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Clauses seeking Draft Payment Claims – are they void by virtue of the SOPA?

Ben Johnson, ||

A recent decision of the Supreme Court of New South Wales has examined the circumstances where a clause within a contract requiring a “draft payment claim” may be seen to operate outside the scope of the Building & Construction Industry Security of Payment Act 1999 (NSW) (the Act). Ordinarily, such a process could be void in circumstances where the right to submit a payment claim only arose where the draft payment claim was provided.

East End Projects Pty Ltd v GJ Building and Contracting Pty Ltd [2020] NSWSC 819

Background

East End Projects Pty Ltd (Developer) and GJ Building & Contracting Pty Ltd (Builder) entered into a contract dated 1 June 2018 for construction works to take place at a project located in Newcastle (Contract). The Developer commenced proceedings seeking a declaration that a claim for payment submitted by the Builder dated 28 May 2020 was void under Act and also sought to restrain the Builder from seeking a determination on that payment claim under the Act on the basis that “a reference date” had not arisen at the time that the claim was served, by virtue of the Contract. 

The contractual mechanism for making a payment claim was as follows: 

  • Clause 37.1 required the Builder to provide a draft progress claim by the 25th day of each month for WUC (work under contract) done to the last day of that month (the Draft Progress Claim);
  • Clause 37.1(e) required the Builder to comply with clause 37.1, otherwise the draft payment claim was not a Draft Progress Claim pursuant to the Contract. It would then follow that no Draft Progress Claim would be considered to have been served until such time as the Builder complied with clause 37.1;   
  • Clause 37.2 required the Developer to issue a preliminary assessment of the amount that it considered to be due within 5 days of receiving the Draft Progress Claim; and,
  • Clause 37.3 provided that no earlier than 7 business days after the Draft Progress Claim had been submitted, the Builder had to provide a progress claim in final form (Final Progress Claim), and that the date referred to by clause 37.3 (being no later than 7 business days after the Draft Progress Claim) was to be the reference date for the purposes of the Act. 

The Builder did not follow the regime set out in clause 37.1 of the Contract. Instead, the Builder served a purported payment claim pursuant to the Act on 28 May 2020. The claim referred to a reference date of 30 April 2020.

The Builder submitted that clause 37 was void as a result of section 34 of the Act, and submitted that the reference date was the final day of each month in accordance with s 8(2)(b) of the Act as it stood at the time the Contract was entered into. The Developer, on the other hand, submitted that in accordance with s 8(2)(a) of the Act at the time the Contract was entered into (i.e. the old regime of the Act) meant that the reference date occurred by the process set out in the Contract, and as the Builder had failed to follow that process, there was no Reference Date. 

Decision

The Court found in favour of the Builder. The Court held that the Contract, despite the procedure contained within clause 37, did not identify a date on which a claim for a progress payment could be made, and thus, as at the date that the Contract was formed, the reference date was the last day of the month that the work was carried out as set out in s 8(2)(b) of the Act.

The Developer tried to argue that clause 37 gave rise to a reference date and sought to expedite payment of progress claims by virtue of the timeframe to review the Draft Progress Claim. The flaw within the clause 37 procedure was that if the Builder failed to submit the Draft Progress Claim by the 25th day of each month, then no reference date would arise. That requirement alone restricted the operation of the Act, which would mean that any such clause would be void as a result of section 34 of the Act.

A key takeaway from this case is that clauses that set out a different regime for payment are not necessarily void. The Court held that “the purpose of the time limit is to ensure that once the processes of the Act commence with the service of a payment claim, they occur promptly.  It is not the purpose of the Act to prevent parties from introducing other mechanisms in their contract to ensure that they are not caught by surprise”. Clearly, parties may be in a position to set out a similar approach to preparing payment claims as long as the Contract does not seek to contract out of the Act.

However, issues of this kind are likely to occur as a result of the October 2019 amendments to the Act, which allows (subject to the terms of the contract) the payment claim to be made on and from the last day of any month where works are undertaken or goods supplied. 

If you have any questions regarding the Building & Construction Industry Security of Payment Act 1999 (NSW) or require assistance, please do not hesitate to reach out to Coleman Greig’s Building and Construction lawyers, who are highly experienced with matters relating to the Security of Payment Act NSW and are able to provide expert, tailored advice – no matter the complexity of the matter at hand.

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