Security of Payments: No Right to Payment After Termination

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Sunday, February 8th, 2015
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The case of Patrick Stevedores Operations No. 2 Pty Ltd v McConnell Dowell Constructors (Aust) Pty Ltd [1] was heard in the Supreme Court toward the end of 2014. 

An appeal, although filed, did not proceed to judgment. The first instance decision of Justice Ball means that currently, there is no right to payment under the Security of Payment legislation (SoPA) in NSW after termination of a building contract. Plant and materials on order by the contractor and removal of plant and materials post-termination are also not construction work under SoPA.

This case related to work carried out at Port Botany for Patrick Stevedores (Patrick) by McConnell Dowell (MacDow). Patrick terminated MacDow for convenience. Under the contract, MacDow became entitled to payment for: work done up until the date of termination; demobilisation costs; and materials ordered. MacDow issued a payment claim under SoPA and Patrick denied that any payment was due. MacDow initiated an adjudication process (the First Adjudication) which resulted in an incomplete (and so invalid) decision. The First Adjudicator stated that he had not had time to make a determination of certain line items in the claim and had valued them at nil. MacDow was then entitled to re-apply and did so (the Second Adjudication). The Second Adjudicator issued a complete decision. Patrick applied to the court, claiming that the Second Decision was void.

Justice Ball determined that the work which was the subject of the claim included work which was not “construction work” in the meaning of SoPA. Neither plant and materials ordered by MacDow in order to comply with its contractual obligations, or the costs of removing equipment from the site, are construction work or the supply of related goods or services. The judge said removal was an activity that follows construction work coming to an end as a result of termination of the contract.

The judge considered that no reference date accrued upon termination because, prior to termination, the contract provided for accrual of reference dates. At termination (two days prior to the accrual of the next reference date,) the contract ceased to be effective and so the next reference date did not accrue. The subsequent absence of a reference date was not a deficiency in the contract and so would not be caught by the SoPa (s.8(2)(b)) because up until termination, the contract provided for the reference date.

The judge also commented that “the purpose of the Act is not to ensure that a contractor is paid for work as soon as it is done. Nor do I think it is to ensure that a contractor is paid everything it is owed promptly. Rather, the purpose of the Act is to provide a practical mechanism to ensure that contractors receive progress payments for the work that they do.”

The judge agreed that by adopting a nil value for the items he did not consider, the First Adjudicator did not determine the claim within the time limits of the SoPA (s.21(3)) and so MacDow had been properly entitled to commence the Second Adjudication under SoPA (s.26).

Finally, the Second Adjudicator, a construction professional, had used certain elements of the contract schedules, and other documents, in order to ascertain the value of the claims. This process was different from that suggested by either party. The judge found that this approach rendered the Second Decision void for breach of the Rules of Natural Justice as the parties had not been given an opportunity to make submissions on the methodology adopted.

Until the judgment is appealed it is important to address these matters in your contract, to the extent allowed by SoPA.

[1] [2014] NSW 1413
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