Major Projects & Construction 5 Minute Fix 124: security of payment, prior negotiations, interest rate or penalty

The "rare" case for quashing a SOP Act determination

It's rare to successfully challenge an adjudicator's determination for want of procedural fairness. However, in A-Civil Aust Pty Ltd v Ceerose Pty Ltd [2024] NSWCA 7, the NSW Court of Appeal observed that, although unusual, the particular facts supported this outcome. The NSW Court of Appeal upheld the trial judge's decision that the adjudicator determined the dispute on a basis for which neither party contended, finding that, Ceerose (the head contractor) could not have "properly anticipated" the basis of the adjudicator’s determination regarding an entitlement to retention monies under the subcontract.

Justice Leeming's judgment highlights the "pay now, argue later" assumption underpinning the courts' willingness to allow, on an interim basis, legally incorrect adjudication determinations to stand so long as they are not infected by jurisdictional error. His Honour observed: "it is to be borne steadily in mind that the adjudicator’s determination may be replete with errors of law on its face, but even so it remains immune from judicial review until and unless jurisdictional error be established". However, he explained that the adjudicator's determination does not affect the parties' rights, and the parties can later fully agitate any dispute before a court.

Justice Leeming also observed the "peculiarity" of the facts in this case, with the reasons given by the adjudicator being "so far removed" from the parties' submissions; this amounted to a substantial breach of the parties' entitlement to procedural fairness. As Justices Mitchelmore and Leeming noted in their judgments, only in rare circumstances will there be a basis for quashing an adjudication determination on procedural fairness grounds.

Security of payment changes in force in the ACT

Significant changes to the Building and Construction Industry (Security of Payment) Act 2009 (ACT) (SOP Act) have commenced, aligning the ACT legislation with the NSW SOP scheme in two key areas. We look at the changes that commenced on 11 March 2024.

Removal of the "reference date" concept

The SOP reforms remove the concept of "reference date", to determine the date on and from which a party could claim a progress payment. Instead, the legislation provides a statutory entitlement to make a monthly payment claim. This change brings the ACT SOP legislation into line with NSW legislation and the recommendations of the Murray Review.

Instead, a new section 15(3A) provides that a payment claim may be given on or after:

• the last day of the calendar month;
• an earlier day in the calendar month as provided in the contract; or
• if the contract is terminated, the day of termination.

Due date for payment

Previously, the default due date for payment of a progress payment under section 13(1) of the SOP Act (where not specified in the contract) was 10 Business Days after a payment claim.

Under the amended section 13(1), the due date for payment is now the earlier of:

• 15 Business Days after a payment claim is served; and
• the due date under the contract.

The time frame of 15 Business Days now aligns with the NSW time frame for paying a head contractor.

By adjusting key aspects of the progress payment framework, the reforms aim to facilitate streamlined payment and reduce the likelihood of disputes, in line with the NSW Security of Payment Act.

Mistakes happen: when will the Court intervene?

In SSABR Pty Ltd v AMA Group Ltd [2023] NSWSC 1551, the NSW Supreme Court ordered the rectification of a business sale agreement to make the document conform to the parties' true agreement. Although not specifically a construction law case, it recaps the requirements for rectification of contract and is of broad application. It also illustrates how courts can look at evidence of prior negotiations with a claim for rectification.

The case hinged on a formula for calculating an "earn-out amount" in a business acquisition. The formula allowed SSABR (the seller) to receive additional payments based on the acquired business' performance for two years after completion. AMA Group (the purchaser) sought rectification of the contract by including the words "Average annual" before the reference to earnings before interest and tax (EBIT) in the formula. Using the aggregate EBIT for two years, rather than the average annual EBIT, effectively doubled the multiplier used in the formula.

Evidence of prior negotiations is admissible in rectification proceedings. Despite an "entire agreement" clause, Justice Rees considered documentary evidence of the history of the negotiations and drafting, a Binding Heads of Agreement and the evidence of one of the directors of AMA Group. Her Honour found the evidence supported the parties' common intention that the earn-out amount would be "the average annual EBIT". In other words, the absence of the phrase "average annual" was a mistake in the contract that did not accord with the true common intention of the parties. The Court ordered the contract rectification consistent with the construction for which AMA Group contended.

Once a mistake has been made, it can be difficult for a party to prove rectification. Justice Rees cited Franklins Pty Ltd v Metcash Trading Ltd [2009] NSWCA 407 and held that "rectification is granted only upon clear and convincing proof" which provide:

• the parties had a common intention; and
• by mistake, the document did not reflect that common intention.

Conversations with friends: contract formation and when interest on amounts unpaid will or won't be a penalty

In Taycon Pty Ltd v Williams [2023] QSC 297 the Queensland Supreme Court provided insight into how the existence and terms of oral agreements can be determined, and to what extent an agreed interest rate will be void as a penalty. This case provides a timely reminder that parties should seek to formalise business arrangements by way of written agreements to avoid uncertainty and potential disputes – even between friends. In addition, in considering whether interest payable on unpaid amounts will be void as a penalty, the courts will consider the parties' legitimate business interests.

Without repeating the lengthy and complex factual history of the matter, the plaintiff was a small building company run by Mr Taylor, the defendant (Mr Williams) was a "sophisticated businessman" and there was a degree of informality about the contractual arrangements between the parties as Mr Taylor trusted Mr Williams and the two were friends. Mr Williams failed to pay Taycon amounts owing to it for construction works completed on Mr William's house and there was subsequently a number of conversations and other correspondence between the parties in respect of the amount, timing for and form of payment.

In determining whether one such conversation amounted to a binding agreement, Justice Applegarth found that there was insufficient certainty of the terms of the agreement and that the parties' conduct, including in respect of obtaining legal and accounting advice and subsequent communications between them, meant that there was no binding agreement made during this conversation.

Another primary issue was whether an interest rate of 20% to be paid in the event that the principal amount was not paid by Mr Williams was void as a penalty. In respect of this point, His Honour contemplated the various authorities and considered that, as Taycon was a small business with a legitimate interest in maintaining cashflow (by being "promptly paid what was owed to it"), the agreed interest rate "was a reasonable reflection of the costs and disadvantages to Taycon of being kept out of money". His Honour concluded that that the agreed interest rate was not a penalty, and that its purpose was to compensate Taycon for the consequences of being deprived of the use of money it was owed and which it needed to conduct its business.

Back to basics: does the evidence support an oral contract?

Dig It Landscapes Pty Ltd (in liq) v Bupa Aged Care Australia Pty Ltd (No 2) [2024] FCA 31 involved a common construction industry scenario where delayed payment by an upstream contractor has dire consequences for subcontractors further down the chain. In this case, a landscaping subcontractor (Dig It) tried to skip up the contractual chain, bypassing the head contractor (Denham), arguing that an oral contract existed between the principal under a building contract (Bupa) and Dig It.

Dig It's argument was twofold, based on contract and section 18 of the Australian Consumer Law. It argued that Bupa:

• said things at a site meeting that comprised an offer capable of acceptance by Dig It's conduct (its continued work on the project);
• engaged in misleading and deceptive conduct which caused Dig It to believe that it would be paid by Bupa, and so causing Dig It to continue work.

Dig It failed to establish that Bupa's statement and conduct gave rise to a contract between Bupa and Dig It. Justice Jackson observed: "It would be unusual for a principal to assume a direct [payment] obligation to a subcontractor". Unusually, the Court could hear what transpired at the site meeting because an audio recording and transcripts of the meeting were in evidence. Bupa's and Dig It's representatives discussed an upstream "Payment Deed" between Bupa and Denham requiring Denham to provide proof of payment to subcontractors within four business days of a corresponding payment by Bupa. However, Justice Jackson found that although the Bupa discussed the purpose of the deed with Dig It (and other subcontractors), Bupa did not assume any direct contractual relationship with the subcontractor in doing so.

His Honour emphasised the importance of ascertaining the full context when considering whether what was said or what has happened gives rise to an oral contract:

"[the exchange] illustrates how important it is to pay close attention to what each person said in the context of the entire discussion at the meeting. A superficial reading of Mr Fordham's statement, taken by itself, could suggest some sort of quid pro quo between payment to subcontractors and completion of the works in accordance with a proposed program. But Mr Fordham was only referring to the fact of past payment of the two subcontractors in question".

Ultimately, Dig It's contractual case failed in all three conventional elements of contract formation: there was no certainty as to the parties to the arrangement, the terms of the arrangement, or any exchange of consideration.

Dig It's claim of misleading or deceptive conduct also failed because the claim was based on an allegation that the representations were inconsistent with the terms of the Payment Deed. However, Dig It never clarified how the alleged representations were inconsistent with those terms.