Australia: Security of payment alert: termination of building and construction contracts and the subsequent limitations on security of payment rights
Building and Construction Update

The recent Queensland Supreme Court decision of Walton Constructions (QLD) Pty Ltd v Corrosion Control Technology Pty Ltd & Ors [2011] QSC 67 (Walton) arms respondents with an additional defence to payment claims and presents a new risk to claimants in further limiting their rights to pursue payment under security of payment regimes.

Until recently, it was generally accepted that the termination of a construction contract would not prevent a claimant from exercising its statutory right (pursuant to security of payment legislation) to claim progress payments. However, in Walton, it was held that the termination of a construction contract deprives a claimant from having recourse to the Building and Construction Industry Payments Act 2004 (QLD) (BCIPA).

The position before Walton

Pursuant to the New South Wales Court of Appeal decision of Brodyn Pty Ltd v Davenport (2004) 61 NSWLR 421 (Brodyn), it was accepted that the termination of a construction contract would not prevent a claimant from utilising security of payment legislation in pursuing progress payments.

Brodyn confirmed that under the Building and Construction Industry Security of Payment Act 1999 (NSW) (BCISPA), monthly reference dates, on which a payment claim can be made, continue to accrue for 12 months after the cessation of work, despite the contract having been terminated.

The facts of Walton

The decision concerned a contract (based on AS2545) between a painting subcontractor, Corrosion Control Technology Pty Ltd (CCT) and Walton Construction (QLD) Pty Ltd (Walton Construction).

Subsequent to the contract being terminated by Walton Construction on 15 January 2010, CCT continued to submit payment claims under the BCIPA in respect of reference dates that occurred after the date of termination.

In respect of the last payment claim submitted on 22 March 2010, CCT proceeded to adjudication under the BCIPA and received a favourable determination in the amount of $225,856.92.

Walton Construction challenged the adjudicator's decision on a number of grounds including that the contract's termination deprived CCT of further reference dates and therefore the entitlement to submit its last payment claim pursuant to the BCIPA. CCT relied on Brodyn, arguing that reference dates continue to accrue on a monthly basis after termination.

The Court upheld Walton Construction's argument on the following two grounds:

1. Clause 44.10 of AS2545 (a clause found in a number of Australia Standard contracts) provides that upon termination of the Contract

the rights and liabilities of the parties shall be the same as they would be at common law had the defaulting party repudiated the Subcontract and the other party had elected to treat the Subcontract as at an end and recover damages.

The Court found this to mean that while the subcontractor can pursue any common law causes of action against the contract to recover any outstanding monies, its BCIPA entitlements cease on termination of the contract.

2.The case of Brodyn was distinguished as the definition of 'reference date' in the BCISPA (NSW) was expressed 'in relation to a construction contract' whereas the definition of 'reference date' in the BCIPA (QLD) was expressed as 'under a construction contract'. It was held that the reference to 'under a construction contract' meant that reference dates cannot occur subsequent to termination.

Practical implications

The Walton decision means that contractors who enter construction contracts in Queensland with clauses similar to clause 44.10 of AS2545 and who do not have reference dates accrued before the contract was terminated, may not be entitled to rely on security of payment legislation to enforce their rights. The drafting of termination clauses within building and construction contracts to ensure reference dates survive termination, can avoid this result.

On the other hand, the Walton decision presents an opportunity for disgruntled principals, anticipating large ambit claims from contractors, to consider terminating a contract in an attempt to force contractors to pursue payment through the more expensive and time consuming means of litigation or arbitration. However, seeking legal advice as to the right to validly terminate a contract is always recommended.

This report does not comprise legal advice and neither Gadens Lawyers nor the authors accept any responsibility for it.

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