Builders Claims How Secure are They
09 September 2022
Key Points
Claims under building contracts can be resolved by a speedy process of adjudication provided by Security of Payments legislation in each State and Territory ("SOPA")1.
The adjudication results in the determination of an adjudicated amount which is payable under the building contract and a liability which may be enforced as a judgment of the Supreme Court in the relevant jurisdiction.
What are the options for enforcement?
A judgment of a Supreme Court can be enforced by a process of levying execution. However, this is time consuming and slow.
An alternative is to begin winding up proceedings by serving what is called a notice of statutory demand under s 459E of the Corporations Act ("CA"). If a creditor elects this alternative, it should be aware that the debtor can make an offsetting claim to contest the amount of the demand, without necessarily having to prove that claim.
Accordingly, in this circumstance, the creditor might need to adjust the amount of its claim to at least get partial payment.
What are the implications?
While an adjudication under a SOPA is enforceable by way of a statutory demand, the adjudicated amount is not necessarily "secure". Similar to other enforceable claims by the debtor, the courts have determined that a SOPA adjudication is liable to be offset. The effect of this is that a statutory demand may not have the desired consequence of obtaining compliance by the debtor of the adjudicated amount if the debtor has a genuine claim against the creditor. Instead, it may result in further unwanted litigation.
Accordingly, the key lessons for both creditors and debtors are as follows:
- before a creditor seeks to issue a statutory demand based on a SOPA adjudication, the creditor should be satisfied that the debtor has no genuine claim against it; and
- if a debtor has been served a statutory demand based on a SOPA adjudication, in addition to the usual bases to set aside statutory demands, the debtor should carefully consider whether it has any genuine claim against the creditor.
Introduction
Whilst a debtor cannot contest the amount of a determination under a SOPA, it can seek to offset the amount of the demand for the purpose of having it set aside.
What standard does the debtor need to satisfy when making an offsetting claim?
Answer: The debtor only needs to prove that the offsetting claim is "genuine".
This requires no more than "the Court [being] satisfied that to be tried or an 'issue deserving of a hearing' as to whether a [debtor] had such a claim against the creditor"; CBS Commercial Canberra Pty Ltd v Axis Commercial (ACT) Pty Ltd [2022] FCA 544 ("Axis").
What offsetting claims are available to a debtor?
Answer: Any "genuine claim that the company has against the respondent by way of counterclaim, set-off or cross-demand (even if it does not arise out of the same transaction or circumstances as a debt to which the demand relates)": s 495H(5) CA.
On an application to set aside a statutory demand, can the debtor dispute liability for the adjudicated amount?
Answer: No.
As to that issue, in Axis, the Court said (at [48]):
"In Diploma Construction2, the [Western Australian Court of Appeal] held that an argument that adjudicated amounts under the SOPA were not in truth, as a matter of contractual right, due and payable, could not give rise to a genuine dispute as to the existence or amount of the resultant judgment debt." (emphasis added).
Can the debtor claim an offset as a basis for disputing a statutory demand?
Answer: Yes.
In Axis, the Court referred to two relevant judgments of Brereton J of the Supreme Court of New South Wales that answer this question3.
In one judgment, Douglas Aerospace, his Honour held (at [96]):
"Accordingly, the position that a genuine cross-claim for damages for negligence or breach of contract or restitution will result in a statutory demand being set aside or varied is undisturbed by Diploma [Construction]. Thus, while a demand for an amount adjudicated under [the SOPA] is not amenable to a "genuine dispute" under section 459H(1)(a) [CA], it remains vulnerable to a genuine "offsetting claim" under section 459H(1)(b) [CA]."
A statutory demand may also be set aside on the basis of a claim for liquidated damages; Project Venture Development No 11 Pty Ltd v TQM Design & Construct Pty Ltd [2009] NSWSC 699.
Can the debtor set up an offsetting claim which has been rejected by the adjudicator on an application for a determination under the SOPA?
Answer: Yes
In Axis, the Court referred to the judgment of Robb J in J Group Constructions Pty Ltd v PGA Rendering Group Pty Ltd [2015] NSWSC 1607, in which his Honour said (at [167] and [168]):
"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 section 459H(1)(b) and (2) [CA], 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."
Can the debtor set up an offsetting claim which has already been allowed by the adjudicator in reaching a determination under the SOPA?
Answer: Yes
As to that issue, Halley J in Axis said (at [82]):
"I note that Robb J did not have to address in J Group the status of an offsetting claim that had been accepted by an adjudicator and taken into account by way of a set off in the determination of the adjudication amount. In my view, to the extent that the whole or any part of any offsetting claim had been "taken into account" by an adjudicator because it had been set off against amounts determined to be owing under progress claims, it has thereby reduced the adjudicator's amount and cannot logically also be relied upon as an offsetting claim for the purposes of section 459H [CA]."
Can the debtor set up offsetting claims which had arisen after the adjudicator had made a determination under the SOPA?
Answer: Yes
As to that issue, Halley J in Axis held (at [85]):
"I am therefore satisfied that [such claims] are offsetting claims falling within section 459G(5) (sic) of the Corporations Act and can be relied upon by [the debtor] in its application to set aside the Statutory Demand."
Authors: Richard Fisher, Consultant; Camilla Clemente, Partner; Michael Sloan, Partner; and Jake Overend, Senior Associate.
1. Building and Construction Industry Security of Payment Act 1999 (NSW) Pt 3 Div 2; Building and Construction Industry Security of Payment Act 2002 (Vic) Pt 3 Div 2; Building and Construction Industry Payments Act 2004 (Qld) Pt 3 Div 2; Construction Contracts Act 2004 (WA) Pt 3; Construction Contracts (Security of Payments) Act 2004 (NT) Pt 3; Building and Construction Industry (Security of Payment) Act 2009 (ACT) Pt 4 Div 4.2; Building and Construction Industry Security of Payment Act 2009 (Tas) Pt 5; and Building and Construction Industry Security of Payment Act 2009 (SA) Pt 3 Div 2.
2. Diploma Construction (WA) Pty Ltd v KPA Architects Pty Ltd [2014] WASCA 91.
3. BBB Constructions Pty Ltd v Frankipile Australia Pty Ltd [2008] NSWSC 982 and Douglas Aerospace Pty Ltd v Indistri Engineering Albury Pty Ltd [2015] NSWSC 167.
