Security of payment – a problem financing progress claim invoices

If you are:

• a contractor in the construction industry and want to raise finance on progress claims to boost cashflow, or

• you provide finance that relies on progress claims being payment claims under security of payment legislation,

you need to be aware that you may need to change your processes as a result of a problem recently thrown up by the NSW Court of Appeal.

The problem

In Quickway Constructions Pty Ltd v Electrical Energy Pty Ltd the Court of Appeal held that an invoice for a progress claim that identifies that it has been assigned and directs that payment should be made to the lender is not a payment claim under the Building and Construction Industry Security of Payment Act 1999.

The case

Electrical Energy had entered into an arrangement to raise cashflow finance on its progress claims with a well-known invoice discounting financier. The arrangement required Electrical Energy to assign the right to receive payment from its head contractor or principal to the financier, and to include on its invoices a notation stating:

“This invoice has been assigned to [financier]. All payments must be made payable and sent to [financier]. [address].”

The financier also sent “Customer Statements” to Quickway, requiring payment, and advising that “All existing and future invoices have been assigned to [financier]” and “All payments must be made out and forwarded to [financier] until such time that the notice is withdrawn in writing by [financier].”

The judgment

Because Quickway was given notice of the assignment, the debts in question were validly legally assigned with effect from the service of the progress claim invoice bearing the notation, and from that point in time Electrical Energy ceased to be a creditor of Quickway.

The problem for Electrical Energy (and its financier) was that section 13 of the Act stipulates that only a person who has undertaken to carry out construction work under the relevant construction contract and:

• who is, or

• who claims to be entitled to a progress payment

may serve a payment claim.

But here:

“Electrical by the very document contended to be a payment claim asserted, correctly, that it was no longer a creditor.” That is, the invoice stated that Electrical Energy was no longer entitled to payment.

So, the invoice was not served by a person who was entitled to a progress payment, or who even claimed to be entitled to a progress payment.

The result is that the Act didn't apply to Electrical Energy’s invoice.

What does the decision mean for you?

If contractors and their financiers want to be able to take advantage of the summary procedures for payment that the Act provides, the practice of giving notice of the assignment on invoices and elsewhere will have to change.

The good news for contractors and their financiers is that the Court expressly noted that its judgment does not decide the position where there has been a transfer of the right to be paid (an assignment) that the head contractor or principal isn't told about, or some other form of security has been granted by the contractor to the financier.

How we can help

Bartier Perry can advise you on structuring your financing arrangements so that the Act applies, and can ensure that the arrangements are properly documented.

Conversely, if you are a principal or head contractor, we can advise you on whether the progress payment invoice you have received is a valid payment claim under the Act, and what steps then need to be taken to protect your interests.

Author: David Creais