Setting the reference date: A recent decision on the SOP Act

A recent case in the Australian Supreme Court of NSW diverges from market understanding about the rights of parties to a construction contract to agree preconditions to a reference date arising under the SOP Act.

What you need to know

• It is common for a principal to require a contractor to submit certain documents as a precondition to receiving progress payments under the contract. One common example is a requirement for the contractor to submit a Subcontractor Statement.
• There has long been a tension between these contractual requirements and the Building and Construction Industry Security of Payment Act 1999 (NSW) (SOP Act), which gives contractors a separate statutory right to recover progress payments in respect of construction work.
• Over the years, principals have resorted to various formulations to attempt to bring the document submission requirements within the framework of the SOP Act.
• Following court decisions and amendments to the SOP Act that reduced the options available to principals, Ashurst has drafted contracts such that reference dates for the purposes of the SOP Act arise when, among other things, a specified date has passed and the relevant documentation has been submitted. This approach was left open by the case law at the time.
• In J Hutchinson Pty Ltd v Glavcom Pty Ltd [2016] NSWSC 126, the Supreme Court of NSW held that a provision requiring provision of a Subcontractor Statement as a precondition to a reference date arising was void as an attempt to contract out of the SOP Act. The failure to submit a true and correct Subcontractor Statement therefore, was held not to prevent the reference date arising for the purposes of the SOP Act.
• The drafting held to be void differs from the Ashurst approach. We consider however that the Courts may look to the effect of the clause in determining whether it is void.

What you need to do

• In light of the decision in J Hutchinson Pty Ltd v Glavcom Pty Ltd, there is a risk that a court and/or adjudicator may determine that a reference date has arisen notwithstanding that the all of the contractual requirements for that date to arise have not been met.
• Accordingly, if a contractor submits a payment claim on or after the date a reference date would have arisen (but for the failure to comply with the contractual requirements), there is a risk that the contractor may be (i) entitled to seek summary judgment for the full amount of its payment claim if the principal fails to provide a payment schedule; or (ii) awarded the full amount of its payment claim by an adjudicator if the only reason given by the principal in a payment schedule for rejecting the payment claim is that the relevant reference date has not accrued.
• Principals should be aware of the risks of relying on the contractor's failure to submit a Subcontractor Statement (or other relevant document) as the only reason for not assessing and/or paying a payment claim. We recommend that contract administrators seek advice in a timely manner where a contractor submits a payment claim without the accompanying Subcontractor Statement.

J Hutchinson Pty Ltd v Glavcom Pty Ltd [2016] NSWSC 126

Background

A "Subcontractor Statement" is a statutory declaration from contractors declaring that the contractor has complied with the requirement under the:

• Workers Compensation Act 1987 (NSW) to pay any workers compensation insurance premiums payable;
• Payroll Tax Act 2007 (NSW) to pay any payroll tax payable; and
• Industrial Relations Act 1996 (NSW) to pay any remuneration payable,
• in relation to its employees and subcontractors.

Unless the principal has received a Subcontractor Statement from its contractor, the principal is liable for complying with the requirements of each of those Acts.

Hutchinson (as head contractor) and Glavcom (as subcontractor) entered into a subcontract under which Glavcom would carry out the design, fabrication and installation of joinery at a residential development at Bondi Beach (the Subcontract). The Subcontract contained a provision that required Glavcom to submit a Subcontractor Statement as "a precondition to a reference date arising under the SOP Act". The submission of a Subcontractor Statement was also a precondition to the payment of any progress claim: The Subcontract provided that Hutchinson would be "entitled to withhold payment until satisfactory declarations are provided".

Glavcom submitted a payment claim under the Subcontract, which Hutchinson contested. Glavcom obtained an adjudication determination under s 22 of the SOP Act, and Hutchinson sought to have this adjudication determination set aside. This brought the matter before Ball J of the Supreme Court of NSW.

Issue

Relevantly, Hutchinson contended that, whilst Glavcom had submitted the required Subcontractor Statement, it was knowingly false, and on that basis the determination was voidable.

Glavcom submitted in response that, even if the Subcontractor Statement did not comply with the requirements of the subcontract, it was not material to the Adjudicator's decision. That is because, submitted Glavcom, the contractual precondition was void under s 34 of the SOP Act, which provides as follows:

34 No contracting out
(1) The provisions of this Act have effect despite any provision to the contrary in any contract.
(2) A provision of any agreement (whether in writing or not):
(a) under which the operation of this Act is, or is purported to be, excluded, modified or restricted (or that has the effect of excluding, modifying or restricting the operation of this Act), or
(b) that may reasonably be construed as an attempt to deter a person from taking action under this Act,
is void.

Outcome

Ball J dismissed Hutchinson's application to have the determination set aside, accepting Glavcom's submission that the truth or otherwise of the Subcontractor Statement was irrelevant to the Adjudicator's determination. In reaching this conclusion, the Court pointed to s 8 of the SOP Act:

8 Rights to progress payments
(1) On and from each reference date under a construction contract, a person:

(a) who has undertaken to carry out construction work under the contract, or
(b) who has undertaken to supply related goods and services under the contract,
is entitled to a progress payment.

(2) In this section, reference date, in relation to a construction contract, means:

(a) a date determined by or in accordance with the terms of the contract as the date on which a claim for a progress payment may be made in relation to work carried out or undertaken to be carried out (or related goods and services supplied or undertaken to be supplied) under the contract, or

(b) if the contract makes no express provision with respect to the matter—the last day of the named month in which the construction work was first carried out (or the related goods and services were first supplied) under the contract and the last day of each subsequent named month.

Ball J held that a person who performs construction work, or provides related goods and services, under a construction contract has a right to receive a progress payment on each reference date, which is a date determined in accordance with the contract or a date fixed by s 8(2)(b). Ball J stated that whilst under s 8 of the SOP Act the contract can fix a date, or provide a method for fixing a date, it "cannot be interpreted as permitting other conditions to be attached to the occurrence of a reference date or a right to receive a progress payment" (at [26]).

Ball J concluded that "any provision that purposes to do so would be a provision that ought to modify or to restrict the circumstances in which a person was entitled to a progress payment and would therefore be void under s 34" (at [26]).

Ball J went on to refer to Applegarth J's decision in Lean Field Developments Pty Ltd v E & I Global Solutions (Aust) Pty Ltd [2014] QSC 293 as authority for the narrow proposition that a condition that facilitates the purposes of the security of payment legislation may not infringe the Queensland equivalent of s 34 of the SOP Act.

Applying this reasoning, Ball J considered that:

"… the apparent purpose in this case of the requirement to supply a statutory declaration in the form of Annexure Part M is to make the payment of progress payments conditional on the payment by Glavcom of workers compensation premiums. It is not clear how that furthers the purposes of the Security of Payment Act, which is to ensure that those who do construction work have a cash flow from that work they do so that they are in a position to meet their financial obligations."   Ball J

As a consequence, Ball J held that the pre-condition was void as an attempt to contract out of the SOP Act.

Discussion

It is common for construction contracts to contain provisions under which a principal can require the submission of certain documents as a precondition to making progress payments under the contract. These documents typically include:

• evidence that insurances and security required under the contract are in place;
• evidence that the relevant works have been duly performed and certified under the contract (such as design certificates); and
• (at least in NSW) a statement (known as a "Subcontractors Statement") that the contractor has made relevant payments relating to the work (to protect against liability under Workers Compensation, Payroll Tax and Industrial Relations legislation).

There is, however, tension between the SOP Act, which gives contractors a statutory right to recover progress payments in respect of construction work, and provisions of this nature that seek to impose conditions on those progress payments. Historically, principals have taken various approaches to reconciling this tension. For example, construction contracts often contain clauses that provide that:

• a valid "payment claim" must include the documents sought by the principal;
• submission of the relevant documents is a precondition to the "due date for payment" arising under the SOP Act; or
• each "reference date" for the purposes of the SOP Act does not arise unless and until the documents are submitted.

The courts have held that it is not possible to specify a particular form of payment claim for the purposes of the SOP Act: A statutory payment claim will be valid so long as it meets the minimum requirements set out in the SOP Act, which do not include the submission of additional documents. Furthermore, in NSW and Queensland, there are statutory longstop periods that override any contractual provision that seeks to provide for a later "due date for payment" than specified in the legislation. This effectively means it is not possible to use the first two mechanisms referred to above.

As a consequence, contracts that Ashurst has drafted or negotiated since the current form of the SOP Act came into force have provided that each "reference date" will not arise until the later of various events, one of which is the submission of the relevant documents (including a "Subcontractor Statement"). We considered that this was a reasonable approach as:

• decisions of the court, such as Lean Field Developments Pty Ltd v E & I Global Solutions (Aust) Pty Ltd & Anor [2014] QSC 293, made clear that it was permissible to condition the accrual of reference dates on the contractor's compliance with specified requirements (including post-contractual conduct), albeit within certain limits;
• in our view, the requirement to submit the documents referred to above: (i) is not excessively onerous and certainly not so onerous as to make a reference date more of a theoretical possibility than an actuality; (ii) serves a practical purpose in: (A) protecting the principal from liability for the contractors default under the contract and/or certain legislation; (B) evidencing the progressive completion of the work under the contract; (iii) does not unjustifiably impede the making of a payment claim under the SOP Act; and
• in our view, if a principal is unable to enforce a requirement to submit the "Subcontractor Statement" as a precondition to payment, this would substantially undermine the scheme of the relevant parts of the Workers Compensation, Payroll Tax and Industrial Relations legislation.

The recent decision in Hutchinson v Glavcom has cast doubt on this approach, despite its prevalence in the current market.

Conclusion

In light of the decision in Hutchinson v Glavcom, there is a risk that a court and/or adjudicator will determine that a reference date has arisen notwithstanding that the contractor has not satisfied all of the contractual pre-conditions to that reference date arising.

Accordingly, if a contractor submits a payment claim on or after the date a reference date would have arisen (but for the failure to comply with the contractual requirements), the 10 business day period within which the principal must serve a payment schedule may commence. At the end of the 10 business day period, there is a risk that the contractor may be:

• entitled to seek summary judgment for the full amount of its payment claim if the principal fails to provide a payment schedule; or
• awarded the full amount of its payment claim by an adjudicator if the only reason given by the principal in a payment schedule for rejecting the payment claim is that the relevant reference date has not accrued.

The decision in Hutchinson v Glavcom is not currently the subject of an application for leave to appeal.