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Courts confirm there are no second chances for Payment Claims - Kitchen XChange V Formacon Building Services [2014] NSWSC 1602

CaseFlash 19 November 2014

The recent decision of his Honour Justice McDougall of the New South Wales Supreme Court in Kitchen Xchange v Formacon Building Services [2014] NSWSC 1602 (Kitchen Xchange decision) has emphasised the importance of strict compliance with the procedural requirements of the Building and Construction Industry Security of Payment Act 1999 (NSW) (the Act).

What are the industry lessons?

The Kitchen Xchange decision re-affirms that a payment claim is the only payment claim you can make for the respective reference date under the contract - so care ought to be taken by claimants when serving payment claims.

Whilst the Kitchen Xchange decision has affirmed that a payment claim can be consensually withdrawn, and leaves open the possibility of unilateral withdrawal in certain narrow circumstances, it also emphasises how easy it is to get withdrawal of a payment claim incorrect.

The decision also importantly provides guidance on the way in which the Court is interpreting the service requirements relating to Supporting Statements following from the inclusion of sub-clause 13(7) into the Act during its amendment in early 2014.

When issuing documents for payment we recommend always keeping the following in mind:

  1. has the amount being claimed been properly calculated;
  2. do you wish the document to be the payment claim for the given reference date (noting you may be precluded from a second chance due to section 13(5); and
  3. have you prepared a valid Supporting Statement, as a failure to include this document will result in the service of a payment claim being deemed invalid?

What are the background facts?

Kitchen Xchange Pty Limited entered into a ‘fit-out’ contract (the Contract) with Formacon Building Services Pty Limited (Formacon), concerning the former’s shop at Rouse Hill. The Contract prescribed payments for the services performed were to be made via four instalments.

On 4 June 2014, Formacon served a document on Kitchen Xchange purporting to be a ‘payment claim’ made under the Act (the first payment claim). Following discussions between the parties, the first payment claim was withdrawn by agreement.

On 12 June 2014, a second claim was served on Kitchen Xchange by Formacon, again purporting to be a payment claim made under the Act (the second payment claim).  On 13 June 2014 Kitchen Xchange, by way of their Solicitors, sent to Formacon a document addressing the second payment claim, which was found by the Court to fulfil the requirements of a payment schedule for the purposes of section 14 of the Act.

On 20 June 2014, Formacon served a further payment claim (the third payment claim) seeking approximately $15,500 more than the amount claimed in the second payment claim. Kitchen Xchange did not serve a payment schedule concerning the third payment claim.

Notably, none of the payment claims served by Kitchen Xchange were accompanied by a Supporting Statement pursuant to sub-section 13(7) of the Act.

Subsequently, a notice under s 17(2)(a) of the Act was served by Formacon in relation to the third payment claim, and again Kitchen Xchange did not respond. The matter was referred to adjudication and the adjudicator determined in favour of Formacon. Kitchen Xchange subsequently applied to the New South Wales Supreme Court to have the determination quashed.

The main issues

The chief issues considered by the Court were as follows:

  1. whether the second or third payment claims were valid, or were they served in breach of section 13(5) of the Act?
  2. what is the appropriate interpretation of “must not” under sub-section 13(7) of the Act and whether a payment claim served without an accompanying Supporting Statement invalidates that payment claim. Section 13(7) states that “A head contractor must not serve a payment claim on the principal unless the claim is accompanied by a supporting statement that indicates that it relates to that payment claim.

What did the Court decide? – Section 13(5) of the Act

In short, section 13(5) of the Act restricts a claimant to serving only one payment claim per reference date under a contract. It is well established at law [1] at contravention of section 13(5) of the Act will render an offending payment claim invalid.

In the Kitchen Xchange decision, it was common ground that the three payment claims had been served within the same reference date period prescribed under the Contract – in this instance, one reference date only arose for each of the payment instalment periods prescribed under the Contract. As such, the relevant question became whether or not the payment claims (or any of them) had been validly ‘withdrawn’, thus avoiding the prohibition in section 13(5) of the Act.

The First Payment Claim

Justice McDougall, in addressing the first payment claim, referenced previous Supreme Court decisions [2] in support of the proposition that a payment claim can be validly withdrawn by consent – thereby circumventing issues arising from section 13(5) should a ‘fresh’ payment claim be served.

As such, his Honour determined that the first payment claim was validly withdrawn, and therefore section 13(5) of the Act was not offended by the service of the second payment claim during that reference date period.

The Second and Third Payment Claims

The Court then explored the circumstances surrounding the second payment claim, and the service of the third payment claim.

Formacon argued that the second payment claim was withdrawn - however, his Honour found no evidence or agreement to demonstrate that the purported withdrawal of the second payment claim occurred with the consent of Kitchen Xchange.

His Honour decided that the consequences that can arise from the failure to serve a payment schedule are too significant to allow for unilateral withdrawal of payment claim, and as such Formacon was required to demonstrate that the intention to unilaterally withdraw was sufficiently communicated and understood.

Arising from his finding that no successful withdrawal of the second payment claim had occurred, his Honour concluded that the third payment claim was invalidly served.

What did the Court decide? – Section 13(7) of the Act

The Courts have been asked on occasion to consider whether a payment claim must meet the relevant procedural requirements under the contract to be a valid payment claim for the purposes of the Act. For example, many construction contracts contain a clause requiring a statutory declaration stating that all suppliers, subcontractors and workers have been paid – if no such statement has been provided, is a payment claim still valid?

Whilst the Courts of different states and territories in Australia have differed somewhat on this issue, the largely accepted view in NSW [3] is that the provisions of section 13 of the Act dictate whether or not a payment claim is valid, and not the requirements of the Contract.

Since the 2014 amendments to the Act, pursuant to section 13(7) of the Act a payment claim ‘must not’ be served without a Supporting Statement in the form prescribed by r.4A of the Building and Construction Industry Security of Payment Regulation 2008.

His Honour determined that the intention of the words ‘must not’ in sub-section 13(7) are prohibitory, as must is a word of absolute obligation [4]. In reaching this conclusion, his Honour decided that the correct interpretation of the legislative clause is that a payment claim is not of itself invalid for its lack of accompanying Supporting Statement - but that the service of a payment claim without an accompanying Supporting Statement has not been properly performed.

For this reason service of all three payment claims served by Formacon, having lacked Supporting Statements, were found to have been ineffectively served and therefore could not be relied upon.

This decision serves not only as a helpful refresher on the importance of process and procedure, but it also provides guidance on how strictly the Courts will apply the new service requirements relating to Supporting Statements.

[1] Dualcorp Pty Ltd v Remo Constructions Pty Ltd (2009) 74 NSWLR 190
[2] NC Refractories Pty Limited v Consultant Bricklaying Pty Limited [2013] NSWSC 842
[3]  See for example Leighton Contractors Pty Ltd v Campbelltown Catholic Club Ltd [2003] NSWSC 1103
[4] At [41]

Brian Ambler, Partner

CaseFlash 19 November 2014
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