Bitannia makes constitutional waves for the Security of Payment Act

By Bill Ilkovski.

Key Points:
Scope of section 15(4) prohibition on defences and cross-claims clarified. Prohibition does not extend to defence under the Trade Practices Act 1974 (Cth) to a claimant's conduct in serving a payment claim. Question left open whether TPA may be raised in respect of other conduct. The Building and Construction Industry Security of Payment Act 1999 survives its first constitutional challenge.

The Building and Construction Industry Security of Payment Act 1999 (the "SOPA"), in operation in New South Wales for more than half a decade, has proved to be an ironical legislative scheme. The SOPA's objectives is to ensure that:

• any person who undertakes to carry out construction work or supply related goods and services under a construction contract is entitled to receive a progress payment; and
• any person who is entitled to receive a progress payment can take steps to recover that progress payment by utilising the adjudication procedures and recovery mechanisms set out in the Act.

The mechanisms and processes by which these objectives are to be achieved "contemplate a minimum of opportunity for court involvement" (see Brodyn Pty Limited v Davenport [2004] NSWCA 394). Where, however, the involvement of a court is required (such as where proceedings are commenced under section 15 of the SOPA to recover the amount of a payment claim where no payment schedule has been served) procedural and substantive rights which a defendant would have in non-SOPA proceedings are significantly circumscribed by the SOPA. For instance, a defendant may not bring a cross-claim or raise any defence in relation to matters arising under the construction contract to resist the recovery of the value of a payment claim made under SOPA where no payment schedule has been served.

So where is the irony? Rather than reducing the court's involvement in the resolution of payment disputes, the SOPA's operation has caused a significant amount of judicial ink to be spilt.

In this context, the recent New South Wales Court of Appeal decision, Bitannia Pty Limited v Parkline Constructions Pty Limited [2006] NSWCA 238, dealt with competing arguments about the operation of the section 1_(4) prohibition in raising defences and cross-claims in resisting recovery of a judgment for a debt arising under the SOPA.

Facts

Parkline Constructions Pty Ltd entered into a construction contract with Bitannia Pty Ltd and Rossfield Nominees Pty Ltd (collectively "Bitannia"). The contract required all payment claims to be served on Bitannia. During the course of the contract Parkline submitted all payment claims to S & S Quirk, which was the architect (and agent) appointed by Bitannia. Quirk was also responsible for issuing the payment schedules. This was the accepted practice between Bitannia and Parkline.

Despite this practice, Parkline submitted a claim directly to Bitannia. The claim included claims for work submitted in two earlier payment claims and rejected by Quirk. The claim stated that it had been copied to Quirk, but, in fact, the claim had not been copied.

In alleged reliance on the statement that the claim had been copied to Quirk and that Quirk would issue a payment schedule in accordance with the accepted practice, Bitannia did not issue a payment schedule to the claim within the time frame stipulated by the SOPA. Consequently, Parkline commenced proceedings in the District Court to recover the amount of the claim. Bitannia resisted the recovery on a number of bases, which ultimately included:

• a cross claim for damages under the Trade Practices Act 1974 (Cth) ("TPA") alleging conduct contrary to section 52, namely, that Bitannia's failure to serve the payment schedule was induced by Parkline's misleading and deceptive conduct that the claim was sent to Quirk
• an order that Bitannia be indemnified in respect of any judgment it is required to pay Parkline; and
• a defence that Bitannia relied on "by way of defence and set off on the matters pleading in the cross-claim".

Legal issues

The Court considered:

• Whether in proceedings commenced by a claimant to recover a statutory debt under section 15 of the SOPA, section 15(4)(b) precludes the raising, by way of defence or cross-claim, a contention under the TPA that Bitannia's failure to provide a payment schedule was induced by Parkline's misleading or deceptive conduct?
• If Bitannia is so precluded, whether section 15(4)(b) of the SOPA is inconsistent with the TPA and, because of section 109 of the Commonwealth Constitution, inoperative to the extent of the inconsistency?

Relevantly, section 15(4)(b) states:

"If the claimant commences proceedings...to recover the unpaid portion of the claimed amount from the respondent as a debt:

....

(b) the respondent is not, in those proceedings, entitled:

(i) to bring any cross-claim against the claimant, or

(ii) to raise any defence in relation to matters arising under the construction contract."

Decision

In answering the first question, the Court of Appeal (Justices Hodgson, Tobias and Basten) was unanimous in its view that breaches of the TPA can be raised by way of defence. That being so, a defence alleging misleading or deceptive conduct in the process of making a payment claim under the SOPA is not precluded by the language of section 15(4)(b)(ii). It is not a defence in relation to a matter "arising under the construction contract" and, therefore, escapes the prohibition in that clause. Justice Basten put it this way:

"While it is true that the phrase ‘in relation to' may identify any rational connection between the prohibited defence and a matter arising under the construction contract, and while the entitlement to a progress payment depends in part upon the construction contract and conduct in execution thereof, this language should not be construed so broadly as to prohibit a defence based upon conduct undertaken in service of a payment claim for the purpose of creating a statutory right."

In light of the above, the second question did not need to be answered by the Court. However, Justice Basten ventured an answer. In his view, a breach of the TPA could not be raised by way of defence, then there would be an inconsistency between the SOPA and the TPA. This inconsistency would arise notwithstanding that separate proceedings could be commenced claiming relief under the TPA.

Accordingly to Justice Basten, the ability to navigate around the prohibition in section 15(4) is not an answer to the question of inconsistency because:

"The loss which the Appellants seek to prevent is one which will occur, in a summary way, in the s 15 proceedings. The institution of separate proceedings will not avail them in that respect, unless they can obtain a stay of the s 15 proceedings to allow the separate Trade Practices Act proceedings to be completed. At best that involves a claim for a stay, on discretionary grounds, of the s 15 proceedings… It is quite likely that a Court would refuse a discretionary stay in those circumstances, on the basis that the Respondent was trying to achieve indirectly the very result which the Parliament had prohibited it from obtaining directly."

Notwithstanding the views expressed by Justice Basten, the SOPA has withstood its first constitutional challenge.

For further information, please contact Bill Ilkovski .