High Court rules that a payment claim is invalid without a valid reference date

Introduction

In our November 2016 Construction, Property & Projects Insights (Issue 5), we noted that the High Court was soon to release judgment in Southern Han Breakfast Point Pty Ltd (In Liquidation) v Lewence Construction Pty Ltd [2016] HCA 52 (Southern Han Decision), which would be the first time the High Court had given judgment in respect of the Building and Construction Industry Security of Payment Act 1999 (NSW) (Act).

The High Court’s judgment was handed down on 21 December 2016 and is explained below.

Facts

Lewence was engaged by Southern Han under a contract for the construction of an apartment block.  The contract determined the reference date.

During the project, Southern Han purported to take works out of Lewence’s hands under the contract, which if effective, would result in payments to Lewence being suspended.  Lewence treated this action as a repudiation of the contract and elected to accept Southern Han’s repudiation and terminate the contract.

Lewence subsequently purported to serve a payment claim.  Southern Han responded with a payment schedule, and the scheduled amount was $Nil.  The payment claim was referred to adjudication and the adjudicator determined that approximately $1.2 million was payable to Lewence.

First instance decision

Southern Han subsequently applied to the Supreme Court for judicial review of the adjudicator’s determination on the basis that no reference date had arisen for the payment claim and therefore the adjudicator had made a jurisdictional error.

At first instance, Ball J found that the Act required a reference date to have arisen under the contract as a precondition to the making of a valid payment claim (and consequently a precondition to the making of a valid adjudication application and determination).  Ball J went on to find that there was no reference date to support the purported payment claim on the following alternative hypotheses:

  • payment was suspended upon Southern Han taking the whole of the works out of Lewence’s hands (Hypothesis 1); or

  • Lewence had accepted Southern Han’s repudiation of the contract, in which case, Lewence’s right to make a payment claim was only in respect of reference dates that had accrued prior to the termination, and that reference date had already been used (Hypothesis 2).

Court of Appeal decision

The NSW Court of Appeal overturned the decision of Ball J and unanimously held that:

  • The existence of a reference date is not a jurisdictional issue that can be reviewed by the court;

  • The payment claim was not made in respect of the reference date that had arisen prior to the works being taken out of Lewence’s hands or the termination of the contract, and therefore s13(5) had not been breached;

  • In respect of Hypothesis 1, payment had been suspended and therefore there was no reference date available; and

  • In respect of Hypothesis 2, there was nothing preventing the accrual of reference dates under the Act, such that there was an available reference date after the contract was terminated for which the payment claim could validly have been made.

Accordingly, the Court of Appeal allowed the appeal and reinstated the adjudicator’s determination.

High Court decision

Southern Han appealed to the High Court.  There were three issues to be considered by the High Court:

  1. whether the existence of a reference date is a precondition to making a valid payment claim;

  2. whether a reference date had accrued following the termination of the contract by Lewence (i.e. hypothesis 2); an

  3. whether the payment claim was the second payment claim in respect of the earlier reference date and therefore precluded by the operation of section 13(5) of the Act.

The High Court (in a joint judgment) held that;

  • a reference date is a precondition to the making of valid payment claim under the Act (it is “jurisdictional”) and the Court will intervene and overturn determinations if a payment claim is not supported by a valid reference date; and

  • there was no reference date under both hypotheses espoused by Ball J, namely:

    • payment was suspended under the contract and therefore there was no right to payment under until the suspension was lifted; and

    • the payment provisions of the contract did not survive termination and therefore Lewence’s rights were only those that had accrued at the date of the termination.

Accordingly, the High court reversed the decision of the NSW Court of Appeal and the adjudicator’s determination was set aside.

 Significance

The Southern Han Decision has clarified that an adjudicator will not have jurisdiction if there is a not a valid reference date.  It has also confirmed that the Act operates in such a way that if a contract does not provide for reference dates after termination, recourse to the Act is not available under section 8(2)(b).  That is a claimant cannot default to the Act’s monthly reference dates once a contract is terminated.

The case is also a timely reminder for the need to be clear in a contract as to the determination of a reference date and the effect that a termination will have on the accrual of reference dates.

If you would like further information about case law developments or the Act, please contact Phillip Coady, Executive Director, or Sasha Kolodkina, Associate, on +61 2 9261 5900.