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Dodging SOP Act

Southern Han Breakfast Point Pty Ltd (in Liq) v Lewence Construction Pty Ltd [2016] FICR 40

A unanimous five member bench of the High Court of Australia has reversed the NSW Court of Appeal and held that a contractor must have a present entitlement to payment under a construction contract to make a payment claim under the Building and Construction Industry Security of Payment Act 1999 (NSW):

Southern Han Breakfast Point Pty Ltd (in Liq) v Lewence Construction Pty Ltd [2016] FICR 40; [2016] HCA 252

Put that way the decision seems unremarkable, but it has opened up a device for head contractors to avoid the operation of the security of payment legislation.

A construction contract contained provisions that, in certain circumstances, the head contractor could take work out of the contractor's hands and suspend payment, or terminate the contract. If the contract were terminated, the parties' rights and liabilities would be for the innocent party to recover damages from the defaulting party.

In this case, the head contractor gave notice that it was taking work out of the contractor's hands, the contractor accepted this as a repudiation of the contract and terminated, and then made a payment claim under the Act for work done to termination.

The adjudicator ruled there was an entitlement to payment; Ball J in the Supreme Court disagreed; the Court of Appeal disagreed with Ball J, and the High Court disagreed with the Court of Appeal.

Here the contract set a date for making payment claims during the existence of the contract but then converted the right to payment claims to a right to damages on termination. There was therefore "express provision" but no reference date.

The High Court said the Act only relates to progress payments and does not entitle a contractor to damages, quantum meruit or other restitutionary claims. So suspending payment and converting rights on termination to a right to damages avoids the operation of the Act.

Their Honours confirmed that the Act ensures not only progress payments but also one-off payments, milestone payments and final claims after termination, but only if those are "for" work done "under" the contract and not a damages or restitutionary claim.

`This seems to open the possibility of head contractors avoiding the operation of the Act by drafting contracts to convert contractors' claims under the contract into damages claims. While this might seem to have "the effect of excluding, modifying or restricting the operation" of the Act contrary to s 34 and be void, that point was not taken by either party or any court in this case, even though the High Court confirmed that the Act is intended to ensure final payment claims on termination of a contract.