Beware Premature Payment Claims: MKA Bowen v Carelli Constructions

Introduction

On 24 September 2019, Justice Digby of the Supreme Court of Victoria handed down his decision in MKA Bowen Investments Pty Ltd v Carelli Constructions Pty Ltd [2019] VSC 436(Carelli).

Previously, it had been accepted within Victoria that a bona fide payment claim served prematurely (ie before the reference date under the contract) could be considered valid: Metacorp Australia Pty Ltd v Andeco Construction Group Pty Ltd & Ors (2010) 30VR 141 (Metacorp). However, Carelli overturns this, and any payment claims served prior to the relevant reference date (which are therefore premature) will now be invalid.

In Carelli, Justice Digby held that the payment claim was invalid because it had been served prior to the prescribed reference date within the contract. His Honour also found that the deeming provision in the contract (seeking to deem the payment claim to have been served on or from the reference date, when it was served before the reference date) was ineffective and would contradict the intent and purposes of the Building and Construction Industry Security of Payment Act 2002 (Vic) (SOP Act).[1]

What is the SOP Act?

The SOP Act aims to ensure that a person will be paid if they carry out construction work or supply related goods and services under a construction contract. Such a person can make a payment claim and serve it on the relevant contractor, purchaser or client. If a dispute arises over the payment claim, the person bringing the claim can apply for adjudication to resolve the dispute and to determine the amount to be paid (if any).

Background

1. On or about 12 December 2017, MKA Bowen Investments Pty Ltd (Principal) entered into a contract with Carelli Constructions Pty Ltd (Builder) for the builder to carry out the design and construction of a 17 apartment complex for the contract sum of $3,598,000 plus GST (Construction Contract).
2. The Construction Contract stated that the reference date for making payment claims was on the 25th day of each month.
3. On 26 November 2018, (relying upon,- the 25 November2018 reference date), the Builder served a payment claim on the Principal in the amount of $39,087.48 (including GST).
4. On 21 December 2018, the Builder (relying upon the 25December 2018 reference date) served a payment claim on the Principal in the amount of $411,358.36 (including GST)(December Payment Claim).
5. On 11 January 2019, the Principal provided a payment schedule to the Builder in the amount of $7,182 (excluding GST) (in response to the December Payment Claim).
6. On 25 January 2019, the Builder made an application under the SOP Act (Adjudication Application).
7. On 4 February 2019, the Principal provided a response to the Adjudication Application (Adjudication Response).
8. On 18 February 2019, the Adjudicator made a decision and determined that the Builder was entitled to payment in the amount of $209,470.04 (including GST) (Adjudication Determination).
9. The Principal commenced proceedings in the Supreme Court to quash the Adjudication Determination.

The Plaintiff’s arguments

The Principal’s arguments included that:

• that the payment claim was not served in accordance with the provisions of the SOP Act, namely s 9(1), and that the payment claim was not served ‘on and from’ the relevant reference date;
• the High Court of Australia (High Court) had held that a valid reference date is a ‘precondition’ to the making of a valid payment claim: see Southern Han Breakfast Point Pty Ltd (in liq) v Lewence Construction Pty Ltd (2016) 260 CLR340 (Southern Han);[2]
• the Builder was not entitled to make an application under the SOP Act, due to the December Payment Claim not being served ‘on or from’ the reference date of 25 December 2018but served on 21 December 2018;
• the deeming provision in clause 37.1 of the Construction Contract should not deem the payment claim to have been made on or from the reference date, when the payment claim was made before. The Principal relied on the decisions in:
  • All Seasons Air Pty Ltd v Regal Consulting Services Pty Ltd [2017] NSWCA 289 (All Seasons); and
  • Doyle J (of the Supreme Court of South Australia) in The Trustee for Allway Unit Trust trading as Westside Mechanical Contracting Pty Ltd v R&D Air Conditioning Pty Ltd & Ors (Westside Mechanical),[3]
• the decision in All Seasons (which relied upon the reasoning in Southern Han) determined that a deeming provision(similar to the deeming provision in Carelli) ‘cannot operate in the context of the security of payment legislation to cure the premature service of a payment claim’;[4]
• the Adjudicator erred in its decision by considering that the reference date is the deemed date (being 25 December 2018) for making the payment claim;
• that the Adjudicator erred in relying on the decision in Metacorp, when this decision was made prior to the decision in Southern Han and All Seasons; and
• that the Adjudicator did not have jurisdiction to hear the matter because the December Payment Claim was served prematurely (being on 21 December 2018 before the 25 December 2018 reference date).

Builder’s arguments

The Builder argued that:

The

• December Payment Claim was not served prematurely.
• It relied upon the Metacorp decision, which considered the meaning of the words ‘entitled to a progress payment under the construction contract’.
• It relied upon statements made by Vickery J in the Metacorp decision.
• That it is a person referred to in s 9(1) of the SOP Act – who, as at 21 December 2018, claimed to be entitled to a progress payment.
• That it is a person referred to in s 9(1) of the SOP Act because it is a person who has undertaken to carry out construction work under a contract.
• That it is entitled to a progress payment under the SOP Acton and from each reference date. That the phrase ‘on and from each reference date’ in s 9(1) of the SOP Act, when properly interpreted, means ‘on and with effect from each reference date’.
• That the premature service of the December Payment Claim did not affect the Builder’s entitlement to a reference date because it became entitled to a progress payment on 25 December 2018, notwithstanding the premature service on 21 December 2018 (supported by Vickery J in Metacorp).[5]

Supreme Court decision

In summary:

1. The Supreme Court held that the Builder’s December Payment Claim was invalid because it was served before the relevant reference date of 25 December 2018.
2. Consequently, the Adjudication Determination was void for the reason that the Adjudicator did not have jurisdiction to hear the matter.
3. The Adjudication Determination was quashed.
4. Digby J stated that: ‘given that the word “on” in the phrase “on and from each reference date” in s 9 of the SoP Act clearly relates to a particular date, in my view there is a strong reason to conclude the word “from” in the same phrase was intended by the legislature to refer to the period of time following that date’.[6]
5. The Supreme Court held that the SOP Act gives rise to statutory implications, notwithstanding that it does not expressly state that a person who is entitled to a progress payment may not serve a payment claim before the reference date. The implication therefore being that any untimely payment claim will not be compliant, because it is the reference date itself that triggers the entitlement to make a progress claim in the first instance.[7]
6. The Supreme Court relied upon the High Court’s decision in Southern Han – which clarified, among other things, that an entitlement to a progress payment under the SOP Act:
   • ‘is enlivened by an undertaking to carry out construction work or supply related goods and services under the construction contract’;
   • arises on and from each reference date under the construction contract; and
   • can be made by the person entitled to serve a payment claim in the form and within the periods prescribed in s 13of the SoP Act (NSW) (s 14 of the SoP Act (Vic)).[8]
7. The Supreme Court held that the decisions in Southern Han and All Seasons overruled the decision in Metacorp with respect to the provisions in the SOP Act NSW, which in Digby J’s view, were equivalent to s 9(1) and 14(1) of the SOP Act.[9]
8. Digby J stated: ‘In my view, although neither the High Courtin Southern Han nor the New South Wales Court of Appeal in All Seasons simply and succinctly express the effect of the language which is pivotal in this case, namely the words ‘on and from each reference date’ in s 8(1) of the SoP Act (NSW)(also appearing in s 9(1) of the SoP Act (Vic)), it is sufficiently clear in light of Southern Han and All Seasons[47] that s 9 and s 14 of the SoP Act (Vic) do not operate so as to permit the valid service of a payment claim prior to the relevant reference date which itself establishes a valid foundation for that payment claim to be made under the SoP Act (Vic); the statements in Southern Han and All Seasons in paragraphs [45], [49] and [52] hereof respectively clarify that.’
9. Digby J did not accept that a construction contract which contained a clause deeming the early service of a payment claim as deemed to be served on and from the reference date for the purposes of the SOP Act was valid because it was inconsistent with the express regime for service of payment claims under the SOP Act. Digby J said that giving effect to such deeming clauses would ‘contradict the intent and purposes of the SOP Act which seeks to establish a strict and time critical regime.’[10]

Key takeaways

• This decision has clarified the legal position in Victoria with respect to the early service of payment claims. (The decision may also be of persuasive value and may be followed by New South Wales courts interpreting the New South Wales SOP Act in light of the High Court’s decision in Southern Han.)
• · The SOP Act is to be interpreted in a way that does not permit any person entitled to a payment claim from making a payment claim prior to or before the reference date. Recipients of payment claims served before the reference date under the contract, you should seek advice on how to respond (by way of a payment schedule) and the payment schedule should identify that the payment claim is invalid under the SOP Act.
• · All adjudicators must now ensure that they refer to Carelli when assessing the validity of a payment claim. Adjudicators will not have the jurisdiction to hear these matters where the payment claim has been served prematurely.
• · Deeming provisions within contracts deeming will be unsuccessful to the extent that they deem a payment claim to have been made on or from the reference date, (where, the payment claim was made before the reference date) are ineffective.
• · The case is another example of why parties should seek legal advice as to their rights and options before issuing a payment claim and seeking to engage the provisions of the SOP Act.

[1] See paragraph 75 per Digby J.

[2] See paragraph 9 per Digby J.

[3] See paragraph 17 per Digby J.

[4] See paragraph 19 per Digby J.

[5] See paragraph 32 per Digby J.

[6] See paragraph 35 per Digby J.

[7] See paragraph 41 per Digby J.

[8] See paragraph 50 per Digby J.

[9] See paragraph 56 per Digby J.

[10] See paragraph 74 per Digby J.

Queries

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Disclaimer

This article is general commentary on a topical issue and does not constitute legal advice. If you are concerned about any topics covered in this article, we recommend that you seek legal advice.