Grocon (Belgrave St) Developer Pty Ltd v Construction Profile Pty Ltd

By a summons dated 6 April 2020, the plaintiff, Grocon (Belgrave St) Developer Pty Ltd (Grocon), seeks a declaration that a payment claim dated 17 March 2020 and served by the defendant, Construction Profile Pty Ltd (CP), purportedly under the Building and Construction Industry Security of Payment Act 1999 (NSW) (the Act) is void and of no effect for the purposes of the Act. Grocon also seeks an injunction restraining CP from seeking a determination under the Act in respect of the claim.

The claim is made in relation to a construction contract entered into on 24 May 2017 between Grocon and CP by which CP agreed to construct for Grocon the Telstra Exchange residential development in Manly for the sum of $20,836,850.00 (excluding GST) (the Contract).

Under the terms of the Contract, a reference date for the purposes of the Act fell on the last business day of each month. On 10 January 2020, CP served Payment Claim No 032 on Grocon for $3,220,377.56 (including GST) in respect of the reference date that arose on 24 December 2019.

On 23 January 2020, Grocon served a Payment Schedule stating the amount due to CP was -$1,360,307.40 and that therefore the scheduled amount was nil. The amount of -$1,360,307.40 was calculated by allowing $295,332.60 (including GST) in respect of the work the subject of the payment claim and deducting liquidated damages said to total $1,655,640.00 in accordance with cls 35.7 and 42.8 of the General Conditions of the Contract. Clause 35.7 provides for the payment of liquidated damages for delay in reaching practical completion under the Contract. Clause 42.8 permits Grocon to setoff amounts due to it under the Contract against amounts payable to CP.

On the same day (that is, 23 January 2020) Grocon purported to serve a tax invoice in the amount of $1,665,640.00 in respect of its claim for liquidated damages.

On 12 February 2020, CP served a notice of dispute under cl 47.1 of the General Conditions in respect of the claim for liquidated damages.

On 21 February 2020, Grocon re-issued its tax invoice claiming liquidated damages and on 24 February CP disputed that invoice.

The Adjudicator handed down her determination on 3 March 2020. She determined that the amount payable in respect of Payment Claim No 032 was $1,241,238.07 (including GST). In reaching that conclusion, the Adjudicator determined that CP was entitled to extensions of time which extended the date for practical completion under the Contract from 15 May 2019 to on or about 27 February 2020. The date of practical completion was 21 January 2020, with the result that the Adjudicator determined that the value of Grocon’s claim for liquidated damages for delay was nil.

Under the terms of the Contract, CP agreed to provide two bank guarantees each for the sum of $498,911.10 as security for the performance of its obligations under the Contract. Clause 5.6(d) of the General Conditions of the Contract relevantly provides that Grocon was entitled to call on that security if “the Contractor [that is, CP] is otherwise indebted to the Principal [that is Grocon] and the Principal remains unpaid after 5 Business Days has elapsed since the Principal issued an invoice to the Contractor seeking payment of the debt”. On or about 6 March 2020, Grocon, relying on the invoice it had sent CP on 27 February 2020 for liquidated damages, called on the two bank guarantees.

On 11 March 2020, Grocon paid the adjudicated amount.

CP has not challenged Grocon’s right to call on the bank guarantees. However, on 17 March 2020, it served Payment Claim No 033 claiming an amount of $1,054,386.38. That payment claim set out the total amount claimed under the Contract for the work done together with the total amount paid, including the amount paid in respect of Payment Claim No 032. It also included two negative amounts each of $498,911.10 (including GST) which were described as amounts “to cover LDs [liquidated damages] under the contract.”

Section 8(1) of the Act as it applies to the Contract provided:

Section 13 of the Act relevantly provided:

The Act provides for the adjudication of a payment claim served in accordance with s 13. It is apparent from the terms of ss 8 and 13 as they apply to the Contract that any such claim had to be a claim in respect of “construction work” or “related goods and services” performed or provided under a “construction contract”.

“Construction work” is relevantly defined in s 5 in the following terms:

“Related goods and services” is relevantly defined in s 6 in the following terms:

Grocon’s claim is simple. It says that, insofar as Payment Claim No 033 claims amounts paid under the guarantees, the claim is not one for construction work or related goods or services undertaken to be carried out or supplied under a construction contract. Consequently, it is not one that can be the subject of an adjudication under the Act.

CP advances three answers to that claim. First, it says that the question whether the claim is a claim for construction work or related goods or services is a question that can be determined by the adjudicator. Second, it says that, in any event, Payment Claim No 33 is a claim for construction work. That is because the payment claim includes the value of the whole of the work undertaken less the amount it has been paid. Third, CP submits that, cl 42.8 of the General Conditions of the Contract is rendered void by s 34 of the Act. That section provides:

I do not accept CP’s first point. As the High Court pointed out in Southern Han Breakfast Point Pty Ltd (In Liquidation) v Lewence Construction Pty Ltd (2016) 260 CLR 340; [2016] HCA 52 the jurisdiction of the adjudicator is determined by the Act; and it is ultimately a question for the Court, not the adjudicator, to determine whether the adjudicator has jurisdiction to determine a particular claim, although, of course, it may be necessary for an adjudicator to reach a decision on that question as part of the process of determining whether he or she should entertain an application under the Act in respect of the claim.

Moreover, as the High Court pointed out in Southern Han at [66], the Act is not concerned with any payment under a construction contract. It is only concerned to secure payment for work done under the contract or for the supply of related goods and services:

Normally, the question whether a particular claim falls within the scope of the Act is determined by the Court after an adjudicator has determined an application in respect of that claim. But there is no reason why in an appropriate case the question of jurisdiction should not be determined in advance of an application under the Act. That course may be appropriate where, for example, it is contended that the whole or a substantial part of the claim is said to fall outside the Act and a determination of the issue may obviate the need for a determination in accordance with the Act.

CP points to a number of cases where the Court has been reluctant to grant an injunction to restrain a purported payment claim from being referred to adjudication, including Australian Remediation Services Pty Ltd v Earth Tech Engineering Pty Ltd [2005] NSWSC 362 and Boutique Developments Ltd v Construction & Contract Services Pty Ltd & Anor [2007] NSWSC 1042. But those cases must be treated with some caution and do not establish any general principle. In Boutique Developments, Gzell J based his decision on the view that “it is for the adjudicator to determine the question whether or not he has jurisdiction” (at [14]). But that is no longer the law. In Australian Remediation, McDougall J was not willing to grant an injunction. But in that case it was “plain that many of [the] items [covered by the claim] are either construction work or related goods and services” (at [8]).

Nor do I accept CP’s second point. I do not see how it could be said that the “claim” for the two amounts of $498,911.10 could be described as a claim for construction work or for related goods and services. Rather, in substance and in form it is a claim for a credit of those two amounts against the amounts that Grocon claimed under the bank guarantees for liquidated damages. The fact that the payment claim is for the whole of the work done less the amount paid does not alter the character of the two amounts in question. Even if the basis of the claim for a credit in respect of those two amounts is contractual, it is plainly not a claim for construction work performed by CP or for related goods and services. There may be a question whether the other amounts claimed in Payment Claim No 033 have that character. But those amounts are small compared to the amounts claimed in respect of the guarantees. They do not provide a sufficient basis for refusing the relief sought by Grocon if it otherwise should be granted.

In my opinion, the third issue raised by CP is more difficult.

One difficulty with CP’s submissions is that its attack is focussed on cl 42.8. But Grocon’s claim does not depend on the right of setoff. CP’s real complaint is that Grocon has called on the guarantees notwithstanding that the adjudicator determined that it had no claim for liquidated damages that it could set off against Payment Claim No 032.

It might well be said in that case that the effect of the provisions of the Contract permitting Grocon to call on the guarantees notwithstanding the determination of the adjudicator was to modify or restrict the operation of the Act because the effect of those provisions was to reduce the amount that CP was entitled to recover (on an interim basis) as a consequence of the adjudicator’s determination.

Grocon takes issue with the conclusion of the previous paragraph relying principally on the decision of White J in Patterson Building Group Pty Ltd v Holroyd City Council [2013] NSWSC 1484. The facts of that case were similar to those of the present one. But in that case the question was whether the Court should grant an injunction restraining the principal under a building contract (the Council) from calling on guarantees given by the contractor as security for performance by the contractor of its obligations under the construction contract. Each guarantee was for the sum of $232,091.70. The superintendent appointed under the contract had written to the contractor stating that the superintendent had made an assessment in accordance with the terms of the relevant construction contract that the contractor owed the Council $138,143.82 (excluding GST) and had formed the view that a further amount of $253,728.52 was also due from the contractor. Those amounts related to claims by the Council for liquidated damages for delay, negative variations and amounts paid in respect of claimed variations to which it was said the contractor was not entitled. The claim for liquidated damages and the variations had previously been the subject of an adjudication determination under the Act in connection with a payment claim lodged by the contractor. The adjudicator had determined that the contractor was entitled to extensions of time, with the result that the Council was not entitled to set off its claim for liquidated damages against the payment claim. The adjudicator had also determined that the contractor was entitled to the claimed variations.

In a separate notice dated 16 August 2013, the superintendent also claimed that the contractor was liable for a number of defects and provided an estimate of the costs of rectification of $153,458.

Each of the superintendent’s claims was disputed and the contractor had sought an undertaking that the Council would not call on the guarantees. In response, the Council said that it had no present intention to call on the guarantees, but it refused to give the undertaking the contractor sought.

White J refused to grant the injunction. He held that there was a seriously arguable case that the contractor had not rectified a substantial number “of the long list of defects attached to the superintendent’s letter of 16 August 2013”: at [49]. For that reason alone it could not be said that sometime in the future the Council would not be entitled to have recourse to the guarantees; and for that reason the injunction should be refused: at [55].

His Honour went on to consider the position if his conclusion in relation to the defects was wrong. The question in that case was whether the Council could have recourse to the securities in respect of amounts that had been the subject of the adjudicator’s determination or whether any contractual entitlement to call on the guarantees in those circumstances was rendered void by s 34 of the Act. White J held that the Council could call on the guarantees notwithstanding s 34. In reaching that conclusion he said this:

White J’s comments are clearly obiter; and there is a question whether they should be followed for the reasons I have given. As to the point in para [73], it is not clear why an adjudicator could not make an adjustment in his or her determination to take account of amounts recovered by the principal as a consequence of an exercise of a right to call on a guarantee. Earlier, commenting on the obligation under the contract to provide security, White J said (at [39]):

It is not, however, necessary to determine finally this issue in the present context. CP does not challenge the validity of the guarantees or Grocon’s right to call on them. The question before the Court is a different one. It is whether Payment Claim No 033 is a payment claim within the meaning of the Act. It is difficult to see how the validity of Grocon’s right to call on the guarantees in the events that have happened has any bearing on that question.

It follows that Grocon is entitled to the relief that it seeks. There is no reason why CP should not pay its costs. Accordingly, the orders of the Court are: