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Make sure you “stay” at the same time you have a “go”.

More Security of Payment lessons from the Courts

When a Respondent wishes to “go” to the Supreme Court and challenge a determination of an Adjudicator for jurisdictional error; that Respondent must also make sure that an application is made to “stay” (“stop”) and restrain the enforcement of the determination of the Adjudicator in the meantime.

A recent reminder of this lesson was provided by the Court of Appeal in the decision of Fitz Jersey Pty Ltd v Atlas Construction Group Pty Ltd [2017] NSWCA 53 (23 March 2017) which resulted in an unfortunate outcome for a Developer whose bank account was garnished for approximately $11m because the Developer did not apply for an order to stay (to stop) the enforcement of an Adjudicators Determination while the Developer challenged that determination in the Supreme Court.

How Could This Have Happened?

The Developer had engaged a Builder to design and construct a major development in Mascot Sydney.

On 15 November 2016; the Builder served a Payment Claim on the Developer for more than $10.5m plus interest under the Building and Construction Industry Security of Payment Act 1999 (NSW)(SOPA).

On 29 November 2016; the Developer served a Payment Schedule saying that no money was owing.

An Adjudicator determined that the Payment Claim was payable in full.

The Developer did not pay the Adjudicated Amount and on 13 January 2017; commenced proceedings in the Supreme Court challenging the validity of the Adjudication Determination.

The Developer however did not take any steps to stay (stop) the enforcement of the Determination.

Following commencement of the challenge by the Developer; the Builder registered the Determination and on 27 January 2017; obtained a garnishee order directed to the Developer’s Bank which paid the full amount determined by the Adjudicator being $11m to the Builder.

On discovering that the payment of $11m had been made from the Developer’s bank account; the Developer applied to the Supreme Court for urgent orders for the return of the money from the Builder.

What was the Developers argument?

The Developer argued that:

  • the Builder was required to notify the Developer that a judgment had been obtained before taking any steps to enforce the judgment (including by way of garnishee order) as reasonable notice would have allowed the Developer to apply to have the judgment set aside and to pay the adjudicated amount as security into Court and under s 25(4) of SOPA pending the determination of the validity of the Adjudicator’s Determination;
  • when applying for the garnishee; the Builder should have informed the Court that the Developer had commenced proceedings to set aside the determination of the Adjudicator.

What did the Court say?

The Court was not persuaded by the Developer’s arguments and dismissed the Developer’s application for an injunction.

Justice McDougall who heard the matter said that:

  • an application for a garnishee order was “essentially an administrative decision” and that the material to be put before the court on such an application was “specified in the rules.” There was no requirement to do more.
  • although there may be occasions when a garnishee order might be set aside because it was obtained in bad faith; this was not such a case.

Importantly the Court also noted that there was no evidence before the Court to suggest that the Builder would not be able to repay the $11m.

The Developer appealed the decision of Justice McDougall.

What did the Court of Appeal say?

The Court of Appeal dismissed the appeal and found that there was no error in the approach of Justice McDougall.

The Court of Appeal held that:

  • a judgment can be enforced without notice to the affected party; and
  • this case involved no circumstance requiring the Builder to notify the Court of the proceedings commenced by the Developer when making the application for the garnishee order.

 What has happened since?

The proceedings by the Developer to challenge the Adjudicators Determination are continuing (see Fitz Jersey v Atlas Construction Group [2017] NSWSC 340).

The Developer is arguing that the Adjudicator lacked the jurisdiction to make the Determination and that the judgement based on the Determination should be set aside

We will monitor the progress of this case and provide updates in future newsletters.

 What are the lessons of this case?

  • As set out in a previous article a Respondent can only challenge an Adjudication Determination for jurisdictional error.
  • If a Respondent wishes to challenge an Adjudication Determination; it must act quickly and also obtain either an undertaking from the other side that they will not enforce the decision or apply to the Court for an injunction to restrain the enforcement of the Determination.
  • A Respondent should obtain urgent legal advice before any steps are taken to restrain an Adjudicator’s Determination.
  • The Court will restrain the enforcement of Adjudication Determinations where:

¨ firstly, there is evidence of a substantial basis of challenge to the determination (on a ground that the courts recognise as being available) and,

¨ secondly, there is reason for thinking that if such a challenge is made and succeeds, the applicant may not enjoy the fruits of its success because the respondent will be unable to repay the adjudicated amount.

¨ Time is of the essence and it will be too late to take steps to restrain and stay the enforcement of a Determination once monies have been paid in accordance with a garnishee order.

¨ For a claimant; the case is a powerful reminder that a garnishee order is an effective way to enforce a Determination of an Adjudicator.

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