In the matter of J Group Constructions Pty Ltd

On 30 July 2015, the plaintiff, J Group Constructions Pty Ltd (J Group), filed an originating process by which it sought orders that a creditor’s statutory demand dated 21 July 2015 served upon it by the defendant, PGA Rendering Group Pty Ltd (PGA), be set aside under ss 459G, 449H and 449J of the Corporations Act 2001 (Cth) (the Act).

The creditor’s statutory demand claimed payment of $174,009.96 and described the debt as being a judgment debt entered on 20 July 2015 in the District Court of New South Wales. The demand annexed a copy of the District Court judgment, which shows that the amount of the judgment was $173,761.80, plus interest of $76.16 and filing fees of $172.

The judgment debt was based upon an adjudication certificate obtained by PGA under the Building and Construction Industry Security of Payment Act 1999 (NSW) (the Security of Payment Act). The judgment was entered pursuant to s 25 of that Act.

J Group has not paid the amount claimed in the creditor’s statutory demand.

J Group commenced the present proceedings within the time required by s 459G of the Act.

J Group’s originating process first came on for hearing on 17 August 2015. J Group relied upon a copy of the statement of claim that it had filed in the District Court of New South Wales on 29 July 2015. J Group’s application was, therefore, in jeopardy of failure on the basis of decisions such as ICM Agriculture Pty Ltd v Young [2009] FCA 109, as a statement of claim filed to initiate what is claimed to be an offsetting claim is not adequate evidence to substantiate that claim, even if the pleading is verified.

J Group successfully applied for an adjournment of the proceedings in order to file further evidence to support the claim that it made in its District Court statement of claim.

Further evidence has been filed by both J Group and PGA, and the nature of the issues raised by the application has evolved significantly.

The dispute arises out of a contract entered into between J Group and PGA for the supply of all relevant materials and labour required to install acrylic render and paint to all exposed walls of a building that was being constructed by J Group at 38-40 Albert Road Strathfield (the Building).

PGA submitted a quotation to J Group on 15 April 2014 for the acrylic render and colour texture coating works for the Building for a lump sum price of $290,000 plus GST.

The work to be undertaken by PGA, as set out in the quotation, was described as follows:

It should be noted that the quotation specified Dulux products. The product described in the third bullet point was referred to as being “coarse.

For reasons that will appear below, J Group contended that the relevant contract was constituted by the acceptance by J Group of this quotation. As counsel for J Group acknowledged, there was no evidence of any acceptance of the quotation that could support a claim that the contract was formed by acceptance of the quotation.

The evidence included a subcontract agreement dated 24 May 2014 between J Group and PGA. The document has been signed on behalf of PGA, but not on behalf of J Group. It has also been initialled at the foot of each page on behalf of PGA in the space provided for “Subcontractor Initial”. There are no initials in the equivalent place for “Builder Initial”.

Clause 1 relevantly provides for “Scope” in the following terms: “The Design, Supply, Certification and Installation of all Rendering Works…”

This clause therefore suggests that PGA was responsible for the design of the rendering works. There is also a reference in cl 5 to PGA having “allowed to provide adequate design”. Clause 9(1), concerning subcontractor obligations, also provides for PGA having assumed responsibility to “complete the design of the works”; cl 10 imposes detailed design obligations on PGA; and cl 14 includes design in the scope of works. I will not refer further to the issue of design because, as will be seen, J Group has not alleged that PGA has any liability to it based upon defective design.

Clause 2 provided for a fixed price of $290,000 plus GST of $29,000.

Clause 14 provided for the scope of works. The description of the work required to be done by PGA differs from the equivalent description in the quotation. It provided:

The word “Rockcoat” (more correctly “Rockcote”) appears in three places. Rockcote is a proprietary paint product that performs an equivalent function to the Dulux products specified in the quotation. The word “Rockcoat” is on each occasion written on the contract in handwriting above the original wording, which has been crossed out as follows (in order):

The apparent intent of the alteration was to substitute Rockcote products for Dulux products.

The hand written amendments to the contract have not separately been initialled, even on behalf of PGA.

Clause 25 of the contract provided for variations to the contractual agreement. It is sufficient to note that PGA was prohibited from varying the works under the contract except as directed in writing.

There was no evidence from either J Group or PGA of the circumstances in which the hand written changes to cl 14 of the contract document were made.

There was no evidence of any counterpart of the contract document signed and initialled on behalf of J Group. It is therefore not known whether such a document was prepared, or if it was, whether it contained the hand written amendments.

The written contract document was put into evidence by J Group as part of the exhibit to J Group’s s 459G affidavit.

The manner in which the written contract document was put into evidence was as part of the evidence that was put before the adjudicator of PGA’s claim under the Security of Payment Act.

An important issue on this application is whether PGA was required by the contract to provide the Rockcote product referred to in the scope of works in the written contract document, which was the product in fact provided; or whether, alternatively, it was obliged to provide the Dulux products specified in the quotation.

The only objective evidence going to the resolution of this question, other than what is contained in the written contract document, is to be found in an email dated 14 January 2015, written by J Group’s construction manager, Mr Joseph Alha, to a director of PGA, Mr Pedro Coutinho, in which Mr Alha said in part:

I interpolate that, in his reasons for finding in favour of PGA on its claim under s 17 of the Security of Payment Act, the adjudicator said, in respect of the issue as to whether the relevant contract was formed by the simple acceptance of the quotation, or was comprised of the written contract document as amended by hand:

I have only referred to the reasoning of the adjudicator for the forensic reason that it ought to have brought home to J Group and its legal advisers that there was a serious risk that, if J Group proffered the written contract document as part of its evidence, without going further to provide evidence that might support a finding that the written contract document was not the true contract, or that the hand written amendments were not part of the true contract, it would be found that the written contract document did indeed contain the terms of the contract. As I have noted above, J Group has not tendered that evidence in support of its present application.

I will consider below the principles that are applicable to the question of the nature of the satisfaction on the part of the court that an applicant for an order setting aside a creditor’s statutory demand must establish in order to show that it has a true offsetting claim. It will be convenient, however, at this point to deal with the identification of the terms of the contract between J Group and PGA.

On the evidence before the court, the only conclusion that is reasonably arguable is that the contract was constituted by the written contract document as amended by hand.

As I have noted, there was no evidence that the quotation had ever separately been accepted by J Group. It is likely that, at some point before the written contract document was prepared, J Group informed PGA that it would offer the work to PGA. In the absence of evidence, however, it cannot be inferred that J Group made an absolute and unqualified acceptance of the quotation. It is more likely that, if any such acceptance was notified, it was qualified expressly or impliedly by the requirement that there be no binding contract unless and until the parties had agreed upon a comprehensive written agreement. It is inherently unlikely that the parties to works such as the present, which concerned a substantial building project, would have agreed to enter into a bare contract on the terms of the quotation. There is a question as to whether any such contract would have been sufficiently certain to be enforceable, but that is an issue that does not require detailed consideration. The fact is that the written contract document was signed and initialled on behalf of PGA, and given to J Group. It is known that J Group received the counterpart signed by PGA, because J Group supplied that document to the adjudicator. Until the matter became an issue before the adjudicator, there is no objective evidence that J Group disputed that the written contract document contained the terms of the contract. On the contrary, the 14 January 2015 email written by Mr Alha on behalf of J Group is quite inconsistent with the argument that the scope of works was as set out in the quotation. The words “The Rockcote system proposed” clearly signify an understanding and acceptance that the Rockcote system was required by the contract. There is no assertion in the email that PGA had provided a system that was not specified in the contract. That was the obvious place and time for J Group to make that assertion if, at the time of the email, it was Mr Alha’s belief that the Dulux product had been specified.

J Group submitted that the hand written amendments to the scope of works term in the written contract document had been written by some unidentified person, on some unnamed date, after the 24 May 2014 date of the written contract document. There was no evidence to support that claim, and it was not accepted by PGA. Moreover, as the handwriting was on the counterpart of the contract executed on behalf of PGA, and then given to J Group, PGA would not have had any opportunity to alter the document after it was given to J Group. Thus, even if the document was altered after it was initially executed on behalf of PGA, that alteration must have happened before the document was given to J Group.

J Group also submitted that the hand written amendments were not effective because they were variations to the contract, and were invalid because they did not satisfy the requirement in cl 25 that PGA was not permitted to vary the works except as directed in writing by J Group. I do not accept this argument, because I do not see conceptually how the handwriting on the document constituted a variation. I have found that the handwriting comprised part of the original contractual document. Consequently, it is not a variation in the sense contemplated by cl 25, but rather it is simply an amendment to an earlier draft of the contract, that became incorporated into the contract.

In addition to the provisions of the contract that specify the scope of works, it is also necessary to consider the obligations imposed upon PGA by the contract in relation to the performance of the works.

First, cl 9 relevantly provided the following concerning PGA’s obligations:

Secondly, cl 11 imposes the following subcontractor warranties:

The important feature of the terms of the contract that govern the obligations of PGA in relation to the performance of the work required by the contract is, speaking generally, that cl 9 imposes obligations concerning the manner in which the work was required to be done in order to be satisfactory; and cl 11 imposes upon PGA an additional obligation whereby it warranted that the materials that it provided under the contract were fit for purpose.

Clause 23 establishes a regime for PGA to be paid monthly progress claims, subject to compliance by PGA with various requirements.

Mr Nick Aoun was a construction manager for J Group. On 3 December 2014, he sent an email to Mr Coutinho that contained the following claim:

J Group apparently prepared a document called “project day sheet” in the ordinary course of its business. There is no evidence that copies of the project day sheets were given to PGA. The evidence included project day sheets for 5, 6 and 10 December 2014, which included the following entries concerning PGA’s work (in order):

These three project day sheets were put into evidence by J Group as annexures to Mr Alha’s affidavit affirmed on 19 August 2015, which was the primary affidavit relied upon by J Group to augment the concerns it apparently had that led it to apply for an adjournment of the first hearing. J Group did not put into evidence any later project day sheets.

Mr Coutinho gave evidence in his 8 September 2015 affidavit (par 4), in response to the complaint made by Mr Aoun in his 3 December 2014 email, that while PGA did not agree that the building needed to be repainted, he caused PGA to repaint the building at no extra charge to J Group, and that by 19 December 2014, PGA had applied at least 3 coats, and on some elevations, 4 coats of Rockcote Armour to the building.

Mr Aoun also swore an affidavit in PGA’s case. As noted above, Mr Aoun had been a construction manager employed by J Group. Mr Alha claimed in his 19 August 2015 affidavit that Mr Aoun had simply not come back to work after the Christmas break. Mr Aoun explained in his affidavit that this occurred because he had received a text message from Mr Alha that terminated his employment. Mr Aoun acknowledged that he was a brother-in-law of Mr Coutinho.

More significantly, Mr Aoun gave evidence that, after he sent the email on 3 December 2014, PGA repainted all of the building with the exception of the Western elevation. The Western elevation could not be repainted at that time because the scaffolding had been removed. Mr Aoun said (par 6): “After PGA repainted the East, South and North elevations of the building in December 2014 I was of the view that the aesthetics for those elevations were perfect”. He also referred to the fact that the last project day sheet annexed to Mr Alha’s affidavit was dated 10 December 2014, and said that that was consistent with his memory that PGA had repainted the East, South and North elevations of the building by about 11 December 2014. He said that the Western elevation may have been repainted but he did not believe it was necessary for that to occur. He further said that, in his view, the aesthetics of the building were now as good as or better than any comparable building that he had seen.

On 27 January 2015, PGA sent an email to J Group asking when PGA would get paid for an outstanding invoice in relation to the Building. On the same day, J Group’s accounting and finance officer, Ning Su, replied that J Group would be processing all payments by the end of the week, and it was still waiting for a bank drawdown to come through. PGA submitted that this response meant that J Group did not, in reality, have any concern about the adequacy of the work done by PGA, and that its complaints were invented later in order to avoid paying the debt that J Group owed to PGA. Ning Su gave evidence, however, that he was unaware of the dispute, and sent an email to all contractors and suppliers who had requested payment indicating that the drawdown had been delayed, and that payment would be processed shortly. That was a standard response and not a specific response to PGA’s email.

J Group sent a defect list to PGA on 29 January 2015. The defect list described 7 relatively minor defects, and did not mention the alleged defective application of the paint to the exterior walls of the Building.

On 9 February 2015, Mr Michael Ferreira, PGA’s manager, sent an email to Mr Alha in which he referred to J Group owing PGA $216,531.58, which he said was more than 60% of the total project value. He said that he understood that J Group was waiting on a report regarding the painting, and he referred to PGA seeking a report from Rockcote. Mr Ferreira gave what appears to be an estimate of $45,690 plus GST for providing three swinging stages for the north, east and west elevation of the Building and for painting 3000 m² with one coat. He suggested that J Group hold $60,000 until the parties had received the reports they had commissioned, and that J Group pay the balance of $156,531.58 to PGA.

On 12 February 2015, J Group paid PGA an amount of $50,000 in respect of the claim for $216,531.58.

The parties agreed that a meeting took place in early February 2015 at the site between Mr Alha, Mr Courtinho, Mr Ferreira, and Mr James McGregor, who was a representative of Rockcote Pty limited. On 11 February 2015, Rockcote Pty Ltd sent a letter to PGA, signed by its customer service officer, which said:

I am satisfied that this letter was prepared in the ordinary course of Rockcote Pty Ltd’s business, and there is no suggestion that it was prepared in contemplation of any legal proceedings. The parties cooperated in arranging for the supplier of the product that the contract required be used in the preparation and painting of the exterior walls of the Building to confirm that it had been properly applied. Rockcote Pty Ltd did so, and confirmed that the coating complied with the specification and that a warranty of 10 years would apply. It is notable that the letter stated that, in certain light conditions, some overlap and roller marks may be visible, but that was not detrimental to the performance of the product.

On 25 February 2015, an expert report on the exterior painting of the Building was prepared by Mr Brian Thompson. Mr Thompson is a technical consultant to the painting industry, and has been involved in that industry for over 50 years. He appears, from his curriculum vitae, to be suitably qualified to give expert evidence.

Mr Thompson set out his instructions in the following terms:

Mr Thompson stated in Section 3 of his report that he was “given to understand the top coat of the painting system was Dulux Weathershield – a premium quality exterior paint coating – colour “Whisper White”. That was an incorrect understanding as the contract specified Rockcote. There is no evidence that Dulux Weathershield is the same Dulux product as was specified in the original quotation, before the written contract document was amended. Mr Thompson also said in Section 8 in relation to rectification that the specification utilised should be one provided by the manufacturer of the advised finished product, which he identified as Dulux.

Mr Thompson’s observations were set out in Section 7 of his report as follows:

Mr Thompson therefore identified poor opacity, application marks, uneven appearance, uneven paint finish and clearly noticeable patched repair areas as being the cause of unacceptable results.

In Section 8 of his report, Mr Thompson referred to an Australian Standard “Guide to the painting of buildings”, and summarised the standard as requiring “any finished paint coating to represent uniformity of gloss, colour and opacity, together with freedom from painting defects such as paint application, roller-coater marks and those irregularities and uneven texture which is inconsistent with good trade practices”.

Mr Thompson advised that the standard advised “against ‘spot or touch-up painting’ and therefore ‘total’ areas should be repaired and repainted”.

On 26 February 2015, one day after Mr Thompson’s report, a company called Euphoria Trade Services Pty Ltd (Euphoria) provided a quotation to J Group in the following terms:

The instructions that were given to Euphoria to produce this quotation were not in evidence. Given the date of the quotation, it is unlikely that it was produced in response to Mr Thompson’s report. There is no explanation of the need for two coats. It is likely that the product Dulux Acra shield matt is the product referred to in the quotation, rather than the written contract document.

PGA arranged for its own expert report, which was prepared by Mr Mark Roia. I am satisfied that Mr Roia is qualified to give expert evidence on the matters covered in his report dated 11 March 2015. Mr Roia gave his opinion on the assumption that the specified product was Rockcote. It will be sufficient to set out the executive summary provided by Mr Roia in his report:

It was therefore Mr Roia’s opinion that the Rockcote product had been applied by PGA in a satisfactory manner, but visual evidence of aesthetic variation was caused by the natural characteristics of the substrate, enhanced by the fact that the product was high-gloss.

On 19 March 2015, Rockcote Pty Ltd sent to PGA a commentary on what it described as an “experts report completed on [the Building] by the applicator”. The letter stated:

PGA served a payment claim on J Group under s 13 of the Security of Payment Act. That claim does not appear to be in evidence, which therefore does not establish the basis of PGA’s claim with any precision. It is likely that PGA’s claim comprised outstanding progress claims payable under cl 23 of the contract, less any amounts paid by J Group.

J Group served a payment schedule under s 14 of the Security of Payment Act on 2 June 2015. In the attachment to the payment schedule, J Group asserted (par 3) that PGA was contracted to install Dulux Acratex Tuscany coarse acrylic colour texture to all exposed AFS walls of the Building; PGA did not install the required product “but rather installed an alternative product instead, which [J Group] maintains is an inferior product; and even the product used by PGA “was not installed in accordance with its specifications and is defective”. The written submissions provided to the adjudicator by J Group are consistent with the assertions in the payment schedule.

PGA’s application under the Security of Payment Act was determined on 7 July 2015. The adjudicator determined that J Group was liable to pay PGA $166,531.58 (including GST), and that the due date for payment was 14 May 2015. J Group was required to pay interest as prescribed by s 101 of the Civil Procedure Act 2005 (NSW). J Group was also ordered to pay 100% of the adjudication fees.

In par 31 of his adjudication, the adjudicator noted the submission made by J Group in par 3 of the attachment to its payment schedule. He also noted PGA’s response in par 32, which included:

The adjudicator noted that J Group had responded by asserting that PGA should not be entitled to rely upon its expert report (by Mr Roia) because it had not been served on J Group. The adjudicator rejected that submission because J Group had quoted extracts from the expert report in its submission in support of its payment schedule. He then summarised the report of Mr Thompson provided by J Group, and by Mr Roia provided by PGA. In relation to the latter, the adjudicator noted the observations by Mr Roia concerning gloss levels and that “there appears to be some visual evidence of aesthetic variation which is brought about by the natural characteristics of the substrate”, and that the “high-gloss nature of applied paint exacerbates the aesthetic sheen variations by enhancing reflectivity and highlighting surface irregularities”. The adjudicator further noted Mr Roia’s conclusion that the “variations in sheen may be described as a natural consequence of the inherent characteristics of the substrate and/or the pre-painted surface”. The adjudicator preferred Mr Roia’s report to that of Mr Thompson.

The adjudicator expressed his conclusions as follows:

The adjudicator found that PGA was entitled to be paid $166,531.58 inclusive of GST. He decided that the contract required PGA to use the Rockcote product, and not the Dulux product specified in the quotation. He further decided that PGA had applied the Rockcote product in accordance with its specifications.

The question is whether J Group raised in the adjudication any claim that, even if the contract specified the Rockcote product, and PGA applied that product properly in accordance with its specification, PGA was nonetheless in breach of the contract because the product was not fit for purpose.

It is not surprising that the documents produced during the course of an adjudication under the Security of Payment Act may not have the detail and specificity of pleadings and submissions that are produced in the course of conventional litigation. However, as I have noted above, in par 3 of its payment schedule J Group asserted that the product installed by PGA was “an inferior product”. The finding made by the adjudicator in par 51 of his adjudication appears in general terms to be a response to this claim by J Group. As the adjudicator had found that the contract specified Rockcote, and that PGA applied the product in accordance with its specifications, there was no need for the adjudicator to comment upon the absence of the specification of a particular finish in the contract, unless he was directing his attention to J Group’s claim that the Rockcote product was not fit for purpose. A contractual obligation that a particular product will be fit for purpose will be devoid of meaning if there is no objective specification of the purpose that is recognised by the contract. It may not be necessary for the purpose to be specifically stated in the contract, but the contract must provide some objective method for identifying the purpose. The adjudicator appears to have ruled on J Group’s claim that Rockcote was an inferior product, by finding that J Group had not ensured that the contract specified the required characteristics of the finish of the paintwork, with the consequence that it could not be found that the Rockcote product itself was defective – meaning not fit for purpose.

I have considered the reasoning of the adjudicator in some detail, because a question may arise on an application to set aside a statutory demand based upon a judgment obtained by the filing of an adjudication certificate under the Security of Payment Act, as to whether, and if so in what way, the reasoning of the adjudicator may affect the court’s identification of the claim and whether there are any offsetting claims.

J Group filed a statement of claim in the District Court of New South Wales on 29 July 2015. It pleaded the following breaches of the contract by PGA:

J Group’s statement of claim therefore raises its claim that the contract did not specify Rockcote; that PGA did not apply the Rockcote product adequately; and also in the various ways set out in the pleading, the product that was supplied was not fit for purpose. As I have noted above, there is no allegation in the statement of claim that PGA was responsible for defective design of the rendering works.

J Group claimed damages in the sum of $350,000. This amount covered not only rectification of the allegedly defective work by PGA, but also consequential loss allegedly suffered by J Group because of delay in the completion of the Building. J Group did not seek any order that the District Court judgment based upon the adjudication certificate be set aside. I was told during the hearing that J Group had filed a notice of motion seeking a stay of that judgment, but the evidence did not deal with the fate of that application.

There are a number of features of the present case that will make it necessary to consider in some detail the authorities that establish the legal principles that are to be applied in determining whether a statutory demand should be set aside.

The statutory demand has been based upon a District Court judgment issued upon the filing of an adjudication certificate following the adjudication of PGA’s claim. It has not been based upon a failure by J Group to deliver a payment schedule to PGA, or a failure to pay an amount acknowledged to be due in a payment schedule.

In its District Court statement of claim, J Group alleges that PGA applied paint product that was not the one specified in the contract; that even if the product that was used was specified in the contract, that product was not fit for purpose; and in any event, the application of the paint product that was used was defective.

J Group has provided evidence of the cost of redoing the work with the Dulux product that it claims was the one specified in the contract. That rectification work may be required if either PGA used paint product that was not permitted by the contract, or if it was permitted, it was not fit for purpose, so that the work will have to be substantially redone. PGA has tendered evidence that on balance supports the conclusion that the cost estimate provided by J Group is excessive if Rockcote was the product specified by the contract, and all that is necessary is to apply another coat to correct such defects as inadequate cover and application marks.

Further, there is evidence that PGA agreed to repaint the walls, but failed to paint the west wall, because the scaffolding had been taken down. An allowance of about $60,000 for the cost of the rectification work that was not done by PGA in relation to the west wall may be justified by the evidence.

In the present case, the better view is that the adjudicator decided not only that the contract required the application of Rockcote by PGA, but also that the work was not defective, and was not unfit for purpose (because the contract did not specify the required surface finish).

How then is the court to determine whether J Group is attempting to set up a genuine dispute that the debt is owing, or to prosecute an offsetting claim, and if there is no offsetting claim, whether there is some other reason why the statutory demand should be set aside?

Initially, J Group claimed that there was a genuine dispute about the existence of the debt upon which the statutory demand was based, for the purposes of s 459(1)(a) of the Corporations Act. PGA submitted, however, and J Group accepted, that I should follow the decision of Brereton J in In the matter of Douglas Aerospace Pty Ltd [2015] NSWSC 167, on the issue of whether a company that is a judgment debtor on a judgment issued upon the filing of an adjudication certificate under the Security of Payment Act can claim that there is a genuine dispute about the existence of the underlying debt.

As will be seen, I am satisfied that it is proper for me to follow Douglas Aerospace in the present case. However, I respectfully suggest that there are additional considerations that may arise in other cases where an application is made to set aside a statutory demand based upon a debt created by the Security of Payment Act, that may require the court to approach the determination of the dispute differently than was done in that case. My following Douglas Aerospace should not be taken to convey an acceptance that the case establishes principles that will cover all applications to set aside statutory demands based upon Security of Payment Act debts. There is scope for further development of the relevant principles.

I will start by referring to a number of introductory propositions stated by his Honour. Brereton J said at [39], concerning the issue of what is required to satisfy the Court that there is a genuine dispute or offsetting claim:

This statement is consistent with the decision of the Court of Appeal in W & P Reedy Pty Ltd v Macadams Baking Systems (Pty) Ltd [2007] NSWCA 146 at [5], and many other decisions. The threshold for establishing either a genuine dispute, or a genuine offsetting claim, is a relatively low one, and it is sufficient that there is a serious question to be tried based on a cause of action advanced in good faith for an amount claimed in good faith, such as not to be frivolous or vexatious.

It is relatively obvious from the evidence considered above that the contemporaneous correspondence between the parties strongly suggests that there is a dispute between them, or an offsetting claim. However, in the present case, the course of the proceedings, and the nature of the evidence that has been filed, has drawn the court more deeply into the detail of the dispute than ordinarily would be thought necessary.

In Elm Financial Services Pty Ltd v MacDougal [2004] NSWSC 560, Barrett J (as his Honour then was) made the following observations concerning the nature of the evidence of the quantum of an offsetting claim that is required:

In Douglas Aerospace, Brereton J said on the same subject:

These authorities point to the generality of the evidence that may be sufficient to establish the amount of the offsetting claim for the purposes of s 459H(2) of the Corporations Act, and how greater specificity will be required if it is not reasonably clear that the amount is greater than the amount of the claim; such that greater “particularity” will be required where the offsetting claim approximates or is less than the amount of the claim.

The most significant feature of Douglas Aerospace for the purposes of the present case is the ruling by Brereton J, following the decision of the Court of Appeal of Western Australia in Diploma Construction (WA) Pty Ltd v KPA Architects Pty Ltd [2014] WASCA 91, that where a party serves a statutory demand based upon a judgment obtained by filing an adjudication certificate following an adjudication under the Security of Payment Act, the company served with the statutory demand cannot claim that it has a genuine dispute as to the existence of the debt for the purposes of s 459H(2)(a), where the company’s only right is to assert that the underlying debt the subject of the adjudication certificate has not arisen under the contract. The company can mount an offsetting claim under s 459H(1)(b) if it has a counterclaim, set off or cross demand that does not deny the debt, but asserts a countervailing liability: see Douglas Aerospace at [98].

Brereton J held at [100] that he should follow the decision of the Court of Appeal in Diploma Construction, as that decision was correct, and that he should not follow a number of decisions of this court, and decisions of other courts that have followed those decisions, which Brereton J accepted were plainly wrong: (primarily Plus 55 Village Management Pty Ltd v Parisi Homes Pty Ltd [2005] NSWSC 559; Ettamogah Pub (Rouse Hill) Pty Ltd v Consolidated Constructions Pty Ltd (In Liq) [2006] NSWSC 1450; and Prime City Investments Pty Ltd v Paul Jones & Associates Pty Ltd [2013] NSWSC 2).

In Diploma Construction, the respondent had obtained a judgment in the District Court of Western Australia, based upon two adjudication certificates under the Western Australian equivalent of the Security of Payment Act. The respondent served a statutory demand based upon the judgment. The appellant commenced proceedings in the District Court for negligence in the performance of the respondent’s contractual duties. The appellant claimed an amount that was less than the total of the judgment issued in favour of the respondent, plus damages to be assessed. The appellant also sought a declaration that the amount the subject of the judgment in favour of the respondent “is not due and payable”. The appellant commenced proceedings in the Supreme Court of Western Australia for an order setting aside the statutory demand.

The Court of Appeal (Pullin JA; Newnes and Murphy JJA agreeing) held that there was no genuine dispute about the existence of the debt upon which the statutory demand was based:

The Court of Appeal also held in relation to the issue of whether the appellant had an offsetting claim:

Concerning the possibility that the court might set aside the statutory demand on the basis that there was “some other reason” for the purposes of s 459J(1)(b), Pullin JA said:

Brereton J, having noted at [90] that, on the basis of the principle in Farah Constructions Pty Ltd v Say-Dee Pty Ltd [2007] HCA 22; (2007) 230 CLR 89 at [135], he should follow the decision in Diploma Construction unless satisfied that it is plainly wrong, expressed his conclusions in the following three paragraphs at the end of his judgment:

Thus, Brereton J held that a plaintiff who applies for an order setting aside a statutory demand cannot claim that there is a genuine dispute as to the existence of the debt created by the registration of the adjudication certificate in a court, and the consequent issue of judgment.

However, where the claim made by the plaintiff accepts the validity of the debt, but asserts that there is a countervailing liability (which his Honour described as “a ‘true’ offsetting claim”), there may be an offsetting claim. Brereton J gave as an example an “offsetting claim for damages for negligence or breach of contract” ([93]).

It should be noted that Brereton J said, at [92], concerning the possibility that the pendency of proceedings to establish that the liability established by the adjudication process does not exist under the contract could justify the court making an order setting aside the statutory demand under s 459J(1)(b), because there is “some other reason why the demand should be set aside”:

It must be accepted, with respect, that so long as a statutory debt created by the Security of Payment Act exists, or a judgment issued under that Act remains in force, a company which is so indebted cannot genuinely dispute the existence of the debt for the purposes of s 495H(1)(a) of the Corporations Act. Furthermore, on the basis of the second of the reasons given in Diploma Construction, proceedings that only seek to set aside the debt or any judgment founded on the debt under the Security of Payment Act will not be an offsetting claim, because there cannot be an “offsetting amount” for the purposes of s 459H(2), so that the company will not have an offsetting claim within s 459H(1)(b).

However, I would suggest that there are reasons for doubting that the principles stated by the High Court in Deputy Commissioner of Taxation v Broadbeach Properties Pty Ltd [2008] HCA 41; (2008) 237 CLR 473 in relation to the Commonwealth taxation legislation should be given the same force in considering how the operation of the State Security of Payment Act may impinge upon the operation of Division 3 of Part 5.4 of the Corporations Act, particularly if that operation is likely to undermine fundamental principles concerning the proper use of statutory demands. Furthermore, there may be a basis for the court to be more liberal in considering the possible application of s 459J(1)(b) than has been suggested in Diploma Construction (being an issue that was specifically reserved at [92] of Douglas Aerospace). There may be more scope for the court to find some other reason why the statutory demand should be set aside, than was apparently contemplated in Diploma Construction to allow the court to guard against the possibility that otherwise statutory demands based upon debts created by the Security of Payment Act may be used as nothing more than a debt collecting mechanism against solvent companies, which is contrary to the purposes of Division 3 of Part 5.4 of the Corporations Act.

It is necessary to examine how the operation of the Security of Payment Act interacts with Division 3 of Part 5.4 of the Corporations Act, in order to determine the practical implications of a principle that a company served with a statutory demand, which reasonably disputes the basis of an adjudication, or other debt arising, under the Security of Payment Act, has neither a genuine dispute within s 459H(1)(a), nor an offsetting claim within s 459H(1)(b).

The right that is created by the Security of Payment Act in favour of a claimant is found in s 8, which provides:

This section creates a novel statutory entitlement in persons who have carried out construction work, or who have undertaken to supply related goods and services, under a construction contract. They are entitled to what is called a “progress payment”. They are entitled to a progress payment on and from each “reference date”. That date may be a date provided for under the terms of the construction contract. However, the persons are still entitled to a progress payment even “if the contract makes no express provision with respect to the matter”. In this latter case, the right arises on the last day of each month. Thus, although the right to the progress payment arises under s 8 of the Security of Payment Act, it may conform to an entitlement that the person has under the building contract. However, in other cases it may arise solely under the Security of Payment Act.

“Progress payment” is defined in s 4 of the Security of Payment Act as meaning “a payment to which a person is entitled under s 8, and includes (without effecting any such entitlement)” certain specific payments that need not now be considered.

The amount of the progress payment to which a person is entitled is governed by s 9, which provides:

As was the case with the creation of the right to a progress payment, the amount may be governed by the terms of the contract, but if there are no such terms, the amount will be equal to “the value of the construction work” in accordance with s 9.

The combined effect of ss 8 and 9 is that, provided (1) a construction contract exists between a person called a “claimant” and a “respondent”; (2) relevantly, the claimant has undertaken to carry out construction work under the contract; (3) then the claimant is entitled to a progress payment; and the amount of the progress payment is either (4) the amount calculated in accordance with the terms of the contract, or (5) the value of the construction work carried out. The entitlement of the claimant to the progress payment is not necessarily equivalent to being entitled to receive a progress payment under the contract. Where the contract deals with the valuation of progress claims, the amount of the progress payment may be determined by the contract. In other cases, the fact that the claimant has done construction work under the contract, which has a value, will entitle the claimant to a progress payment calculated accordingly.

The point of these observations is that, in some cases, claimants may be entitled to progress payments that do not arise under the relevant construction contract, either in relation to the amount of the claim, or at all. This will become relevant when the time comes to consider how it is that the court is to work out, in relation to a debt created by the Security of Payments Act, what the respondent is, and is not, permitted to raise by way of an offsetting claim. As there may only be a limited relationship, or none at all, between the basis of the claimant’s right to a progress payment, and considerations of whether the respondent is entitled to challenge whether the claimant has a right to a debt under the contract, or whether the respondent only has a right to make an offsetting claim for damages, difficulties may arise in the application of s 459H of the Corporations Act.

Section 10 of the Security of Payment Act governs how construction work carried out under a construction contract is to be valued. It relevantly provides:

This provision again recognises the possibility that the construction contract may or may not deal with the relevant issue, in this case the valuation of construction work. Section 10(J)(a) deals with the case where the contract provides directly for the calculation of the value of work done under the contract: Plaza West Pty Ltd v Simon’s Earthworks (NSW) Pty Ltd [2008] NSWCA 279 per Hodgson J (as his Honour then was) at [53]. Where there is such a contractual mechanism, the amount of the progress payment is to be determined in accordance with it. However, s 10(1)(b) provides a valuation mechanism where the contract does not make any express provision for the matter. In that case, the value of the work is to have regard to the contract price, and any other rates or prices, and any variations to those prices, and also the estimated cost of rectifying defective work.

Section 10 may therefore, in some cases, create conceptual difficulties when the court comes to try to work out, in an application by the respondent under s 459G of the Corporations Act that relies upon s 459H, what is a dispute as to the existence of the relevant debt, and what is an offsetting claim. Speaking generally, where the claimant’s claim to a progress claim is dealt with entirely under the contract, it should in theory be possible to analyse the terms of the contract to determine whether the respondent’s challenge to the claimant’s claim contests the existence of the debt, or accepts the debt and is an offsetting claim in the nature, for example, of a claim for defective work or breach of some other term of the contract. The fact that the work is defective, or some other term of the contract is breached, may not have the technical effect of depriving the claimant of an entitlement to payment of the debt. However, at least in cases where the amount of the progress claims depends upon the value of the work, and the contract does not make express provision for the determination of that value, one of the things that must be taken into account in determining the value is the estimated cost of rectifying any defective work. That may have the effect of collapsing the distinction between debts and offsetting claims. The amount of the progress claim that is determined may be a debt reduced by an allowance for an offsetting claim.

Section 13 of the Security of Payment Act deals with the service by a claimant of a payment claim on the respondent. The claim must identify the construction work to which the progress payment relates as well as the amount of the progress payment that is claimed.

It may not always be the case that the amount claimed is the amount of a contractual debt under the contract, without any adjustment. The claimant may recognise that some allowance must be made for the cost of rectifying defective work, or for some other breach of the contract by the claimant; even in cases where s 10(1)(b)(iv) is not directly applicable. The claim amount may be calculated on a basis that attempts to allow for an offsetting claim available to the respondent.

Under s 14, the respondent may reply to the claim by providing a payment schedule to the claimant. The payment schedule, among other things, must indicate the amount of the payment (if any) that the respondent proposes to make. If the amount of the payment is less than the claimed amount, the payment schedule must indicate why the scheduled amount is less, and in appropriate cases the respondent’s reasons for withholding payment.

Section 14(4) has the effect that, if the respondent does not provide a payment schedule to the claimant within a stipulated time, “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”.

In cases where s 14(4) creates a liability in the respondent to pay the amount of the claimant’s claim, a statutory debt will arise. Not only will there have been no judicial determination of the claimant’s rights, but there will not even be an adjudication. The only source of information concerning the basis of the claimant’s claim will be whatever the claimant chose to include in the claim made under s 13, which may, depending upon the content of the claim, be more or less informative.

The liability of the respondent under s 14(4) is reinforced by s 15(2), which entitles the claimant to recover the unpaid portion of the claimed amount from the respondent, as a debt due to the claimant, in any court of competent jurisdiction. Alternatively, the claimant may make an adjudication application under s 17(1)(b) in relation to the claim. Additionally, the claimant may serve notice on the respondent of an intention to suspend carrying out construction work. Subsection (4) prohibits the respondent from bringing any cross claim or raising any defence in proceedings authorised by s 15(2)(a)(i) to recover the amount claimed in court. That limitation only applies to those court proceedings.

Section 16 deals with the situation where the respondent provides a payment schedule to the claimant that accepts that some amount is payable by the respondent, but the respondent fails to pay the whole or some part of the amount admitted. That failure in essence has the same consequences as are set out in s 15, that follow the failure by the respondent to provide a payment schedule at all.

Sections 17 to 25 of the Security of Payment Act deal with the process of adjudication of a claim to a right to be paid a progress payment under s 8. Section 17 authorises the claimant to apply for an adjudication of a payment claim, if the respondent has not provided a payment schedule, or has not paid the whole amount that has been admitted in a payment schedule. The adjudication application must be in writing and, as provided in s 17(3)(h), may contain such submissions relevant to the application as the claimant chooses to include. Relevantly, the written claim, or any submissions that are made, may assist to identify the nature and the grounds for the claim. Under s 20, the respondent may lodge with the adjudicator a response, which must be in writing, and may contain such submissions relevant to the response as the respondent chooses to include (though the respondent cannot include any reasons for withholding payment that have not been included in the earlier payment schedule). Under s 21, the adjudicator is to determine the adjudication application as expeditiously as possible, in accordance with a very confined timetable.

Section 22 governs the determination of the claim by the adjudicator. It relevantly provides:

The adjudicator is required to make a determination. The determination must be in writing, and ordinarily must include the reasons for the determination. The reasons may assist the court in its determination of whether an application by the respondent to set aside a statutory demand based upon the determination is a dispute as to the existence of the debt or an offsetting claim; or it may not.

The terms of s 22(2) may be significant. The subsection is prescriptive of what the adjudicator is required to consider. This is not the time for the court to express any considered view as to how the Security of Payment Act requires adjudicators to make their determinations. However, it is notable that the only legal principles that adjudicators are instructed to consider are the provisions of the Security of Payment Act itself, and “the provisions of the construction contract from which the application arose”. They are not, at least expressly, instructed to consider the principles of the law of contract. Be this as it may, it seems obvious from the express and relatively summary procedure to be adopted for adjudications, that determinations may not always be able to be carried out in a thorough manner, and may not apply all relevant principles of law to all of the facts that should be taken into account.

Section 23 obliges a respondent to pay an adjudicated amount by an identified date, if the adjudicator determines that an amount is payable.

If the respondent fails to pay the whole or any part of the adjudicated amount, the effect of s 24 is that the claimant may obtain an adjudication certificate, and may serve notice on the respondent of the claimant’s intention to suspend carrying out construction work.

Under s 25, the adjudication certificate may be filed as a judgment for a debt in any court of competent jurisdiction, and is enforceable accordingly. Under s 25(4), in any proceedings by the respondent to set aside the judgment, the respondent is not entitled to bring any cross claim against the claimant, or to raise any defence in relation to matters arising under the construction contract, or to challenge the adjudicator’s determination.

It is not necessary for the purpose of determining the present dispute to consider in any detail the manner in which s 32 of the Security of Payment Act has the effect that the statutory debts that may arise under ss 14, 15, 16, 23 and 25 of the Security of Payment Act may only have a temporary operation, by reason of the fact that the section preserves the civil rights of parties to construction contracts, but for completeness I set out the relevant parts of the provision:

A debt created by the Security of Payment Act, or a judgment issued upon the filing of the adjudication certificate, will continue to have effect indefinitely unless a court or tribunal with jurisdiction to do so sets aside the debt or judgment, or makes an order with a similar effect, under s 32(3)(b).

The debt upon which the statutory demand is based is a creation of the Security of Payment Act. It is not a debt that arises under the contract.

The debt may arise because of the failure by the respondent to serve a payment schedule, because the respondent does not pay an amount admitted in a payment schedule, or because an amount is found to be payable by the respondent following an adjudication. The first two ways that the debt may be created involve no process of determination.

The statutory demand may be based directly upon a statutory debt created by the Security of Payment Act, or a judgment created by the registration of an adjudication certificate, or a suit commenced to enforce the statutory debt.

The process begins with the service of a claim by the claimant. The claimant may claim a debt that arises under the contract. However, the claimant may make an allowance for defective work, or for some other breach of contract. It may be in the interests of the claimant to make such an allowance because an excessive claim may be self-defeating. Thus, the amount claimed may be a debt payable under the contract, or it may be the net amount of such a debt and what is described in s 459H(1)(b) as an offsetting claim.

A respondent may serve a payment schedule in response to a claim for a contractual debt that withholds payment of an amount to allow for an offsetting claim. If the respondent then does not pay the amount admitted, a debt will arise under the Security of Payment Act that is the net amount of a contractual debt and an offsetting claim.

As a result of a process of adjudication, the adjudicator may allow a claim that is equivalent to a debt arising under the contract, or the adjudicator may find that the respondent is liable to pay an amount calculated by reducing a contractual debt by an allowance for an offsetting claim.

It follows that, where a statutory demand is based upon a debt created by the Security of Payment Act, and that debt cannot reasonably be disputed, the debt may equate to a debt that arises under the contract, leaving open to the respondent the ability to rely upon an offsetting claim. However, that will not necessarily be the case, as the Security of Payment Act debt may itself be the net effect of a contractual debt and an offsetting claim. The outcome in a particular case will depend upon the underlying facts, and how the claimant and the respondent implement the procedures in the Security of Payment Act.

Furthermore, debts created by the Security of Payment Act may not directly reflect any rights created by the contract at all. The contract may not give the claimant a right to progress claims. If it does give the claimant such a right, it may not contain a contractual mechanism for valuing the work done during progress claim periods. Even in the absence of an offsetting claim, the respondent may have a right to assert that it does not owe the claimant any amount at all, or owes an amount that is different to that which is determined under the Security of Payment Act.

It will be a matter for experience, and the available evidence in each case, as to whether the debt created by the Security of Payment Act can transparently be related to the underlying contractual entitlement of the claimant, or the relationship between the claimant’s contractual claim, and any offsetting claim under the contract available to the respondent.

This is unlike the situation considered by the High Court in Broadbeach. Where a taxation assessment is issued, it reflects a taxation debt owed by the taxpayer. The effect of the notice of assessment is to make the existence of the debt conclusive. In the ordinary case, the taxpayer will not have an offsetting claim, but if it does, there should be no difficulty in distinguishing between the debt and the offsetting claim. The service of a statutory demand based upon a taxation debt evidenced by a notice of assessment naturally fits, so to speak, into the dichotomy of debt and offsetting claim contemplated by s 459H(1) of the Corporations Act.

As I have said, the Security of Payment Act creates a number of different types of statutory debt, and it protects those debts in various ways from cross claims and defences based on matters arising under the contract. The Security of Payment Act does not, however, establish any presumptive validity of the steps taken in implementation of that Act; in particular the determination made in any adjudication process. The adjudication does not decide any issues that arise in relation to any contractual debt or any offsetting claim that arises under the contract.

What, in these circumstances, does it mean to say that the respondent cannot reasonably dispute the Security of Payment Act debt by claiming that the debt is not supported by an underlying contractual debt (even in the unusual case where there is obviously no underlying contractual debt) for the purposes of s 459H(1)(a), but the respondent may be permitted to raise an offsetting claim under s 459H(1)(b)?

In the present case, the problem is simplified because it appears, albeit not with great clarity, that the adjudicator dealt with a claim by PGA for a contractual debt, and an offsetting claim by J Group for breach of contract on two bases; breach of warranty of fitness for purpose, and breach of contract for defective work. He allowed the claim by PGA based upon the contract, but he rejected J Group’s offsetting claims entirely.

Thus, it is a practicable approach for the court in this case to reject any argument by J Group that the debt upon which the statutory demand is based is genuinely disputed (because the debt created by the Security of Payment Act equates to a contractual debt). The court can recognise the existence of J Group’s offsetting claims for the purposes of s 459H(1)(b), because they exist and have not affected the amount of the Security of Payment Act debt. However, the issue would not be so simple if the Security of Payment Act debt was solely a creation of the statute, with no equivalent in the contract, or the Security of Payment Act debt was the net result of allowing for a claim and an offsetting claim.

The ultimate problem is that the application of the relevant provisions of the Corporations Act may not permit the court simply to accept the statutory debt, and enquire whether there is an offsetting claim, and if so what the value of that claim is. Plainly, if the statutory debt is $1000 calculated by reducing a contractual debt of $2000 by $1000, to allow for the cost of rectifying defective work, the court could not properly proceed upon the basis that there was a debt of $1000 that could not reasonably be disputed, and then allow an offsetting claim of $1000 under s 459H(2).

Two important features of the law governing applications to set aside statutory demands should be borne in mind in addressing this problem.

The first concerns the underlying purpose of Division 3 of Part 5.4 of the Corporations Act.

In Bakota Holdings Pty Ltd v Bank of Western Australia Ltd [2011] NSWSC 1277, Barrett J (as his Honour then was) said:

In considering the application of this principle, it should be borne in mind that a creditor with the benefit of a statutory debt under the Security of Payment Act will always have various means of enforcing the debt that do not involve the service of a statutory demand, and an attempt to wind up the respondent. The need to afford the creditor a means of enforcing the debt does not require the court to risk the subversion of the statutory purposes inherent in Division 3 of Part 5.4. As Campbell J (as his Honour then was) said in Demir Pty Ltd v Graf Plumbing Pty Ltd [2004] NSWSC 553 at [20]:

The second feature is more prosaic, but nonetheless important for practical reasons. As Barrett J (as his Honour then was) said in Drum Cafe Australia Pty Ltd v Lieberman [2010] NSWSC 642 at [13]:

There may be scope for unwarranted complexity to be introduced into the determination of applications to set aside a statutory demand based upon a debt created by the Security of Payment Act, if it becomes necessary to investigate the basis of the adjudication in order to determine what the respondent is permitted to challenge by way of making an offsetting claim.

There is a question, I respectfully suggest, as to whether it is correct to apply the principles considered by the High Court in Broadbeach as if they were equivalent to the effect of the State Security of Payment Act.

In Broadbeach, the plurality (Gummow ACJ, Heydon, Crennan and Kiefel JJ) considered a number of different provisions in taxation statutes at [25] to [39], which had the effect that the making of an assessment shall be conclusive evidence “that the amount and all the particulars of the assessment are correct” (for example [26]). The plurality commented at [41] on the “apparent asperity” with which the various taxation provisions operated, and observed at [44]: “But harsh though the operation of these provisions may be, they implement a long-standing legislative policy to protect the interests of the revenue”.

In considering the issue of whether “tax debts” could be “disputed” for the purposes of Division 3 of Part 5.4 of the Corporations Act, the plurality said at [51] (footnotes omitted):

By the reference to tax debts having special incidents or characteristics attached, which do not pertain to ordinary debts, the plurality is referring to the circumstance that the effect of the Commonwealth taxation legislation is that the tax debts in question were relevantly conclusive.

In relation to the possible application of s 459J(1)(b) to the setting aside of a statutory demand based upon a tax debt made conclusive by the relevant taxation statute, the plurality said (footnotes omitted):

The plurality therefore said in terms that one material consideration that the court must take into account when deciding whether there is some other reason why the statutory demand should be set aside was the legislative policy respecting the recovery of tax debts notwithstanding the pendency of proceedings challenging the assessments.

It is one thing, however, to say that a court applying s 459J(1)(b) of the Commonwealth Corporations Act must take into account the legislative policy in another Commonwealth statute; it is entirely another to say that the court should take into account the legislative policy in a State statute, particularly when to do so may compromise the fundamental objective of the Corporations Act: see the extract from Demir Pty Ltd v Graf Plumbing Pty Ltd set out above.

The present case is not one in which the adjudicator based his adjudication decision upon the existence of a contractual debt in the absence of the availability to J Group of any offsetting claim. Had that been the case, the only course available to J Group would have been to challenge the existence of the debt that underlies the statutory debt, and J Group would be faced with the prohibition against claiming that the statutory debt was genuinely disputed.

J Group has argued that the contract between itself and PGA required PGA to apply Dulux products. If that was the true legal position, in my view, as PGA has applied the alternative Rockcote product, PGA would not have done the work necessary to permit it to claim the contract price as a debt. This aspect of J Group’s claim seeks to dispute the existence of the underlying debt, and is not permissible.

As it has happened, the adjudicator rejected this aspect of J Group’s claim. I would have held, in any event, based upon the analysis that I have set out above in relation to the terms of the contract, and specifically the scope of works, that it is not reasonably open for J Group, to argue that the contract required PGA to use Dulux products rather than Rockcote.

In the present case, J Group has a number of offsetting claims, being that the product that was applied by PGA was applied defectively, so that an amount of remedial work is necessary to repair the defective application of the Rockcote product. It is likely that a single additional coat of product, properly applied, would be sufficient to repair the defective application. There is an issue in the evidence as to whether PGA has already applied that additional coat of product, at least on all walls other than the western wall, or whether it remains necessary for an additional coat to be applied to all of the walls. The cost of doing this work would be less than the amount of $165,218.90 estimated by Mr Thompson in his 26 February 2015 report, because that assumes application of 2 coats of Dulux to all walls of the Building.

J Group has a further offsetting claim that, even if Rockcote was specified in the contract, PGA warranted that the product was fit for purpose, and it is not fit, because the effect of its high-gloss finish, when applied to the substrate material, is to produce unsightly differences in the appearance of the walls of the Building. If J Group were able to make out this offsetting claim, it is inherently much more likely that it could justify the requirement for rectification by applying 2 coats of a matt, Dulux product.

The court does not in the present case face the difficulty that I have discussed in theory above, that would have arisen if the adjudicator had determined an adjudication amount that made an allowance for the rectification costs of defective work, so that the amount in the adjudication certificate was already a net amount of a claim and an offsetting claim. I therefore do not have to deal with the problem of how to proceed, if the adjudicator had already made an allowance for some or all of an offsetting claim made by J Group.

Instead, in the present case, the better view is that the adjudicator has rejected both offsetting claims made by J Group, so that the amount of the adjudication certificate represents the value of the work done by PGA, so that the certificate is based upon the adjudicator’s assessment of a debt that arises under the contract.

The real question that therefore arises in the present case is as to how the court should treat J Group’s offsetting claims for the purposes of s 459H(1)(b) and (2), in circumstances where they have been rejected by the adjudicator.

In my opinion, the answer to this question is that the offsetting claims remain available for the purposes of the present application, and that they are ‘true’ offsetting claims, being for damages for breach of contract: see Douglas Aerospace at [93]. Sections 23 and 25 of the Security of Payment Act may have the effect that the adjudication amount cannot reasonably be disputed by J Group, but the statutory provisions do not clothe the adjudicator’s reasoning with any finality that must be accepted by the court.

The most significant feature of the present case is that J Group has a genuine offsetting claim against PGA, which it is seriously prosecuting in its District Court proceedings, and that even if the contract specified the use of Rockcote for application to the walls of the Building, and even if that product was applied in accordance with specification, it was not fit for purpose because it was a high-gloss product applied to a substrate that would most likely lead to an unsightly and uneven finish.

The question of whether or not J Group is in some way precluded from pursuing its want of fitness for purpose claim, because there is an absence of any specification in the contract of the description of the required surface finish, is a matter for argument, which is not a proper subject for determination on an application to set aside a statutory demand.

The apparent determination by the adjudicator that J Group is not entitled to succeed on its offsetting claims does not in any way bind this court on an application to set aside the statutory demand.

It is necessary for the court to consider the application of s 459H(2) of the Corporations Act, which requires the Court to determine the difference between the “admitted total” and the “offsetting total”. The former is $173,761.80. The latter will be $165,218.90, if I accept that the evidence of Mr Thompson is adequate for present purposes to provide a sufficient basis for assessing the offsetting total. The difference is $8542.90.

In my view, J Group could not justify this amount, if the only offsetting claim it had was for defective application of the Rockcote product. As J Group has an offsetting claim for unfitness for the purpose, it is not necessary for the court to pursue this issue further.

In the light of the statement of principle by Barrett J in Elm Financial Services Pty Ltd v MacDougal that I have set out above, concerning the nature of the evidence that is required on an application such as the present to quantify the amount of an offsetting claim, I will accept Mr Thompson’s estimate.

I will therefore make the following order:

I will hear the parties as to costs, particularly in relation to the adjournment of the first hearing of this application, and in relation to the significance of the fact that the court has varied the statutory demand without setting it aside as sought by J Group.