Matthew Bell, ‘Cashflow is the “Lifeblood” of the Construction Industry: Has the High Court Applied a Torniquet? Southen Han Breakfast Point Pty Ltd (in liq) v Lewence Construction Pty Ltd‘ (23 December 2016).

The High Court has allowed an appeal against a decision of the New South Wales Court of Appeal on jurisdictional error in the context of a building commission adjudication over a construction contract and ‘reference date’ requirements. Following the collapse of a building agreement between the parties, an adjudicator ordered the appellant company to make payments to the respondent builder in recognition of progress on the works. Section 8(1) of the Building and Construction Industry Security of Payment Act 1999 (NSW) provides that ‘[o]n and from each reference date under a construction contract’, a person undertaken to carry out the work or supply related goods and services is entitled to a progress payment. Section 13(1), relating to payment claims, provides that ‘[a] person referred to in s 8(1) who is or who claims to be entitled to a progress payment may serve a payment claim on the person who, under the construction contract concerned, is or may be liable to make the payment’. On appeal, the trial judge quashed the adjudicator’s ruling, holding that no reference date had arisen. The NSWCA allowed the builder’s appeal, holding that the existence of a reference date was not a ‘jurisdictional error’ that could be reviewed by the Supreme Court, and further that, in any case, the adjudicator’s finding that the date had arisen was open on the evidence before it. Before the High Court the appellant contended that a reference date is a jurisdictional precondition, that no reference date arose here, and that the respondent’s unlawful service of two payment claims meant the adjudicator had no jurisdiction to determine the later claim.

The Court (Kiefel, Bell, Gageler, Keane and Gordon JJ) unanimously allowed the appeal, holding that the existence of a reference date under a construction contract is a precondition to making a valid payment claim, and that in this case no reference date existed.

Noting that the dispute between the parties here was essentially over the connotation in the s 13 reference to ‘[a] person referred to in section 8(1)’ (see at [45]ff), the Court agreed with the appellant’s contentions and held (at 61]) that

The description in s 13(1) of a person referred to in s 8(1) is of a person whom s 8(1) makes entitled to a progress payment. Section 8(1) makes a person who has undertaken to carry out construction work or supply related goods and services under a construction contract entitled to a progress payment only on and from each reference date under the construction contract. In that way, the existence of a reference date under a construction contract within the meaning of s 8(1) is a precondition to the making of a valid payment claim under s 13(1).

This interpretation was based on the legislative history of the Act, in particular a set of amendments in 2002 that sought to ensure that a person entitled to a progress payment could make a valid payment claim even though it might be ultimately proved that no payment was due under the contract (see at [54], [57]). This understanding is reinforced by the structure of pts 2 and 3 of the Act, which distinguish between present entitlements to progress payments, and a future ascertainment of the amount of the payment to which the present entitlement relates (see at [60]). Consequently, a reference date must exist as a precondition to making a valid payment claim under s 13.

Turning to the determination of reference dates, the Court noted that, following the amendments, the meaning of ‘progress payment’ in s 8(1) extended to a range of payments, including instalments, final payments, and milestone payments, claimed for work carried out or goods and services supplied under the contract (at [65]–[66]). This forms an important limitation in the Act: that it provides a statutory mechanism for securing payment of amounts claimed for partial or total discharge of obligations imposed by the construction contract itself, but it does not provide security for payment claimed as damages for a breach of the contract (see at [65]). This limitation explains the need for a reference date, which is ‘the date for making a claim for payment of the whole or part of the amount contracted to be paid’ for work or goods (at [69]), which is in turn set by the terms of the contract (at [70]–[71]).

In this case, while the contract fixed the date for claiming progress payments, neither possible understanding of the two parties’ actions could support fixing a reference date as provided by the contract in cl 37 as 8 November. The first reading — that Southern Han exercised its contractual right under cl 39 to take the entire remaining work out of Lewence’s hands on 27 October — would mean, under the express terms of that clause, that the payments were suspended until the completion of the process under cl 39, and that cl 37 would not operate (at [76], [78]). The second reading — that Lewence accepted Southern Han’s repudiation and terminated the contract on 28 October — would mean both parties were discharged from further performance of their contractual obligations, and the progress payment right had not yet accrued, and would not have accrued until 8 November. Consequently, not reference date existed, and the Court ordered Lewence to repay the $1.27 million paid in October 2015.