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Westbourne Grammar School v Gemcan Constructions Pty Ltd [2017] VSC 645 (26 October 2017)

by Hugh Foxcroft

In this case Robson J followed the High Court of Australia’s determination in Southern Han Breakfast Point Pty Ltd v Lewence Construction Pty Ltd [2016] HCA 52 (Southern Han) that a reference date under the Building and Construction Industry Security of Payment Act 2002 (NSW)(the Act) will not arise after the suspension or termination of a construction contract where the contract does not make express or implicit provision for reference dates to continue thereafter. (Southern Han also standing for the proposition that a reference date is a pre-condition the making of a valid payment claim under the Act.)

Further, properly exercising a show cause notice procedure and thereafter taking works out of the hands of the contractor (without terminating the contract) pursuant to the terms of the contract did not constitute ‘contracting out’ in breach of s 48 of the Act. Westbourne was granted an order quashing the adjudication on the grounds of jurisdictional error by the adjudicator and errors of law on the record.

In Southern Han Breakfast Point Pty Ltd v Lewence Construction Pty Ltd [2016] HCA 52 (Southern Han) the High Court of Australia determined that a reference date under the Building and Construction Industry Security of Payment Act 2002 (NSW)(the Act):

1 is a pre-condition the making of a valid payment claim under the Act; and
2 will not arise after the suspension or termination of a contract where the contract does not make express or implicit provision for reference dates to continue thereafter.

The second part of the decision in Southern Han has recently been applied by Robson J in Westbourne Grammar School v Gemcan Constructions Pty Ltd [2017] VSC 645 (26 October 2017) (Westbourne). In this case the contractor, Gemcan, obtained an adjudication determination under the SOP Act that it be paid by the principal, Westbourne, $241,073.33 for work done under a construction contract.

The contract provided that if Gemcan committed a substantial breach of the contract Westbourne could give to Gemcan a written notice to show cause. If Gemcan failed to show reasonable cause by the stated date and time, Westbourne could by written notice ‘take out’ the whole or part of the work remaining to be completed and suspend payment until, in effect, the works were completed, or terminate the contract (cl 39.4).

In the period 24 March to 12 April 2017 Westbourne served three show cause notices and took the work out of the hands of Gemcan, without terminating the contract. Gemcan demobilised from the site on 3 April 2017. On 2 or 3 May 2017 Gemcan served a payment claim under the SOP Act. On 16 May 2017 the Superintendent served on Gemcan by email a payment schedule stating:

(a) that the amount proposed to be paid was ‘Nil’; and
(b) the amount was less than the claimed amount as the payment claim was not a valid payment claim, as the obligation to make payment under the relevant contract had been suspended and, as a consequence, there was no relevant reference date in respect of which a payment claim could be made.

On 30 May 2017 Gemcan applied for an adjudication pursuant to s 18(1)(a)(i) of the SOP Act. The adjudicator published his determination of the payment claim, referred to as the payment claim dated 3 May 2017 on 7 July 2017. The adjudicator found that the reference date to which the claim dated 3 May 2017 was referable was 30 April 2017. He determined 30 June 2017 to be the due date for payment of that payment claim.

Before the Court Westbourne ultimately relied on four grounds to challenge the adjudicator’s determination:

(a) the adjudicator committed jurisdictional error, or alternatively erred in law, in determining that cl 39.4 of the contract was void pursuant to s 48 of the SOP Act (no contracting out);
(b) the adjudicator committed jurisdictional error, or alternatively erred in law, in finding that the second show cause notice was invalid and that therefore even if clause 39.4 of the contract was effective, Westbourne was not entitled to suspend payment under clause 39.4, and therefore a further reference date arose for the purposes of making a payment claim under the SOP Act on 30 April 2017;
(c) the adjudicator committed jurisdictional error, or alternatively erred in law, in failing to take into account the third show cause notice and the third take out notice; and
(d) the adjudicator erred in law in including in the adjudication determination amounts for variations which were disputed and therefore excluded amounts under s 10B of the SOP Act.

As to the first ground, Robson J held that the adjudicator’s determination was contrary to the reasoning in Southern Han, concluding:

74 In my opinion, what the Act does is to prevent the principal from refusing to pay on grounds such as claims that the work has not been properly done or has otherwise been done in breach of contract. The Act provides that those issues can be raised and resolved by the adjudicator for the purposes of enforcing the contractual right to payment. However, if under the terms of the contract a right to make a claim for a progress payment has been removed by suspending a reference date or the right to payment, then there is no contractual right of the builder’s which the Act enables the builder to enforce.
75 If a reference date is removed under the terms of the contract, then the inability of the claimant to make a valid payment claim is due to the terms of the contract. The contractual term that took away the contractual right to make a payment claim is not a provision under which the operation of the Act is, or is purported to be, excluded, modified or restricted, or that has the effect of excluding, modifying or restricting the operation of the Act. The Act only operates upon contractual rights as agreed between the parties. In those circumstances, the non-engagement of the Act is not due to any contractual term purporting to affect the operation of the Act. Rather, under the contract, the necessary entitlement to a payment by reference to a reference date does not exist or has been extinguished.
76 Accordingly, I find that s 48 is not engaged and the adjudicator erred in law in holding that it did.
Robson J then considered each of the three show cause notices, concluding that only the third such notice was valid. As a result, Westbourne did validly ‘take out’ the works remaining to be completed and suspend payment until it became due and payable pursuant to the contract. As the adjudicator did not address the exercise of these rights under the contract and erred in finding (by implication) that the third show cause and take out notices were invalid, the adjudicator erred in law.

Westbourne was granted an order quashing the adjudication on the grounds of jurisdictional error by the adjudicator and errors of law on the record.

Hugh Foxcroft QC

1 November 2017

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