Cashflow is the ‘Lifeblood’ of the Construction Industry: Has the High Court Applied a Tourniquet? Southern Han Breakfast Point Pty Ltd (in liq) v Lewence Construction Pty Ltd

By Matthew Bell

Southern Han Case Page

The December solstice of 2016 was celebrated in diverse ways around the world. At Stonehenge, druids and pagans greeted the mid-winter dawn. In Australia, construction lawyers were digesting the first High Court judgment on the Building and Construction Industry Security of Payment Act 1999 (NSW): Southern Han Breakfast Point Pty Ltd (in liq) v Lewence Construction Pty Ltd [2016] HCA 52.

The Court (Kiefel, Bell, Gageler, Keane and Gordon JJ in joint judgment) confirmed that the existence of a Reference Date under a Construction Contract is a precondition to the making of a valid Payment Claim (the capitalised terms are defined under the Act — more on that shortly). In doing so, the Court overturned the decision of the NSW Court of Appeal ([2015] NSWCA 288), effectively restoring the declaration by Ball J at trial ([2015] NSWSC 502) that the adjudicator had no jurisdiction to make a determination under the Act on a purported payment claim.

Ball J’s conclusion rested upon his Honour’s interpretation of the contract used here (AS4000-1997, a widely-used, construct-only form of construction contract) as having exhausted its capacity to generate ‘Reference Dates’ (which trigger the right to make a payment claim under the Act). This was based on alternate hypotheses: either the contract had been terminated for repudiation, or (if the contract remained on foot) the ‘show cause’ procedure then in effect suspended the right to claim payment.

The judgment is on a narrow point, but has wider significance. This is because the NSW Act has, as was noted by Senior Counsel for the appellants, Michael Christie SC, in his submissions before the Court,

assumed great commercial significance. Billions of dollars’ worth of claims have been adjudicated under this legislation. … Statutory adjudication under this legislation now sits alongside arbitration and litigation as a primary form of dispute resolution in the construction industry.

Moreover, each of the Australian States and Territories has enacted legislation with like intent (though, significantly different approaches) to the NSW Act. The eight Australian statutes are themselves planks in a raft of legislation, derived from the Housing Grants, Construction and Regeneration Act 1996 (UK), which seeks to keep construction industry cashflow afloat in Ireland, Malaysia, New Zealand and Singapore, as well as the UK. It may also soon be extended to South Africa, Hong Kong and Canada. Thus, the consideration by Australia’s apex Court is likely to generate interest internationally, as did the first UK Supreme Court decision on the UK Act, Aspect Contracts (Asbestos) Ltd v Higgins Construction plc [2015] UKSC 38.

A contract dispute with a harbour view

The genesis of the Southern Han dispute was a January 2014 contract between the parties, by which Lewence undertook to construct the Augusta Apartments at Breakfast Point in Sydney.

On 27 October 2014, Southern Han purported to exercise its rights under the ‘show cause’ procedure in the contract, taking the remaining work out of Lewence’s hands. Lewence viewed that action as a repudiation of the contract and purported to accept that repudiation. After that purported termination, on 4 December 2014, Lewence purported to serve a Payment Claim under the Act for some $3.2 million. Southern Han responded to that claim with a Payment Schedule indicating its opinion that Lewence had in fact been overpaid to the tune of $65,000.

This exchange proceeded to a predictable result in the context of security of payment legislation: Lewence applied for the expedited adjudication which is a core feature of those schemes. After some delays in finding an adjudicator who would hear the case, an adjudicator purported to make a determination under the Act that Lewence was entitled to be paid $1.2 million.

The repetition of ‘purported’ in the previous section, whilst syntactically jarring, is entirely intentional: it was the parties’ dispute over the legal efficacy of each of these matters which took them to the NSW Supreme Court.

What happened once the matters went to Court?

At trial, Ball J analysed the ‘Reference Date’ provisions under the Act, noting that they relied upon there being a contractual right to claim payment on that date which had not already been exercised. His Honour observed that Parliament intended this ‘to be an important mechanism by which abuses of the right to make a payment claim are to be prevented’.

Ball J interpreted the AS4000 provisions and found that Lewence had no contractual right to claim payment as at 4 December 2014. In turn, there could be no Reference Date upon which to base the purported Payment Claim of 4 December 2014. This finding was reached by two alternative routes:

  • if the contract had not validly been terminated by Lewence, its right to claim payment had been suspended pursuant to the show cause provisions; or
  • if the contract had been terminated, in the absence of contractual intent that the accrual of rights to claim progress payments continue after termination (which, his Honour observed, would be counter-intuitive where, as here, the work had been taken out of the contractor’s hands), the only right Lewence had to claim for the extant work had been exhausted with its claim on account of it in October 2014.

In effect, the essential trigger for the adjudication process to run under the Act was absent and the adjudicator never had jurisdiction to make his determination. Therefore, Ball J granted Southern Han the declaration it sought, namely that the purported adjudication determination was void.

The NSW Court of Appeal (Ward and Emmett JJA, and Sackville AJA, each in separate judgments) overturned Ball J’s decision at trial. Whilst their Honours did not agree on all points leading to their allowance of the appeal, they unanimously found that the existence of a Reference Date was not an essential pre-condition to the making of a valid Payment Claim under the Act.

For Sackville AJA, to find that it was such a pre-condition would cut across the object of the Act, which is (as stated in s 3) to ‘grant a statutory entitlement’ to progress payments. His Honour observed that pt 2 of the Act ‘creates a claimant’s substantive entitlement to a progress payment’ whereas pt 3 (including s 13, the key provision under consideration in Southern Han) ‘creates the procedural mechanism for enforcing that entitlement.’

The High Court heard the appeal on 12 October 2016. In addition to the central question of whether a reference date is a precondition, Southern Han’s grounds of appeal included whether the Court of Appeal had erred in finding that 8 November 2014 (ie after the purported termination) was an available Reference Date. This would have given the 4 December 2014 purported claim a fresh Reference Date upon which to base itself. (A third ground of appeal based on construction of s 13(5) of the Act was immediately dispatched by the Court; it will not be dealt with in this short note.)

Reference Dates: a pre-condition to claims?

For the High Court, the contest between the parties on this key point was, ‘on one view, quite narrow’. It came down to the meaning of the reference in s 13(1) of the Act to ‘[a] person referred to in section 8(1)’. The ambiguity of this phrase had been recognised by Ball J, and remained unresolved before the High Court. Essentially, Lewence’s argument was that it referred to persons who had undertaken construction work, whereas Southern Han’s view (like that of Ball J), to which it attached the label of ‘jurisdictional fact’ (though, as the Court noted, recognising that it added ‘nothing to the requisite antecedent statutory analysis’), was that the reference was to those entitled to a progress payment. That latter entitlement presupposed the existence of a Reference Date under the Act.

The Court undertook a detailed analysis of the relevant provisions, including by referring to the intent behind amendments to the Act in 2002. Their Honours’ ‘close attention to the structure of the Act’ recognised, as Sackville AJA had, that pts 2 and 3 of the Act build upon each other, but the High Court observed that they ‘are not hermetically sealed.’ In particular, the Court illuminated a distinction in the relevant provisions between ‘a present entitlement to a progress payment and the future ascertainment of the amount of the progress payment to which that present entitlement relates’ (emphasis added).

The Court found that it was Southern Han’s interpretation of the ‘person referred to’ phrase which was consonant with that distinction. Thus, the existence of a Reference Date was held to be a precondition to making a valid Payment Claim.

Was 8 November a fresh Reference Date?

The Court began its consideration of Southern Han’s second ground of appeal by observing that the ‘statutory contemplation is that a claim for a progress payment might be made after the contract has expired.’ This was on the basis of the Act’s definition of ‘Progress Payment’ and its amendment in 2002 to adopt the drafting device ‘means… and includes’. In turn, the Court was able to confirm (at [65]) that the Act is

capable of creating a statutory entitlement not only to a payment in the nature of an instalment but also to a final payment under a construction contract, to a single or one-off payment under a construction contract and to a payment of a type known in the construction industry as a milestone payment.

On the other hand, the Court emphasised that the Act is concerned with providing rights to payment for work done (or goods and services supplied) pursuant to obligations ‘imposed by the contractual force of a [C]onstruction [C]ontract’. It neither provides security for payment of damages for breach of contract nor an ‘alternative to damages by way of restitution… in the event of the construction contract terminating on acceptance of repudiation’ (the latter reflecting the current legal status of the long-favoured route to recovery by contractors known as the ‘quantum meruit’).

Turning to the specific question of whether 8 November 2014 could have been a Reference Date under this contract, the Court answered this in the negative, essentially following Ball J’s analysis of the AS4000 form at trial (see above).

Where to now?

Whilst, as acknowledged by the Court, the case turned on a fairly narrow point, the clarification provided by the High Court of Australia in Southern Han is likely to broadly be welcomed by the construction industry and its lawyers. This is because it provides a much-needed measure of certainty in respect of a legislative ‘patchwork’ that has been the subject of continual, and often contradictory, statutory amendment and judicial pronouncement at State and Territory level since the turn of the millennium.

This clarification has been provided by the Court in Southern Han at two levels:

  • at the micro level, the specific rulings on Reference Dates will have application to a substantial (though, given the differences in wording between jurisdictions mentioned above, not universal) extent to the legislation which broadly follows the NSW model: that of the ACT, Queensland, Singapore, South Australia, Tasmania and Victoria;
  • at the macro level, the confirmation (noted above) that the legislation is both widely framed to secure rights to payment but also that those rights arise under contracts, as opposed to the legislation allowing, as was remarked upon by Martin J in Delmere Holdings Pty Ltd v Green [2015] WASC 148, ‘idiosyncratic, general fairness claims rendered at large’.

The decision may also come to be regarded as part of a mid-decade turning of the tide in Australia towards a rationalised manner of providing appropriate statutory protection to vulnerable construction parties. In December 2015, the Australian Senate Economics References Committee released its report into insolvency in the Australian construction industry. The seemingly-simple plea of thousands of industry participants was reflected in its title, ‘I just want to be paid’. The Committee was strongly in favour of national harmonisation of security of payment laws, observing that ‘[i]t is absurd that in this day and age there are eight separate SOP regimes which differ markedly from one another.’

The Committee’s recommendations have not yet been adopted; indeed, during 2016, further amendments to state-based legislation have continued the continental drift amongst the Australian jurisdictions. There has, however, been some recent activity at a Commonwealth level under the aegis of the legislation restoring the Australian Building and Construction Commission. This includes the requirements to comply with security of payment legislation in Commonwealth Government procurement under s 11D of the Code for the Tendering and Performance of Building Work 2016, and the establishment of a Security of Payments Working Group under Ch 2 Pt 4 of the Building and Construction Industry (Improving Productivity) Act 2016 (Cth).

It is a truism that cashflow is, as Denning LJ noted in Modern Engineering (Bristol) Ltd v Gilbert-Ash (Northern) Ltd (1973) 71 LGR 162, the ‘very lifeblood’ of the construction industry. The legal balancing act involved in implementing an effective means of keeping that cashflow moving appropriately has proved to be fraught. It is to be hoped that the High Court’s judgment on the 2016 summer solstice contributes meaningfully to striking that balance.

POSTSCRIPT:

On 23 December 2016, two days after the judgment in Southern Han was handed down, the NSW Court of Appeal released its decision in Shade Systems Pty Ltd v Probuild Constructions (Aust) Pty Ltd (No 2)[2016] NSWCA 379. The Court overturned the decision of Emmett AJA at trial ([2016] NSWSC 770), which had allowed judicial review of an adjudication determination under the NSW Act on the basis of a non-jurisdictional error of law on the face of the record.

The extension of the scope of judicial review in Emmett AJA’s judgment had significant potential ramifications for adjudications under the NSW Act and similar security of payment legislation around the country (at least, that of  Queensland, South Australia and Tasmania: as is acknowledged in Shade Systems, the Victorian Act has a different constitutional basis and there is an applicable express privative clause (s 43) in the ACT Act). Reflecting the importance of the issue before it, five Justices of Appeal heard the case (and did so less than six months after the trial decision) and the decision was handed down within three weeks of the hearing. Basten JA provided the judgment of the Court, with which Bathurst CJ, Beazley P, Macfarlan and Leeming JJA agreed.

Basten JA’s judgment essentially involved statutory construction to discern whether, in the absence of an express privative clause, the NSW Supreme Court’s supervisory jurisdiction extended to non-jurisdictional errors. Ultimately, his Honour found that ‘no sufficient reason’ had been put forward to doubt the correctness of previous decisions which had found that jurisdictional error is the only ground on which judicial relief is available to quash an adjudicator’s determination. His Honour observed that, ‘the contrary conclusion would undermine the underlying purposes of the Security of Payment Act.’

The Court’s judgment will no doubt be the subject of detailed analysis and review in the coming months. And, given how critical the issue of judicial review is to the security of payment schemes (and, of course, to the interests of the contractor which lost the appeal and other major contractors in the Australian industry) the case seems a plausible candidate for a Special Leave application to the Kiefel High Court in 2017.

AGLC3 Citation: Matthew Bell, ‘Cashflow is the ‘Lifeblood’ of the Construction Industry: Has the High Court Applied a Tourniquet? Southern Han Breakfast Point Pty Ltd (in liq) v Lewence Construction Pty Ltd’ on Opinions on High (23 December 2016) <http://blogs.unimelb.edu.au/opinionsonhigh/2016/12/23/bell-southern-han/>.

Matthew Bell is Senior Lecturer and Co-Director of Studies for Construction Law at Melbourne Law School.

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