CASE NOTE: McDonald v MAK Constructions and Building Services Pty Ltd [2024] NSWCA 63

Can ‘claw back’ proceedings brought under s 32 of the SOPA be stayed because a separate judgment-debt arising under the SOPA, has not been satisfied?

This question was addressed recently by the Court of Appeal in the decision of McDonald v MAK Constructions and Building Services Pty Ltd [2024] NSWCA 63. In exercising its discretion to stay such claw back proceedings, the Court must carefully balance a builder’s right to recover progress payments under the Building and Construction Industry Security of Payment Act 1999 (NSW) (SOPA) with the owner’s common law rights in respect of the underlying residential building contract (see Samadi [1] and Grant [2]). However, due to the common law rights of the parties being expressly preserved by operation of s 32 of the SOPA, it is incredibly difficult for an applicant to succeed in obtaining a stay of such claw back proceedings.

The Court allowed the appeal from Ms McDonald (the owner) on the basis that the primary judge had misconstrued s 32(3) of the SOPA by concluding that claw back proceedings could only be brought at common law after a judgment debt arising from an adjudication determination had been paid. 

Facts

In early 2022 the owner and MAK Constructions and Building Services Pty Ltd (MAK) entered into a contract for residential building work (the contract). The building works progressed until the contract was terminated by the owner for a breach. Ultimately, MAK obtained an adjudication certificate under s 22 of the SOPA in the amount of $246,493.20 which was then filed in the District Court and converted to a judgment debt under s 25 of the SOPA (the judgment debt). Later the owner commenced claw back proceedings in which she sought damages in the amount of $528,112.00 for incomplete and defective works. MAK then sought a stay of those claw back proceedings until such time as the owner paid the judgment debt. The primary judge granted that stay.

Issues

On appeal, the primary issues were: 

1. Whether s 32 of the SOPA preserves the rights of parties to a construction contract to bring claw back proceedings in circumstances where a stay of the claw back proceedings is sought pending payment of a judgment debt obtained pursuant to s 25 of that Act. 
2. Whether the primary judge erred in exercising the discretion to stay the owner’s claw back proceedings. 
3. Whether the Court of Appeal should exercise its discretion to stay the owner’s claw back proceedings. 

Decision

The Court allowed the appeal on the basis that the primary judge had misconstrued s 32(3) of the SOPA by concluding that claw back proceedings could only be brought at common law after a judgment debt arising from an adjudication determination had been paid. The Court ultimately held that there “is nothing in the legislative scheme to support that qualification” and that the primary judge placed excessive emphasis on the legislative policy of the SOPA over the contractual rights of the parties expressly preserved by s 32 of the SOPA. The Court also expressed in obiter dicta that if the primary judge had turned her attention to the decisions of Ball J in Samadi Developments Pty Ltd v SX Projects Pty Ltd [2015] NSWSC 1576 (Samadi) and Einstein J in Grant Constructions Pty Ltd v Claron Constructions Pty Limited [2006] NSWSC 369 (Grant), that her errors might have been avoidable.  

In re-exercising its discretion by deciding not to stay the owner’s claw back proceedings, the Court held that: 

1. Granting a stay in these circumstances would be inconsistent with the rights preserved by s 32 of the SOPA. 
2. The builder’s failure to take prompt steps to enforce the judgment debt weighed heavily against a stay being granted. 
3. The financial hardship of both parties was a neutral factor as the unsuccessful party was likely to suffer some kind of financial hardship. 
4. There was no basis to find that the owner’s claw back proceedings are hopeless of lacking in reasonable prospects. 

Key Takeaways

The Court of Appeal in McDonald v MAK Constructions and Building Services Pty Ltd [2024] NSWCA 63 confirmed the approach taken by Ball J in Samadi and by Einstein J in Grant. That is, due to the common law rights of the parties being expressly preserved by operation of s 32 of the SOPA, it is incredibly difficult for an applicant to succeed in obtaining a stay of claw back proceedings brought under s 32 of the SOPA simply because a judgment debt arising under the SOPA has not been satisfied. 

[1] NSWSC 1576. 

[2] Grant Constructions Pty Ltd v Claron Constructions Pty Limited [2006] NSWSC 369.

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