; that is, the contract between Castle Constructions and Ghossayn Group).

6. [66]

   The matter for consideration is whether Castle Constructions and Castlenorth have demonstrated that the first limb of the definition of “head contractor” was enlivened: that is, whether Ghossayn Group was carrying out construction work “for the principal” under the “main contract”.

7. [67]

   The critical question is whether the counterparty to the contract, Castle Constructions, was a “principal”.

8. [68]

   The term “principal” is defined in s 4 as follows:

9. [69]

   There is no dispute that the first limb of this definition is engaged in the circumstances of this case, in that Castle Constructions was a person for whom construction work was to be carried out under a construction contract.

10. [70]

    What divided the parties was whether the second limb of the definition of “principal” was engaged; namely, that Castle Constructions was not itself engaged under a construction contract (by the owner of the land, Castlenorth) to do that work.

11. [71]

    It was for Castle Constructions and Castlenorth, as the parties contending that Ghossayn Group was a “head contractor”, to establish this negative proposition.

12. [72]

    As Mr Christie pointed out, it is an offence for a party that is a head contractor not to comply with s 13(7) of the SoP Act. Thus, proof that there was a construction contract between Castlenorth and Castle Constructions has the consequence of proving that Ghossayn Group has committed an offence. It is thus a matter to be proved, on the balance of probabilities, taking account of the gravity of the matter alleged: see s 140(2)(c) of the Evidence Act 1995 (NSW) and Briginshaw v Briginshaw (1938) 60 CLR 336.

13. [73]

    Mr Lahoud did not give evidence that was, in terms, directed to that question. He did not depose that there was no construction contract between Castlenorth and Castle Constructions.

14. [74]

    As the sole director of both Castlenorth and Castle Constructions, it might reasonably be supposed that Mr Lahoud would know the true position.

15. [75]

    In that regard, Mr Christie relied upon the principle approved in Commercial Union Assurance Company of Australia Ltd v Ferrcom Pty Ltd (1991) 22 NSWLR 389 at 419 that:

16. [76]

    However, although Mr Lahoud did not, in terms, depose that there was no construction contract between Castlenorth and Castle Constructions, the evidence overall makes clear that there was not and, accordingly, I am not persuaded that I should draw a Ferrcom inference in this case.

17. [77]

    First, Mr Lahoud said:

18. [78]

    Second, as I have mentioned, Ghossayn Group addressed each of the first, second and third payment claims to Castle Constructions.

19. [79]

    Castle Constructions paid each of those claims.

20. [80]

    Those payments were reflected in the accounts of Castlenorth and Castle Constructions as a loan from Castle Constructions to Castlenorth.

21. [81]

    I infer, from Mr Lahoud’s evidence at [77], that the reason Castle Constructions made the payments to Ghossayn Group, and that the payments were treated as loans from Castle Constructions to Castlenorth, was because Castle Constructions had, and Castlenorth did not have, cash resources available to make the payments.

22. [82]

    However that may be, the fact that, in effect, Castle Constructions lent Castlenorth funds to enable the works (on property owned by Castlenorth) to be carried out suggests, strongly in my opinion, that there was no construction contract between the parties.

23. [83]

    If there were such a construction contract, one would not expect that the contractor (which, on this hypothesis, would be Castle Constructions) would lend to its principal (on this hypothesis, Castlenorth) the funds needed to meet payment claims made by the contractor’s subcontractor (on this hypothesis, Ghossayn Group). Instead, one would expect that the contractor would charge the principal for its services and include in those charges an amount reflecting the amounts paid by it to its subcontractor. If there were a construction contract between Castlenorth and Castle Constructions, one would expect the transaction to be reflected in the books of Castlenorth as an expense of the project and in the books of Castle Constructions as income from the project; rather than as a loan from the contractor to the principal.

24. [84]

    The manner in which Castlenorth and Castle Constructions in fact accounted for the transactions suggests no more than, as a matter of convenience, and probably because of the availability of ready funds, Castle Constructions paid Ghossayn Group’s payment claims on behalf of Castlenorth, and claimed reimbursement through its loan account with Castlenorth.

25. [85]

    The probability that this was the arrangement is reflected in evidence that Mr Lahoud gave in cross-examination:

26. [86]

    Further, it appears improbable that Castlenorth would have entered a construction contract with Castle Constructions; there was no explanation offered as to why Castlenorth would take that step.

27. [87]

    Finally, I have mentioned that Castle Constructions held a licence as a building contractor until 2010. It held no such licence in 2016. Its licence expired in 2010, some years after it ceased construction work. It only renewed its licence in January this year, evidently so that it could itself engage in construction on the site.

28. [88]

    Mr Lahoud has been in the building and construction industry for almost 40 years. He struck me as a careful and conscientious businessman who was clearly conscious of his obligations as a director of Castle Constructions and Castlenorth, including his obligation to ensure that either company be licensed as a building contractor if it proposed to engage in construction work; hence the renewal of Castle Constructions’s building licence once the relationship between Castle Constructions and Ghossayn Group fell away.

29. [89]

    It seems most unlikely that Mr Lahoud would have permitted Castle Constructions to enter into a construction contract with Castlenorth without having the requisite licence.

30. [90]

    In those circumstances, I am comfortably satisfied that the evidence that has been adduced shows that there was no construction contract made between Castle Constructions and Castlenorth.

31. [91]

    It follows that the payment claim was not validly served for the purposes of the SoP Act, and that no statutory rights or entitlements arose by reference to that document: Kitchen Xchange Pty Ltd v Formacon Building Services Pty Ltd [2014] NSWSC 1602 (McDougall J) at [46]; Kyle Bay Removals Pty Ltd v Dynabuild Project Services Pty Ltd [2016] NSWSC 334 (Meagher JA) at [37]; Mt Lewis Estate Pty Ltd v Metricon Homes Pty Ltd [2017] NSWSC 1121 (Hammerschlag J) at [28].

32. [92]

    For that reason alone, the adjudicator had no jurisdiction to make the determination. It must be quashed.

The “service” issue

1. [93]

   In light of the conclusion to which I have come concerning the “head contractor” issue, it is not necessary for me to deal with this final issue. Nonetheless, in deference to the detailed submissions made by the parties on the subject, I will deal do so.

2. [94]

   By reason of s 20 of the SoP Act, Castle Constructions was obliged to lodge with the adjudicator its adjudication response by the later of five business days after receiving a copy of Ghossayn Group’s adjudication application or two business days after receiving notice of the adjudicator’s acceptance of his appointment.

3. [95]

   It is common ground that it is the latter of these two time limits that is relevant.

4. [96]

   Castle Constructions lodged its adjudication response on Monday 12 December 2016.

5. [97]

   The matter for consideration is whether Castle Constructions received notice of the adjudicator’s acceptance on:

   1. (1)

      Wednesday 7 December 2016; in which event, it is common ground that it lodged its adjudication response out of time and that the adjudicator was bound not to take it into consideration: see 22(2)(d) of the SoP Act; or

   2. (2)

      Thursday 8 December 2016; in which event, it is common ground that its adjudication response was served in time and ought to have been taken into consideration by the adjudicator.

6. [98]

   The point arises this way.

7. [99]

   The relevant Authorised Nominating Authority under the SoP Act purported to fax notification of the adjudicator’s acceptance to Castle Constructions on 2 December 2016. Transmission of that fax failed.

8. [100]

   The Authorised Nominating Authority then sent notification of the adjudicator’s acceptance by registered post addressed to Castle Constructions at its ordinary place of business (suite 35 at the Sailors Bay Road address in Northbridge).

9. [101]

   There are 39 individual suites at those premises. The letterboxes for the building comprise 39 individual letterboxes, in 5 rows, located just inside the commercial floor on the ground floor of the building.

10. [102]

    One of those suites, suite 38, is occupied by “Anytime Fitness Northbridge”.

11. [103]

    According to the record of Australia Post, the letter enclosing the notification of the adjudicator’s acceptance was delivered to “Northbridge” at 3.20pm on Monday 5 December 2016.

12. [104]

    However, as a result of an error on the part of Australia Post, it was not deposited into Castle Constructions’s letterbox (the box for suite 35) but was, rather, deposited into Anytime Fitness’s letterbox (the box for suite 38).

13. [105]

    It was not discovered there until around 7.30pm on Wednesday 7 December 2016, when an employee of Anytime Fitness, Mr Daniel Carr, checked the mail in the letterbox for suite 38 (for the first time since the morning of Monday 5 December 2016; and thus before Australia Post had delivered the letter).

14. [106]

    In an affidavit, Mr Carr gave this evidence:

15. [107]

    Although Mr Carr was challenged in cross-examination as to the reliability of his recollection of these matters, I am satisfied that his recollection is accurate. He was first asked about whether or not he had seen the relevant correspondence within a few weeks of 7 December 2016 and swore his affidavit on 7 March 2017. While Mr Carr said that his recollection at the date of the hearing was not as clear as it was when he swore his affidavit, he was adamant that his recollection, at the time he swore the affidavit, was as he set out in the affidavit. I accept his evidence.

16. [108]

    Section 31 of the SoP provides:

17. [109]

    Notice of the adjudicator’s acceptance was, in accordance with s 31(1)(c), sent by post addressed to Castle Constructions at its ordinary place of business, namely suite 35 at the Sailors Bay Road address.

18. [110]

    Accordingly, by reason of s 31(2) of the SoP Act, service of that notice is taken to have been effected when the notice was “received at that place”.

19. [111]

    There is no requirement in s 31(2) that the notice be received at that place during normal office hours. Section 31(1)(b) provides that if services is effected by lodging the notice at the person’s ordinary place of business (as opposed to sending it by post to that place) it must be lodged “during normal office hours”. The absence of a corresponding reference in s 31(1)(c) or s 31(2) suggests that the legislature did not intend that receipt of a document sent by post necessarily be during normal office hours.

20. [112]

    In Falgat Constructions Pty Ltd v Equity Australia Corporation Pty Ltd [2006] NSWCA 259, Hodgson JA said at [62]:

21. [113]

    Thus, for example, had Australia Post delivered the notice to Castle Constructions by depositing it into the suite 35 letterbox on 7 December 2016 (and, in my opinion, no matter at what time) it would have been then “received” by Castle Constructions.

22. [114]

    The question is whether it makes a difference that the notice was deposited into Castle Constructions letterbox by Mr Carr, rather than by Australia Post.

23. [115]

    Mr Hicks, who appeared with Ms Carr for Castlenorth and Castle Constructions, submitted that as “the postal system has broken down” and “the document was not delivered by Australia Post”, service was no longer capable of being effected pursuant to s 31(1)(c) but, rather, could only be effected by one of the other means referred to s 31(1), particularly lodgement during normal office hours in accordance with s 31(1)(b).

24. [116]

    I do not accept that submission.

25. [117]

    Section 31(1) is facultative and provides a means by which “a person may be served”.

26. [118]

    If the method adopted is to send the relevant notice by post under s 31(1)(c), then such service is “taken to have been effected” when the notice is received at “that place” (that is the “ordinary place of business” to which the notice was sent by post).

27. [119]

    I cannot see that it makes any difference that, ultimately, the receipt “at that place” was by reason of the intervention of a “good Samaritan” (as Mr Carr was described in submissions) rather than by agency of Australia Post itself.

28. [120]

    No doubt that reading of s 31 could lead to results that might be seen to be capricious and arbitrary. But that appears to me to be the result of the plain language used in the section.

29. [121]

    For those reasons, my conclusion is that Castle Constructions received the adjudicator’s acceptance on 7 December 2016 and that service of its adjudication response on 12 December 2016 was out of time. The adjudicator was thus bound not to take it into account.

30. [122]

    Thus, this final challenge to the determination fails.

Conclusion

1. [123]

   For those reasons, the adjudicator’s determination must be quashed.

2. [124]

   I will hear submissions as to costs and as to what orders should be made concerning the money paid into Court pursuant to the order made on 3 February 2017.