Focus: Conditions on payment claims unenforceable
6 July 2012
In brief: The Queensland Court of Appeal has determined that contractual conditions placed on a payment claim for construction work cannot be justified under that state's security of payments legislation. Partner Adrian Baron and Lawyer Laura Nagy report.
How does it affect you?
- The Building and Construction Industry Payments Act 2004 (Qld) (the Act) expressly prohibits parties from attempting to exclude, modify, restrict or otherwise change the effect of a provision of the Act. It is likely that any condition precedent to the issuing of a payment claim would fall foul of the Act, and will not be enforceable.
- If you want to ensure certain conditions are met before a reference date arises, those conditions should attach to the accrual of a reference date rather than the entitlement to issue a payment claim under the Act. You should be aware that conditions that are so onerous that, in practice, they would prohibit a reference date occurring monthly, will likely be held to be contrary to the purpose of the Act, and will not be enforceable.
The Act sets out the process by which, for 'each reference date under a construction contract, a person is entitled to a progress payment if the person has undertaken to carry out construction work, or the supply of related goods and services, under the contract'.1
Schedule 2 to the Act defines the term 'reference date' to mean a date stated in, or worked out, under the contract as the date on which a claim for a progress payment may be made, or, if the contract does not provide such a date, the last day of the month in which the construction work was begun and the last day of each subsequent month.
The Act cannot be contracted out of.2
John Holland Pty Ltd subcontracted certain dredging works in the Gladstone Harbour region to Coastal Dredging & Construction Pty Ltd. Clause 12.6 of that subcontract included a number of preconditions, including the requirement for a statutory declaration to be made by Coastal stating that it had paid its employees for any work it included in its payment claim, before a progress payment was made by John Holland. The subcontract also included a definition of 'reference date', as being 'the date when the Subcontractor may submit a Payment Claim to John Holland in accordance with clause 12.6 and Schedule A, and has the same meaning as defined in the Security of Payment Act'.3
On 28 November 2011, Coastal served a payment claim under the Act on John Holland for the amount of $5,042,837. In response, John Holland served a payment schedule and, as a result, Coastal applied to have the matter determined by an adjudicator. In its adjudication response, John Holland argued that Coastal had failed to comply with the contractual preconditions, and as such, no reference date had arisen which would entitle Coastal to submit a payment claim.
The adjudicator delivered his decision in January 2012, finding that Coastal was entitled to payment of $3,571,790. The adjudicator did not determine whether Coastal had failed to comply with the preconditions of the subcontract as argued by John Holland, but held that the reference date for the payment claim was the 28th day of the relevant month, being 28 November 2011.
John Holland applied to the Supreme Court for a declaration that the adjudicator's decision was void on the basis that, among other things, the payment claim did not relate to a valid reference date as required by section 12 of the Act. John Holland relied, in part, on a concession by Coastal that it had not provided the relevant statutory declaration.
The primary judge rejected that argument. Her Honour held that the term 'reference date' in clause 12.6, when considered in conjunction with the definition of that same term in Schedule A to the subcontract, made the reference date 28 November 2011. Her Honour considered that the preconditions 'amounted to promises by Coastal as to the contents of any payment claim it made. A breach of those promises might or might not give John Holland valuable rights, but it did not change the fact that a reference date had occurred.'4
John Holland appealed the decision.
On appeal, John Holland maintained its position that the proper construction of the definition of 'reference date' in the subcontract was that its accrual was conditional upon satisfaction of each of the preconditions, together with it being the 28th day of the month.
John Holland contended that the subclauses of clause 12.6 assisted in identifying the date 'worked out under' the subcontract for the issuing of a payment claim, as defined in paragraph (a) of the definition of 'reference date' in the Act. John Holland submitted that Coastal's admitted failure to provide a statutory declaration justified its position that no valid reference date for the issuing of a payment claim had arisen. John Holland submitted that the authorities supported the conclusion that this interpretation did not amount to it contracting out of the Act.5
His Honour, Appeal Justice Fraser (with whom Appeal Justices White and Lyons agreed) considered that the object of the Act,6 and how that object is best achieved,7 must be borne in mind when considering the issues of construction of the contract relied on by John Holland. His Honour considered that the 'contractual provisions to which reference may be made for the purpose of ascertaining the "reference date" are those which state, or provide for the working out of, the date on which a progress payment claim "may be made" '.8 His Honour considered that this expression referred to an entitlement to make a progress claim. It did not 'comprehend reference to warranties which concern the form and content of progress claims or the consequences of breaching warranties about the form and content of progress claims'.9
Therefore, his Honor considered that the effect of John Holland's argument was that the relevant provisions of the subcontract operated to defer Coastal's statutory entitlement to make a monthly payment claim in accordance with the Act. His Honour concluded that, in breach of the Act,10 those provisions were void because they purported to 'modify ... or otherwise change the effect of a provision of [the] Act'.11
His Honour noted that John Holland did not raise any circumstances that could justify their Honours re-writing the clause of the subcontract at issue so that it was construed differently, or how, in combination with the Act, that might be done 'in a way which deferred the accrual of [Coastal's] statutory entitlement to a progress payment' in accordance with s12 of the Act.12
Accordingly, their Honours dismissed John Holland's appeal with costs.
The case provides a timely reminder that the courts are likely to hold that conditions precedent to the issuing of a payment claim under the Act are void. While conditions may be placed on the form of a progress payment under a contract, in practice, if a contractor does not comply with these conditions, they will not be barred from issuing a payment claim under the Act.
For parties who want certain conditions to be met prior to a reference date accruing under a construction contract, the case leaves open the possibility of attaching these conditions to the definition of the term 'reference date'. This would require careful drafting so as to ensure that practically, these conditions did not prohibit a contractor being able to make a monthly payment claim. Any conditions that have the effect of excluding, modifying, restricting or otherwise changing the effect of a provision of the Act will be void.
- The Act s12.
- The Act s99.
- John Holland Pty Ltd v Coastal Dredging & Construction Pty Limited & Ors  QCA 150 at .
- Above note 3 at .
- Above note 3 at . For example, see Reed Constructions (Qld) Pty Ltd v Martinek Holdings Pty Ltd  QSC 345 at  –  where it is stated that the 'Act does not override the contractual provisions and stresses adherence to their terms'; and the comments by Justice Douglas in Simcorp Developments & Construction P/L v Gold Coast Titans Property P/L; Gold Coast Titans Property P/L v Simcorp Developments and Construction P/L  QSC 162.
- As set out at s7 of the Act.
- As set out at s8 of the Act.
- Above note 3 at .
- Ibid note 8.
- Above note 3 at .
- The Act s99. Above note 3 at .
- Above note 3 at .
- Brian MillarPartner,
Ph: +61 2 9230 4839
- Stephen McComishPartner,
Ph: +61 8 9488 3767
- Nick Rudge Partner,
Ph: +61 3 9613 8544