- Aldoga Aluminium Pty Ltd v De Silva Starr Pty Ltd

Whether an offsetting claim is established

An offsetting claim, for the purposes of s 459H(1)(b) of the Act, is the amount of a claim or claims that a person has against the person who served a creditor's statutory demand by way of, inter alia, counterclaim or cross demand, whether or not the amount arises out of the same transaction or transactions as the debt to which the statutory demand relates. Mr Pokoney rightly acknowledges that, where a debt claimed in a statutory demand arises from an adjudication, it remains open to the recipient of the demand to assert an offsetting claim as Growthbuilt here seeks to do: Douglas Aerospace at [93]; Powerpark at [13].
In TR Administration Pty Ltd v Frank Marchetti & Sons Pty Ltd [2008] VSCA 70 at [71], Dodds Streeton JA summarised what was necessary to establish an offsetting claim, namely that the party that seeks to establish that claim: "...is required to evidence the assertions relevant to the alleged dispute or offsetting claim only to the extent necessary for that primary task. The dispute or offsetting claim should have a sufficient objective existence and prima facie plausibility to distinguish it from a merely spurious claim, bluster or assertion, and sufficient factual particularity to exclude the merely fanciful or futile... It is not necessary for the company to advance, at this stage, a fully evidenced claim. Something 'between mere assertion and the proof that would be necessary in a court of law' may suffice."
In Britten-Norman at [20], the Court of Appeal observed that, "to establish an offsetting claim, a party must show that there is a 'serious question to be tried' or 'an issue deserving of a hearing' as to whether the company has such a claim against the creditor". The relevant principles were also reviewed in Grandview Ausbuilder Pty Ltd v Budget Demolitions Pty Ltd [2019] 136 ACSR 583, [2019] NSWSC 60 at [62]ff, where Bell J (as the Chief Justice then was), referring to the observations of Debelle J in Ozone Manufacturing Pty Ltd v Deputy Commissioner of Taxation (2006) 94 SASR 269 and to the judgment of Eyota Pty Ltd v Hanave Pty Ltd (1994) 12 ACSR 785 at 787 and to the observations of White J in Re Citadel Financial Corporation Pty Ltd [2019] NSWSC 675 at [30], observed that: "In judging the sufficiency of the evidence to give rise to an offsetting claim, the question is not whether the evidence is sufficient to establish the offsetting claim or its amount, but whether it is sufficient to establish that the offsetting claim is genuine, and its genuine level... It is sufficient if there be a plausible contention requiring investigation... The offsetting claim should have a sufficient objective existence and prima facie plausibility to distinguish it from a merely spurious claim, bluster or assertion and not be merely fanciful or futile..."
Mr Boyle also refers to Williams J's summary of these principles in Re Libdy Developments Pty Ltd [2023] NSWSC 647 at [10]-[11] and I have here drawn on my summary of the applicable principles in Re TJM. Holdings Group Pty Ltd [2024] NSWSC 1376 at [19]ff.
In order to establish an offsetting claim, it is also necessary for Growthbuilt to establish a seriously arguable case not only as to liability, but also as to the quantum of an offsetting claim: Macleay Nominees Pty Ltd v Belle Property East Pty Ltd [2001] NSWSC 743. In Douglas Aerospace at [40], Brereton J observed that: "While the full amount of an offsetting claim is to be deducted from the admitted total to ascertain the substantiated amount [Classic Ceramic Importers Pty Ltd v Ceramic Antiga SA (1994) 13 ACSR 263], that applies only to the extent that the offsetting claim is genuine. Thus a company relying on an offsetting claim must adduce evidence that enables the court to ascertain the amount of the genuine claim to the extent necessary to apply the formula in s 459H. If the offsetting claim must plainly exceed the amount of the demand, it is unnecessary that it be precisely quantified. But where that is not clear, the court must be able to quantify an offsetting claim, and if the evidence does not permit it to do so, will attribute to it only a nominal value [Jessen Holdings Pty Ltd v Middle East Trading Consultants Pty Ltd (No 1) (1994) 13 ACSR 455]."
I took the same approach in Re Savemore Wholesale Pty Ltd [2021] NSWSC 307 at [36].
Growthbuilt here put its offsetting claim on the basis that it had a genuinely arguable claim that there were defects in work done by Chalouhi and it was entitled to recover the costs of repairing those defects, or was at least entitled to recover that amount as discounted to reflect the prospect that it might or might not be required to repair those defects. I referred to the expert reports tendered by both parties above, although it is ultimately not necessary to address those reports in detail where Mr Pokoney was content to proceed on the assumption that they supported a genuinely arguable case that there were defects in the work done by Chalouhi and that the costs that would be incurred to repair those defects, if they were in fact repaired, would exceed the amount claimed in the Demand.
Mr Boyle submitted that: "Growthbuilt's claims of offsetting claims are premised on the existence of defective works. That there are at least some defective works is common ground when the expert evidence before the Court is considered, even in a cursory fashion. It cannot be said that the grounds for these claims are "illusory" or "spurious", as the authorities would require before Growthbuilt's application could be dismissed. Furthermore, the various subcontracts entitle Growthbuilt to set off its claims against amounts that might otherwise be payable to Chalouhi: see, e.g., clause 2.6 of the Mount Druitt Subcontract... That right of set off is in respect of "any amount which in the opinion of Growthbuilt is due or owing", including "(3) estimated cost of rectifying any defective works". Insofar as it may be suggested that Growthbuilt has not required Chalouhi to rectify the defects to date (in accordance with, for example, clause 8A.4 of the Mount Druitt Subcontract…) that is of no real consequence to the present application … It remains open to Growthbuilt to rectify works itself and recover from Chalouhi, as reflected in the discretionary nature of clause 8A.4 ("may Direct"). Furthermore, the Court would not conclude by reason of the present lack of rectification that it will not be done in the future. For example, clause 6 of the Mount Druitt Subcontract … provides that Growthbuilt can direct Chalouhi to rectify within a period of 24 calendar months after the Date of Completion, and given clause 8A.4 it remains possible that when directed to perform rectification works in that period if Chalouhi fails to comply then Growthbuilt would perform itself (including through another contractor) and be entitled to recover those costs from Chalouhi as a debt (i.e. there remains a claim against Chalouhi). In the alternative, it is plain on the material that there has been a breach by Chalouhi of the subcontracts in terms of the defects, for which Growthbuilt could sue Chalouhi and seek to recover an amount reflecting the loss which Growthbuilt faces in the event that the principals under the head contracts call on Growthbuilt to rectify the defective work during the warranty period. Whilst that amount may need to reflect some discounting for the possibility that Growthbuilt is never called upon to rectify, it still follows that the claims are genuine ones for the purposes of the Act and s 459G."
Mr Pokoney responded that Growthbuilt's approach does not give rise to an arguable offsetting claim as a matter of law. He submits that: "Where (as here) a head contractor advances a claim for damages against its subcontractor arising from construction defects, it is necessary for that contractor to establish that its principal (usually the property owner) has called upon it to rectify those defects. Until that occurs, the head contractor has not suffered loss beyond exposure to a risk (which may never eventuate) that the principal calls upon it to rectify."
Mr Pokoney here draws attention to Alucraft Pty Ltd (In Liq) v Grocon Ltd (No 2) [1996] VR 386 ("Alucraft"), where a head contractor sought damages against its subcontractor by reason of defective steelwork. Smith J held (at 396) that the head contractor was not in the same position as a property owner and could not simply claim the cost of rectifying the identified defects and that its loss was instead the "potential liability to the proprietor for breach of the head contract". His Honour there found (at 400) that that risk was "very remote", and that $5,000 was "reasonable compensation having regard to that risk". That decision was approved by Giles JA (with whom McColl and Campbell JJA agreed) in Westpoint Management Ltd v Chocolate Factory Apartments Ltd [2007] NSWCA 253 at [46] ("Westpoint Management"), where his Honour observed that: "…In [Alucraft], the builder claimed from a subcontractor the cost of rectification to bring steelwork to specification. The builder had denied any obligation to the proprietor to rectify the work, the proprietor had apparently accepted the work and had issued a final certificate, and the builder had been paid for the work. The builder did not intend to carry out the rectification work. His Honour considered, with respect correctly, that the builder was not in the same position as an owner, because the benefit it expected to derive from the subcontract was fulfilment of the head contract and payment under the head contract, not a building in conformity with the specification; he distinguished Bellgrove v Eldridge for that reason. On the assumption that, in accordance with Bellgrove v Eldridge, the rectification measure of damages was prima facie to be applied, his Honour found that it would not be reasonable to assess damages "on the basis of the work being rectified", and assessed damages on the basis of the builder's loss being the money it paid for the defective work or alternatively the risk of being required by the proprietor to rectify the work or pay for its rectification. Apartments did not contend for a loss of either kind."
The decision in Alucraft was also applied by Adamson J (as her Honour then was) in Cubic Metre Pty Ltd v C&E Critharis Constructions Pty Ltd [2020] NSWSC 479 at [96]-[101]; and the Court of Appeal refused leave to appeal from that decision and noted (at [11]) that Alucraft had been followed in Westpoint Management and in C&E Critharis Constructions Pty Ltd v Cubic Metre Pty Ltd [2020] NSWCA 348 ("Cubic Metre"). Mr Pokoney submits that Growthbuilt's claim for an offsetting claim, quantified as the costs of repairing the defects identified in the expert reports, is not seriously arguable for the same reasons as described in Alucraft, Westpoint Management and Cubic Metre. While I accept that proposition, that does not exclude a claim by Growthbuilt reflecting the risk that it will be required to remedy the identified defects and incur the costs of doing so.
I recognise that, despite the volume of the evidence led by the parties, Growthbuilt has not sought to show, and has not shown, that it would or might voluntarily repair the relevant defects or be required by property owners to repair them. It would, of course, have been open to Growthbuilt to volunteer to remedy these defects in respect of each of the properties, irrespective of whether their owners required it to do so, but it leads no evidence that it has taken that course. It would also have been open to Growthbuilt to advise the owners of the properties of the defects and seek their indication as to whether they required those defects to be repaired, which may have depended on the owners' assessment of the significance of the defects, having regard to the use to which the relevant properties will be put, which may differ between different owners and different properties. Again, Growthbuilt leads no evidence that it has done so or that the owners, having been informed of those defects, have requested that they be remedied. Third, consistent with the case law to which I referred above, Growthbuilt could have led objective evidence to provide a basis for a preliminary assessment of the risk that the owners of the properties would ultimately bring claims against it in respect of the identified defects, and of the costs to which it would be exposed in consequence, which would also likely need to address matters such as the significance of the defects for the owners' intended use of the properties. Growthbuilt also does not lead such evidence.
I recognise the strength of the legal argument put by Mr Pokoney and the real defects in the evidence led by Growthbuilt as to whether it will, or will be required to, remedy these defects. Having recognised these matters, it seems to me that it would be wholly unrealistic for me not to recognise that, where at least the Norwest project is a large apartment block and the expert evidence indicates that the water ingress has the potential adversely to affect the life of the concrete in the basement areas, the owners of the properties will likely require that these defects be remedied rather than simply ignoring them. On that basis, it seems to me that Growthbuilt has a seriously arguable case that there is a substantial prospect, or a likelihood, that it will be required to remedy these defects. There is also a seriously arguable claim that the loss reflecting that risk, after discounting for the fact that is not a certainty, would exceed the balance of the debt claimed by the Demand, after it is varied to exclude the retention claim.
For this reason, the Demand should be set aside. I remind myself that that does not prevent Chalouhi from seeking to recover the amount claimed in substantive proceedings in which Growthbuilt can bring a cross-claim for the remedial costs noted above, rather than by the use of the summary procedure of a creditor's statutory demand.

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