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NSW Court of Appeal confirms that Security of Payment Act benefit flows one way

24 June 2020

#Construction & Infrastructure

Helena Golovanoff

Published by Helena Golovanoff, Divya Chaddha

NSW Court of Appeal confirms that Security of Payment Act benefit flows one way

On 19 June 2020, the Court of Appeal in TFM Epping Land Pty Ltd v Decon Australia Pty Ltd [2020] NSWCA 118[1] (Stay Proceedings) held that the policy intent of the Building and Construction Industry Security of Payment Act 1999 (Act) prevailed in refusing to grant a stay of enforcement of judgment arising under the Act (SOP judgment), in considering the following “Balancing Exercise”:

  • the object of the Act, designed to ensure prompt payment; against
  • irreparable justice that would flow from the refusal of the stay, namely a developer purportedly teetering on the edge of insolvency.

Basis of the SOP judgment

At first instance in the Supreme Court of NSW, Decon Australia Pty Limited (Decon) obtained an SOP judgment[2] in the amount of approximately $6.4 million against TFM Epping Land Pty Limited and Katoomba Residents Investment Pty Limited (together, the Developers), for the Developers’ failure to serve a payment schedule in response to a payment claim validly made under the Act.  

This SOP judgment was readily obtained by virtue of section 15 of the Act, which in line with the strict nature of the Act’s regime, entitles a claimant to recover a payment claim in full as a debt due in a Court where the respondent fails to serve a payment schedule within the time prescribed by the Act. In such proceedings, the respondent is prohibited from bringing any cross claims and raise any matters arising under the contract in its defence.

The Developers’ subsequent appeal of the SOP judgment was dismissed.

The Stay Proceedings

Prior to serving the payment claim, the subject of the dispute, Decon had commenced Supreme Court proceedings for recovery of amounts it claimed were owed to it upon completion of the subject project.

After failing to have the SOP judgment overturned, the Developers filed a separate cross-claim against Decon in those original proceedings in an amount exceeding the SOP judgment debt. In reliance upon the cross-claim and the “Balancing Exercise” principles from Grosvenor Constructions (NSW) Pty Ltd (in administration), the Developers sought to stay enforcement of the SOP judgment (Grosvenor Stay) mounting the novel argument that they would become insolvent and their cross-claim may never be litigated if the SOP judgment was not stayed. 

The primary judge refused the stay. The Developers sought leave to appeal. 

In conducting the Balancing Exercise, the Court of Appeal considered the strength of the cross-claim, however held that even if the Developers would succeed on it, there are anterior matters that lean against the Grosvenor Stay, in particular its inconsistency with the purpose of the Act. Namely, the denial of cash flow. In addition, the Developers failed to present sufficient evidence to establish an insolvency risk.

The Court of Appeal held there was no stultification of rights established and it had not been established that it was in the interests of justice to grant a stay of enforcement of the SOP judgment.

When a stay of enforcement may be ordered

The Court held that a stay of enforcement will generally be less available in relation to judgments entered following an adjudication under the Act compared to other judgments.

However, having regard to the “interim” intent of the Act, the Court may cautiously intervene and grant a stay so the “practical effect” is not permanent. There is an onus to demonstrate this “practical effect” and here, the Developers failed to establish the “practical effect”. The interim SOP judgment became final against the Developers. 

The limits imposed by the Act

Consistent with many other cases, this decision reinforces the Courts’ hesitance to negate the effect of the Act. In this regard, the scheme of the Act is unforgiving in terms of the technicalities and there is limited room for a claimant or respondent to rectify a procedural breach of the Act. Relevantly, it is vital that respondents stay on top of contract management and issue payment schedules within the prescribed timeframe under the Act to avoid liability of the full claim.

Authors: Helena Golovanoff & Divya Chaddha

[1] https://www.caselaw.nsw.gov.au/decision/172c612de471f7c6750ad581
[2] https://www.caselaw.nsw.gov.au/decision/5ebb4c1ee4b0f66047ed912b

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Helena Golovanoff

Published by Helena Golovanoff, Divya Chaddha

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