Can insolvent contractors seek the benefit of Security of Payment legislation?
The recent decision the Supreme Court of New South Wales in Seymour Whyte Constructions Pty Ltd v Ostwald Bros Pty Ltd (in liq); Ostwald Bros Pty Ltd (in liq) v Seymour Whyte Constructions Pty Ltd  NSWSC 412 considered the extent to which Security of Payment legislation can be used by an insolvent contractor.
Seymour Whyte Constructions Pty Ltd (Seymour Whyte) entered into a contract with Ostwald Bros Ltd (now in liquidation) (Ostwald) as subcontractor, to perform road works on the Pacific Highway north of Grafton. Ostwald served on Seymour Whyte a payment claim for $6,351,066.08 pursuant to s 13 of the Building and Construction Industry Security of Payment Act 1999 (NSW) (the NSW SOP Act). In response, Seymour Whyte served on Ostwald a payment schedule pursuant to s 14 of the NSW SOP Act which identified a ‘scheduled amount’ for the purposes of s 14(2)(b) of the Act (being the payment that Seymour Whyte then stated it proposed to make) of $2,505,237.58. Seymour Whyte failed to pay the scheduled amount, and Ostwald made an adjudication application under s 17(1)(a)(ii) of the NSW SOP Act. However, prior to making the application, Seymour Whyte terminated the contract with Ostwald, and the day after termination, the directors of Oswald resolved to appoint administrators. The Adjudicator subsequently issued an adjudication determination pursuant to s 22 of the NSW SOP Act that the amount due by Seymour Whyte to Ostwald was $5,074,218.27. Importantly, in the weeks that followed the adjudication determination, Ostwald’s creditors resolved to wind up Ostwald.
Seymour Whyte commenced proceedings seeking a declaration that the adjudication determination was void and a stay of any judgment arising from the filing by Ostwald of an adjudication certificate, on the basis that Ostwald was insolvent.
In concluding that the NSW SOP Act continued to apply even though Ostwald was in liquidation, Stevenson J held that:
there is nothing in the text to compel the conclusion that ‘undertake’ means not only to undertake to carry out construction work, but to ‘continue to perform such activities’; and
a person’s status as a ‘claimant’ does not depend on whether that person ‘undertook’, to carry out construction work. It depends, and depends only, on whether the person served a payment claim.
The judgment of Stevenson J provides authority for the proposition that a company in liquidation remains a ‘claimant’ under the NSW SOP Act, and can therefore seek the benefits of the Act. The decision is of particular significance as it creates a divergence between the position in this respect in New South Wales and Victoria, despite the legislation being in substantially the same terms.
In Victoria, the position was addressed in Façade Treatment Engineering Pty Ltd (in liq) v Brookfield Multiplex Constructions Pty Ltd  VSCA 247. In that case, the Court of Appeal held that a ‘claimant’ under the Building and Construction Industry Security of Payment Act 2002 (Vic) (the Vic SOP Act) was a person who had ‘undertaken to, and continued to, carry out construction work’. The Court reasoned that a company in liquidation cannot ‘carry out construction work and, therefore, could not fall within the meaning of the term ‘claimant’ for the purposes of the Vic SOP Act.
Notably, Stevenson J expressly considered the reasons of the Court of Appeal in Façade at length and rejected the decision as being ‘plainly wrong’. In doing so, Stevenson J emphasised that, in his Honour’s view, the Victorian Supreme Court of Appeal had erred in its consideration of the text of the statute, in failing to have regard to the definition of ‘claimant’ in s 4 of the Act. This had, in Stevenson J’s view, led the Victorian Court to conclude that ‘claimant’ was defined in Vic SOP Act s 14 (NSW SOP Act s 13) which, in turn, led it to conclude that its interpretation of the word ‘undertaken’ in Vic SOP Act s 9 (NSW SOP Act s 8) was determinative of the question of who was a ‘claimant’.
There are good public policy arguments that provide support to both approaches:
On the one hand, in support of the Façade approach, the Security of Payment (SOP) legislation was introduced largely as a response to cash flow problems within the construction industry and was intended to create an ‘interim payment regime’. To compel payment to a claimant in liquidation on the basis of an adjudicator’s determination would be to risk such payment being final in effect, rather than provisional as was intended by the Act.
[endif]On the other hand, the approach adopted by Stevenson J could also be said to advance the overarching objective of SOP legislation. The risk of a subcontractor’s insolvency may just be a ‘necessary evil’ for the security of cash flow within the construction industry. Notably, the risk of a payment being ‘final in effect’ is already present in circumstances where there is nothing that prevents or protects against a claimant becoming insolvent the day after receiving payment on an interim basis.
Further clarification from the courts is required to determine which position will ultimately prevail. In the meantime, parties to construction contracts should be cognisant that there is a real risk that insolvency may not be a bar to subcontractors seeking the benefit of SOP legislation, and consequent entitlements to payment. In this respect, the impact of this decision may extend beyond New South Wales, and to other jurisdictions adopting the ‘East Coast Model’ of SOP legislation.
The full decision can be found here.