Security of payment – early payment claims are fatal

The Supreme Court of NSW has recently established that a contractor can’t save a premature payment claim by relying on a provision in a construction contract which deems the date of service to be later than the actual date.

The issue

We know that under the Building and Construction Industry Security of Payment Act 1999 (NSW) the entitlement to a progress claim only arises on and from each reference date (because the High Court has told us so). A payment claim served before the relevant reference date has arisen will therefore be invalid.

But what is the effect of a clause like clause 37.1 of the Australian Standard contract for design and construction, which states that:

“An early progress claim shall be deemed to have been made on the date for making that claim”?

In All Seasons Air Pty Ltd v Regal Consulting Services Pty Ltd the contractor argued that the clause means that a payment claim which is actually served before the reference date prescribed by the contract or the Act is nonetheless taken to have been served on the prescribed reference date.

The case

Briefly, the relevant facts in All Seasons Air were:

• The contract included clause 37.1.

• It provided that progress claims were to be made on the 20th day of the month.

• The contractor served a payment claim on 20 June 2016.

• It then served another payment claim on 12 July 2016.

The principal contended that the payment claim served on 12 July 2016 was invalid because it was the second payment claim served in respect of the 20 June 2016 reference date (section 13(5) of the Act prohibits service of more than one payment claim in respect of each reference date).

The adjudicator accepted the contractor’s submission that the reference date for the 12 July 2016 payment claim was 20 July 2016, by virtue of clause 37.1.

The principal commenced proceedings in the Supreme Court of NSW seeking a ruling as to the validity of the adjudicator’s determination. The trial judge disagreed with the adjudicator and declared the adjudication determination void.

The judgment

The Court of Appeal agreed with the trial judge and dismissed the contractor’s appeal.

While it was accepted that the contractual position as between the parties was that the 12 July 2016 payment claim was “deemed” to have been made on 20 July 2016, that did not mean that the same applied for the purposes of the Act.

Rather, the Court of Appeal felt that it was inconsistent with the purposes of the Act for the parties to a contract to create and rely on a counterfactual position so as to engage the provisions of the Act.

In particular, it is important for there to be certainty as to precisely when a payment claim has been served due to the time-critical regime which follows service of a payment claim.

The lesson

So, the important take away is that a payment claim that is served before the relevant reference date is invalid, no matter what the contract between the parties says.

Contractors must be patient, or for the sake of a few days they will be unable to use the powerful tools to obtain payment that the Act provides. Conversely, principals should be diligent in checking payment claims against reference dates, as receipt of a premature payment claim may provide the opportunity to avoid, or at least delay, payment.

Author: David Creais