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Payment Claims: A Valid Reference Date is an Essential Requirement

In the recent decision of Southern Han Breakfast Point Pty Ltd (in Liquidation) v Lewence Construction Pty Ltd [2016] HCA, the High Court:

  • confirmed that a valid Reference Date is required in order for a purported Payment Claim to be valid under the Building and Construction Industry Security of Payment Act 1999 (“the Act”); and
  • explored whether or not reference dates continue to accrue after suspension and/or termination of a Contract.

Facts

Southern Han Breakfast Point Pty Ltd (“Southern Han”) and Lewence Construction Pty Ltd (“Lewence”) were parties to a contract for the purposes of the Act.

The Contract provided that the reference date for the issuing of a Payment Claim under the Act was the 8th day of each calendar month. Lewence served a Payment Claim on 8 October 2014.

Lewence allegedly committed one or more substantial breaches of the contract. On 27 October 2014, Southern Han exercised a clause in the contract allowing it to suspend payment to Lewence.

Lewence treated Southern Han’s actions as a repudiation of the contract and purported to terminate the contract. As a result of this sequence of events, from 27 or 28 October 2014, either the contract was terminated or the payment mechanisms of the contract were suspended.

Lewence served a Payment Claim under the Act on 4 December 2014, claiming for work performed up to 27 October 2014. Southern Han served a Payment Schedule, stating that it proposed to pay “nil” in respect of the Payment Claim. The Payment Claim, having been issued on 4 December 2014, purported to have a reference date of 8 November 2014.

The matter proceeded to Adjudication under the Act. Southern Han submitted that the Payment Claim was invalid as it had no reference date and therefore the Adjudicator did not have jurisdiction to make an Adjudication Determination. The Adjudicator held that there was in fact a valid reference date for the Payment Claim and purported to issue an Adjudication Determination.

Southern Han applied to the Supreme Court of NSW to have the purported Adjudication Determination set aside.

Supreme Court and Court of Appeal Proceedings

The Supreme Court agreed with Southern Han’s position and:

  • found that the Act requires a reference date to have arisen under the Contract in order for a valid Payment Claim to be made (and, in turn, a valid reference date is a precondition to the making of a valid Adjudication Application and Determination);
  • reasoned that no reference date could have arisen after 28 October 2014 because either the contract was terminated or Lewence’s right to receive any payment under the contract had been suspended (and Lewence, in the absence of having a right to receive payment, had no right to make a claim for payment under the Act); and
  • therefore, found ultimately that the Payment Claim was invalid and the purported Adjudication Determination was also invalid.

Lewence appealed to the Court of Appeal. Although there were a number of aspects to the case, the most significant bases of the Lewence’s appeal were twofold:

  • firstly, that the trial judge had made an error of law in concluding that a Reference Date was an essential precondition to the making of a valid Payment Claim under the Act; and
  • secondly, that the trial judge erred in finding that no reference date had in fact arisen in respect of the Payment Claim.

The Court of Appeal agreed with Lewence’s position and held (unanimously) that the existence of a reference date is not a precondition to the making of a valid Payment Claim under the Act and, further, that 8 November 2014 was in fact a valid reference date in respect of the purported Payment Claim. Southern Han appealed to the High Court.

High Court Proceedings

The High Court overturned the decision of the Court of Appeal and held, consistently with the conclusion of the primary judge, that:

  • the existence of a reference date under a construction contract is a precondition to the making of a valid Payment Claim under the Act; and
  • no such reference date existed in this particular case.

Both of the above findings are significant for Claimants, Respondents and Adjudicators under the Act.

Reference Date Essential Precondition to Valid Payment Claim

By reason of the High Court’s judgment, an Adjudicator, when considering an Adjudication Application, is required to correctly determine the existence of a valid reference date. Failure to make a correct finding on this point will render the Determination liable to be set aside.

To put this another way, an incorrect finding in respect of a valid reference date is now a “jurisdictional” error for the purposes of applying to have an Adjudication Determination reviewed by a Court. This is a critical point because the only ground for review of an Adjudication Determination is “jurisdictional” error – Shade Systems Pty Ltd v Probuild Constructions (Aust) Pty Ltd (No 2) [2016] NSWCA 379.

No Reference Date Existed

When considering the facts, the High Court made two interesting findings:

  • if the contract was in fact terminated, no reference date for the purposes of the Act could have arisen after the date of termination; and
  • when Southern Han exercised its right under the Contract to suspend payment and take out of Lewence’s hands the whole of the work remaining to be completed, that suspension of payment was a suspension of the totality of the rights conferred and obligations imposed in relation to payment under the Contract, including Lewence’s right to make a Payment Claim under the Act for work carried out up to the time of the work being taken out of its hands.

The idea that reference dates cease to accrue after the date of termination of a Contract is relatively straightforward. The practical application appears to be that in circumstances where a Contract has been terminated, a Claimant may only issue a valid Payment Claim under the Act if a reference date was enlivened prior to the contract termination date.

The finding that reference dates ceased to accrue after the suspension by Southern Han of the contractual payment regime perhaps has more complicated implications. What is not clear from the judgment is whether or not reference dates would cease to accrue from any suspension of the contract work – for example, a suspension by a contractor under the provisions of the Act in circumstances where the contractor has not been paid.

Such a broad application at first glance appears to be inconsistent with the purposes of the Act, although future application of the High Court’s judgment will no doubt reveal the extent of the Court’s intention.

Conclusion

Claimants, Respondents and Adjudicators must remain aware that a valid Reference Date is an essential precondition to the making of a Payment Claim under the Act. Any failure by an Adjudicator to correctly consider and determine the validity of a purported reference date will be considered a “jurisdictional” error and will render the Adjudicator Determination liable to review by the Court.

This communication is sent by Kreisson Legal Pty Limited (ACN 113 986 824). This communication has been prepared for the general information of clients and professional associates of Kreisson Legal. You should not rely on the contents. It is not legal advice and should not be regarded as a substitute for legal advice. The contents may contain copyright.

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