Major Projects & Construction 5 Minute Fix 93: security of payment, stays and COVID-19, security of critical infrastructure reforms

By the Major Projects & Construction team 
03 Mar 2022
Get your 5 Minute Fix of major projects and construction news. This issue: Service of payment claim vital to Adjudicator's jurisdiction under the NSW security of payment act; COVID-19 alone not a sufficient justification for a stay of judgment execution; reminder for parties to clearly document variations to construction contracts; update on part two of the Federal Government's security of critical infrastructure reforms; and the NSW Court of Appeal considers the issue of repudiation. 

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Service of payment claim vital to Adjudicator's jurisdiction under the NSW security of payment legislation

In Equa Building Services Pty Ltd (Equa) v A&H Floors 2 Doors Australia Pty Ltd (AH) [2022] NSWSC 152, the NSW Supreme Court quashed an adjudication determination, finding that the Adjudicator lacked jurisdiction to make the adjudication determination under the Building and Construction Industry Security of Payment Act 1999 (NSW) (the Act) as no payment claim had been validly served on Equa.

In this case, Equa challenged the adjudication determination on the basis that:

  • the Act was not engaged as AH had failed to serve a payment claim, and therefore the Adjudicator lacked jurisdiction to make the adjudication determination; and
  • the Adjudicator denied Equa procedural fairness or considered matters outside section 22(2) of the Act, which sets out the exhaustive list of matters an adjudicator is to consider in determining an adjudication application.

The Court held that there was no service of the payment claim, as a consequence of AH's efforts of posting the payment claim to an incorrect address and emailing the payment claim to an addressee who was not an employee of Equa, and not someone that Equa had nominated as its representative for service of documents. On this basis, the Court held that the Adjudicator had no jurisdiction to adjudicate the dispute and quashed the adjudication determination.

While it was not necessary for Hammerschlag J to consider the second ground of Equa's challenge, his Honour commented that even if a payment claim had been served, his Honour would have quashed the determination, as the Adjudicator denied Equa natural justice on the disputed issue of whether there was a contract between the parties.

This decision is a useful reminder for parties to construction contracts to ensure that payment claims and other documents under the Act are validly served. This case also highlights the importance of ensuring that:

  • adjudicators have jurisdiction in accordance with the relevant security of payment legislation when making an adjudication determination under that legislation; and
  • the adjudicator affords all parties procedural fairness in reaching their determination.

COVID-19 alone insufficient justification for a stay of judgment execution

The recent Victorian Supreme Court case of Whitehorse Box Hill Pty Ltd v Alliance CG Pty Ltd & Anor [2022] VSC 61 demonstrates that citing 'COVID-19' alone may be insufficient justification for a stay of judgment execution.

In this case, the developer, Whitehorse Box Hill Pty Ltd, made an application for a stay of judgment execution of 14 days to allow it time to consider filing an appeal in respect of the court's decision to refuse the developer's application to quash or declare void an adjudication determination made against it under the Building and Construction Industry Security of Payment Act 2002 (Vic).

In considering whether to exercise her discretion to grant the stay, Stynes J noted that:

  • the applicant for the stay bears the onus of demonstrating that a stay is justified; and
  • more than a real risk of the judgment being rendered nugatory may need to be established to satisfy the requirement of a special or exceptional circumstance sufficient to justify a stay of execution pending an appeal.

In refusing the application for a stay, Stynes J noted that the developer did not identify a proposed or possible ground of appeal to justify the stay, and referred only to the 'context' of COVID-19 without explaining why that context ought to deprive the contractor of the benefit of the judgment. 

Recent NSW District Court case is a reminder for parties to formally document variations to construction contracts

The recent case of Cosmo Cranes & Rigging Pty Ltd (Cosmo Cranes) v Eq Constructions Pty Ltd [2022] NSWDC 6 is a reminder for parties to clearly document their intentions when seeking to vary the terms of a contract.

In this case, Cosmo Cranes made an application for summary judgment in relation to its statutory claim under the Building and Construction Industry Security of Payment Act 1999 (NSW) for amounts claimed under a payment claim.

In considering whether to grant this application, the NSW District Court was asked to consider whether the payment claim was for work under two or more construction contracts and therefore an invalid payment claim under the Act.

The issue in this case was whether correspondence between the parties amounted to variations under the original contract or formed new contracts between the parties (which would result in the payment claim being invalid).

Abadee DCJ was not persuaded that it was unarguable for Eq Constructions to contend that there was more than one construction contract in relation to the work performed. Accordingly, in the absence of clear evidence that there was only a single contract being referred to in the payment claim, Cosmo Cranes' application for summary judgment was dismissed.

Separately, in resisting the application, Eq Constructions argued that because Cosmo Cranes was seeking to recover an amount claimed under the Act for which no valid payment schedule was provided (relying on s 15(2) of the Act), as well as common law claims, Cosmo Cranes had waived its right under section 15(4)(b) of the Act, which prevents Eq Constructions from raising defences in relation to matters under the construction contract. Adabee DCJ did not accept this, observing that section 15(2) of the Act (which allows a claimant to recover amounts claimed in a payment claim in response to which no payment schedule has been issued) does not preclude a claimant from bringing claims which mix matters under the Act and at common law.

Second half of Federal Government's critical infrastructure security reforms passes lower house

Owners and operators of critical infrastructure assets will be monitoring the progress of the remainder of the critical infrastructure security reforms. The Security Legislation Amendment (Critical Infrastructure Protection) Bill 2022 (Cth) passed the lower house on 16 February 2022 and is currently awaiting consideration by the Senate. The reforms are far-reaching, affecting many sectors: communications; financial services and markets; data storage and processing; defence; higher education and research; energy, food and grocery; health care and medical; space technology; transport; and water and sewerage.

The Bill contains the second half of the federal government's critical infrastructure security reforms after the original critical infrastructure bill was split into two tranches, allowing the more urgent reforms to be passed late last year.

Building on the reforms passed in December 2021, this Bill intends to introduce additional security obligations for entities responsible for critical infrastructure assets. A key reform, if passed, will require such entities to establish, maintain and comply with critical infrastructure risk management programs for critical infrastructure assets. The purpose of such a program is to:

  • identify hazards for which there is a "material risk" of that hazard having a relevant impact on the asset; and
  • minimise and mitigate the impacts of those risks.

If passed, the Bill will also introduce enhanced cyber security obligations for "systems of national importance", being assets that are considered important to Australia's security, economy, and sovereignty. This would require entities responsible for such systems to comply with statutory incident response planning obligations and conduct cyber security exercises.

NSW Court of Appeal reconsiders repudiatory conduct

The NSW Court of Appeal's decision in Aslan v Stepanoski [2022] NSWCA 24 underscores that the courts will not lightly conclude that conduct is repudiatory. The Court of Appeal unanimously allowed the builder's (Aslan's) appeal, overturning the trial judge's finding of repudiatory conduct.

The Court of Appeal found that the owner (the Stepanoskis) could not establish that the builder repudiated the lump sum conduct. The primary judge found that the builder's conduct in suspending work and failing to resume work on the basis that the owner had failed to pay amounts where there was no entitlement to payment amounted to a repudiation of the contract (thereby entitling the owner to terminate the contract). However, the Court of Appeal took a different view and found that the primary judge erred in finding that the builder repudiated the contract. As a result, the owner was not entitled to accept the repudiation, elect to terminate the contract and claim damages.

The Court of Appeal held that the builder's payment claim under the lump sum contract did not amount to repudiation. In fact, in making the disputed Progress Claim 4, the contractor was not acting in disregard of the lump sum contract; instead, the contractor sought to hold the owner to the contract. The Court of Appeal found that the trial judge's approach to whether the builder

had claimed an amount to which he was not entitled was misconceived. The trial judge compared the sums paid by the owner under the contract against the value of the work completed.

However, the Court of Appeal observed that in the context of a lump sum contract, several reasons might explain why a builder's contractual payment entitlement may not necessarily accord with the value of the work completed, for example:

  • the parties may decide to "front-end" payments, making earlier payment instalments "disproportionately high"; or
  • the owner may have struck a "bad bargain".

The Court of Appeal found that the trial judge did not consider whether the builder was entitled to the progress claim. There was no evidence that the builder had not yet reached the identified stage of work relevant to Progress Claim 4. Even if the owner could establish that the builder was claiming an amount to which the builder not entitled, the courts will not infer repudiation lightly. The owner would need to point to the conduct by the builder showing an intention to no longer be bound by the contract. As there was nothing to prove that the builder's progress claim was not a bona fide claim for payment under the contract, repudiation had not occurred.

The Court of Appeal also found that there was evidence that the owner locked the builder out of the building site. As a result, neither the builder's "stopping work" nor its "failing to resume work" could be characterised as repudiatory conduct.

Clayton Utz communications are intended to provide commentary and general information. They should not be relied upon as legal advice. Formal legal advice should be sought in particular transactions or on matters of interest arising from this communication. Persons listed may not be admitted in all States and Territories.