Does a non-compliant supporting statement invalidate a payment claim served in NSW?

The Court of Appeal has now in TFM Epping Land Pty Ltd v Decon Australia Pty Ltd [2020] NSWCA 93 clarified that a non-compliant supporting statement by a head contractor under s13(7) of the Building and Construction Industry Security of Payment Act 1999 (NSW) (SOPA) will not invalidate a payment claim or render ineffective service of a payment claim under the SOPA. Prior to this there were conflicting decisions of Justice Ball in Central Projects[1]  (that there was no invalidation) and Justice McDougal in Kitchen Xchange[2] (that the payment claim was invalidated). The decision of Justice McDougal was subsequently followed in Kyle Bay[3] and Duffy Kennedy[4].

Relevantly, section 13(7) of the SOPA provides:

(7)   A head contractor must not serve a payment claim on the principal unless the claim is accompanied by a supporting statement that indicates that it relates to that payment claim.

Maximum penalty: 200 penalty units.

The Court of Appeal upheld the reasoning of Justice Ball in Central Projects that section 13(7) of the SOPA does not in terms invalidate a payment claim served without a supporting statement, nor does it invalidate the act of serving such a claim. This conclusion was essentially supported by the reasoning that section 13(7) provided for a penalty for failure to comply with its requirements with respect to supporting statements and so there was no basis to imply a legislative intention that further consequences ought to apply for non-compliance such as invalidating a payment claim or service of an otherwise valid claim. 

What does this mean for you?

If you are a principal in receipt of a payment claim without a supporting statement or a supporting statement that does not comply with the prescribed form, you should ensure that a payment schedule is provided within the prescribed 10-business day period (not that ignoring anything purporting to be a payment claim is ever good practice).

Head contractors who serve a payment claim in respect of an available reference date without a supporting statement or a non-compliant statement, (regardless of whether they receive a payment schedule asserting that the payment claim is invalid by reason of the non-compliance) should not issue another payment claim in respect of the same reference date as to do so would risk the head contractor falling foul of the prohibition in section 13(5) of the SOPA of the service of two payment claims with respect to the same reference date.

Facts

The principal and the builder were parties to a contract for the construction of a residential development in Epping. The builder issued payment claim 10 under the SOPA for approximately $6.4 million together with a supporting statement. The supporting statement referred to a subcontract and stated that it applied for work between 27 June 2018 and 3 July 2018 inclusive which was the subject of the payment claim. The principal did not serve a payment schedule within the time required by the SOPA and so potentially became liable to pay the claimed amount.

The builder proceeded to file a summons and a notice of motion in the Supreme Court of NSW seeking summary judgment for the claimed amount. The principal challenged the validity of the progress claim and its service. The primary judge gave judgment in favour of the builder finding that the principal did not raise any triable issues.

The principal sought leave to appeal the decision on three grounds:

1. The payment claim was not validly served as it was not accompanied by a supporting statement that complied with s13(7) of the SOPA;
2. The payment claim was invalid because it claimed payment in respect of variations to the contract which were not claims under the construction contract but were quantum meruit claims;
3. The payment claim was invalid as it was not made in respect of an available reference date. 

The appeal was dismissed with the primary judgment given by Basten JA (with whom Meagher JA and Emmett AJA agreed). 

Decision

Was the claim validly served because it was not accompanied by a complaint supporting statement? 

The principal contended that:

• the supporting statement did not satisfy the requirements of the SOPA because the construction work the subject of the payment claim was, on the face of the claim, carried on outside of the seven day period referred to in the supporting statement;
• the absence of a compliant supporting statement was said to render the service of the payment claim invalid, or, in the alternative, to render the payment claim itself invalid.

Basten JA held that a failure of a head contractor to serve a valid supporting statement under section 13(7) of the SOPA did not invalidate a payment claim. His Honour reasoned as follows:

• Section 13(7) of the SOPA identified its own consequence: it was a prohibition with a prescribed penalty such that the contravener committed a statutory offence; 
• Section 13(7) did not in terms invalidate a payment claim served without compliance with the terms of section 13(7) nor did it invalidate service. If the provision was to have those effects, they were implied consequences;
• In determining whether s13(7) had those implied consequences, his Honour considered Justice McDougall’s reasoning in Kitchen Xchange where McDougal J:
  • in respect of s13(5), found that the terms of that subsection were a prohibition (i.e. ‘cannot serve more than one payment claim’) which was a sufficiently clear statutory indication that a document purporting to be a payment claim that is in respect of the same reference date as a previous claim was not a payment claim under the SOPA. McDougal J clarified in a later decision in The Trustees of the Roman Catholic Church for Diocese of Lismore[5] that the rationale for that approach was that if the statutory prohibition was not to be given effect, then the subsection served no useful purpose i.e. it would set at naught the statutory prohibition;
  • in respect of s13(7), found that the language of s13(7), also being in the form of a prohibition, the same conclusion should follow as with respect to s13(5), in that s13(7) did not render the payment claim invalid but invalidated or rendered ineffective service of a payment claim that is not accompanied by the requisite statement.
• McDougal’s reasoning omitted one consideration which was significant – no reference was made to the fact that s13(7), unlike s13(5), was a penalty provision. It would not set at naught the prohibition if it were not found to invalidate service because the penalty provision would survive; 
• Ball J’s reasoning in Central Projects was to be preferred. Ball J looked at whether the legislature impliedly intended breach of the prohibition to have other consequences and found that there were several reasons for thinking that it did not including:

(a) the language of s13 did not readily accommodate an additional consequence;

(b) s13(7) was to be contrasted with s13(5) in that the language of the latter subsection was entirely consistent with the notion that any subsequent document purporting to be a payment claim could not be characterised as one because only one could be served and that subsection provided no other consequence; and

(c) given the consequence of not validly serving a payment claim was significant (i.e. it would deprive an adjudicator of jurisdiction), it was to be expected that if that were an intended consequence of the legislature, there would have been some reference to it in the Inquiry’s Final Report or in the Second Reading Speech;

• Each of ss13(2), 13(4) and 13(5) explicitly constrained the conferring of power under s13(1) to serve a payment claim. On the other hand, s13(7) was expressed to condition the service of a payment claim upon the provision of a supporting statement. It did not qualify or attach a condition to the nature or content of the payment claim, which is the critical document giving rise to a legal right to recover a progress payment;
• Section 13(5), despite its mandatory terms, contained no adverse consequence for non-compliance by a claimant. In stark contrast, s13(7) contained its own penalty;
• Implying consequences should be approached with caution. To invalidate a payment claim (or the service thereof – the effect is the same) would allow a contractor to make a subsequent valid payment claim despite an apparent contravention of s 13(5). There was no basis for supposing that Parliament intended such an outcome.

Was the payment claim valid where it claimed payment in respect of variations which were not claims under the contract but were quantum meruit claims?

The principal contended it was arguable that, as a matter of construction of the payment claim, the amounts claimed for variations were not available under the contract and therefore the payment claim was arguably invalid.

Basten JA rejected that submission. His Honour held that the payment claim on its face was a claim for works completed under the contract. Whilst it was possible that the amounts claimed for variations did not properly arise under the contract (because, for example, relevant procedural steps had not been followed), for that issue to be pursued, it would involve raising a defence in relation to matters arising under the contract which was prohibited by s15(4) of the SOPA.

A challenge on that basis was, however, available to the principal in a payment schedule which, in this case, the principal had elected to not provide.

Was the payment claim invalid by reason of it not being made in respect of an available reference date?

At the relevant time, the right to a progress payment conferred by s 8(1) of the SOPA operated “[o]n and from each reference date”. The parties had accepted that a reference date arose on the 20^th day of each month. The principal argued that the payment claim could not be in respect of the 20 May 2019 reference date because it claimed interest accruing up to and including 23 May 2019. It relied on the proposition, said to be derived from the High Court’s decision in Southern Han[6], that a payment claim which included any amount which accrued after a reference date precluded the payment claim being made with respect to that reference date.

Basten JA rejected that submission. His Honour distinguished Southern Han and held that:

• Southern Han did not support that reasoning, nor was it consistent with the language of s 8;
• The “work” to which the interest payment related had been carried out long before the reference date. It was not explained why, as a matter of law, an interest payment which accrued after the reference date, but before the payment claim was lodged, was not recoverable as part of that payment claim;
• It would not matter if some construction work had been undertaken after the reference date, so long as the payment claim was referrable to that reference date;
• As the contract remained on foot, and there was an available reference date, the builder was entitled to claim a progress payment for work done up until that date. The payment claim bore the necessary relationship to the reference date sufficient to satisfy entitlement to a progress payment under the Act;
• The inclusion of interest which accrued after the reference date did not mean the payment claim was not made with respect to that reference date.

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