Kitchen Xchange v Formacon Building Services

1. [1]

   HIS HONOUR: On 2 May 2014, the plaintiff contracted with the first defendant for the latter to fit out the former's shop at Rouse Hill. There is no doubt that the contract was a construction contract for the purposes of the Building and Construction Industry Security of Payment Act 1999 (NSW) (the Act). There is a dispute as to the validity of a payment claim and as to an adjudicator’s determination thereon.

Relevant terms of the contract

1. [2]

   Under the contract, which incorporated the quotation provided by the first defendant to the plaintiff dated 22 April 2014, payment of the contract price was to be made by four instalments. I set out the payment terms:

The payment claims

1. [3]

   On 4 June 2014, the first defendant served on the plaintiff a document described as a payment claim. The document explicitly stated that it was a claim made under the Act, even though the requirement to do so had been removed by what in my view was an unwise amendment to s 13(2)(c) of the Act in 2013.

2. [4]

   There were discussions between Ms Foster, the principal of the plaintiff, and Mr Palasty, the principal of the first defendant. It is common ground that, as a result of those discussions, the payment claim (which I will call the first payment claim) was withdrawn.

3. [5]

   On 12 June 2014, the first defendant served on the plaintiff a further payment claim, again containing the otiose statement that it was made under the Act. I will call this the second payment claim. The second payment claim was for an amount of about $1,200 less than the first payment claim.

4. [6]

   On 13 June 2014, solicitors acting for the plaintiff wrote to the first defendant. Although the letter was not in terms described as a payment schedule for the purposes of s 14 of the Act, it seems to me that it met such formal requirements as there are for a document to be a payment schedule. It identified the payment claim to which it related. It indicated the amount that the plaintiff was prepared to pay. It gave reasons why the plaintiff took the attitude, towards payment, that it did.

5. [7]

   The first defendant's response was not to engage in correspondence or discussions but, rather, to serve a document which was (or purported to be) a further payment claim. That payment claim was dated 20 June 2014. It is common ground that it was served on 23 June 2014. It claimed an amount that was, in round figures, approximately $15,500 more than the amount of the second payment claim. A substantial reason for that increase was the inclusion of what was said to be a variation described as "damages for failing to pay on time $10,400 ex GST".

6. [8]

   The plaintiff did not provide a payment schedule in response to what I will call the third payment claim (which, I should have noted, likewise stated that it was made under the Act).

7. [9]

   On 8 July 2014, the first defendant gave to the plaintiff what purported to be a notice under s 17(2)(a) of the Act, in respect of the third payment claim. (I assume that the document was served on or about the date it bears, which was 8 July 2014.)

8. [10]

   The plaintiff did not provide a payment schedule within the five business day period for doing so limited by s 17(2)(b) of the Act.

9. [11]

   The matter was referred to the second defendant for adjudication. He concluded, in substance, that the first defendant should have everything that it claimed except for the variation for $10,400 ex GST to which I have referred.

10. [12]

    The plaintiff moves for relief in the nature of certiorari to quash the determination. The adjudicator has submitted save as to costs.

11. [13]

    There are three issues raised. The first and second issues are related.

First issue

1. [14]

   The plaintiff submits that it was not open to the first defendant to do as it did and serve two payment claims in relation to the same reference date.

2. [15]

   It is common ground that the reference date was either 31 May 2014 or 4 June 2014. That follows from the provisions of the contract to which I have referred, making the last instalment payable "on completion", and from the contractual definition of completion. Given the parties' agreement, and given the immateriality of the choice of 31 May or 4 June as the reference date, it is not necessary to set out the relevant contractual provisions.

3. [16]

   It is also common ground that the first payment claim was withdrawn following negotiations between the plaintiff and the first defendant. Thus, there is no submission that the second payment claim was served in breach of s 13(5) of the Act.

4. [17]

   The concept of withdrawal of a payment claim, at least by consent, was recognised by Hammerschlag J in NC Refractories Pty Limited v Consultant Bricklaying Pty Limited [2013] NSWSC 842 at [38] and [39]. I agree with his Honour that it is at least open to a claimant, with the consent of the respondent, to withdraw a payment claim and to substitute for it another one, relating to the same reference date, without contravening s 13(5). His Honour's actual decision appears to contemplate, as well, unilateral withdrawal. Whilst I see no reason in principle why that could not happen, (at least where the fact of withdrawal is made clear to the respondent), I prefer to express no final opinion on that particular issue.

5. [18]

   Section 13 of the Act deals with payment claims. Although not all of the section is relevant, I set it out in its entirety:

6. [19]

   Section 13(2)(c) was amended by the insertion of the words, "if the construction contract is connected with an exempt residential construction contract", and subss (7) to (9) were added, by the Building and Construction Industry Security of Payment Amendment Act 2013.

7. [20]

   It is clear that the second and third payment claims were each served in respect of the same reference date. As I have said, it does not matter whether that reference date is taken to be 31 May 2014 or 4 June 2014. There was no other event under the contract which would justify the conclusion that there were two separate reference dates. Nor is there any reason to think that work was done either between those two dates or between the date of service of the second payment claim and the date of service of the third payment claim.

8. [21]

   It has been held that s 13(5) means what it says. That is to say, it has been held that when s 13(5) says that more than one payment claim cannot be served in respect of the same reference date, it is intended to have a prohibitory effect. Allsop P expressed that view very clearly in Dualcorp Pty Ltd v Remo Constructions Pty Ltd (2009) 74 NSWLR 190 at [13], [14]. I set out the last two sentences of the latter paragraph:

9. [22]

   I came to the same conclusion in Trustees of Roman Catholic Church for Diocese of Lismore v TF Woollam& Son [2012] NSWSC 1559. Although the reasoning extends over a number of paragraphs, the conclusion that I reached, stated at [49], was founded on what Allsop P had said in Dualcorp:

10. [23]

    I do not think that Mr De Buse of counsel, who appeared for the first defendant, submitted that s 13(5) should not be given the effect that I ascribed to it in Woollam& Son. If he did so submit, I do not agree. It seems to me to be an inevitable consequence of the statutory language that a payment claim served in breach of the prohibition is not a valid payment claim which has the capacity to set in motion the procedure for recovery of progress payments set out in Pt 3 of the Act.

11. [24]

    Mr De Buse did submit that I should conclude that the second payment claim had been withdrawn. It is clear that it was not withdrawn consensually. There is no evidence to suggest that the first defendant put to the plaintiff that the second payment claim should be withdrawn, let alone that the plaintiff agreed. Nor is there evidence from which there could be inferred, in the absence of express agreement, some implied agreement to withdraw the second payment claim.

12. [25]

    Thus, Mr De Buse's submission depends upon the proposition that it is open to a claimant unilaterally to withdraw a payment claim.

13. [26]

    I have said already that I do not propose to decide in this case whether that is so. However, I shall assume that it is correct. To my mind, even on that assumption, the submission fails. The concept of withdrawal of a payment claim must include, at least, that something is said or done from which the respondent, the recipient of the payment claim, should understand that the claimant is not relying upon it but is instead relying on some different payment claim.

14. [27]

    Whether or not implied unilateral withdrawal is sufficient is a difficult question. It seems to me, in particular given the serious consequences that follow if a respondent does not reply to a payment claim by providing a payment schedule, that the circumstances must make it very clear to the respondent that a payment claim is to be withdrawn, if it is intended that withdrawal should occur.

15. [28]

    In the present case, the evidence falls far short of that. All the evidence suggests is that, having received the letter which in my view was a payment schedule and considered what it said, the first defendant decided, as it were, to up the ante and put in a payment claim which not only reinstated the hitherto conceded amounts, but also introduced a totally new and hitherto unheralded claim.

16. [29]

    In my view, that is exactly the sort of action that s 13(5) is intended to prohibit. The vice of submission of repetitive payment claims is obvious. It was considered in Dualcorp, not only by Allsop P but also by Macfarlan JA (with whom Handley AJA agreed). It is clearly deleterious to a respondent to be forced to reply individually, often at the expense of time, labour and money, to repetitive payment claims which all relate to the same reference date. On the other hand, should the respondent take the view that it has done enough, it is courting the risk that a particular document will be held to be valid and, thus, sufficient to initiate the process of recovery.

17. [30]

    Accordingly, I conclude that the second payment claim was not withdrawn. It follows that the third payment claim was not properly served, because it was served in breach of s 13(5).

18. [31]

    It was thus not open to the first defendant to seek adjudication of the second payment claim. Nor was it open to the adjudicator, as a matter of jurisdiction, to consider it and make a determination.

Second issue

1. [32]

   The second and related argument is based on s 17(2) of the Act. That subsection provides as follows:

2. [33]

   The proposition is that if the letter of 13 June 2014 should not be treated as a payment schedule, then there was no compliance with s 17(2)(a) in respect of the second payment claim. Since the second payment claim was not referred to adjudication, and also because in my view the letter did amount to a payment schedule, that ground does not succeed.

Third issue

1. [34]

   The third ground relates to s 13(7) of the Act. I have set that out already. It is common ground that none of the payment claims were accompanied (whatever that may mean) by a supporting statement in the form prescribed by the regulations.

2. [35]

   The prescribed form is set out in cl 4A of the Building and Construction Industry Security of Payment Regulation 2008, by reference to Sch 1. I set out that clause and the Schedule:

3. [36]

   The language of subs (7) is prohibitory. A payment claim must not be served unless it is accompanied by the requisite supporting statement. The words "must not" are generally taken to indicate prohibition. That appears from a number of cases, many of which were usefully summarised in the judgment of Lucev FM in Birch v Wesco Electrics (1966) Pty Ltd (2012) 257 FLR 237 at [29] and following, through to [56]. (His Honour's consideration goes further but it is not necessary for me to go so far.)

4. [37]

   Amongst the cases to which Lucev FM referred was the decision of the Court of Appeal of the Supreme Court of Victoria in Halwood Corporation Ltd v Roads Corporation [1998] 2 VR 439.

5. [38]

   In this case Tadgell JA, with whom Brooking JA agreed, dealt at length (and not entirely in approving terms) with the legislative use of "must" and "must not" to indicate respectively a requirement to do something and a prohibition on doing something. His Honour said, after referring to authorities ranging from the Book of Genesis through Punch to the decision of JD Phillips J in Brygel v Stewart-Thornton [1992] 2 VR 387, that the modal verb "must not" might not necessarily indicate prohibition unless some form of personal prohibition were intended.

6. [39]

   In the present case, it seems to me, personal prohibition is exactly what is intended by s 13(7).

7. [40]

   There are numerous cases observing that "must" is a word of absolute obligation. See, for example, Williams J in Posner v Collector for Interstate Destitute Persons (Vic) (1946) 74 CLR 461 at 590 - one of the cases cited by Lucev FM in Birch.

8. [41]

   In the present case, it seems to me that what s 13(7) is intended to do is prohibit the service of a payment claim that is not accompanied by the requisite supporting statement. The reasons why this was thought to be necessary appear clearly from the second reading speech on the Building and Construction Industry Security of Payment Amendment Bill 2013 (Hansard, Legislative Council, 12 November 2013):

9. [42]

   Mr De Buse did not suggest that the subsection did not apply to the relationship between the plaintiff and the first defendant. He submitted that the subsection was not intended to be jurisdictional. He noted that the same language (“must not serve”) had been used in subs (8), and submitted that it could not have been intended that adjudicators would be required to consider, as a matter of jurisdiction, whether the accompanying statement was false or misleading in a material particular. I agree that this task has not been given to adjudicators, either as a requirement to consider matters of formal validity or otherwise. I do not agree that it necessarily follows that subs (7) should not be given the effect which, plainly, the language requires.

10. [43]

    Although both subsections commence with the words "[a] head contractor must not serve a payment claim on the principal", what follows is quite different. Subsection (7) continues by stating the exception to the prohibition: a payment claim must not be served unless it is accompanied by a supporting statement of the requisite kind.

11. [44]

    Subsection (8), on the other hand, continues by defining the prohibition. It does so by defining in what circumstances the prohibition operates: if the payment claim “is accompanied by a supporting statement which, to the knowledge of the contractor, is false or misleading in a material particular."

12. [45]

    It is easy to see whether the requirement of subs (7) has been met, because it is easy to see whether the accompanying statement meets the requirements set out in subs (9), incorporating as it does the relevant clause and form set out in the Regulation.

13. [46]

    To my mind, the better view of subs (7) is not that it renders the payment claim invalid but, rather, that it invalidates or renders ineffective service of a payment claim that is not accompanied by the requisite statement. It seems to me that the subsection recognises that the payment claim exists in fact, and requires it to be accompanied by a supporting statement. If it is not, it seems to me, the service is invalid.

14. [47]

    To paraphrase what I said, of s 13(5), in Woollam& Son at [49], to hold that s 13(7) did not intend to invalidate service of a payment claim unaccompanied by the requisite statement would set at nought the prohibition. It would permit a claimant to engage the operation of Pt 3 of the Act without troubling to comply with a specific, and “mandatory”, requirement for doing so.

15. [48]

    In Brodyn Pty Limited v Davenport (2004) 61 NSWLR 421, Hodgson JA identified at [53] what his Honour considered to be the basic and essential requirements for there to be a valid adjudicator's determination. They included, as the second requirement, "[t]he service by the claimant on the respondent of a payment claim."

16. [49]

    It has since been recognised that his Honour's statement of basic and essential requirements may be equated with essential preconditions for the exercise of jurisdiction by an adjudicator. See Basten JA in Coordinated Construction Co Pty Ltd v JM Hargreaves (NSW) Pty Ltd (2005) 63 NSWLR 385 at [71]. See also my judgment, with which Basten JA generally agreed, in Chase Oyster Bar Pty Ltd v Hamo Industries Pty Ltd (2010) 78 NSWLR 393 at, in particular, [148].

17. [50]

    In the present case, if the service was ineffective because it was not authorised by subs (7) and thus should not be taken to have been proper service, there would be jurisdictional error for this reason also.

18. [51]

    Because I have concluded that the intention of subs (7) is to prohibit the service of a payment claim that is not accompanied by the requisite statement, and that service of a payment claim which is not so accompanied is ineffective or invalid, it follows for this reason also that the adjudicator lacked jurisdiction.

Discretion

1. [52]

   There was some argument as to questions of discretion. Mr De Buse submitted that, as a matter of discretion, if I came to the conclusion that there were jurisdictional error, nonetheless I should withhold relief in the nature of certiorari. Mr Barham of counsel, for the plaintiff, accepted that even if a case were made out for such relief, it could be withheld on discretionary grounds.

2. [53]

   First Mr De Buse submitted, the first defendant had in some way been led into doing what it did because of the plaintiff's response to the second payment claim. I do not agree. It is correct to say that the response to the second payment claim put in issue far more than had been discussed between representatives of the plaintiff and the first defendant after service of the first payment claim. However, if the first defendant took the view that the response to the second payment claim went beyond what had been discussed, it was open to it to refer the second payment claim to adjudication.

3. [54]

   I do not see that there is any basis for the submission that in some way the first defendant acted on the basis of some imputed representation or statement of position, in proceeding as it did.

4. [55]

   Secondly, Mr De Buse submitted, the point had not been taken in a payment schedule that responded to the third payment claim. That argument is, if I may say so with respect, circular. If the third payment claim were (as I have concluded it is) invalid, there was no occasion to respond to it.

5. [56]

   Thirdly, Mr De Buse submitted, the amount in issue was relatively small, and within the jurisdiction of the Local Court. The latter half of that submission is undoubtedly correct. But I am not prepared to say, in the context of a contract under which the contract price was agreed to be $141,675.60 inclusive of GST, that an amount of $28,120.84, as determined by the adjudicator, is insignificant, or of such small moment that, in the scheme of things, this Court should not intervene.

6. [57]

   I can accept that in the context of many of the substantial construction and infrastructure contracts with which this Court deals, the amount might be thought to be insignificant. I do not think that it should be so characterised in the context of this particular contract, bearing in mind the circumstances of the individuals who stand behind the plaintiff and the first defendant.

7. [58]

   Mr De Buse sought to call in aid what Hammerschlag J had said, as to discretion, in NC Refractories at [39]. For convenience I set that paragraph out:

8. [59]

   If we were dealing with the second payment claim and not the third payment claim, I would agree that what his Honour said is of direct relevance. However, as I have said, I see no reason for concluding that the second payment claim was "served, as a consequence of what was in effect an invitation by the plaintiff to do so."

Conclusion

1. [60]

   It follows that the plaintiff has made good its claim to the primary relief sought by the amended summons, leave for filing which was given today. However, that includes a claim for an order that a judgment of the Local Court, given on filing of the determination, be set aside. I am not certain that I have the power to do that. I could, I suppose, remove the proceedings from that Court into this and do it. The simpler course seems to me to make an order quashing the determination and to leave it to the parties to work conformably with that order by causing the judgment to be set aside. I will reserve liberty to apply, in the event they do not do so.

Orders

1. [61]

   Accordingly, I order that the determination of the second defendant made on 6 August 2014 be quashed.

2. [62]

   I order the first defendant to play the plaintiff's costs of the proceedings.

3. [63]

   I make no other order as to costs.

4. [64]

   I reserve liberty to apply on five days' notice.

5. [65]

   I direct that on completion of the revised reasons the exhibits be handed out.

[Counsel addressed.]

1. [66]

   HIS HONOUR: I direct that a bank guarantee provided to the Court by the plaintiff as security for the amount of payment be returned forthwith to the plaintiff.

2. [67]

   I direct that these orders be entered forthwith.

[Counsel addressed further.]

1. [68]

   HIS HONOUR: I direct that the costs payable not include the costs of any affidavit that was not read.