What is the characterisation of your payment claim?

When a claimant makes a claim seeking the recovery of proceeds of a bank guarantee call, the fact that the claimant has added in a few bucks for “hammering some nails” does not validate the payment claim.

On 14 December 2023, the New South Wales Supreme Court in Acciona Infrastructure Projects Australia Pty Ltd v EnerMech Pty Ltd [2023] NSWSC 1565 handed down judgment confirming that a payment claim that in substance sought the recovery of proceeds of a bank guarantee call was invalid for the purposes of the Building and Construction Industry Security of Payment Act 1999 (NSW) (Act).

Clyde & Co successfully acted for the Plaintiffs, Acciona Bouygues Samsung Joint Venture.

Facts

On 3 June 2020, an unincorporated joint venture between Acciona Infrastructure Projects Australia Pty Ltd, Samsung C&T Corporation and Bouygues Construction Australia Pty Ltd (ASBJV) and EnerMech Pty Ltd (EnerMech) entered into a subcontract to carry out electrical installation works for the WestConnex M4-M5 Link (Contract).  Pursuant to the terms of the Contract, EnerMech procured an Unconditional Undertaking from Hong Kong and Shanghai Banking Corporation Limited (HSBC) in the sum of $9,230,157.40 (Security).

On 26 May 2023, ASBJV had recourse to the Security by way of a demand on HSBC (Demand).

On 8 June 2023, EnerMech served on ASBJV a purported payment claim under the Act in the sum of $9,900,457.99 (Payment Claim).  Relevantly, the Payment Claim included a claim for $9,230,157.40 which in effect was the sum received by ASBJV under the Demand and a claim for $18,611.67 (or 0.18% of the total amount claimed) for a variation. 

On 7 July 2023, EnerMech made an adjudication application based on the Payment Claim under the Act.  Subsequently, on 25 July 2023, the appointed adjudicator made a determination in favour of EnerMech in the sum of $10,180,582.60 (Determination).

ASBJV then brought proceedings to quash the Determination on the basis that ASBJV had a contractual entitlement to have recourse to the Security. The contractual entitlement upon which ASBJV sought to rely on was based on a set of agreed facts between the parties.

The proceedings examined interesting issues concerning:

1. whether the Payment Claim was, in substance and in form, a “payment claim” for the purpose of the Act; and
2. in the event that ASBJV’s contractual right to make the Demand was inconsistent with previous adjudication determinations in relation to the Project, whether such contractual provision was rendered void by reason of section 34 of the Act.

A claim “for construction work”

ASBJV argued that the Determination was affected by jurisdictional error and liable to be quashed.  In substance, the Payment Claim was not a “payment claim” under section 13(1) of the Act as it was not a claim for “construction work” (or “related goods and services”) but rather a claim for a credit in relation to the amount paid to ASBJV following the Demand.

ASBJV relied upon the conclusions of Ball J in Grocon (Belgrave St) Developer Pty Ltd v Construction Profile Pty Ltd [2020] NSWSC 409 (Grocon) that:

1. in substance and in form, a claim in respect of an amount called on is a claim for a credit;
2. even if the basis for the claim for a credit in respect of the amounts is contractual, it is not a claim for “construction work: or “related goods and services”; and
3. other amounts which are small compared to the amounts called on do not provide a sufficient basis for refusing the relief sought if it otherwise should be granted.

Stephenson J agreed.  Accordingly, it was held that the Payment Claim was not a claim for construction work and was therefore, in substance and in form, not a “payment claim” for the purpose of the Act. 

Further, Stevenson J considered whether the adjudicator had jurisdiction to determine if the Payment Claim was a “payment claim” for the purpose of the Act.  Stevenson J agreed with Ball J’s findings in Grocon and held that the jurisdiction of the adjudicator is determined by the Act and it is ultimately a question for the Court to determine whether the adjudicator has jurisdiction to determine a particular claim.

No contracting out

ASBJV relied on clause 42.11 of the Contract to have recourse to the Security. Clause 42.11 provided that:

Where, within the time provided by this Subcontract, the Subcontractor fails to pay the Contractor an amount due and payable under this Subcontract, the Contractor may have recourse to the security under this Subcontract and any deficiency remaining may be recovered by the Contractor as a debt due and payable.

EnerMech argued that ASBJV’s contractual right to make the Demand was inconsistent with previous adjudication determinations in relation to the Project. In effect, EnerMech posited that clause 42.11 of the Contract had the effect of authorising or enabling ASBJV to have the benefit of the Security for reasons inconsistent with previous adjudication determinations, and to the extent that clause 42.11 had the effect of excluding, modifying or restricting the operation of the Act, it was void by reason of section 34(2)(a) of the Act.

Stevenson J rejected this argument and held that clause 42.11 (as well as clause 5.5(a)(iii), which provides that “The Contractor may have recourse to the security provided in accordance with this clause 5 where the Contractor to the extent to which the Contractor has or may have a bona fide Claim against the Subcontractor under, arising out or in any way in connection with this Subcontract.”) cannot be seen to exclude, modify or restrict the operation of the Act.  Although it may be true that the Demand practically reversed the effect of the previous determinations, that was a “result of events occurring subsequent to the orderly operation of the Act, and in accordance with the Contract”.  It was not a result of a modification or restriction on the operation of the Act and therefore not in contravention of section 34 of the Act.

Decision

Having determined that the Payment Claim was not a valid payment claim for the purpose of the Act and that ASJBV’s Demand did not contravene section 34 of the Act, Stevenson J quashed the Determination.

Key takeaways

The key takeaways are:

1. Payment claims which, in substance, purport to recover proceeds of a demand on a bank guarantee will not be valid for the purposes of the Act.
2. If a demand on security has the effect of reversing previous adjudication determinations, that will not be enough to enliven the contracting out provisions in section 34 of the Act.