McDonald v MAK Constructions and Building Services Pty Ltd

1. [1]

   PAYNE JA: : I agree with Griffiths AJA.

2. [2]

   ADAMSON JA: I agree with Griffiths AJA.

3. [3]

   GRIFFITHS AJA:

Introduction

1. [4]

   The applicant seeks leave to appeal from a decision dated 21 July 2023 by Olsson SC DCJ (see Kylie McDonald v MAK Constructions & Building Services Pty Ltd (District Court (NSW), 21 July 2023, unrep) (PJ or primary judgment)). Her Honour granted a stay of proceeding in which the then plaintiff owner sought damages against a building corporation and one of its directors. I shall refer to the parties respectively as the owner (or Ms McDonald, who is the sole registered proprietor of the relevant Land) and the builder (being the building corporation and one of its directors).

Summary of background matters

1. [5]

   In early 2022, the parties entered into a contract for residential building work. Although the building work progressed significantly, the parties fell into dispute and the building contract was terminated by the owner for breach. Around that time, the builder made a payment claim under ss 8, 9 and 13 of the Building and Construction Industry Security of Payment Act 1999 (NSW) (SOP Act) for progress payments. The following day, the owner served in response a payment schedule pursuant to s 14 of the SOP Act.

2. [6]

   On 19 December 2022, and several weeks after the builder had set in train the process for adjudication of a disputed payment claim under the SOP Act (see ss 17 to 25), the owner commenced proceedings against the builder in the NSW Civil and Administrative Tribunal (NCAT) for recovery of the cost of rectifying alleged defects and costs to complete the building works. The owner claimed damages in the amount of $528,112.00.

3. [7]

   On 27 January 2023, the builder obtained an adjudication certificate under s 22 of the SOP Act in the amount of $246,493.20.

4. [8]

   On 16 February 2023, the adjudication certificate was filed in District Court proceedings 2023/53228 (the builder’s SOP proceedings) as a judgment for a debt in the amount of $246,695.20 (see s 25 of the SOP Act).

5. [9]

   On 28 February 2023, the NCAT proceedings were transferred to the District Court by consent, where they were given the proceeding number 2023/68414 (the owner’s damages proceedings). On the same day, the owner filed a motion in the builder’s SOP proceedings seeking a stay of the judgment obtained by the builder or, alternatively, a stay of the enforcement of the judgment (the owner’s stay motion).

6. [10]

   The owner swore an affidavit dated 9 February 2023 in those proceedings. She deposed that she paid the builder’s progress claims in the amount of approximately $755,000. She contested the adjudication certificate and said that she would seek to have the final rights of the parties determined in the District Court. She also gave evidence regarding her assets and liabilities and said that she was unable to make full payment of the adjudicated amount without selling the family home. She added that if she was forced to sell the home she was concerned that she would not be able to prosecute the NCAT proceedings to final determination. Finally, Ms McDonald said that she was willing to grant the builder a charge over the home to secure the adjudicated amount and any interest.

7. [11]

   Directions were made on 2 March 2023 in the SOP proceedings for the hearing of the owner’s stay motion. The builder gave an undertaking to take no further steps to enforce the judgment debt pending the determination of the motion.

8. [12]

   On 8 March 2023, the owner’s stay motion was, by consent, dismissed with costs after Ms McDonald elected not to proceed with it.

9. [13]

   By letter dated 4 April 2023, the builder’s solicitor advised the owner’s solicitor that the builder’s costs on the withdrawn stay motion were $23,971.00. These costs remain unpaid and have not been assessed.

10. [14]

    In late April 2023, the builder took action to enforce the judgment debt by obtaining several garnishee orders against Ms McDonald. On 27 April 2023, the District Court issued two garnishee orders to St George Bank and Macquarie Bank Ltd respectively. A third garnishee order was issued on 1 May 2023 to Westpac Banking Corporation. The only amount recovered by the builder has been by way of the garnishee order on Macquarie Bank Ltd in the amount of $200.19.

11. [15]

    Before taking such action to enforce the judgment, on 17 April 2023, the builder filed a notice of motion in the owner’s damages proceedings seeking a stay of those proceedings until such time as the owner paid the judgment debt in the SOP proceedings and the costs as ordered on 8 March 2023. This is the motion which was determined by the primary judge on 21 July 2023 and which is the subject of the summons seeking leave to appeal.

12. [16]

    In opposing the builder’s stay application in the Court below, the owner relied on an outline of written submissions dated 14 July 2023. Those submissions referred to Ms McDonald’s affidavit dated 9 February 2023 (see at [10] above). In opposing the stay application, the owner submitted that:

13. [17]

    The owner relied upon Samadi Developments Pty Ltd v SX Projects Pty Ltd [2015] NSWSC 1576 and Grant Constructions Pty Ltd v Claron Constructions Pty Limited [2006] NSWSC 369 in support of the proposition that a stay should be refused because of the effect of s 32 of the SOP Act. She submitted that she should be entitled to pursue her action for damages and the builder should not be allowed to prevent the parties' rights from being determined on a final basis. She submitted that to stay her proceedings would effectively turn the judgment debt into a final judgment, whereas in truth the SOP Act provided “a statutory entitlement for interim payments with the final determination of the party’s entitlements being determined by proceedings brought in a court or tribunal to enforce the Contract” (emphasis in original).

14. [18]

    Ms McDonald also submitted below that the builder had “all coercive enforcement powers available to it to satisfy the Judgment” and that there was no evidence that the builder had attempted to exercise any of those powers. As noted above, this is not entirely accurate because garnishee orders had been issued and resulted in a very modest return of $200.19.

15. [19]

    No other steps were taken by the builder to enforce its judgment debt prior to the hearing of the owner’s stay motion on 14 July 2023. As will be developed, it was not until six months after the primary judge granted the stay that the builder took further steps to enforce the judgment debt by filing in the District Court on 29 January 2024 a notice of motion seeking a writ for the levy of property.

The primary judgment summarised

1. [20]

   At PJ[8], the primary judge described the dispute as that “of a builder suing for its progress payments and the owners claiming the work is defective and incomplete. The scope of such a dispute is ordinarily framed as a claim and cross-claim”.

2. [21]

   Her Honour described the owner’s amended statement of claim (filed on 8 May 2023 in the owner’s damages proceedings) at PJ[9] as “effectively a cross-claim”, which her Honour said was prohibited by s 15(4)(b)(i) of the SOP Act. (In fact, her Honour identified the relevant provision as s 15(4)(3)(i), but the parties were agreed that this was a typographical error). Her Honour added that, when viewed as a cross-claim, “it nullifies the precise benefit provided for by the Act, namely the timely payment of progress claims”. Later in the primary judgment, the owner’s proceedings were described as proceedings which “amount to a cross-claim” (see PJ[20]). This characterisation is now challenged by the owner.

3. [22]

   Her Honour said at PJ[11] that s 32(3) of the SOP Act specifically endorses a right to bring a claim at common law, “but only after the judgment has been satisfied”. The correctness of this qualification is now challenged by the owner.

4. [23]

   Her Honour summarised the parties’ respective evidence, including evidence that the builder was a small family company which carried out relatively modest renovations (usually only three or four per year) and that the builder had been required to meet the ongoing legal costs of defending the owner’s damages proceedings. Her Honour described the steps which the builder had taken to ensure that all subcontractors and trade suppliers had been paid. Her Honour referred to the builder’s unchallenged evidence that it had no further funds to draw upon and that if a stay were not granted, it would not only be out of pocket for the judgment debt, but it would also have no funds to carry on its business or defend the owner’s damages proceedings.

5. [24]

   The primary judge summarised Ms McDonald’s evidence (which was unchallenged by cross-examination) to the effect that if the owner’s proceedings were stayed pending payment of the judgment debt, the owner would need to sell her family home to pay it and to advance her proceedings (see PJ[18]).

6. [25]

   Her Honour summarised various relevant legal principles and authorities regarding both the policy of the SOP Act and the Court’s discretion to order a stay. Her Honour described the relevant test as “one of balancing the interests of justice together with the rights of the parties” (see PJ[21]).

7. [26]

   After referring to various authorities (including TFM Epping Land Pty Ltd v Decon Australia Pty Ltd [2020] NSWCA 118; Grosvenor Constructions (NSW) Pty Limited (in administration) v Musico [2004] NSWSC 344; Shade Systems Pty Ltd v Probuild Constructions (Aust) Pty Ltd [2018] NSWCA 33; RJ Neller Building Pty Ltd v Ainsworth [2009] 1 Qd R 390; Goodwin Street Developments Pty Ltd v DSD Builders Pty Ltd [2018] NSWSC 1229 and Hakea Holdings Pty Ltd v Denham Constructions Pty Ltd; BaptistCare NSW & ACT v Denham Constructions Pty Ltd [2016] NSWSC 1120), her Honour stated at PJ[32]:

8. [27]

   It is evident from the outline of written submissions dated 14 July 2023 that the owner submitted that her claim for damages had strong prospects of success, and was supported by an expert report dated 20 January 2023 prepared by Mr Bruce Frizzell of Allambie Building Consultants Pty Ltd, a copy of which was in evidence in the Court below. As will be developed, the owner now complains that the primary judge did not address either this submission or the expert report. She also complains that the primary judge made no reference to either Samadi or Grant, notwithstanding that these cases were drawn to her Honour’s attention.

9. [28]

   The primary judge concluded that the builder was entitled to enforce the judgment debt and, accordingly, the owner ought be stayed from pursuing the owner’s damages proceedings pending payment of the judgment debt and interest.

The primary issues in this Court

1. [29]

   Ms McDonald contended that she should have leave to appeal because her proposed appeal raises issues of public importance and general application. She identified as an issue of general application how properly to balance a builder’s right to recover progress payments under the legislative scheme with the owner’s interest in the scheme operating without prejudice to the common law rights of both parties in respect of the underlying residential building contract. She also contended that it was of public importance to have the Court provide guidance on the balancing of competing interests in the context of a residential building contract dispute.

2. [30]

   Three proposed grounds of appeal are identified in the amended draft notice of appeal. The first is that the primary judge erred in her construction of s 32(3) of the SOP Act.

3. [31]

   The second proposed ground of appeal is that in granting the stay the primary judge’s discretionary power miscarried. This was said to involve various errors of principle, namely (a) failing to consider s 32(2) of the SOP Act; (b) misconstruing the operation and effect of s 32(3); (c) misconstruing the policy of the SOP Act; (d) failing to assess the strength of the owner’s case; and (e) describing the owner’s claim as effectively being a cross-claim.

4. [32]

   The applicant also contended that the primary judge’s discretion miscarried by her failure to take into account the following matters: (a) the practical effect of granting a stay was to make permanent that which the legislature intended only to be interim; (b) s 32(2), which expressly preserves the applicant’s rights; and (c) the strength of the applicant’s case.

5. [33]

   The third proposed ground is that the primary judge failed to afford the applicant procedural fairness because no party was provided an opportunity to make submissions on whether the amended statement of claim was effectively a cross-claim and nullified the benefit provided by the SOP Act.

Consideration and determination

1. [34]

   The leave application and appeal were listed for a concurrent hearing.

2. [35]

   I consider that there should be a grant of leave to appeal. The applicant raises an issue of public importance and general application with reference to the need to reconcile the underlying policy of the legislative scheme (which is to enable a builder to receive progress payments promptly) while preserving the common law rights of both parties in respect of the construction contract as provided for on the proper construction of s 32 of the SOP Act.

3. [36]

   Before addressing each of the three grounds of appeal, it is desirable to say something more about the policy of the SOP Act.

4. [37]

   Since 1 March 2021, the SOP Act has applied to a construction contract for the carrying out of residential building work within the meaning of the Home Building Act 1989 (NSW). It was common ground that the SOP Act applied here.

5. [38]

   The legislative policy underlying the SOP Act is reflected in ss 3(1) to (4):

6. [39]

   Importantly, however, express provision is made in s 32 of the SOP Act for the preservation of the rights of any party to a construction contract notwithstanding the provisions in Pt 3 for a builder to recover progress payments. Section 32 provides:

7. [40]

   The tension between the legislative policy and the preservation of rights under s 32 has been commented upon in many cases. Those cases fall into two broad categories. First, proceedings where an owner or developer seeks a stay of proceedings brought by a builder to enforce a judgment debt. The second category concerns an application by a builder to stay proceedings brought by a developer or owner which seek to enforce a contractual or other right relating to a construction contract.

8. [41]

   This Court’s decisions in TFM and A-Civil Aust Pty Ltd v Ceerose Pty Ltd [2023] NSWCA 144 are examples of cases in the former category. This may reflect the emphasis given in both those cases to the legislative policy of ensuring that progress payments should be made promptly so as to ensure a builder’s cash flow. Thus, in TFM the Court (Bell P, Macfarlan and Leeming JJA) said at [22]:

9. [42]

   More recently, this Court made the following observations in Ceerose at [19]-[20] (Payne JA, Simpson and Basten AJJA):

10. [43]

    No party suggested that the observations in both TFM and Ceerose were incorrect in their description of the legislative policy. Understandably, however, those observations reflect the particular circumstances of those cases, which are somewhat different to those here.

11. [44]

    In the present proceeding, rather than taking available steps to enforce its judgment debt, the builder sought and obtained a stay of the owner’s damages proceedings in which the owner was seeking to enforce her rights under or in relation to the construction contract. Such circumstances are more akin to those in Samadi and Grant. In Samadi, the builder (SX) obtained a judgment debt based upon an adjudication determination in its favour under the SOP Act. Shortly beforehand, the developer (Samadi) commenced proceedings seeking liquidated damages in respect of the builder’s alleged breaches of the underlying contract. The builder experienced difficulties in enforcing this judgment debt, primarily because if it sought to have the developer wound up, the developer would maintain that it had an offsetting claim under s 459H of the Corporations Act 2001 (Cth). The builder sought a stay of the developer’s proceedings.

12. [45]

    In that context, Ball J made the following observations at [6]-[7], with which I respectfully agree:

13. [46]

    Similarly, in Grant, the builder obtained an adjudication certificate and a judgment debt in its favour based on that certificate. The developer had failed or refused to pay the judgment debt, apart from a modest sum garnisheed from its bank account. The developer referred the parties’ dispute to arbitration. The builder then sought a stay of the arbitration proceedings relying on the Court’s inherent powers, the jurisdiction under s 23 of the Supreme Court Act 1970 (NSW) or s 47 of the Commercial Arbitration Act 2010 (NSW).

14. [47]

    Einstein J refused the builder’s application for a stay, describing it as being “clearly misconceived” and inconsistent with s 32(2) of the SOP Act. His Honour made the following observations at [11]-[13], again with which I respectfully agree:

15. [48]

    As noted above, the primary judge made no reference to either Samadi or Grant even though the owner relied upon them. Instead, her Honour referred to and purported to apply a series of other cases, including TFM, which, while uncontroversial in their own particular circumstances, are not on all fours with the circumstances here. This may have caused the primary judge to misapprehend or overlook some relevant features of this matter.

16. [49]

    The owner’s complaint that the primary judge misconstrued s 32(3) of the SOP Act at PJ[11] should be accepted. Her Honour said there that while s 32(3) endorsed a right to bring a claim at common law, she added that this was “only after the judgment has been satisfied”. There is nothing in the legislative scheme to support that qualification.

17. [50]

    It appears that the primary judge introduced that qualification on the basis of her Honour’s understanding of the legislative policy. But the terms of s 32 are clear and must be read harmoniously with the legislative policy. They state unequivocally that nothing in Pt 3 (which sets out the procedure for recovering progress payments) affects any rights of a party to a construction contract. Indeed, the point is further reinforced in s 32(2), where it is unambiguously stated that nothing done under or for the purposes of Pt 3 “affects any civil proceedings arising under a construction contract” (whether under Pt 3 or otherwise), except as provided for in s 32(3) (which provision has no application here).

18. [51]

    In my respectful view, the primary judge erred in giving excessive emphasis to the legislative policy and in misunderstanding and misapplying s 32 in the particular circumstances here.

19. [52]

    These errors might have been avoided if the primary judge had turned her attention to the relevance of the observations of Ball J in Samadi and Einstein J in Grant, as discussed above.

20. [53]

    I do not accept the builder’s contention that the observations of Ball J in Samadi are inconsistent with TFM. There is no reason to doubt the correctness of what was said in TFM at [78] that the “basal purpose” of the legislation is to create a speedy determination to ensure that progress claims are dealt with and paid promptly. At [80], the Court said:

21. [54]

    In the next paragraph, however, the Court acknowledged the possible exception of s 32 and the general proposition that the Court will intervene “albeit cautiously” in order to prevent the interim rights created by Pt 3 from being made permanent. The Court then turned its attention at [82] to the effect of s 32.

22. [55]

    It is important to reiterate that TFM involved developers seeking to obtain a stay of the execution of a judgment debt in circumstances where the developers had failed to provide a payment schedule and had unsuccessfully appealed against entry of the judgment debt. The developers sought a stay on the basis they were unable to pay the judgment debt and would be insolvent if the judgment was not stayed. They added that they had a cross-claim in an amount which exceeded the judgment debt.

23. [56]

    In response to the developers’ contention that the practical effect of execution of the judgment would be to stultify their ability to vindicate their contractual rights in accordance with s 32, the Court made the following observations at [84]-[85] (emphasis in original):

24. [57]

    Those observations are not inconsistent with Ball J’s observations in Samadi. Rather, they reflect the very different factual circumstances in TFM. It is notable that in TFM the Court went on to say at [90] that “the onus must rest on the party who seeks relief which will prevent the ordinary operation of the processes authorised by the Act” and that the Court would be cautious to intervene if it detracted from the primary purpose of the Act being that a builder be paid. But unlike the position there, it is not the owner (or developer) who is seeking to prevent the ordinary operation of the legislative scheme in the present proceeding. It is the builder who, instead of seeking to enforce the judgment debt, sought and obtained a stay, which had the effect of frustrating the operation of s 32.

25. [58]

    As I have emphasised, there is and was nothing stopping the builder from seeking to enforce the judgment debt. For the reasons given above, the first ground has been made out.

26. [59]

    The applicant’s complaint that the primary judge’s discretion whether or not to grant a stay miscarried overlaps to some extent with ground 1. I have explained why the primary judge misconstrued and misapplied s 32.

27. [60]

    In addition, the exercise of discretion miscarried for four other reasons. First, I accept the owner’s submission that the primary judge failed to consider and assess the strength of her case as raised by the amended statement of claim and as supported by the expert report. These were relevant considerations and the point was squarely raised in the owner’s case.

28. [61]

    Secondly, I accept the owner’s submission that her Honour erred in characterising the amended statement of claim as though it were a cross-claim. The amended statement of claim was based on causes of action in both contract and tort. It did not directly relate to the issue of the outstanding progress payments which were the subject of the judgment debt. Her Honour’s erroneous characterisation of the owner’s proceeding as amounting to a cross-claim appears to have deflected her attention from the significance of s 32 of the SOP Act.

29. [62]

    Thirdly, the primary judge also erred at PJ[9] where she described the amended statement of claim as effectively being a cross-claim, which is prohibited by s 15(4)(b)(i) (after correcting the typographical error). That provision applies where a payment claim is served on a person and the person (a) fails to provide a payment schedule and (b) fails to pay any or all of the claimed amount before the due date. It is common ground that here the owner did provide a payment schedule as required by s 14(4). Section 15 had no application to this case and her Honour erred in suggesting that it did. This error adds little, however, to the primary judge’s earlier error in characterising the amended statement of claim as “effectively a cross-claim”.

30. [63]

    There is a fourth reason why the primary judge’s discretion miscarried. As noted above, it was only during the course of the hearing of the appeal that the builder handed up a copy of the notice of motion seeking a writ for the levy of property which he belatedly filed in the District Court on 29 January 2024. No explanation was provided as to why the builder delayed six months in seeking to enforce the judgment debt in this manner, nor why he had not taken this step prior to the hearing of his motion in the District Court. The simple point is that, putting to one side the three garnishee orders referred to above, the builder took no expeditious step to enforce the judgment debt. Instead, he sought and obtained a stay of the owner’s proceeding. As the Court pointed out, there was nothing stopping the builder from enforcing the judgment debt by applying in the Equity Division to have a trustee appointed for the sale of the owner’s home. Any issues of mutual hardship caused by the stay could have been agitated in the course of such a proceeding.

31. [64]

    The builder’s failure to take prompt and meaningful steps to enforce the judgment debt sits very uncomfortably with the legislative scheme of providing a speedy and effective means of ensuring cash flow to builders (while not prejudicing the common law rights of the parties).

32. [65]

    The complaint of procedural unfairness relates to the primary judge’s characterisation of the amended statement of claim as effectively being a cross-claim, a matter which was not the subject of submissions by either party. It is more accurate to describe the error as one of substance as outlined in the reasons for upholding ground 2, rather than procedural unfairness. Procedural fairness does not require the decision-maker to give a running commentary to the parties as to how a case might be decided or to divulge deliberative processes (see Commissioner for Australian Capital Territory Revenue v Alphaone Pty Ltd (1994) 49 FCR 576; [1994] FCA 1074 and SZBEL v Minister for Immigration and Multicultural and Indigenous Affairs (2006) 228 CLR 152; [2006] HCA 63 at [29]-[32]). The primary judge’s error relating to the so-called cross-claim was substantive, not procedural.

33. [66]

    During the course of the hearing of the appeal, the owner invited the Court to determine for itself the merits of the builder’s motion filed on 17 April 2023, rather than remit the matter to the District Court. The builder consented to this course on the basis that all the relevant evidentiary material was before this Court, which was in as good a position as the District Court to determine the application for a stay.

34. [67]

    It is appropriate that this Court re-exercise the discretion on the basis of the documentary material before it, including the builder’s notice of motion seeking a writ for the levy of property which was filed in the District Court on 29 January 2024. The documentary material also includes the evidence adduced below regarding the parties’ respective financial positions (noting again that no witness was cross-examined on the hearing of the motion for a stay).

35. [68]

    For the following reasons, I would decline to stay the owner’s damages proceedings.

36. [69]

    First, in the circumstances of this case, such a stay would be inconsistent with the rights preserved by s 32 of the SOP Act, as explained above.

37. [70]

    Secondly, the builder’s failure to take prompt steps to enforce the judgment debt weighs heavily against a stay being granted. The garnishee orders having reaped so little, it was open to the builder promptly to take other potentially more meaningful steps to enforce the judgment debt, including bringing proceedings in the Equity Division seeking the appointment of a trustee for sale of the owner’s home. Moreover, the builder delayed almost six months before applying in the District Court for a writ for the levy of property, an application which apparently has progressed no further since it was filed on 29 January 2024. The evidence indicates that there is sufficient equity in the owner’s home to cover the amount of the judgment debt plus interest.

38. [71]

    Thirdly, I view the financial hardship of the respective parties (depending on whether or not a stay is granted) to be a neutral factor. This is because the evidence indicates that there will be some degree of hardship for whoever is the unsuccessful party, which will depend on whether or not a stay is granted. It is unnecessary to determine which of the parties would suffer the greater hardship because, independently of that matter, the other considerations weigh so heavily against the grant of a stay.

39. [72]

    Fourthly, without descending into a detailed assessment of the strength of the owner’s case as pleaded in the amended statement of claim and as supported by the expert report, there is no basis to find that the case is hopeless or lacking in reasonable prospects. The builder did not contend that the case was lacking in merit and, to date, it has not filed a defence.

40. [73]

    It is true that under cl 17.6 of the construction contract the owner has no right of set off other than in relation to the final progress claim. But that is neither here nor there in circumstances where the owner is seeking damages in an amount which far exceeds the judgment debt.

Conclusion

1. [74]

   For these reasons, I propose the following orders:

   1. (1)

      The applicant have leave to file the proposed amended notice of appeal.

   2. (2)

      The applicant have leave to appeal.

   3. (3)

      The appeal be allowed.

   4. (4)

      The orders made by Olsson SC DCJ on 21 July 2023 be set aside.

   5. (5)

      The notice of motion filed in the District Court on 17 April 2023 be dismissed, with costs.

   6. (6)

      The respondents pay the appellant’s costs of the appeal.