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More welcome clarity on SOP Act payment claims: Security called on by principal cannot be claimed

17 January 2024

#Construction, Infrastructure & Projects

Published by:

Jessica Xu

More welcome clarity on SOP Act payment claims: Security called on by principal cannot be claimed

In December 2023, the Supreme Court of NSW held that contractors cannot claim a drawdown of security by a principal as a ‘payment claim’ within the meaning of the Building and Construction Industry Security of Payment Act 1999 (NSW) (SOP Act).

This decision in Acciona Infrastructure Projects Australia Pty Ltd v EnerMech Pty Ltd [2023] NSWSC 1565 provided further clarity on the operation of security of payment regimes, following a recent Supreme Court of Victoria decision that held that retention moneys can be claimed. Read our article on Hunters Green Retirement Living Pty Ltd v JG King Project Management Pty Ltd [2023] VSC 536 here.

Background

Acciona Infrastructure Projects Australia Pty Ltd, Samsung C&T Corporation and Bouygues Construction Australia Pty Ltd (collectively Acciona) had formed an unincorporated joint venture to construct the WestConnex M4-M5 Link in Sydney.

In June 2020, Acciona subcontracted EnerMech Pty Ltd (EnerMech) to perform electrical installation works for the M4-M5 Link (Contract). The Contract required EnerMech to provide security, which it did in the form of an unconditional undertaking from a bank for $9,230,157.40 (Security).

EnerMech served two payment claims on Acciona in 2022. Although Acciona disputed the claims, both adjudication determinations found in favour of EnerMech. Acciona duly paid the adjudicated amounts.

Acciona then called on the Security in May 2023. Within two weeks, EnerMech served a payment claim on Acciona, claiming $10,180,582.60 (Payment Claim). This amount comprised:

  • the amounts previously certified by Acciona’s representative as payable to EnerMech or determined as payable by adjudicators of previous disputed payment claims ($106,922,872.42)
  • EnerMech’s variation claim for an additional barrier strip and interest on an amount owing from a previous correction under the ‘slip rule’ per section 22(5) of the SOP Act ($18,611.67)
  • less a ‘paid to date’ figure ($97,622,808.76), calculated as the sum of the 28 identified progress payments made by Acciona to date minus $9,230,157.40 (equal to the amount of Security)
  • GST on the sum of the above items ($931,867.53)
  • less a sum subtracted on account of an earlier slip ruling ($69,960.26).

Acciona disputed the Payment Claim, but an adjudication determination found in favour of EnerMech, notably in relation to the return of the drawn down Security. Acciona appealed to the Supreme Court, arguing that the Payment Claim was not a ‘payment claim’ under the SOP Act because it did not relate to ‘construction work’ or ‘related goods or services’ as required under section 13(2)(a).

Claim for credit in relation to security that had been called on

Stevenson J found in favour of Acciona, holding that the Payment Claim was not a claim for construction work and therefore not a ‘payment claim’ for the purpose of the SOP Act.

His Honour observed that the only possible items of ‘construction work’ in the Payment Claim were the variation claim and interest on the amount owed from the slip rule correction, which totalled $18,611.67 (18 per cent of the amount claimed). Although the Payment Claim listed items of construction work that had previously been certified or determined as payable to EnerMech, this did not necessarily make the Payment Claim a claim for construction work. His Honour concluded that EnerMech did not claim the payment of $10,180,582.60 because it had performed these items of construction work (save for the $18,611.67), but because of its asserted entitlement to claim as a credit an amount equal to the Security paid to Acciona.

His Honour cited Grocon (Belgrave St) Developer v Construction Profile [2020] NSWSC 409 in finding that the characterisation of the Payment Claim should be addressed as a matter of both substance and form. For the reasons discussed above, he accepted that in substance and form, the Payment Claim was a claim to recover an amount equal to the Security. [1]

Although EnerMech submitted the Payment Claim was for the whole of the work done less the amount paid and not as a claim to recover an amount equal to the Security, this did not alter its character. [2]

Moreover, the small proportion of the Payment Claim associated with construction work did not provide a sufficient basis to convert the entire claim into a ‘payment claim’ under the SOP Act. [3]

In respect of jurisdiction, his Honour also found that not only did the adjudicator not have jurisdiction over the Payment Claim (as it was not a ‘payment claim’ under the SOP Act), but the adjudicator also did not have jurisdiction to determine whether they had jurisdiction or not. This was because the adjudicator’s jurisdiction itself was determined by the SOP Act. [4]

Applicability of ‘no contracting out’ provisions under the SOP Act

EnerMech had also contended that the Contract was void under section 34 of the SOP Act to the extent that the Contract allowed Acciona to have recourse to the Security.

Section 34 prohibits contractual provisions that purport to exclude or modify the SOP Act, or deter a person from taking action under it. In respect of the two adjudicated amounts paid to EnerMech in 2022 that had been effectively reversed by Acciona’s call on the Security, EnerMech argued that the provisions in the Contract that related to Acciona’s call on the Security had the effect of “excluding, modifying or restricting the operation of the Act […] because the result of the Call is that [Acciona] can recover from EnerMech monies which, by its operation, the Act requires [Acciona] pay to EnerMech”.

His Honour rejected this argument. Acciona’s exercise of its contractual right under the contract to call on the Security did not modify or restrict the operation of the SOP Act. His Honour found that the SOP Act had operated in accordance with its terms in relation to EnerMech’s 2022 payment claims and Acciona’s payment of the adjudicated amounts, and any subsequent exercise of contractual rights to call on the Security was separate to the security of payment process.

Key takeaways

Does this mean that a respondent to a payment claim can simply reverse any payment made by accessing the security?

No. Respondents need to carefully consider the drafting of their contracts to ensure that relevant recourse to security provisions are included and there is a compliant basis to effect the drawdown.

This decision clearly reinforces the difference in the way courts will treat retention moneys and security bonds/bank guarantees – the latter are not deductions from payment for construction work, in contrast to the retention moneys in Hunters Green.

How can we help?

If you have any questions about payment claims under the SOP Act, please get in touch with our team below.

1. Acciona Infrastructure Projects Australia Pty Ltd v EnerMech Pty Ltd [2023] NSWSC 1565, [114]–[117].
2. Ibid [114]–[116].
3. Ibid [124].
4. Ibid [126]–[131].

Disclaimer
The information in this article is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavour to provide accurate and timely information, we do not guarantee that the information in this article is accurate at the date it is received or that it will continue to be accurate in the future.

Published by:

Jessica Xu

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