Building blunders and statutory demands: Mistakes that hammer home the importance of precision

The problem facing a builder who hasn't been paid

When working on a building project, it can be quite common for a contractor to supply labour and materials that are not actually covered by a contract. This can unfortunately occur in a number of situations, such as:

• a contractor undertaking extra work outside the scope of the contract where it is not possible to have that work included as a variation;
• work being done in accordance with a contract which is ultimately held to be unenforceable or void, perhaps because the contact didn't comply with relevant building legislation or had uncertain terms;
• where work was carried out in anticipation that a contract would be formed, but ultimately one never was (for example, due to a breakdown in negotiations).

In these circumstances, if a builder or contractor considers that it is owed money by the principal, then it may need to recover its debt by making a claim for restitution on the basis of unjust enrichment. This may also be known as a quantum meruit claim for the reasonable value of services provided.

The difficulty arises when it is unclear whether or not a contract actually applies, which causes uncertainty about whether the debt is based in contract or restitution. This is because no restitutionary claim will be available if it turns out that the parties are, in fact, bound by a contract.

As recently demonstrated in CM Luxury Pty Ltd v Menzies Civil Australia Pty Ltd [2023] WASC 340, this may become problematic when a builder or contractor decides to issue a statutory demand and is required to specify and verify the relevant debts.

The built up debt and the dispute

In CM Luxury, the Contractor carried out civil construction works for the Principal as part of the development of a private recreational club. The parties negotiated on entering into an AS 2124 contract.

The Contractor issued 12 payment claims, with the Principal paying the first 10 but not the last two, which totalled $1.3 million.

The Contractor served the Principal with a statutory demand accompanied by an affidavit describing this debt as being due and payable pursuant to the contract.

The Principal then commenced legal proceedings seeking an order to have the statutory demand set aside on the basis that there was a genuine dispute about the existence of the debt.

The argument was that, although the contract was signed by the Contractor, it was never signed by the Principal and its terms were never agreed. Accordingly, it was not possible for any contractual debt to exist.

As the matter played out, the Contractor eventually changed its position by conceding this and instead arguing that the legal source of the debt was based in restitution.

This turn of events resulted in the Principal arguing that both the statutory demand and its accompanying affidavit incorrectly described the debt as being contractual, with the affidavit also failing to give evidence verifying the reasonableness of the amount claimed by the Contractor (this last point being a crucial element of a quantum meruit claim).

The concrete concepts of statutory demands

A statutory demand must specify the debt that it claims, and must be accompanied by an affidavit, unless the debt is a judgment debt.

The accompanying affidavit must state the nature of the debt in a manner that corresponds with the description of the debt given in the statutory demand, and verify that the debt is due and payable.

If a company fails to pay a debt claimed in a statutory demand within 21 days, it will be presumed to be insolvent, and any of its creditors may apply to have the company wound up.

Given the serious consequences flowing from the presumption of insolvency, the company may want to apply to have the statutory demand set aside.

The Principal's position: the statutory demand should be set aside

As part of its challenge to the statutory demand, the Principal relied on there being a genuine dispute about the existence of the debt, and that it had an offsetting claim.

But more importantly, it relied on two grounds to set the statutory demand aside:

1. because of a defect in the statutory demand, substantial injustice would be caused unless it was set aside; and
2. there was "some other reason" why the statutory demand should be set aside.

Defect in the statutory demand and substantial injustice

Justice Seaward held that a statutory demand must specify the relevant debt in a manner that is accurate and not misleading.

Failing to do so constitutes a defect that may result in substantial injustice caused by undermining the ability of the person receiving the statutory demand to identify the debt with a sufficient degree of precision.

In this case, the defect was the debt being misdescribed as contractual, and the substantial injustice was that the Principal's affidavit filed in support of its setting aside application was concerned with whether a contract had existed, and not whether the defendant had a restitutionary claim. Indeed, this resulted in the Principal's affidavit not containing any evidence that challenged the reasonableness of the amount claimed.

Deficiencies in the accompanying affidavit

Similarly, Justice Seaward held that the accompanying affidavit must state the nature of the debt in a manner that is accurate and not misleading.

In this instance, the Contractor's affidavit inaccurately stated the nature of the debt as contractual, and failed to make any suggestion that the debt was based in restitution. The affidavit also failed to properly verify the debt as it did not include evidence supporting the reasonableness of the payment being sought for the work done.

These deficiencies constituted "some other reason" to set the statutory demand aside.