In the matter of Douglas Aerospace Pty Ltd

1. [1]

   By originating process filed on 18 July 2014, the plaintiff Douglas Aerospace Pty Ltd (“Douglas”) applies pursuant to (Cth) Corporations Act 2001, s 459G, s 459H and s 459J for an order setting aside a creditor’s statutory demand served on it by the defendant Indistri Engineering Albury Pty Ltd (“IEA”) claiming a debt of $229,320.23, described in the schedule of the demand as:

2. [2]

   The attached “Notice of Orders Made” was as follows:

Background

1. [3]

   Douglas agreed with Wagga Wagga Council to build two aircraft hangars at Wagga Wagga airport. Douglas contracted with Adrian Robinson t/as Indistri Engineering (“the Firm”) to build the first hangar (“the Stage 1 Contract”), and with Mr Robinson’s company IEA to build the second hangar (“the Stage 2 Contract”). Substantial progress was made in the construction of the first hangar, although Douglas and the Firm are in dispute over the non-completion of the hangar and defects in its construction. The second hangar has not been built; only its footings and basic plumbing have been completed.

2. [4]

   On 10 January 2014, Douglas sent Mr Robinson a letter requiring completion of all works by the end of January 2014, foreshadowing the invocation of clause 18 (penalties for unjustified delays) and clause 19 (dispute resolution) of the contract, and asserting “Your performance under this contract has resulted in considerable delays, which has been depremental [sic] to our business”.

3. [5]

   On 21 January 2014, IEA sent Douglas a payment claim under (NSW) Building and Construction Industry Security of Payment Act 1999 (“BACISOPA”) in respect of the Stage 2 contract, claiming a total of $224,445.87, comprising the balance of invoice 247 (said to be $83,160 of the invoice total of $277,200 after giving credit for a part payment of $194,040), invoice 258 ($101,200) and invoice 285 ($40,085.87). Douglas responded in a letter dated 24 January raising a number of complaints about the works – including about the position of the footings, the integrity of the structure, damage to the bracing, and incorrect assembly of the frame, some at least of which appear to relate to the Stage 1 works – and requested a meeting to discuss the issues, but served no payment schedule.

4. [6]

   On 13 February 2014, IEA gave notice in accordance with BACISOPA, s 17(2), of its intention to apply for an adjudication in respect of the Stage 2 payment claim. The Firm also made a payment claim in respect of the Stage 1 contract, claiming a balance of $956,123.32 said to be due in respect of invoices 235, 236, 238, 240, 242, 243, 244, 245, 248 and 253 (which together totalled $2,725,994.35), after giving credit for payments, which were specified, totalling $1,769,87.03. No payment schedule having been provided in respect of the stage 1 payment claim, the Firm on 10 March 2014 gave notice under s 17(2) of intention to proceed to adjudication in respect of that claim. In fact, there has not yet been any adjudication application in respect of the stage 1 claim, but it is relevant for present purposes because it gives credit for certain payments and thus appropriates them to the Stage 1 contract.

5. [7]

   IEA made and served an adjudication application in respect of the Stage 2 payment claim on 5 March 2014. On 13 March, Douglas repeated its complaints about the position of the footings, the integrity of the structure, damage to the bracing, and incorrect assembly of the frame, and requested a meeting, but not having served a payment schedule, it was not entitled and did not endeavour to lodge any adjudication response. On 14 March, Douglas sent a letter to the lawyers acting for the Firm and IEA, requesting mediation and referring to the “Dispute Resolution” clause of the contract; it is unclear whether this was intended to relate to the Stage 1 contract, the Stage 2 contract or both, but it referred to the letter sent to Mr Robinson on 10 January.

6. [8]

   On 14 March 2014, the adjudicator determined the stage 2 claim in the amount claimed, plus interest at the rate prescribed by (NSW) Civil Procedure Act 2005, s 101, and 100% of the adjudication fees. Subsequently, an adjudication certificate was issued and filed in the District Court at Albury, whereupon it took effect as a judgment against Douglas for $229,320.23. On 27 June 2014, IEA served the creditor’s statutory demand, the subject of the present application, for the judgment debt on Douglas (having withdrawn two earlier statutory demands on account of issues raised by Douglas).

7. [9]

   Douglas instituted the present proceedings, within time, on 18 July 2014. In addition, Douglas applied to quash the adjudicator’s determination. That application was heard by McDougall J on 20 October 2014 [Douglas Aerospace v Indistri Engineering Albury [2014] NSWSC 1445]. One of the issues before his Honour pertained to the identity of the parties to the stage 2 contract: Douglas contended that the Firm and not IEA was the contracting party. McDougall J rejected this contention, concluding that the contracting parties to the Stage 2 Contract were Douglas and IEA. Douglas also contended that it was denied natural justice because it was not provided with notice of the adjudication process; however, McDougall J found that Douglas had notice of the payment claim, of IEA’s intention to apply for adjudication, and of the adjudication application.

8. [10]

   Douglas also made an application in the District Court to set aside the judgment. That application was dismissed on 3 February 2015.

9. [11]

   On 2 February 2015 – the eve of the hearing before me – Douglas filed a statement of claim in the District Court, asserting claims against both IEA and the Firm. In respect of the stage 2 contract, the pleading alleged (1) that Douglas had paid $390,152 in respect of invoices for stage 2 that totalled $335,325; (2) that in breach of the stage 2 contract IEA had not obtained a construction certificate for the stage 2 works, whereby all the stage 2 works were carried out “illegally”; (3) that in breach of the stage 2 contract, the stage 2 works were not completed by the completion date or at all, and were not carried out in a proper and workmanlike manner and were defective and incomplete, as particularised; and claimed $205,000, being the cost of rectification, plus restitution of overpayments, and damages. As will become apparent, that statement of claim has, since the hearing before me, been amended by Douglas.

Application

1. [12]

   In these proceedings, Douglas applies to set aside the demand on the grounds that there is a genuine dispute as to the existence and/or amount of the debt claimed, and/or that it has an offsetting claim, and/or that there is some other reason why the demand should be set aside. Whether and in what circumstances there can be, for the purposes of s 459H, a genuine dispute or offsetting claim in respect of a judgment debt founded on a filed adjudication certificate raises questions which will require further consideration, but it is convenient, before turning to them, to consider to what extent the evidence reveals any dispute or offsetting claim.

2. [13]

   The s 459G affidavit of Mr Clarke of 18 July 2014 raises a number of complaints concerning the Stage 1 works, which are not relevant to liability under the Stage 2 contract. Although there was in the plaintiff’s case a hint that the Stage 1 works and defects in them may be relevant, this cannot be so. Although there was undoubtedly some ambiguity about the contracting party for Stage 2 (there being no doubt that it was Mr Robinson personally for Stage 1), the judgment of McDougall J concludes that it was IEA for Stage 2. Thus any defects claim in respect of Stage 1 is against Mr Robinson, whereas any claim in respect of Stage 2 is against IEA. I do not see how liability for defects in respect of Stage 1 can be visited on IEA, or found an offsetting claim to any debt due to IEA.

3. [14]

   In respect of the Stage 2 contract, the s 459G affidavit supporting the application contends, in essence, (1) that invoice 247 was paid in full, (2) that invoice 258 was paid in full, and (3) that the Stage 2 works had been performed without a construction certificate and were defective and incomplete and that Douglas had incurred and would incur cost and expense to rectify and complete them.

4. [15]

   Invoice 247 was first issued on 27 February 2013 for a total of $277,200, but as issued showed an amount received of $83,160 and an outstanding balance of $194,040. It is not in dispute that the sum of $194,040 was paid, by Wagga Council, on 6 April 2013.

5. [16]

   In his first (s 459G) affidavit, Douglas’ director Mr Clarke said: “On about 6 April 2013, the Plaintiff paid the whole of Invoice 247 in full”. This was apparently a reference to the payment by Wagga Council of $194,040. But in the proceedings before McDougall J, Mr Robinson had explained, in an affidavit sworn on 12 September 2014:

6. [17]

   To this Mr Clarke had replied, in an affidavit sworn on 29 September 2014 in the proceedings before McDougall J:

7. [18]

   This appears to be a reference to the form of the invoice, suggesting that $83,160 had already been paid on account of the invoice when it was issued. However, there is no other evidence of any such payment, in particular in Mr Robinson’s and IEA banking records. In his second affidavit in these proceedings, Mr Clarke said:

8. [19]

   Insofar as that statement invokes the invoice as evidence of payment, the problem is that all the payments referred to in the table were made after the issue of the invoice on 27 February 2013, so the credit sum in the invoice could not have been a reference to them. Mr Robinson explained that invoices were formatted according to a 70:30 split between the Council and Douglas because of financing requirements, and annexed copies of other invoices reflecting such a split. This explanation was not contradicted or challenged, and ultimately Douglas did not contend that the reference to payment on the invoice in fact reflected a payment on account of the invoice.

9. [20]

   Thus the suggestion that the invoice had been paid in full on 6 April 2013 was spurious. Instead, in the table set out in his second affidavit, Mr Clarke set out what he described as a reconstruction, from his documents, of the payments he claimed to have made on account of invoice 247, identifying the following, totalling $291,676:

   1. (1)

      the transfer to Adrian Robinson from Wagga Wagga City Council of $194,040 on 6 April 2013;

   2. (2)

      a transfer from Douglas to AJ Robinson’s CBA account of $7,500 on 16 May 2013;

   3. (3)

      a transfer from Douglas to AJ Robinson’s Bendigo Bank account of $80,000 on 30 May 2013;

   4. (4)

      a transfer from Douglas to AJ Robinson’s Bendigo Bank account of $6,000 on 5 June 2013;

   5. (5)

      a transfer from Douglas to Litrox Lighting Pty Ltd of $4,136 on 30 June 2013.

10. [21]

    It is not in dispute that those payments were made, but Mr Robinson says that, other than the $194,040 for which credit was given in the adjudication, they were attributable to the Stage 1 contract, not the Stage 2 contract. Mr Robinson annexed a table of payments received, in which he attributes all of the above payments (other than the $194,040) to Stage 1. However, this table appears to have been prepared in contemplation of and for the purposes of the litigation, and amounts to no more than Mr Robinson’s assertion, in the context of the dispute, that the payments related to stage 1 and not stage 2.

11. [22]

    As to the payment of $7,500 on 16 May 2013, Mr Clarke said that Mr Robinson asked for this amount to be paid to the plumber. However, in a supplementary submission, provided after the hearing, the plaintiff conceded that this payment related, at least substantially, to stage 1 and not stage 2.

12. [23]

    As to the payment of $4,136 to Litrox on 30 June 2013, Mr Clarke said that Mr Robinson had said: ‘I have to pay the light guys’, and that he had made this transfer for that purpose and believed that it was for electrical conduits and other electricals for Stage 2. However, it appears highly probable – from the circumstance that very little work had been done on stage 2, and particularly from an email apparently sent by Litrox to Mr Clarke on 8 January 2013 – that the work to which this payment related was in connection with Stage 1.

13. [24]

    There is no direct evidence as to the circumstances in which the payments of $80,000 on 30 May and $6,000 on 5 June were made. It is at this point that the stage 1 claim – and in particular, the list of payments for which it gives credit – is of significance. Notably, the payments of $80,000 on 30 May and $6,000 on 5 June do not appear on that list. Thus they were not appropriated to the Stage 1 contract when the payment claim in respect of it was made on 13 February 2014. In my view, coupled with Mr Clarke’s evidence, that founds a plausible contention that those payments were referable to Stage 2.

14. [25]

    Invoice 258 was first issued on 30 July 2013 for $101,200.

15. [26]

    In his s 459G affidavit, Mr Clarke said: “In November 2013, the Plaintiff paid the whole of Invoice No 258”. In his 29 September 2014 affidavit in the proceedings before McDougall J, Mr Clarke said:

16. [27]

    Annexure A listed the following payments, totalling $113,270.87:

17. [28]

    However, in his second affidavit in these proceedings, Mr Clarke gave a completely different account of the manner in which invoice 258 was allegedly paid – again, said to be a reconstruction from his records - identifying the following payments totalling $98,476:

    1. (1)

       credit of $14,476 from invoice 247;

    2. (2)

       a transfer from Douglas to Mr Robinson’s Bendigo Bank account of $40,000 on 8 August 2013;

    3. (3)

       a transfer from Douglas directly to ILB for steel of $30,000 on 14 August 2013;

    4. (4)

       a cash payment by Douglas to A.J. Robinson of $8,000 on 19 August 2013;

    5. (5)

       a cash payment by Douglas to A.J. Robinson of $6,000 on 2 August 2013.

18. [29]

    Mr Robinson explained that on 8 March 2013, Mr Clarke had asked for an advance of $60,000 from the amount IEA had received from the Council, and undertook to repay it the following week, by payment to the steel supplier, ILB. On 8 March 2013, Mr Robinson caused the Firm to transfer $60,000 to an account nominated by Mr Clarke’s wife; a bank record corroborates the withdrawal of $60,000 on 8 March 2013. Mr Robinson says that the payment of $30,000 on 14 August was in part – albeit belated – repayment of that advance. Mr Robinson has not challenged, denied or disputed that evidence.

19. [30]

    Mr Robinson said that the payments to him of $6,000 and $8,000 funded payments to the plumbers in respect of stage 1; Mr Clarke has not challenged, denied or disputed that evidence.

20. [31]

    Mr Robinson also said that the payment of $40,000 to the Bendigo Bank account was used to fund payments of Stage 1 expenses, which are particularised; however, Mr Clarke said that when he paid the $40,000, he was told that it was for stage 2 expenses. The $40,000 does not appear amongst the payments for which credit was given against the stage 1 payment claim.

21. [32]

    The defendant relied on statements by Mr Clarke to the effect that he did not want to proceed with stage 2 to support the proposition that he would not have made payments in respect of stage 2, but as it appears clear that some – albeit limited – work was done on stage 2, and invoices issued in respect of it, I do not accept that that conclusion should be drawn – especially where there are at least a few substantial payments for which credit was not given in the stage 1 payment claim.

22. [33]

    There is a plausible contention, supported by the absence of any reference to it in the list of payments for which credit was given in the stage 1 claim, that the payment of $40,000 was referable to the stage 2 contract. Otherwise, there is no genuine dispute that invoice 258 remains unpaid.

23. [34]

    Invoice 285, for $40,085.87, was first issued on 21 January 2014, after Douglas had instructed IEA to suspend works, and is in respect of materials delivered prior to the suspension. Douglas does not suggest that there has been any payment on account of this invoice, but contends that the works to which it relates were not done legally as there was no construction certificate, and were defective and incomplete so as to give rise to an offsetting claim for damages. Mr Clarke’s s 459G affidavit annexed a schedule identifying work in connection with each of invoices 247, 258 and 285, which was said to be incomplete or defective – including, though not limited to, that the hydronic hoses were incomplete, that the foundations were not in accordance with drawings, and that the materials delivered were incomplete. The defendant objected, correctly, to the admissibility of this schedule as a business record, as it was prepared in contemplation of litigation; but it was admitted on the limited basis of describing the nature and scope of the dispute the plaintiff sought to raise, as is permissible in a Graywinter affidavit.

24. [35]

    In his second affidavit, Mr Clarke identified the following reasons for not having paid this invoice:

    1. (1)

       no construction certificate had been issued for the stage 2 works “and therefore all of them have been carried out illegally”;

    2. (2)

       the footings for stage 2 were poured in the wrong location and will have to be repoured;

    3. (3)

       the steel frame was not assembled in accordance with ILB’s instructions and the engineer’s design.

25. [36]

    Mr Clarke sought to elaborate the status of the stage 2 work that had been invoiced, and asserted that the plaintiff was not able to operate its business properly due to the incomplete Stage 2 works. Some of the elaboration was rejected as unqualified opinion or conclusion, but complaints were identified in respect of invoice 247 that certification by a private certifier would be required due to the absence of a construction certificate; that the steel delivered was rusty and bent and would require repair and repainting, and some members were missing; and that hydronic hoses purchased had been removed from the site by Mr Robinson. In respect of invoice 285, it was said that the steel was badly weathered, damaged and required significant repair or possibly total replacement. In addition, Mr Clarke deposed that because of the delay in completing the stage 2 works, the plaintiff’s business was suffering a loss of profits.

26. [37]

    As has been mentioned, the statement of claim filed by Douglas in the District Court claimed, in respect of stage 2, the cost of rectification of the incomplete and defective works (originally said to be $205,000, purportedly in accordance with a quantity surveyors report) and “restitution of overpayments”. In the course of the hearing before me, it appeared that the schedule from the quantity surveyors report in respect of stage 2 contains a major discrepancy. In supplementary submissions, the plaintiff belatedly recognised that the quantity surveyor’s report in respect of stage 2 was a valuation of the work actually done by IEA, not the cost of rectification. On 5 February – after the hearing before me – Douglas amended its claim in the District Court in respect of stage 2 to claim damages of $213,000 (calculated as the difference between the invoiced amount of $418,000 and the value of the works done as per the quantity surveyor’s report of $205,000), and “a set-off in respect of the judgment [being the registered adjudication certificate] in the sum of $196,112 being amounts already paid in respect of the Judgment sum”. In other words, Douglas now contends that, in respect of stage 2, it has been charged $418,000 for works which are worth only $213,000, and that it has paid $390,152 (being the $194,040 admittedly paid, and a further $196,112).

27. [38]

    But despite this late reformulation of the claim, there is to be found, even in the s 459G affidavit, a claim by Douglas that the stage 2 works are defective and/or incomplete, and that it has overpaid IEA in respect of those works. Although the evidence was initially very general and light on detail as to the alleged defects, the quantity surveyor’s report provides a respectable basis for the allegation, at least to the extent (1) that while the footings had been installed, the dimensional layout was incorrect so that there would need to be considerable alteration to the structural steel members such that at least half would have to be excavated, demolished and rebuilt; (2) that not all the requisite steel had been delivered (estimated shortfall to the value of $27,723.51), and what had been delivered would require reconditioning (estimated at $16,050); and (3) that while there had been some other deliveries they had since been removed, with what was left being unusable.

28. [39]

    Such allegations had been raised by Douglas, at least in general terms, in correspondence as early as 10 January 2014 – before invoice 285 was issued. In those circumstances, I do not think that Douglas’ complaints of defects can be dismissed as not genuine. As Young J, as the later Chief Judge and Judge of Appeal then was, said in John Holland Construction and Engineering Pty Ltd v Kilpatrick Green Pty Ltd (1994) 14 ACSR 250, in a construction case, where the contemporaneous correspondence between the parties shows a dispute or an offsetting claim, the court will ordinarily accept that there is a genuine dispute or offsetting claim without needing to examine in detail the figures, the defects and the evidence that supports them.

29. [40]

    However, the quantification of that offsetting claim is another matter. While the full amount of an offsetting claim is to be deducted from the admitted total to ascertain the substantiated amount [Classic Ceramic Importers Pty Ltd v Ceramica Antiga SA (1994) 13 ACSR 263], that applies only to the extent that the offsetting claim is genuine. Thus a company relying on an offsetting claim must adduce evidence that enables the court to ascertain the amount of the genuine claim to the extent necessary to apply the formula in s 459H. If the offsetting claim must plainly exceed the amount of the demand, it is unnecessary that it be precisely quantified. But where that is not clear, the court must be able to quantify an offsetting claim, and if the evidence does not permit it to do so, will attribute to it only a nominal value [Jesseron Holdings Pty Ltd v Middle East Trading Consultants Pty Ltd (No 1) (1994) 13 ACSR 455].

30. [41]

    The measure of damages for defective work is, at least ordinarily, the cost of remediation of that work. The plaintiff’s evidence does not enable that to be ascertained, even on the preliminary and approximate level required on an application of this kind. The quantity surveyor’s bill does not address the cost of rectification, but the value of the work done to date. As the quantity surveyor’s bill is structured quite differently from the IEA invoices, it is not possible even to compare the items on each and deduce a cost of rectification from that. The difference between the value of the work done (applying standard industry costs, as the quantity survey does, rather than the provisions of the construction contract) and the amount charged by IEA for it, does not establish what it would cost Douglas to rectify the defective works.

31. [42]

    An alternative approach, which can be essayed on the available material, is to measure damages by comparing the value of the works as performed with the amount paid, on the basis that any diminution in value of works against the amount paid for them is reflective of the defects. This is an application of the presumption that prima facie the contact price for works is evidence of their value (without defects). The plaintiff claimed to have paid $390,152 (being the $194,040 admittedly paid, and a further $196,112), but I have found that only $126,000 of the $196,112 was even arguably attributable to Stage 2. Accordingly, at best, the plaintiff has paid $320,040, for works valued by the quantity surveyor at $213,000; this is some evidence that the amount of the offsetting claim is $107,040.

32. [43]

    It should be recorded that counsel for IEA objected, in a responsive supplementary written submission after the hearing, that the plaintiff should not be permitted to rely on the amended statement of claim in the District Court proceedings; that leave to amend should be refused; that the amendment was outside the Graywinter principle; and that if I were minded to permit it, the defendant should be allowed a further opportunity to address it. However (1) the effect of the amendment, at least so far as relevant to this case, is only to alter the basis of calculation of the offsetting claim; (2) the question of leave to amend does not arise, as the amendment was made as of right, and in any event would be a question for the District Court; (3) the amendment does not change the nature of the offsetting claim so as to take it outside the scope of the s 459G affidavit and contravene the Graywinter principle; and (4) my conclusion as to the offsetting claim and its amount does not depend on the amendment in the District Court proceedings, but on the quantity surveyor’s report and the evidence of payments made, all of which was already in evidence at the hearing.

33. [44]

    Accordingly, of the total claimed debt of $229,320.23, I would be inclined to accept that there is a genuine dispute as to $126,000 (the contention that that amount had been paid but not been credited being plausible), and an offsetting claim as to $107,040 (being the amount by which the value of the works is less, on account of the defects, than the amount the plaintiff has arguably paid for them). Together, the dispute and the offsetting claim would reduce the substantiated amount below zero.

Genuine disputes and offsetting claims in the BACISOPA context

1. [45]

   However, as I have foreshadowed, there is a significant issue as to whether “genuine disputes” and “offsetting claims” can be raised in respect of a judgment debt arising upon the filing of an adjudication certificate under BACISOPA, particularly in the light of the recent decision of the Western Australia Court of Appeal in Diploma Construction (WA) Pty Ltd v KPA Architects Pty Ltd [2014] WASCA 91 (Pullin JA; Newnes and Murphy JJA concurring), which has taken a somewhat different view, at least in one respect, from that which has until now prevailed in this State.

2. [46]

   (WA) Construction Contracts Act 2004, s 43, relevantly provides:

3. [47]

   The demand in question in Diploma was based on a judgment created by entry of two adjudication determinations under that provision. The application to set aside the demand relied, relevantly, on two grounds – that there was a genuine dispute as to the existence of the debt which had been the subject of the adjudication, and that there was an offsetting claim (which had been instituted in the District Court) for damages for breach of contract, and declarations that the sums referred to in the adjudications were not payable or alternatively ought to be repaid. At first instance, Master Sanderson accepted that there was a genuine underlying dispute in respect of the debts but dismissed the application, holding that just as, on the authority of Deputy Commissioner of Taxation v Broadbeach Properties Pty Ltd (2008) 237 CLR 473, the statutory demand procedure could be invoked by the Commissioner of Taxation to recover a tax debt even though an objection was on foot, so too under the Construction Contracts Act, the “genuine dispute provisions in the statutory demand procedure were not available”, and that the same reasoning applied to any offsetting claim.

4. [48]

   In the Court of Appeal, the issues of present relevance were (1) whether the appellant’s claim for the declarations that the adjudicated sums were not payable gave rise to a genuine dispute or an offsetting claim within the meaning of s 459H(1)(a) or (b), or provided “some other reason” for setting aside the statutory demand pursuant to s 459J(1)(b); and (2) whether the appellant’s claim for damages was an offsetting claim within s 459H(1)(b).

5. [49]

   As to genuine disputes, the Court held that an argument that the adjudicated amounts were not in truth as a matter of contractual right due and payable could not give rise to a genuine dispute about the adjudicated amount. In doing so, reliance was placed, as it had been by the Master, on Broadbeach:

6. [50]

   As to offsetting claims, the Court accepted that a statutory demand could be set aside or varied if the recipient could show that it had a genuine cross-claim sounding in money – although ultimately it found that the claim propounded was not “genuine”. However, the Court held that a genuine contention that the adjudicated amount is not in truth as a matter of contractual right due and payable could not raise a genuine offsetting claim:

7. [51]

   Thus the effect of Diploma is to hold that (1) an argument – however genuine and strong – that the adjudicated amounts were not in truth as a matter of contractual right due and payable, cannot give rise to a genuine dispute as to the existence or amount of the resultant judgment debt; and (2)(a) while a statutory demand founded on such a judgment debt can be set aside or varied if the company can show that it has a genuine offsetting claim sounding in money, (b) a contention that the adjudicated amount is not in truth as a matter of contractual right due and payable is not a genuine offsetting claim. Proposition (2)(b) is contrary to several first instance decisions of this Court, and the plaintiff submitted that it was plainly wrong and I should not follow it. The defendant on the other hand submitted that proposition (2)(a) was inconsistent in principle with the decision of the High Court in Broadbeach, on which Diploma relied – notwithstanding a line of first instance decisions in this Court to the same effect – and that I should hold that a statutory demand founded on a judgment debt arising from an adjudication certificate was not amenable to being set aside on account of an offsetting claim. To address those submissions, it is necessary to review the legislation and the earlier authorities.

8. [52]

   At the outset, it is as well to note certain principles relevant to whether a debt can be the subject of a genuine dispute or offsetting claim that are of more general application – that is to say, their application is not confined to debts arising under BACISOPA and similar legislation.

9. [53]

   First, it is well-established that a judgment debt is beyond dispute, while it stands [Barclays Australia (Finance) Ltd v Mike Gaffikin Marine Pty Ltd (1996) 21 ACSR 235; Eumina Investments Pty Ltd v Westpac Banking Corporation (1998) 84 FCR 454; Midas Management Pty Ltd v Equator Communications Pty Ltd [2007] NSWSC 759; (2007) 25 ACLC 1038; Joadja Whiskey v Abraham [2007] NSWSC 860, [14] (Hammerschlag J)]. This applies even in the case of a default judgment [Diddy Boy v Design [2009] NSWSC 14, [40]; Virtual Technologies International Ltd v Gye [2010] NSWSC 399, [11]-[13]; Timberland Property Holdings Pty Ltd v Schindler Lifts Australia Pty Ltd [2011] NSWSC 466, [9]-[11]]. It applies also to an arbitration award [Quadwest Development Pty Ltd v Thi [2009] WASC 54]. And it applies notwithstanding that the judgment is subject to an appeal or an application to set it aside, although the pendency of an arguable appeal may provide “some other reason” for setting aside the demand – at least if the judgment is the subject of a stay pending the appeal, or security is given [Wilden Pty Ltd v Greenco Pty Ltd (1995) 13 ACLC 1039; Barclays Australia v Mike Gaffikin Marine; Eumina Investments v Westpac, 457-8; Eagle Homes Pty Ltd v LED Builders Pty Ltd [1999] NSWSC 1049, [20]; Scope Data Systems Pty Ltd v BDO Nelson Parkhill (2003) 199 ALR 6; [2003] NSWSC 137, [17]-[20]; Midas Management v Equator Communications Pty Ltd, [12], [24]; ACN 001 891 103 Pty Ltd v Reiby Street Apartments Pty Ltd [2007] NSWSC 1345, [8], [10]; Australian Beverage Distributors Pty Ltd v Evans & Tate Premium Wines Pty Ltd (2007) 61 ACSR 441, [26]-[41]; Cranney Farm Pty Ltd v Corowa Fertilizers Pty Ltd [2011] NSWSC 9, [57]]. Essentially, that is so because the judgment, so long as it stands, binds the parties and concludes any dispute as to the existence or amount of the debt.

10. [54]

    Secondly, the same applies in respect of debts, not being judgment debts, that are made conclusive by statute. Thus in Broadbeach, the Commissioner had served statutory demands in respect of tax liabilities of the company which had been assessed but were the subject of (admittedly arguable) review proceedings in the AAT. It was provided by (Cth) Income Tax Assessment Act 1936, s 177(1), and (Cth) Taxation Administration Act 1953, Sch 1, s 105-100, that the production of a notice of assessment was (except in review proceedings) conclusive evidence “that the amount and all the particulars of the assessment are correct”; by Taxation Administration Act, Sch 1, s 255-5, that the amount of a tax-related liability that is due and payable is a debt due to the Commonwealth and payable to the Commissioner and may be sued for recovery in a court of competent jurisdiction; and by Taxation Administration Act, s 14ZZM, that the fact that a review [by the AAT] is pending in relation to a taxation decision does not in the meantime interfere with, or affect, the decision and any tax may be recovered as if no review were pending. The High Court held that, in the light of those provisions, the existence of the assessed tax debts could not be the subject of a genuine dispute. So long as the assessments stood, pending the review proceedings, they indisputably existed. This approach is, with respect, entirely consistent with the principle that a judgment debt cannot be the subject of a genuine dispute, notwithstanding that it is subject to an appeal. The High Court also held that, in the light of the legislative policy reflected in ss 14ZZM and 14ZZR that tax debts should be recoverable notwithstanding the pendency of review proceedings, the courts below had been wrong to conclude that the pendency of the review proceedings provided “some other reason” for setting aside the demand.

11. [55]

    Thirdly, however, when it comes to an offsetting claim, the question for the purpose of Corporations Act, s 459H(1)(b), is simply whether there is an “offsetting claim” within the definition in s 459H(5), namely:

12. [56]

    That definition encompasses any claim that the company may have against the creditor, notwithstanding that the claim may not have been available as a defence or set-off in the ordinary course [John Shearer Ltd v Gehl Co (1995) 18 ACSR 780, holding that a claim for damages for misleading and deceptive conduct in contravention of the (Cth) Trade Practices Act 1974 could be raised under s 459H(1)(b) to a demand based on a bill of exchange, notwithstanding the general rule that a claim for unliquidated damages under a contract for sale is no defence to a claim under a bill of exchange accepted by the purchaser, nor available as a set-off or counterclaim]. This was explained by Barrett J, as his Honour then was, in Bakota Holdings Pty Ltd v Bank of Western Australia Ltd [2011] NSWSC 1277:

13. [57]

    If the company has an offsetting claim within that definition, which reduces the “substantiated amount” below the statutory minimum, the Court must set aside the demand. This is so, notwithstanding that the debt founding the demand itself may not be subject to a genuine dispute. It follows that the circumstance that the debt may be of a special character, such that it is not amenable to a genuine dispute, does not immunise a demand that is founded on it from the impact of an offsetting claim. Although this was not the subject of discussion in Broadbeach, which says nothing as to whether there can be an offsetting claim – unremarkably, as offsetting claims against the Commissioner will be uncommon – in principle s 459H(1)(b) and (4) requires the Court, if satisfied that the company has an offsetting claim within the definition that exceeds the debt demanded, to set aside the demand, and that is equally applicable in the case of a judgment debt, or a conclusive tax debt, as in other cases.

14. [58]

    Next, it is convenient to review the main relevant features of BACISOPA, Part 3, which prescribes the procedure for recovering progress payments and the adjudication process. Section 14(4) provides that if a respondent does not provide a payment schedule in response to a payment claim, then the respondent becomes liable to pay the claimed amount to the claimant on the due date for the progress payment to which the payment claim relates. Sections 15 and 16 provide respectively for the consequences of not paying the claimant where the respondent provides no payment schedule, and of not paying the admitted amount in a payment schedule where one is provided. Section 15, which is applicable in the present case because Douglas served no payment schedule, is as follows:

15. [59]

    Section 16(4) similarly provides that a respondent who fails to pay an amounted admitted in a payment schedule cannot raise defences and cross-claims where the claimant commences proceedings to recover that amount as a debt.

16. [60]

    Sections 23, 24 and 25 make provision in respect of the recovery of adjudicated amounts, where a matter proceeds to adjudication. Section 23(2) provides that the respondent must pay the adjudicated amount. Section 24 provides that if the respondent does not do so, the adjudicator may issue an adjudication certificate. Section 25 provides for an unpaid adjudication certificate to be filed in a court and thereupon take effect as a judgment, and limits the scope of an application to set aside such a judgment:

17. [61]

    Section 32, however, preserves the contractual rights of the parties and permits resort to ordinary civil law remedies, including the recovery of any amount paid pursuant to an adjudication if it is ultimately found (in curial proceedings) not to have been truly payable:

18. [62]

    The rationale was explained by the Minister in the second reading speech of 8 September 1999, as follows:

19. [63]

    Section 32 was explained by Handley JA in Falgat Constructions Pty Ltd v Equity Australia Corporation Pty Ltd (2005) 62 NSWLR 385, as follows:

20. [64]

    To similar effect, in Shellbridge Pty Ltd v Rider Hunt Sydney Pty Ltd [2005] NSWSC 1152, Barrett J said:

21. [65]

    Thus the effect is that the adjudication process establishes, on an interim basis, an amount that is immediately payable and enforceable, but that the determination is not conclusive in the sense that in curial proceedings the parties can still contend for a different result, and any judgment in those proceedings can take into account and allow for the adjudication and make any requisite adjustment so as ultimately to give effect to what are found in the curial proceedings to be the true legal rights of the parties.

22. [66]

    Application of the general principles to which I have referred above would suggest that (1) because an adjudication certificate once registered takes effect as a judgment, the adjudicated amount is an indisputable debt so long as the judgment stands, notwithstanding that it might be liable to be set aside, and notwithstanding that in curial proceedings a different result might ultimately prevail; (2) although such a debt could not be the subject of a “genuine dispute” under s 459H(1)(a), a demand founded on such a judgment debt would nonetheless remain amenable to an “offsetting claim” under s 459H(1)(b).

23. [67]

    It is now necessary to review the authorities – mainly of this Court – that consider the relationship between debts arising under BACISOPA and s 459H, and establish a line of authority inconsistent, in some respects, with Diploma.

24. [68]

    The first was Max Cooper & Sons (Builders) Pty Ltd v M & E Booth & Sons Pty Ltd [2003] NSWSC 929; (2003) 47 ACSR 696; (2003) 202 ALR 680. The defendant had served a creditor’s statutory demand on the plaintiff for $51,341.23, being the amount of a BACISOPA adjudication. The adjudication certificate had not been filed as a judgment when the demand was served, but was subsequently filed. The plaintiff applied under s 459G and s 459H for an order varying the demand on account of an offsetting claim for damages for defective work in the sum of $27,231, but raised no dispute in respect of the balance of the demand, namely $24,110.23. After observing that s 32 preserved the contractual rights of the parties, Macready M (as he then was), following Musico v Davenport [2003] NSWSC 977 (McDougall J), held that s 25(4) applied only to proceedings brought to set aside the judgment itself, and not where application was made in separate proceedings to set aside a statutory demand made in respect of the judgment debt, and continued:

25. [69]

    Accordingly, Max Cooper & Sons held that a claim for damages for defective work could permissibly be raised under s 459H as an offsetting claim in respect of a demand for an amount which had been adjudicated under BACISOPA, notwithstanding that the adjudication had by the time of the hearing been filed as a judgment, because raising an offsetting claim – unlike raising a “genuine dispute” – involved no challenge to the existence of the debt.

26. [70]

    Max Cooper & Sons was followed by Campbell J, as he then was, in Demir Pty Ltd v Graf Plumbing Pty Ltd [2004] NSWSC 553. The plaintiff applied to set aside a statutory demand founded on a judgment arising from filing of an adjudication certificate for $27,564. It was common ground that the judgment debt was a debt owing by the plaintiff, and it was conceded by the defendant that there was a dispute concerning overcharging when the demand was served. The plaintiff contended that it had an offsetting demand, with three components – an overpayment in respect of a disputed invoice, an overpayment in respect of other works, and damages incurred by the plaintiff’s business for “unconscionable conduct” within (Cth) Trade Practices Act 1974, s 51AC, being conduct which had the effect of delaying the commencement of the plaintiff’s business in an attempt to apply pressure to pay. In a passage which has provided the foundation for the later cases in this State, his Honour said:

27. [71]

    Consistently with the general principles to which I have referred, this case confirms the availability of an “offsetting claim” in the context of a creditor’s statutory demand founded on an adjudication that has been filed as a judgment, and that all that is required is that the claim come within the definition of “offsetting claim”. The case was again one of an offsetting claim, and was concerned, relevantly, with a claim for damages arising out of a collateral transaction, and a claim to set-off an alleged earlier overpayment – not merely a complaint that the adjudication was wrong. While his Honour used (at [21]) the words: “Before there is an offsetting claim, there needs to be a genuine dispute concerning the debt, or a genuine offsetting claim”, just what was intended by the reference to “a genuine dispute” in the context is not entirely clear; but it seems that his Honour in that paragraph was seeking to stress the requirement of genuineness, rather than to suggest that a judgment debt could be the subject of genuine dispute as distinct from an offsetting claim.

28. [72]

    In Greenaways Australia Pty Ltd v CBC Management Pty Ltd [2004] NSWSC 1186, the creditor’s statutory demand for $97,640.39 was founded on a judgment debt arising upon filing of an adjudication certificate. The plaintiff propounded an offsetting claim for $102,597.90 in respect of alleged overcharging by the defendant in invoices that the plaintiff had already paid. Barrett J held (at [11]) that while s 25(4) limited the extent to which the plaintiff may cross-claim and mount defences against the adjudicated amount, those constraints applied only in proceedings to set aside the judgment resulting from filing an adjudication certificate, and may be ignored in the context of an application under s 459G because the offsetting claim involved no attempt to have the judgment set aside. His Honour said:

29. [73]

    His Honour then cited and adopted the passage from Campbell J’s judgment in Demir which I have set out above. Again, Greenaways was a case of an offsetting claim, founded on overpayment of earlier invoices; the plaintiff did not merely contend that the adjudication was wrong, but sought to set-off against the adjudicated amount, or recover by way of restitution, amounts it had already paid, allegedly in excess of what was properly due.

30. [74]

    In Aldoga Aluminium Pty Ltd v De Silva Starr Pty Ltd [2005] NSWSC 284, the plaintiff had failed to serve a payment schedule in response to a payment claim. The defendant did not sue for the debt under s 15(2) but served a statutory demand for the amount of the claim, for which the plaintiff was liable pursuant to s 14(4), and argued that the provisions of ss 15(2) and (4)(b) created a statutory debt, the existence of which it was no longer open to the Plaintiff to contest. Palmer J rejected that argument:

31. [75]

    His Honour then referred to Greenaways, cited with approval the passage from the judgment of Campbell J in Demir referred to above, and continued:

32. [76]

    Unlike its predecessors, Aldoga was a case in which there had been no adjudication and no filing of the certificate as a judgment; the demand was issued in reliance upon the statutory liability created by s 14(4). The case reinforces that the question for a court considering an application under s 459G and s 459H in this context is simply whether there is a genuine dispute or an offsetting claim within the definition. Palmer J concluded that, at least in the context of a debt arising under s 14(4), it remained open to raise a “genuine dispute” as well as an “offsetting claim”, on the basis that there was no difference. With great respect, the difference lies in the fact that some debts are not capable of genuine dispute – because they are judgment debts or conclusive debts – but may still be amenable to an offsetting claim. It is difficult to see how a debt arising under s 14(4), which creates a statutory liability upon the failure to provide a payment schedule, could be the subject of a genuine dispute, if the conditions in s 15(1) are satisfied, regardless of any underlying dispute. As it seems to me, the only way in which a “genuine dispute” could be raised in respect of such a debt would be by disputing whether the circumstances referred to in s 15(1) existed.

33. [77]

    His Honour’s decision was the subject of criticism in Diploma, on the basis that the view that a winding up proceeding is not a proceeding “to recover the unpaid amount from the respondent as a debt due to the claimant, in any court of competent jurisdiction” within s 15(2)(a)(i), is inconsistent with the decision of the High Court in Broadbeach. However, the context is different. In Broadbeach, the High Court said that the phrase “may be recovered” in Taxation Administration Act, s 14ZZM and s 14ZZR, applied to the statutory demand procedure. In s 15, the relatively common formula “to recover the unpaid amount … as a debt due … in [a] court of competent jurisdiction” is used. To my mind, such a reference is plainly to a court in which debt recovery proceedings may be brought, not to the Companies Court. This is made all the clearer by s 15(4), which would make no sense in the context of winding up proceedings. In my respectful view, the criticism of this aspect of the decision is misconceived. The important consequence is that the strictures of s 15(4)(b)(i), excluding cross-claims, would not operate in relation to s 459G demands, even if, as I think, it would not be open to dispute the debt itself on grounds connected with the construction contract – not because of s 15(4)(b)(ii), but because once the conditions in s 15(1) are satisfied, the liability is indisputable.

34. [78]

    The next step – which is the point where Diploma departs from the New South Wales authorities – was taken in Plus 55 Village Management Pty Ltd v Parisi Homes Pty Ltd [2005] NSWSC 559. The statutory demand relied upon a judgment upon a filed adjudication certificate. White J held that a genuine claim by a company against which there is such a judgment, that the true contractual position (to be determined in subsequent curial proceedings) is that it is not so indebted, can be raised as an offsetting claim under s 459H(1)(b):

35. [79]

    The effect of Plus 55 is that a genuine dispute about the underlying indebtedness itself amounts to an offsetting claim which can be relied on in an application to set aside a demand founded on the judgment debt. As Pullin JA demonstrated in Diploma, this proposition goes further than the authorities cited by White J in support of it, all of which (save Aldoga) were concerned with true offsetting claims for damages, or to set-off or recover sums already paid. It will be necessary to return to this, after noting the later authorities.

36. [80]

    In Falgat Constructions v Masterform [2005] NSWSC 525, the demand was based on an adjudication that had been filed as a judgment. Macready AsJ cited, with approval, the above passage from White J’s judgment in Plus 55, and concluded:

37. [81]

    Similarly, in CCD Group Pty Limited v Premier Drywall Pty Limited [2006] NSWSC 1012, Macready AsJ said (at [48]) that it was plain from the structure of BACISOPA that a payment under the interim regime under the Act did not affect ultimate recovery of final amounts due between the parties based upon their legal rights, and after referring to s 32 and most of the abovementioned authorities, concluded:

38. [82]

    In BBB Constructions Pty Ltd v Frankipile Australia Pty Ltd [2008] NSWSC 982; 68 ACSR 1, I observed:

39. [83]

    The suggestion that Aldoga relates particularly to an offsetting claim was incorrect, but that does not affect the general statement.

40. [84]

    In Ettamogah Pub (Rouse Hill) Pty Limited v Consolidated Constructions Pty Ltd (In Liq) [2006] NSWSC 1450, White J reiterated his Honour’s holding in Plus 55:

41. [85]

    In Project Venture Development No 11 Pty Limited v TQM Design & Construct Pty Limited [2009] NSWSC 699, the statutory demand was founded on a judgment obtained by filing an adjudication certificate. The plaintiff applied to set it aside on account of an offsetting claim, substantially exceeding the amount of the judgment, for liquidated damages as a result of delayed completion and rectification costs. Macready AsJ said:

42. [86]

    His Honour rejected a submission that a clear Parliamentary intention that statutory debts be payable immediately excluded the availability of offsetting claims under s 459H(1)(b), citing in particular the judgment of Campbell J in Demir, and adhering to the view he had expressed in Falgat Constructions v Masterform.

43. [87]

    In Prime City Investments Pty Limited v Paul Jones & Associates Pty Limited [2013] NSWSC 2, I endeavoured to explain the rationale of these cases in the following terms:

44. [88]

    The New South Wales authorities have been followed, in respect of similar legislation, in Queensland. In Reed Construction (Q) P/L v Dellsun P/L [2009] QSC 263, Martin J referred to and followed the New South Wales cases to which I have referred, and concluded:

45. [89]

    In All Type Developments Pty Ltd v Hickey [2010] 2 Qd R 199, White J referred to and applied the New South Wales cases in the context of an offsetting claim for damages for defective work.

46. [90]

    I should follow the judgment of the Western Australia Court of Appeal – particularly on the application of national legislation such as the Corporations Act – unless satisfied that it is plainly wrong [Farah Constructions Pty Ltd v Say-Dee Pty Ltd (2007) 230 CLR 89, [135]]. The submission that I should not follow Diploma falls for consideration against the background of the general principles, and the authorities particular to debts under BACISOPA, to which I have referred.

47. [91]

    First, as to whether a judgment debt arising upon a filed adjudication certificate can be the subject of a genuine dispute for the purpose of s 459H(1)(a), the general principle that a pending appeal or application to set aside a judgment cannot found a “genuine dispute” as to the existence of the judgment debt while it stands, applied in the context of BACISOPA, indicates that the existence or pendency of an arguable claim in curial proceedings that the adjudication does not reflect the true legal rights of the parties cannot amount to a “genuine dispute” about the existence or amount of a judgment debt in respect of an adjudication. That is because the judgment that arises upon filing an adjudication certificate determines that the judgment debt is indisputably due and payable, and remains so unless and until it is set aside. The fact that the judgment may be less conclusive than an ordinary judgment (because of the effect of s 32) does not affect this, because so long as it stands the debt exists. This accords with the legislative policy that adjudicated debts should be paid notwithstanding the pendency of any curial dispute as to whether they reflect the true legal rights of the parties, and that if it is ultimately found that they do not reflect those rights, can later be recovered by way of restitution. The New South Wales cases pertaining to BACISOPA have, perhaps with the exception of Aldoga, consistently accepted this: they have permitted offsetting claims, rather than genuine disputes, and they have often specifically acknowledged that, unlike a “genuine dispute”, an “offsetting claim” does not involve a challenge to the judgment debt, but accepts it [see Max Cooper, [26]; Plus 55, [12]; Ettamogah Pub, [12]]. Insofar as Aldoga goes further and suggests that “genuine dispute” is also available, that was in the context of a statutory liability arising under s 14(4), which was not a judgment debt; in any event, it seems to me that such a debt could be disputed only on grounds that the conditions in s 15(1) were not satisfied, and not by resort to underlying disputes under the construction contract.

48. [92]

    Secondly, the general principle that a pending appeal may provide “some other reason” for setting aside a demand only if the judgment is stayed or security is given indicates that the pendency of curial proceedings which seek relief to the effect that the adjudicated amount is not payable because the adjudication does not reflect the true legal rights of the parties cannot of itself amount to “some other reason” for setting aside the demand. Such proceedings are, for present purposes, analogous to an application to set aside a default judgment, or an appeal. This conclusion is also supported by Broadbeach, as the legislative policy of the Act, referred to in the preceding paragraph, is analogous to the policy reflected in the taxation laws that tax debts are to be recoverable notwithstanding the pendency of any review proceedings. (It is unnecessary to decide, for the purposes of this proceeding, whether an arguable claim in curial proceedings for a different result coupled with a stay or provision of security might provide “some other reason” for setting aside a demand founded on a filed adjudication certificate, as the principle relating to appeals and applications to set aside judgments suggests).

49. [93]

    Thirdly, as to offsetting claims, the authorities on BACISOPA are uniformly consistent with general principle relating to offsetting claims, holding that a “true” offsetting claim – for example, a cross-claim for damages for negligence or breach of contract, or the recovery by way of restitution of amounts already allegedly overpaid – may be relied on to set aside a statutory demand founded on an adjudication certificate. That is because the effect of s 459H(1)(b) is that any claim the company has against the creditor falls within the definition of offsetting claim, and this is unaffected by any special features of the debt that founds the demand.

50. [94]

    Mr Botsman argued that it was inconsistent in principle with Broadbeach to admit such claims as offsetting claims under s 459H:

51. [95]

    I do not agree. There is nothing inconsistent with holding that although a debt is beyond dispute, a demand for it may be met by an offsetting claim. Once it is appreciated that this encompasses any offsetting claim, which need have no connection with the debt, the special characteristics of the debt – including any legislative policy reflected in the statute that creates it – are not relevant to the availability of an offsetting claim [cf John Shearer Ltd v Gehl Co]. About such offsetting claims, Broadbeach is silent – unsurprisingly in the context where the Commissioner of Taxation is the creditor, it does not address at all the question of “offsetting claim”. The judgment of the Court of Appeal in Diploma provides no support for the defendant’s submission in the present case that Broadbeach precludes even an offsetting claim for damages for negligence or breach of contract; to the contrary, it accepts that such offsetting claims, if genuine, may be invoked to set aside a demand founded on a judgment debt arising from an adjudication.

52. [96]

    Accordingly, the position that a genuine cross-claim for damages for negligence or breach of contract or restitution will result in a statutory demand being set aside or varied is undisturbed by Diploma. Thus while a demand for an amount adjudicated under BACISOPA is not amenable to a “genuine dispute” under s 459H(1)(a), it remains vulnerable to a genuine “offsetting claim” under s 459H(1)(b).

53. [97]

    Fourthly, however, that leaves the critical question whether the existence or pendency of an arguable claim that the adjudication does not reflect the true legal rights of the parties amounts to an offsetting claim, where there is no cross-demand for damages, and where there has been no payment and thus no complete claim for restitution. It is on this question that Diploma and the New South Wales authorities – in particular Plus 55, Ettamogah Pub and Prime City Investments – part company. As has been seen, in Diploma, Pullin JA said that those case were “plainly wrong and should not be followed insofar as they stand for the proposition that the person who owes a debt which is due and payable by reason of an adjudicator’s determination and subsequent judgment, can raise a genuine offsetting claim merely by contending that it is not 'in truth, indebted for the amount” determined as due and payable or that, despite the determination, the contractor was not “contractually entitled” to the amount determined or certified to be due by the adjudicator”, adding that there could not be an offsetting restitutionary claim unless and until money has been paid over.

54. [98]

    In my view, a curial proceeding in which a party to a construction contract seeks, by way of enforcing its contractual rights, a declaration that an adjudicated amount is not truly due and payable is in a position closely analogous to one who applies to set aside a judgment, or to appeal from a judgment – essentially, the contention is that the adjudication, and thus the judgment founded on it, is wrong. Despite the width of the concept of “offsetting claim”, it has never been thought to extend to an appeal from, or application to set aside, a judgment. In the absence of payment of an amount of which restitution might be claimed, there is nothing to be set off against the judgment debt, but only a contention that the adjudication is in error. A contention that a debt does not exist is not a “counterclaim, set-off or cross-demand”. Such a contention denies the debt, whereas a counterclaim, set-off or cross-demand admits it, but asserts that there is a countervailing liability. That the curial proceedings might produce a different result is no different from an appeal. The general principle that an appeal or application to set aside a judgment does not found a genuine dispute, or (at least without more) provide some other reason to set aside a demand, supports the conclusion that a claim that an adjudication does not reflect the true contractual rights of the parties does not amount to an offsetting claim.

55. [99]

    Moreover, as Pullin JA pointed out, there is no restitutionary claim unless money has been paid over, and if money had been paid over there would be no statutory demand. In Collier Nominees Pty Ltd v Consolidated Constructions Pty Ltd (NSWSC, unreported, 3 July 1998, BC9803056), Santow J, as he then was, pointed out that the definition of “offsetting claim” refers to a claim the company has – not one that it will have – against the respondent. The company will not have a restitutionary claim under s 32 unless and until it has paid money to the claimant.

56. [100]

    In my opinion, therefore, the existence or pendency of an arguable claim that an adjudication does not reflect the true legal rights of the parties – involving no cross-claim for damages, and where there has been no payment and thus no complete claim for restitution – cannot be an offsetting claim for the purposes of s 459H(1)(b). It follows that, far from being satisfied in this respect that the decision in Diploma is plainly wrong, I respectfully accept its correctness. It also follows that what I said in the last sentence of [23] in Prime City should no longer be regarded as correct.

Conclusion

1. [101]

   My conclusions may be summarised as follows:

   1. (1)

      There is a plausible contention that the payments of $80,000 on 30 May, $6,000 on 5 June and $40,000 on 8 August 2013 were referable to Stage 2, against invoices 247 and 258.

   2. (2)

      Douglas’ complaints of defects in the stage 2 works cannot be dismissed as not genuine. Arguably, the plaintiff has paid $320,040 for works worth only $213,000, which is some evidence that the amount of its offsetting claim is $107,040.

   3. (3)

      It follows that in respect of the total claimed debt of $229,320.23, there is an underlying genuine dispute as to $126,000, and an offsetting claim as to $107,040.

   4. (4)

      However, a judgment debt founded on a filed adjudication certificate is beyond dispute: the existence or pendency of an arguable claim in curial proceedings that the adjudication does not reflect the true legal rights of the parties cannot amount to a “genuine dispute” about the existence or amount of a judgment debt consequent upon an adjudication. Nor does the pendency of curial proceedings which seek relief to the effect that the adjudicated amount is not payable because the adjudication does not reflect the true legal rights of the parties of itself amount to “some other reason” for setting aside the demand.

   5. (5)

      While a “true” offsetting claim – for example, a cross-claim for damages for negligence or breach of contract, or the recovery by way of restitution of amounts already allegedly overpaid – may be relied on to set aside a statutory demand for a judgment debt founded on an adjudication certificate, the existence or pendency of an arguable claim that an adjudication does not reflect the true legal rights of the parties – involving no cross-claim for damages, and where there has been no payment and thus no complete claim for restitution – cannot be an offsetting claim for the purposes of s 459H(1)(b). In this respect, I am not only unpersuaded that the decision in Diploma is plainly wrong, but I respectfully accept its correctness.

2. [102]

   Accordingly, the pendency of the District Court proceedings contending that on the true contractual rights of the parties Douglas does not owe IEA the adjudicated amount does not of itself provide “some other reason” for setting aside the demand, nor does it found an offsetting claim. Douglas will have an offsetting claim only to the extent that it has a genuine cross-claim for damages, or restitution of moneys paid. Douglas’ allegation that it has paid invoices 247 and 258 merely impugns the judgment debt and does not raise any offsetting claim. However, Douglas’ claim for damages for the costs of rectification is a true cross-claim for damages, sounding in money, and may be invoked to impugn the demand.

3. [103]

   It follows that, while there is no genuine dispute, for the purposes of s 459H(1)(a), as to the existence or amount of the judgment debt that founds the demand, there is an offsetting claim for the purposes of s 459H(1)(b) in the amount of $107,040. According to the formula in s 459H(2), the “substantiated amount” is $122,280.23, being the difference between the “admitted amount” of $229,320.23 and the “offsetting total” of $107,040.

4. [104]

   The Court therefore orders that:

   1. (1)

      pursuant to s 459H(4), the creditor’s statutory demand dated 27 June 2014 served by the defendant on the plaintiff be varied so that the amount of the demand is $122,280 and the demand has effect as so varied from when it was served on the plaintiff.

5. [105]

   I will hear the parties on the question of costs.