Security of payment legislation in South Australia

The commencement of the Building and Construction Industry Security of Payment Act (‘the Act‘) on 10 December 2011 was a significant development for the construction industry in South Australia.

The Act has shifted the balance of power between principals and subcontractors in construction contracts.

The Act creates an entitlement to regular progress payments regardless of the terms of the construction contract.

The scheme has been described as ‘pay now argue later’ and is an effective tool that can be used to ensure that the money flows during a construction contract.

Inconsistency when claimant in liquidation

On 24 February 2015 the Supreme Court of Victoria considered and resolved an inconsistency between the security of payment legislation and the Corporations Act.

The decision was Façade Treatment Engineering Limited v Brookfield Multiplex Constructions Pty Ltd [2015] VSC 41.  Click here for an electronic copy of the decision.

Importance of the Façade Treatment decision

If a respondent fails to deliver a payment schedule in response to a payment claim and fails to pay the amount claimed, a claimant may commence proceedings to recover the amount claimed. In those circumstances, section 15(4)(b) of the Act prevents a respondent from bringing a cross-claim or raising a defence in relation to matters under the construction contract.

However, where the claimant is in liquidation, the respondent may set-off amounts due to it from the claimant under section 553C of the Corporations Act. Section 553C of the Corporations Act provides a statutory right to set-off in certain circumstances.

The Facts

The plaintiff Façade Treatment Engineering Pty Ltd (‘Facade‘), as subcontractor entered into a subcontract dated 7 September 2011 (‘the Subcontract‘) with the defendant Brookfield Multiplex Constructions Pty Ltd (‘Brookfield‘) as the principal.

The Subcontract related to a building project known as the Upper West Side Redevelopment and was worth $12,2500,000 plus GST.

The proceedings involved the recovery of monies said to be owed with respect to payment claims made in August, September and October 2012 under the Subcontract.

On 6 February 2013 Façade was placed into liquidation.

The liquidator of Façade commenced proceedings against Brookfield to enter judgment in the amount of $1,193,469.20 (including GST).

Principal issues

The Court considered and determined three principal issues.

First whether an email sent by Brookfield to Façade in response to the September 2012 payment claim amounted to a payment schedule under the Victorian equivalent of the Act.

Secondly whether, due to the winding up of the plaintiff, judgment should be entered, particularly in circumstances where the plaintiff alleged it had a set off under section 553C of the Corporations Act.

Thirdly whether, in the event judgment was entered a stay of execution should be ordered.

Payment schedule delivered by email

An email sent 5 October 2012 on behalf of Brookfield stated that Brookfield did not consider ‘Progress Claim 19 as valid…’. Brookfield did not say in that email that it would pay $0, nil or nothing.

His Honour Judge Vickery held that:

• the email was a valid payment schedule;
• the email set out the reasons why the September payment claim was invalid; and
• the liquidator was not entitled to judgment in respect of the September payment claim.

Set-off

Ordinarily a respondent who had failed to deliver a payment schedule or to pay the amount claimed could not bring a cross-claim or raise a defence in proceedings commenced by a claimant to recover the claimed amount.

Brookfield claimed that it had substantial counterclaims that would have the effect of extinguishing the liquidator’s claim and that there would be ‘substantial injustice’ if the counterclaims were not allowed.

His Honour held that the inconsistent provisions of the State Act must yield to the provisions of the Corporations Act. At paragraph 85 his Honour held that:

‘The conclusion I have come to on the constitutional issue is this: A company to which s 553C of the Corporations Act 2001 applies, subject to s 553C(2), is precluded from entering any judgment pursuant to s 16(2)(a)(i) of the BCISP Act in respect of the debt due to it under that Act, and is further precluded from relying on s 16(4)(b) as a bar to a respondent under the BCISP Act from bringing any cross-claim against the company or raising any defence by way of set-off in relation to matters arising under the relevant construction contract.’

As his Honour held that judgment would not be entered it was not necessary to consider the third principal issue, whether to order a stay of execution.

It should be noted section 553C will not apply where a person had notice of the fact that the company was insolvent at the relevant time.

Implications

Liquidators should, prior to commencing proceedings under sections 15(2)(a)(i) or 16(2)(a)(i) of the Act, consider any circumstances that might give rise to a respondent claiming a ‘set-off’ against the claimed amount and in the process defeating the liquidator’s claim.